Moline Properties, Inc. v. Commissioner of Internal Revenue
319 U.S. 436 (1943)
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Rule of Law:
A corporation will be recognized as a separate taxable entity if the purpose for its creation is the equivalent of a business activity or if its creation is followed by the carrying on of business by the corporation.
Facts:
- In 1928, Uly O. Thompson created Moline Properties, Inc. at the suggestion of a creditor to be used as a security device for a loan.
- Thompson conveyed Florida real estate to the corporation, which in turn assumed outstanding mortgages on the property.
- In exchange for the property, Thompson received the corporation's stock, which was then transferred to a voting trustee controlled by the creditor as loan security.
- In 1933, the loan was repaid, and control of the corporation reverted to Thompson.
- The corporation then refinanced the mortgage debt with a new lender.
- In 1934, the corporation leased a portion of its property to a third party for use as a parking lot, for which it received rental income.
- Between 1934 and 1936, the corporation sold its real estate holdings in three separate transactions, with the proceeds being received by Thompson.
Procedural Posture:
- Moline Properties, Inc. reported a gain on its 1935 tax return but its sole shareholder, Thompson, later filed a claim for a refund on the corporation's behalf, attempting to report the gain on his personal return.
- The Commissioner of Internal Revenue denied the refund and determined the income was taxable to the corporation.
- Moline Properties petitioned the Board of Tax Appeals (the trial-level tax court) for review.
- The Board of Tax Appeals ruled in favor of Moline Properties, holding the corporation was a 'mere figmentary agent' that should be disregarded.
- The Commissioner of Internal Revenue (the appellant) appealed this decision to the U.S. Circuit Court of Appeals.
- The Circuit Court of Appeals reversed the Board's decision, finding that the corporate entity must be recognized for tax purposes.
- Moline Properties (the petitioner) then sought and was granted a writ of certiorari from the U.S. Supreme Court.
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Issue:
Does the gain from the sale of real property held by a corporation, which was formed by its sole shareholder for a business purpose and which subsequently engaged in business activities, constitute income taxable to the corporation rather than to the shareholder?
Opinions:
Majority - Mr. Justice Reed
Yes. The gain from the sale of the property is taxable to the corporation. The doctrine of corporate entity requires that a corporation be treated as a separate taxable entity from its shareholder so long as it was formed for a business purpose or engages in business activity. Here, Thompson created Moline Properties for the business purpose of satisfying his creditors' demands and securing a loan. The corporation subsequently engaged in business activities, including assuming and refinancing mortgages, leasing property for income, and selling its holdings. These activities compel the conclusion that the corporation had a tax identity distinct from its stockholder. The argument that the corporation was merely an agent for its shareholder fails, as the question of agency is dependent upon the same legal issues as the question of corporate identity; if the corporation has a business purpose or activity, it is not a mere agent.
Analysis:
This decision establishes a strong presumption in favor of respecting the corporate form for tax purposes. It makes it very difficult for a taxpayer to create a corporation to gain business advantages and later disavow its existence to avoid tax disadvantages. The Court sets a relatively low bar for what constitutes a 'business activity' sufficient to give a corporation its own tax identity, thereby reinforcing the principle that taxpayers are generally bound by the form of their chosen transactions. This 'Moline Properties doctrine' is a foundational concept in corporate tax law, clarifying that only in cases where the corporation is a pure 'sham' can its separate identity be disregarded.
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