189 F.2d 390

51-1 USTC P 9295

KOMA, Inc.
v.
COMMISSIONER OF INTERNAL REVENUE.
TULSA
BROADCASTING CO.
v.
COMMISSIONER OF INTERNAL REVENUE.

Nos. 4168, 4169.

United States Court of Appeals Tenth Circuit.

May 16, 1951.

James D. Fellers, Oklahoma City, Okl., and L. Karlton Mosteller,
Oklahoma City, Okl. (John C. Andrews, Washington, D.C., on the brief), for
petitioners.

Irving I. Axelrad, Washington, D.C. (Theron Lamar Caudle, Ellis
N. Slack and L. W. Post, Washington, D.C., on the brief), for respondent.

Before HUXMAN, MURRAH and PICKETT, Circuit Judges.

HUXMAN, Circuit Judge.

1

This is an appeal from the judgment of the United States Tax
Court, approving the determination of the Commissioner that for the years 1943
and 1944 appellant taxpayers were subject to the surtax imposed by Section
102(a) of the Internal Revenue Code, 26 U.S.C.A.Internal Revenue Code, §
102(a).

2

Section 102(a) imposes an additional tax upon the net income of
a corporation formed or availed of for the purpose of preventing the imposition
of the surtax upon its stockholders or the stockholders of any other
corporation, through the medium of permitting earnings or profits to accumulate
instead of being divided or distributed. Section 102(c) provides that the fact
that earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose to avoid
surtax upon the shareholders, unless the corporation by the clear preponderance
of the evidence shall prove to the contrary.

KOMA

3

KOMA, an Oklahoma corporation, is engaged in the broadcasting
business. It owns and operates station KOMA at Oklahoma City. J. T. Griffin and
his estate after his death, John Toole Griffin, his son, and Marjory G. Leake,
his daughter, owned all of the common stock except a few qualifying shares and
after 1944 owned all of its preferred stock and prior thereto all but one
hundred shares thereof. Bryan Cole, who owned three qualifying shares of common
stock, was Vice President of both corporations. Bryan Mathes, who owned three
qualifying shares of common stock, was Secretary-Treasurer of both corporations
and was also a Director of KOMA since its organization and of Tulsa since 1944.
The preferred stock of KOMA had equal voting rights with the common stock. It
was callable at the option of the corporation. The stockholders of KOMA and
Tulsa controlled the Ogden Trust Company, Griffin Grocery Company of Arkansas,
Griffin Grocery Company, Griffin Investment Company and Griffin-Goodner Grocery
Company. J. T. Griffin owned about fifty-six per cent of the stock of the
Griffin Grocery Company and his son and daughter owned all except eleven of the
remaining shares in substantially equal amounts.

4

Prior to March, 1941, KOMA was operating AM broadcasting
facilities on 1480 kilocycles with 5 kilowatts of power. In January, 1940 it
applied to the Federal Communications Commission for permission to increase the
power to 50 kilowatts on the same frequency. In March, 1940 the application was
amended to change to 690 kilocycles. In March, 1941 the Commission authorized
KOMA to operate on 1520 kilocycles with a non-directional antenna and the same
power. KOMA filed applications later in that year to operate on 690 kilocycles
with 50 kilowatts of power during the day and 25 at night, using a directional
antenna. In December of that year KOMA amended its application by requesting a
reduction of operating power to 10 kilowatts day and night.

5

In April, 1942 the Commission issued an order to the effect that
it would deny future applications involving the use of material to construct or
change facilities of any standard television or high frequency broadcasting
station. Provision was made in the order for prosecution of pending
applications, but failing to do so by June 1, 1942 was to be regarded as an
abandonment of the application. This order remained in effect until August,
1945.

6

In November, 1945 the Commission granted an application filed
October 4, 1945 to increase the power to 50 kilowatts on 1520 kilocycles, with
directional antenna, and since January, 1947 KOMA has been operating on that
power and frequency. The change was made in AM facilities at a cost of
$186,030.37 in 1946 and $31,061.23 in 1947.

7

In 1940 the Commission first made allocations of electrical
power for commercial use of frequency modulation (FM) and experimental operation
of television. Television was in its experimental stages in 1943 and 1944. The
art of television broadcasting remained practically stationary during the last
war. At various times prior to and during the taxable years in question, Bryan
Mathes and Bryan Cole discussed with the chief engineers and general managers of
both KOMA and Tulsa the question whether they should eventually extend their
facilities to include operation with FM and TV. The chief engineer of Tulsa
estimated in 1942 that cost of facilities for broadcasting on FM and with TV
would be from $250,000 to $500,000. In 1940 the chief engineer of KOMA guessed
that the facilities for FM would cost from $160,000 to $200,000 and TV about
$250,000. In 1943 and 1944 the manager of KOMA estimated that the cost for FM
and TV would be a total of from $300,000 to $400,000, or more. One of the
estimates made by directors of Tulsa was that the loss from operating of FM and
TV would be $80,000 a year for from three to five years. No formal action was
taken by the board of directors of either corporation prior to or during the
taxable years to engage in FM or TV operations. In July, 1945 KOMA, pursuant to
authority by its directors on April 3, 1945, first made application to the
Commission for permission to construct and operate a FM station and applied for
use of 50 kilowatts of power, at an estimated installation cost of $112,000. It
was estimated in the application that operation costs would be $6,000 a month at
the outset and $10,000 a month under normal conditions and that the income would
be $15,000 a month at the end of three years. The final permit to operate FM was
granted in July, 1946. Under an option granted by the Commissioner in 1947, KOMA
acquired at a cost of $17,845.71 a 1 kilowatt transmitter for operation until a
50 kilowatt transmitter became available and started broadcasting in March,
1948. Other costs in 1947 for FM were $816.26. Delivery of a 59 kilowatt
transmitter was not expected until January 1, 1949.

8

In July, 1948 KOMA, in accordance with a resolution passed by
its directors on July 2, 1948, applied to the Commissioner for permission to
operate a commercial TV station. No action had at the time of this trial been
taken by the Commissioner under this application. It was estimated in the
application that the cost of necessary equipment would be $238,925 and that the
operating losses the first year would be $35,000. No TV equipment was available
until 1948. Co-axial cables used to convey television programs were not
available until 1950.

9

The surplus from earnings of KOMA increased from $30,000 at the
close of 1938 to $130,270 at the close of 1942. In 1943 its surplus was $163,382
and in 1944 it was $210,404. In 1943 its net earnings were $36,382 and in 1944
they were $48,263. Its assets, current liabilities, capital stock and surplus,
omitting cents, at the close of each year 1943 to 1947, inclusive, and net
earnings each year were as set out in footnote one.1

10

Among its current assets for 1943, 1944 and 1945 were demand
notes from the Griffin Grocery Company in the amounts of $30,000, $65,000 and
$50,000, respectively. The note outstanding at the close of 1943, bearing
interest at 1 1/2%, was a renewal of demand loans made in 1941 and 1942 at 2%
interest. The notes outstanding at the close of 1944 consisted of the 1943 note
and a new demand note made on July 26, 1944 in the amount of $35,000 at 1 1/2%
interest. Each of these notes was paid on June 26, 1945. The note for $50,000
outstanding at the close of 1945 represents a loan made on July 12, 1945, with
interest at the rate of 1 1/4% and was paid in 1946. Other demand loans at 2%
interest were made in the years 1939 to 1942 to the same corporation and other
companies controlled by the Griffins and were paid prior to or in 1943. KOMA
paid dividends on its common and preferred stock during the years 1939 to 1943,
inclusive, as shown in footnote two.2 No dividends were paid from
1944 to 1947, inclusive. The preferred stock had a par value of $100 per share,
was callable at the option of the corporation and was entitled to 6% cumulative
dividends secured by a first lien on the corporation's assets. The preferred
stock was retired in 1947 without payment of the accumulated dividends. To
obtain funds with which to redeem the stock, KOMA borrowed $130,000 from a bank
at 2 1/2% interest. One reason for retiring the stock was to provide funds for
the estate of John T. Griffin.

TULSA.

11

The additional facts necessary to consider with respect to the
contentions of Tulsa are these. As in the case of KOMA, the Griffins likewise
owned all of the stock of Tulsa except a few qualifying shares.3
Since 1940 Tulsa had operated an AM broadcasting station on 5 kilowatts,
directionalized at night, and 1420 kilocycles, the maximum of its facilities. An
increase in power on that frequency is not possible. In 1941 Tulsa conducted
experimental operations in FM broadcasting by merely building a FM receiver and
a modulator. On April 3, 1945 the directors of Tulsa, by resolution, authorized
its officers to apply to the Commission for permission to operate a FM station.
The application was filed in 1945 and granted in 1946 to operate with 170
kilowatts of power. It was estimated in the application that the cost of the
facilities would be from $106,600 to $118,600; that the monthly cost of
operation would be $5,000 and that the revenue at the end of three years would
be $12,000 a month. Approval of the site selected for broadcasting was withdrawn
in 1948 by the Commission and no new site has been selected. Equipment was not
available to Tulsa at the time of the hearing for construction of a FM station
for operation under the permit. Necessary equipment was expected January 1,
1949. Since April, 1948 it has been broadcasting temporarily on FM with a 1
kilowatt transmitter under an option granted by the Commission. Tulsa may never
operate FM with 170 kilowatts of power under the permit granted by the
Commission.

12

On June 2, 1948 Tulsa's board of directors resolved to take
steps to apply for authority to construct and operate a television station. An
application was made to operate a TV station, giving $219,915 as the estimated
cost for installing necessary equipment and $35,000 as loss to be sustained
during the first year of operation. The application is still pending. The
minutes of June 12, 1948 recited a statement by James C. Leake that the board
had considered a television station for a long time and that contractors and
engineers estimated probable cost as $350,000 to $400,000.

13

Tulsa had earnings each year from 1939 to 1942, inclusive.
During this period its surplus increased from about $103,000 to $190,000. Its
assets, current liabilities, capital stock and surplus, omitting cents, at the
close of the years 1943 to 1947, inclusive, and net earnings for each year were
as set out in footnote four.4 Its current assets included notes and
accounts receivable from the Griffins and companies controlled by them as set
out in footnote five.5 The accounts at the close of 1939 to 1942,
inclusive, show that J. T. Griffin was indebted to the corporation for $25,000,
$24,030, $22,000 and $12,075, respectively. In January, 1948, Tulsa loaned the
Griffin Grocery Company the amount of $100,000 on open account, payable on
demand.

14

In 1946 and 1947 Tulsa spent $14,689.91 and $32,477.52,
respectively, for improvements to its leasehold. In the latter years it spent
$1,500 for land and $14,729.98 for equipment for FM broadcasting.

15

KOMA and TULSA.

16

-KOMA'S directors held at least six meetings in 1944 and Tulsa's
at least three in that year and one in 1945. The directors in attendance at each
of these meetings were Bryan Cole, Bryan Mathes and Marjory G. Leake and in
addition J. T. Griffin attended the meeting held by the directors of KOMA on
January 4, 1944. The absence of J. T. Griffin at other meetings was due to
illness. His son was in active military duty from May, 1943 to November, 1945,
and served overseas during an undisclosed portion of that period. Minutes were
not written for all meetings held by the directors during 1943 and 1944. No
director owning full title to stock of petitioner participated in any decision
to accumulate the profits of the corporation or distribute them as dividends.
Meetings of the stockholders of KOMA held on January 1, 1943 and January 4, 1944
were attended only by J. T. Griffin, Bryan Cole and Bryan Mathes. The same
individuals were the sole attendants at a meeting of the stockholders of Tulsa
on November 2, 1943. J. T. Griffin did not enter the office of Tulsa in Tulsa
and KOMA in Oklahoma City more than two times during the taxable years and those
visits were not made to discuss or transact business of the corporation. He did
not during the taxable years discuss with Bryan Cole or Bryan Mathes the
question as to whether or not the petitioner should declare a
dividend.

17

Three reasons are assigned by the taxpayers for the accumulation
of these net earnings. They are (1) to improve their AM broadcasting facilities,
(2) to provide for the erection of FM broadcasting stations and (3) to provide
for the future construction of TV broadcasting stations. The need to improve AM
broadcasting facilities is stressed more by KOMA than by Tulsa. Without entering
into a detailed discussion of this question, we think the findings with respect
to the reasonable expectations of the possibility of improving KOMA's AM
broadcasting facilities are amply sustained by the record.

18

While KOMA asserts that definite plans were initiated as early
as 1940 and 1941, looking to the construction of FM and TV broadcasting
facilities, the record does not sustain such contention. There is no evidence
that either corporation prior to or during the tax years in question took any
action committing either corporation to the construction of such facilities.
There is no evidence that the board of directors of either corporation, prior to
or during the years in question, formally or informally decided to commit funds
to the construction of such facilities. The records of both are silent as to any
steps taken by the boards of directors looking to such projects. The evidence
most favorable to both taxpayers is that during the years in question and prior
thereto Bryan Mathes and Bryan Cole discussed with the chief engineers and
general managers of the taxpayers the question of whether the corporations
should eventually extend their operations to include FM and TV stations. Mathes
and Cole held only qualifying shares of stock in the corporations and, while the
evidence indicates that they were largely in the management of the corporations
during the years in question, there is nothing in such management or in the
record as a whole indicating that they could commit these corporations to the
expenditure of vast sums of money in a new and untried experimental field
without the consent and approval of the beneficial owners of the stock of the
corporations.

19

Whatever ideas Mathes and Cole might have had about eventually
using FM and TV in the business of these taxpayers were formed without binding
effect on the taxpayers and there is no showing that such ideas were
communicated to the beneficial stockholders or shared by them. While Tulsa
obtained a permit to erect a FM station as late as 1948, there was a question
whether it ever intended to use such facilities. Thus on April 21, 1948, Tulsa's
general manager and one of its vice presidents wrote as follows: 'I would like
to stay away from asking for any modifications because it seems to me we will
eventually want to do one of two things. Either we will want to fulfill the
maximum grant which the commissioner has given us, or we will want to drop FM
completely. I think we are in a position to sit back and wait for the Commission
to push us from this point on. If they push us out, they will be pushing out the
only decent FM operation in Tulsa.'

20

It is also significant that during the period of time when the
taxpayers are contending it was necessary to accumulate reserves for these
future constructions, the corporations and these funds were availed of for the
benefit of J. T. Griffin, his son and daughter, in their various other
enterprises. During the years in question as well as prior and subsequent years
both taxpayers loaned large sums of money to the Griffin Grocery Company,
controlled by J. T. Griffin, his son and daughter. These loans were made at a 2%
interest rate and renewals thereof were made at as low as 1 1/2% and 1 1/4%
interest. In its opinion the Tax Court found there was no showing that interest
was collected on these loans when they were paid. In 1947 KOMA retired its
preferred stock. All of this stock except a few shares was owned by J. T.
Griffin, his son and daughter. The taxpayer was not required to retire this
stock. It was retired because the Griffin estate was in need of funds. At the
time of the retirement, there were unpaid accumulated dividends due on the
stock. These dividends were not paid when the stock was retired. Had they been
paid, they would have constituted income and would have gone to increase the
income tax liability of the Griffin estate. Loaning the funds of the corporation
to the beneficial stockholders at nominal rates of interest, not requiring the
payment of such interest, in substance gave the stockholders the benefit of a
declared dividend without the attendant tax burden resulting from a dividend
payment.

21

At the time Cole and Mathes thought these corporations
eventually might want to go into television broadcasting, television was in an
experimental stage; no equipment was on the market; no co-axial cable was
available prior to 1950; no one knew or could tell with a reasonable degree of
certainty the cost of such a station, if and when it could be constructed, or
whether it would be commercially feasible. From all of these facts and the
further facts that, while the corporations contend that it was necessary to set
aside these reserves for their reasonable needs in the reasonable forseeable
future, they were loaning their earnings to Griffin and his other enterprises
instead of declaring dividends; that KOMA retired its preferred stock when not
compelled to do so for Griffin's benefit and without paying the accumulated
dividends thereon, the Tax Court concluded that the two corporations were
availed of for the purpose of preventing the attachment of surtaxes.

22

We are not warranted in substituting our judgment for that of
the Commissioner or the Tax Court. Our review is limited to ascertaining whether
there was substantial evidence to support the Commissioner's findings and the
findings of the Tax Court. In doing this, we must consider and view all the
facts and circumstances in the light of the setting of the taxpayers at the time
in question (1943 and 1944).6
Subsequent events are relevant only as they throw light on the period in
question. Neither is it decisive whether the decisions to accumulate the income
and the failure to distribute profits were wisely made. The gist of the
statutory violation is the intent to use the corporation to avoid the attachment
of surtaxes.7
Viewed in this light, we think the findings and conclusions of the Tax Court
find ample support in the record. The decisions appealed from are
severally

23

Affirmed.

*
1943 1944 1945 1946 1947
Assets
Current $196,325 $319,009 $306,166 $121,837 $ 79,027
Other 295,541 303,262 302,310 501,226 458,382
Current
Liabilities 65,484 148,868 102,295 60,591 149,609
Capital Stock:
Common 30,000 30,000 30,000 30,000 30,000
Preferred 258,000 258,000 248,000 223,000
Surplus 163,382 210,404 253,181 309,472 357,800
Net Earnings 36,382 48,263 42,777 56,290 48,328
2
Preferred Common
1939 $14,718
1940 16,200
1941 12,150 $3,000
1942 7,500
1943 3,000
3

Stock ownership in Tulsa during the years in question was as follows:

Common
J. T. Griffin 254 shares (a)
Estate of J. T. Griffin (b) 254 shares (a)
John Toole Griffin 96 shares (c)
Marjory G. Leake 87 shares (d)
R. L. Griffin (e) 33 shares
J. C. Leake 16 shares (f)
4
1943 1944 1945 1946 1947
Assets
Current $280,862 $374,409 $372,642 $418,515 $350,808
Other 56,433 60,515 37,600 46,815 92,498
Current
Liabilities 69,258 124,779 67,674 57,495 18,342
Capital Stock 47,000 47,000 47,000 47,000 47,000
Surplus 221,038 263,144 295,567 360,834 377,964
Net Earnings 30,722 39,868 32,957 65,267 17,129
5
1943 1944 1945 1946
Notes $112,000 $152,000 $150,000 $150,000
Accounts
Receivable 16,575 19,352 16,570 127,070
The accounts receivable were, as follows:
1943 1944 1945 1946
J. T. Griffin $ 12,075 $ 12,070 $ 12,070 $ 12,070
J. T. Griffin estate 1,079
J. T. Griffin Guardian
for John Toole Griffin 4,500 4,500 4,500
Griffin Grocery Co. 75,000
Griffin-Goodner Grocery Co. 40,000
K O M A 1,702

6

World Pub. Co. v. United States, 10 Cir., 169 F.2d 186, certiorari denied 335
U.S. 911, 69 S.Ct. 480, 93 L.Ed. 443; See also Mertens, Law of Federal Income
Taxation, Vol. 9, Sec. 51.19 and cases cited therein for extent of review of
facts by reviewing courts

7

DeMille v. Commissioner of Internal Revenue, 31 B.T.A. 1161, 1174; Sauk
Investment Co. v. Commissioner of Internal Revenue, 34 B.T.A. 732, 738; Mertens,
Law of Federal Income Taxation, Vol. 7, Sec. 40.08

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