Guarantee Abstract & Title Company, Inc. v. United States, 696 F.2d 793, 10th Cir. (1983)
Guarantee Abstract & Title Company, Inc. v. United States, 696 F.2d 793, 10th Cir. (1983)
2d 793
83-1 USTC P 9137, 12 Fed. R. Evid. Serv. 800
This appeal involves a claim for refund of federal income taxes paid by
Guarantee Abstract & Title Company, Inc. (Guarantee). The amounts at issue
were assessed as unreasonable accumulations of earnings by the corporate
taxpayer for the years 1969 through 1975 under I.R.C. Secs. 531-37. Guarantee
paid the assessments and sued for refund. The case was presented to a jury,
which found that the accumulations were for the "reasonable needs of the
business," id. Sec. 533(a), and gave judgment for Guarantee. On appeal, the
government argues that the district court erred in submitting the issue to the
jury and erred by not permitting counsel for the United States to examine a slip
of paper the taxpayer's witness took from his pocket and glanced at during his
testimony.
2
The government gives two reasons for its assertion that the trial court erred in
submitting the unreasonable accumulations issue to the jury. First, it argues that
Guarantee's claim for refund did not state all of the grounds asserted at trial as
justifications for the accumulations. Second, it argues that the taxpayer did not
present sufficient evidence of a "plan" for use of these accumulations or
sufficient evidence of the reasonableness of its needs for the money.
The government asserts that the trial court had no jurisdiction to consider the
justifications not contained in the claims for refund. The problem is not one of
jurisdiction, however. After paying the assessed taxes, the taxpayer filed a
claim for refund that stated various reasons for the accumulation. 1 This Court
has held that "if the claim fairly apprises the Service of the ground on which
recovery is sought or if the Service actually considers the ground later sought to
be raised the claim will be held adequate for the purposes of bringing suit ...."
Herrington v. United States, 416 F.2d 1029, 1032 (10th Cir.1969); accord
Austin v. United States, 461 F.2d 733, 738 (10th Cir.1972).
Guarantee raised five justifications on which it bases its claim that the earnings
accumulation was for reasonable business needs. As is recognized by the
government, the language of the refund claim clearly notifies the Internal
Revenue Service (IRS) of two of Guarantee's claimed needs: to accumulate
reserves to self-insure against risks of loss as an abstractor and title insurance
agent, and to evidence financial integrity and generate referral business from
the financial institutions in which Guarantee deposited money. We believe that
the third and fourth justifications, to have working capital to meet operating
expenses, and to self-insure against losses as an escrow agent, are reasonably
encompassed in the claim for refund. Reference was made in the claim for
refund to the needs of the corporation and remaining in business, which
reasonably covers the issue of working capital. The statement in the claim for
refund relating to uninsurable risks as an insurance agent and abstractor
reasonably covers the escrow claim because acting as an escrow agent is very
common for these entities.
More doubtful is whether the claim for refund notified the IRS of Guarantee's
accumulation of earnings in order to become a title insurance company, so that
it could insure the kinds of risks it currently takes as an agent for Chicago Title
Insurance Company. The notice accompanying the claim for refund refers to
increases in exposure on Guarantee's "primary liability," and the evidence
indicates that the company was a self-insurer for exposures above $100,000 on
title policies it wrote, and that there were an increasing number of those large
policies. The evidence also indicates that Guarantee ran the risk of being
threatened with takeover by Chicago Title if it could not cover its losses. Even
if the claim for refund were insufficient, the record supports the taxpayer's
contention that the issue of becoming a title insurance company, in addition to
the other justifications, was raised with revenue agents during the audit of the
corporation's books that led to the assessment. That justification was also
asserted by Guarantee's two shareholders in their depositions taken early in the
litigation. In our view, the IRS was sufficiently apprised of all of the claims
asserted by Guarantee to justify the accumulations that it could fairly review
the claim. The trial court did not err in submitting all of the claimed
justifications to the jury.
6
The government contends that the taxpayer had no plan for the use of the
moneys it was accumulating. This Court has made clear the requirement that a
taxpayer accumulating earnings have a specific and definite plan for use of
those earnings. See Cheyenne Newspapers, Inc. v. Commissioner, 494 F.2d
429, 433-34 (10th Cir.1974); Henry Van Hummell, Inc. v. Commissioner, 364
F.2d 746, 750 (10th Cir.1966), cert. denied, 386 U.S. 956, 87 S.Ct. 1019, 18
L.Ed.2d 102 (1967). The plan must be demonstrated by some objective
evidence. Oklahoma Press Publishing Co. v. United States, 437 F.2d 1275,
1277 (10th Cir.1971); Henry Van Hummell, 364 F.2d at 750. But we do not
think it essential that a plan be reduced to writing. See Hogg's Oyster Co., Inc.
v. United States, 676 F.2d 1015, 1018 (4th Cir.1982). In closely held
corporations, like the one here whose stock is owned entirely by a father and
son, the business may be run informally and the corporate minutes may seldom
contain formal plans for the use of monies being accumulated by the
corporation. In the instant case, there was some evidence of a plan for use of
the accumulated earnings. The shareholders and their accountants testified that
the earnings had been accumulated for the purposes relied upon in this suit. In
addition, a large part of the earnings was retained in the form of cash accounts
or certificates of deposit in the local financial institutions rather than in stock
market or other longer term investments. Thus, the funds were readily available
to apply to operating expenses or policy or litigation losses. While we think it is
a close question whether the evidence supported a definite and specific plan for
using the accumulated earnings, we cannot say the evidence was insufficient to
submit to the jury.
which it was self-insurer for all amounts above $100,000. Thus, there was an
obvious increase in its risks. While the company's title insurance losses were
very small, a major loss of $76,500 was incurred in 1974 for an error made
while the company was serving as an escrow agent. Further, because major
sources of business for a title insurance and abstracting company are financial
institutions who fund mortgages, the accumulation of and holding of accounts
or certificates of deposit in those institutions appears a reasonable way of
securing business. The jury rendered a general verdict that the accumulations
were for the reasonable needs of the business. We believe there is sufficient
evidence to sustain the verdict.
8
We do not think there was any error in the trial court's refusal to order the
taxpayer's witness to show the document he glanced at to the government's
counsel. The record contains no evidence that the witness relied upon the
document in presenting his testimony. The witness glanced at the slip while he
was answering a series of questions about his knowledge of Guarantee's unpaid
accounts receivable. Apparently just before the witness pulled the slip of paper
from his pocket he answered that he did not know the answer to government
counsel's question, and he gave the same answer afterwards. Thus, it does not
appear that he refreshed his memory by referring to the document. He declared
the item was personal and had nothing to do with his testimony. We think the
trial court's refusal to permit government counsel to inspect the document was
within its discretion and not harmful to the government's case. See Fed.R.Civ.P.
61.
AFFIRMED.
necessary reserve for real and potential losses which are not covered by
available insurance. As a direct result of these investments the taxpayer's sales
have more than doubled and the exposure on the primary liability has increased
from $38 million to an amount in excess of $100 million in present outstanding
policies.
The action by the Internal Revenue Service refuses to recognize the hazards for
which a substantial reserve is necessary to be maintained for the life of the
policies in order for this company to remain in business."