United States District Court, Southern District of Illinois, N.D
December 16, 1971
WILLARD S. PAUL ET AL.
UNITED STATES OF AMERICA.
The opinion of the court was delivered by: Robert D. Morgan, District Judge.
DECISION AND ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT
This is an action for refund of federal income taxes paid by
plaintiffs as transferees of Best Advertising Corp. (BEST), a
dissolved Illinois corporation. The court has jurisdiction under
28 U.S.C. § 1346(a)(1). Pending for decision is a motion by the
Government for partial summary judgment, under Rule 56(d),
The following facts are undisputed. BEST was incorporated in
Illinois in 1962 for the purpose of soliciting advertisements
from Illinois businesses for insertion in the "yellow pages" of
telephone directories. Subsequently, the Reuben H. Donnelley
publishes all directories distributed by Illinois Bell Telephone
Co., refused to accept the advertisements proffered by BEST. BEST
then filed suit against Donnelley and Illinois Bell, charging
violations of the Sherman Anti-Trust Act. This court granted a
motion to dismiss the complaint on the ground that it failed to
state a claim against the defendants. Best Advertising Corp. v.
Illinois Bell Telephone Co., 229 F. Supp. 275 (S.D.Ill. 1964),
aff'd, 339 F.2d 1009 (7th Cir. 1965). After affirmation by the
Court of Appeals, Donnelley agreed on March 22, 1965 to pay BEST
$67,500 in settlement on condition that BEST abandon plans to
file a petition for writ of certiorari with the Supreme Court of
the United States. The settlement amount was placed in escrow, to
be paid BEST on April 9, 1965, one day after the period for
filing the petition with the Supreme Court expired. Between March
22, 1965 and April 9, 1965, plaintiffs and Eugene E. Hildebrand,
as holders of all BEST stock, assigned the $67,500 claim to
themselves as individuals. On April 9, 1965, the escrow fund was
paid to BEST. On April 12, 1965, plaintiffs adopted and approved
a resolution to dissolve BEST, and on April 14, 1965 the net
proceeds of the settlement, after payment of some corporate
debts, were distributed to the shareholders.
Although BEST filed no corporate income tax return for 1965,
the Commissioner of Internal Revenue determined that the
settlement proceeds were taxable to the corporation as ordinary
income. Plaintiffs paid the assessed tax in 1969. Then, after
their claim for refund was denied, they instituted this suit.
The Government's motion for partial summary judgment attacks
the following paragraph of the complaint:
"6. . . .
A. The income was that of the shareholders, not
that of the corporation, in that:
(1) Prior to the collection of such net proceeds
the corporation had ceased doing business and had
adopted a plan of liquidation.
(2) That the right to collect the proceeds, by
virtue of said plan, was, in effect, in the
shareholders and not the corporation.
(3) That the proceeds were collected by the
shareholders as individuals."
The Government argues first that this paragraph is at variance
with the plaintiffs' claim for refund and consequently may not be
considered by the court, under a treasury regulation which
provides in part, "The claim [for refund] must set forth in
detail each ground upon which a credit or refund is claimed and
facts sufficient to apprise the Commissioner of the exact basis
thereof." 26 C.F.R. § 301.6402-2(b) (1). The court agrees that
substantial judicial support for this regulation exists, see
Herrington v. United States, 416 F.2d 1029
(10th Cir. 1969), and
cases cited therein, and that the regulation is more stringent
than general pleading requirements under the Federal Rules of
Civil Procedure. Nevertheless, this court holds that there is no
fatal variance between paragraph 6A of the complaint here and the
following paragraph of plaintiffs' claim for refund:
"The corporation realized no income in 1965, and
therefore owed no income tax, because the collection
of damages from Illinois Bell and Donnelley was after
the corporation had adopted a plan of liquidation.
The collection was therefore that of the shareholders
and not that of Best. The right to collect this money
had been assigned by Best to the shareholders, and
the shareholders collected direct. . . ."
With the exception of the reference in the refund claim to the
assignment, the two paragraphs are substantively identical.
Consequently, this court moves to consideration of the
substantive issues raised by paragraph 6A of the complaint.
The cause of action asserted there raises two possible theories
of recovery: (1) that a plan of liquidation had been adopted
prior to receipt of the settlement proceeds, and that this plan
placed the right to receive the proceeds in the shareholders; (2)
that the settlement was made with the shareholders, rather than
the corporation, and the proceeds thereof were in fact collected
by the shareholders as individuals. Plaintiffs' brief in
opposition to the motion does not pursue the liquidation theory,
and it does fail as a matter of law. See Wood Harmon Corp. v.
United States, 311 F.2d 918 (2d Cir. 1963); Cummins Diesel Sales
of Colorado Co. v. United States, 263 F. Supp. 677 (D.C.Colo.
Concerning the second theory, plaintiffs concede in their brief
that "a corporation which has earned the right to income cannot
escape taxation by transferring that right to its shareholders."
They argue, however, that "such rule does not apply to the case
under consideration because the individual activities of the
shareholders was an essential element in creating the income." As
evidence of this they cite the release document given to
Donnelley, which was executed not only by BEST but also by the
shareholders as individuals. Plaintiffs conclude that whether the
settlement was really paid to the corporation or to the
shareholders as individuals is a genuine issue of material fact
requiring a trial. It is, however, undisputed that the settlement
proceeds were paid to BEST, that BEST paid various debts with
part of the proceeds, and that the remainder was then distributed
to the shareholders. Consequently, there is no such disputed
issue of fact present. Instead, the only question is what legal
conclusions should be drawn from these undisputed facts. In other
words, under some legal principle should payment of the proceeds
be deemed to have been made to the shareholders, even though it
was in fact made to the corporation? In this situation, where the
only conflict concerns the legal consequences of undisputed
facts, the court may properly grant summary judgment. See 3
Barron & Holtzoff, Federal Practice and Procedure § 1234, at 128
(Wright ed. 1958).
Plaintiffs cite no legal authorities in support of their
argument that the settlement proceeds should be deemed to have
been paid to the shareholders as individuals, and the court has
found none. Of course, in one sense, it must be recognized that
the shareholders personally may have done the work to earn this
income. All earned income of any corporation can be traced to the
efforts of individuals or groups of human beings. The fictional
legal entity is not capable of performing work. But this fact
does not lessen the corporate nature of the income where, as
here, the corporate entity has been established by its owners as
a separate taxpayer. Here, where payment was made to BEST, as
plaintiff in the anti-trust suit, there is no legal justification
for holding that the income should be deemed to have been paid to
Since both theories of recovery stated in paragraph 6A of the
complaint are insufficient as a matter of law, there being no
genuine issue of material fact in relation thereto, the defendant
is entitled to the partial summary judgment it seeks.
It is ordered, accordingly, that defendant's motion for partial
summary judgment is allowed, and judgment is hereby entered for
defendant on the cause of action alleged in paragraph 6A of the
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