Squire, Inc. v. Coombs ( 1976 )

ELLETT, Justice:

A joint venture agreement was entered into by and between Lynn H. Coombs and Vista International Corporation (hereafter referred to as Vista) for the purpose of subdividing some land owned by The Squire, Inc. Mr. Coombs owned all of the stock of The Squire and, as a part of the agreement, he transferred all of The Squire stock to Vista. The parties further agreed that the joint venture would be effectuated through the Squire Corporation. Thus both parties could use the corporate entity of The Squire as a shield from liability. They further agreed that all net profits from the joint venture would be divided 40% to Coombs and 60% to Vista.¹

This action was brought by Mr. Smith, the assignee of Vista’s interest in the joint venture agreement against Mr. Coombs, the other joint venturer. A counterclaim was filed and both parties sought an accounting.

The case was tried to a jury and thereafter a new trial was granted and the matter tried to the court based upon the record at the jury trial. The court found that the original agreement had been modified by a subsequent agreement and that the claim of Smith and The Squire was not sustained. The evidence sustains this finding. However, the court also found that 40% of the “net profit” due Coombs meant “net profit before income taxes paid by the Squire, Inc.” and gave Coombs judgment for 40% of the profit of the corporation with no deduction for income taxes; thus forcing Smith to bear the entire income tax due by The Squire out of his 60% and this in view that the joint venture agreement provided that the process of subdividing the land would be done through The Squire, Inc.

Had both parties not used The Squire as the agent to accomplish the project, then we could see that net profits would mean profits before taxation. However, so long as Mr. Coombs is receiving the benefit of the corporate shield, he ought not to be able to compel his associate to stand all of the corporate taxes out of his share of the earnings.

When people speak of the net profits of a corporation, they refer to the amount of earnings available for dividends and dividends cannot be paid in disregard of those charges called taxes.

Except for the determination of the term “net profit” as set out in the findings, we affirm. As to the basis for calculating the percentage of the net profit, we reverse the trial court and remand the case with directions to split the net profits available for dividends, to-wit: in the agreed ratio after deducting taxes. Each party will bear its own costs.

CROCKETT, TUCKETT and 'MAUGHAN, JJ., concur,

1 . It is difficult to see how the profits of the corporation could be divided other than as dividends based upon the stock held; however, that point was neither raised below nor here on appeal. The appellant, Harvey Smith, now owns all of the stock of The Squire, Inc.