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ARKHOLA SAND & GRAVEL COMPANY v. UNITED STATES

December 22, 1960

ARKHOLA SAND & GRAVEL COMPANY, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: John E. Miller, Chief Judge.

This is an action by plaintiff, Arkhola Sand & Gravel Company, for the recovery of income taxes which it alleges were erroneously or illegally assessed and collected for the calendar years 1952 and 1953.

Jurisdiction is conferred by Title 28 U.S.C.A. § 1346(a)(1), as amended (1959 Supp.).

The case was tried to the court without a jury on November 7, 1960. At the conclusion of the plaintiff's case, the Government filed a motion to dismiss, alleging that the plaintiff failed to carry its burden of proving that the Commissioner's determination was erroneous, and that the plaintiff failed to prove its right to relief. The court deferred action on the motion, and the Government chose not to introduce any evidence and to stand on its motion. The case was then submitted, and briefs were requested from the parties in support of their respective contentions. The briefs have now been received and considered, along with the evidence and the exhibits, and the court now files this opinion in lieu of formal findings of fact and conclusions of law.

The plaintiff was incorporated under the laws of the State of Arkansas on May 18, 1926, for the purpose of conducting a sand and gravel business, and has carried on such business since that date.

Following an examination of plaintiff's income tax returns for the calendar years 1952 and 1953, the Commissioner of Internal Revenue determined that the equipment rentals paid by plaintiff to W.S. Dills & Sons and to Dills Bros., partnerships, for the rental of equipment during 1952 and 1953 were excessive in the amounts of $78,897.00 in 1952 and $39,173.71 in 1953.

The plaintiff alleges that the Commissioner erroneously disallowed said amounts as deductions in determining plaintiff's taxable income for 1952 and 1953, and that as a result of the disallowance as a deduction, the Commissioner erroneously increased plaintiff's deduction for accrued Arkansas income taxes by the amounts of $3,944.85 for 1952 and $1,689.79 for 1953; that the rentals paid by plaintiff during 1952 and 1953 were reasonable in amounts and were properly deductible as a business expense; and that plaintiff's accrued Arkansas income taxes of $2,355.35 for 1952 and $70.74 for 1953, as reflected by plaintiff's federal income tax returns for those years, were correct.

That based upon the alleged erroneous determinations, the Commissioner assessed against plaintiff income tax deficiencies for 1952 and 1953 as follows:

                 Tax                      Total
  Year        Deficiency    Interest    Assessment
  1952        $38,975.11   $12,554.28   $51,529.39
  1953         10,826.80     2,782.19    13,608.99
              __________   __________   __________
     Totals   $49,801.91   $15,336.47   $65,138.38

On June 26, 1958, the plaintiff paid $64,897.21 and on August 5, 1958, paid the remainder of $241.17. The plaintiff prays judgment against the defendant for the total sum of $65,138.38, with interest from the date of the payments.

The defendant in its answer denies that any taxes were erroneously or illegally assessed and collected, but admits "that the Commissioner of Internal Revenue, after an examination of the plaintiff's income tax returns for 1952 and 1953, determined that the equipment rentals paid by the plaintiff to Dills Bros. during 1952 and 1953 were excessive in the respective amounts of $78,897 and $39,173.71, and the Commissioner disallowed said amounts as deductions in determining plaintiff's income for 1952 and 1953, and admits that the Commissioner increased plaintiff's deductions for accrued Arkansas income taxes by the amounts of $3,944.85 for 1952 and $1,698.79 for 1953."

On August 4, 1960, the parties executed and filed a stipulation in which they stipulated that during 1952 and 1953 the corporate stock of plaintiff consisted of 600 shares of common stock issued and outstanding. These shares were owned by the following persons in the amounts specified:

                                  Number of
                                   Shares
                                  Owned in
      Name                        1952-1953
  W.W. Dills                         210
  R.N. Dills (brother of
    W.W. Dills)                      130
  Cyrena Dills (mother of
    R.N. Dills and
    W.W. Dills)                      100
  Louise Kroh (sister of
    R.N. Dills and
    W.W. Dills)                       25
  Beulah K. Dills (aunt of
    R.N. Dills and
    W.W. Dills)                       75
  P.P. Nesbitt (no relation)          30
  R.C. Clement ...

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