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Gilbert L. Gilbert and Flossie Gilbert, Petitioners v. Commissioner of Internal Revenue, RespondentGilbert v. CommissionerDocket No. 8774-78April 15, 1980, Filed
United States Tax Court *150
Decision will be entered for the respondent .Petitioner husband was the sole shareholder of corporation A and a 50-percent stockholder of B. A borrowed $ 20,000 and transferred that sum to B to enable B to redeem the remaining 50 percent of B's shares owned by petitioner husband's brother.
Held , the transfer did not constitute a loan from A to B.Held, further , the transfer constituted a constructive dividend from A to petitioner husband.Arnold R. Petralia , for the petitioners.William J. Neild , for the respondent.Tannenwald,Judge .TANNENWALD*60 Respondent determined a deficiency in petitioners' income tax for the year 1975 in the amount of $ 7,483. The issue for decision is whether a transfer of $ 20,000 by Jetrol, Inc., to G&H Realty Corp. constituted a constructive dividend to petitioner Gilbert L. Gilbert, the common shareholder of each corporation.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and exhibits are incorporated herein by this reference.
Petitioners Gilbert L. Gilbert (Gilbert) and Flossie Gilbert resided in West Henrietta, N.Y., at the time they filed the petition herein. They jointly filed*151 their 1975 income tax return with the Andover Service Center in Andover, Mass.
During the years 1974 and 1975, Gilbert was the president and sole shareholder of Jetrol, Inc. (Jetrol), a manufacturing company. He was also, during the first part of 1975, a 50-percent shareholder of G&H Realty Corp. His brother, Henry Gilbert (Henry), was the other 50-percent shareholder. G&H Realty Corp. (Realty) owned the building at 27 Lois Street, Rochester, N.Y., in which Jetrol conducted its business as a tenant. Jet Rochester, Inc., another manufacturing company, occupied the balance of the premises. Henry was the sole shareholder of Jet Rochester, Inc., until February 1975, at which time he sold all his stock to two former employees unrelated to Gilbert.
During 1975, Henry and Gilbert decided to redeem Henry's stock in Realty because Henry wanted to retire. Henry had no *61 legal restrictions as to whom he could sell his stock nor was there ever a contractual relationship between Gilbert and Henry obligating Gilbert to purchase the stock. The parties have stipulated that Realty did not have sufficient funds to redeem the stock. *152 Realty attempted to borrow $ 20,000 from Central Trust Co. (the bank) in Rochester, N.Y., but the bank was unwilling to loan the funds to Realty. The bank might have considered refinancing the mortgage on Realty's property, but that would have involved an appraisal, a higher interest rate, and related problems which would have delayed the redemption, and Henry was in a hurry. The bank was willing to loan, and did loan, $ 20,000 to Jetrol on April 9, 1975, with Gilbert personally guaranteeing the loan. *153 executed by Realty. No rate of interest was stated on the "loan" between Jetrol and Realty to Jetrol. The $ 20,000 was carried on the books of account of the two corporations until Realty furnished the $ 20,000 to Jetrol in 1977.
Jetrol's tax return for the year ended December 31, 1974, showed the following balance sheet:
ASSETS Cash $ 16,384 Trade notes and accounts receivable 34,222 Inventories 2,318 Buildings and other fixed depreciable assets $ 129,717 Less: Accumulated depreciation 58,066 $ 71,651 Other assets 7,506 Total assets 132,081 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,932 Mortgages, notes, bonds payable in less than 1 year 7,444 Other current liabilities 22,530 Loans from stockholders 1,243 Mortgages, notes, bonds payable in 1 year or more 3,235 Common stock 12,600 Retained earnings 82,097 Total liabilities and stockholders' equity 132,081 *154 *62 Jetrol's balance sheet as of December 31, 1975, was as follows:
ASSETS Current assets: Cash in bank $ 38,052 Accounts receivable 53,547 Inventory 5,503 Prepaid taxes 4,500 $ 101,602 Property -- at cost: Machinery and equipment 181,579 Automotive equipment 9,343 Office equipment 406 Less: Accumulated depreciation 72,304 119,024 Other assets: Miscellaneous receivable G&H Realty 24,488 Organization costs 100 24,588 Total assets 245,214 LIABILITIES AND CAPITAL Current liabilities: Accounts payable -- trade $ 24,291 Notes payable -- bank (current portion) 3,892 Withheld taxes 8,017 Accrued payroll 2,001 Sales tax payable 140 Accrued expenses 20,963 $ 59,304 Long-term liabilities: Notes payable: Bank (noncurrent portion) $ 45,530 Officers 470 $ 46,000 Stockholders' equity: Common stock issued 12,600 Retained earnings 127,310 139,910 Total liabilities and capital 245,214 *63 Jetrol's balance sheet as of December 31, 1976, was as follows:
ASSETS Current assets: Cash in bank $ 36,909 Accounts receivable 56,096 Inventory 3,484 Prepaid expenses 19,467 $ 115,956 Property -- at cost: Machinery and equipment 199,005 Office equipment 406 Automotive equipment 21,320 Total 220,731 Less: Accumulated depreciation 92,393 128,338 Other assets: Organization costs 288 Miscellaneous receivable G&H Realty 24,489 24,777 Total assets 269,071 LIABILITIES AND CAPITAL Current liabilities: Accounts payable -- trade $ 22,526 Notes payable -- bank 11,888 Withheld taxes 817 Accrued payroll 2,018 Accrued expenses 24,740 Accrued taxes 19,600 $ 81,589 Stockholders' equity: Common stock issued 12,600 Retained earnings 174,882 187,482 Total liabilities and capital 269,071 *155 *64 Jetrol's business was growing in 1975 and subsequently. It needed room to expand its facilities, preferably at 27 Lois Street. Jet Rochester operated in the building on annual leases with Realty, effective February 1, 1975, and February 1, 1976. In December 1976, Gilbert sent Jet Rochester a letter stating that he would not renew the lease in 1977 because Jetrol needed the space. Jet Rochester vacated the building around April 1977, at which time Jetrol began to occupy the entire building.
Later in 1977, Gilbert contracted to sell all of the capital stock of Jetrol to the Pantasote Co. (Pantasote). As part of the purchase agreement, Gilbert guaranteed payment of the obligations owed by Realty to Jetrol. Pantasote would not close the sale until the Realty "loan" was off the books. On August 12, 1977, Gilbert borrowed money from the bank and "loaned" it to Realty. Realty used the money to repay Jetrol, without interest, on August 15, 1977. Thereafter, Jetrol repaid its bank loan. Following the sale of Jetrol to Pantasote, Gilbert repaid his note at the bank.
As of December 31, 1975, Jetrol had accumulated earnings and profits of $ 127,310.
OPINION
It is well established*156 that transfers between related corporations can result in constructive dividends to their common shareholder if they were made primarily for his benefit and if he received a direct or tangible benefit therefrom.
Schwartz v. Commissioner , 69 T.C. 877">69 T.C. 877Rapid Electric Co. v. Commissioner , 61 T.C. 232">61 T.C. 232Joseph Lupowitz Sons, Inc. v. Commissioner , 497 F.2d 862">497 F.2d 862Rushing v. Commissioner , 52 T.C. 888">52 T.C. 888441 F.2d 593">441 F.2d 593 (5th Cir. 1971). The issues of existence of a loan or the nature of the benefit to the shareholder are issues of fact and turn upon the circumstances of the particular case. SeeSchwartz v. Commissioner, supra at 884Welch v. Helvering , 290 U.S. 111 (1933)Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners argue that the transfer at issue constituted a bona *65 fide loan, thereby negating respondent's determination of a dividend. The critical question in resolving this issue is whether there was a genuine intention to create a debt, which, in turn, depends upon weighing such objective factors as reasonable expectation of repayment and the economic reality of the claimed debtor-creditor relationship.
Litton Business Systems, Inc. v. Commissioner , 61 T.C. 367">61 T.C. 367We agree with respondent that, on the facts revealed by the record herein, which is woefully inadequate in many respects (see nn. 1 & 2
supra ), no real indebtedness was created. The factors that petitioners argue establish an intent to repay are not convincing. "Such allegedly objective economic indicia of debt such as consistent bookkeeping and consistent financial reporting on balance sheets are in our opinion little more than additional declarations of intent, without any accompanying objective economic indicia of debt."Alterman Foods, Inc. v. United States , 505 F.2d 873">505 F.2d 873Dean v. Commissioner , 57 T.C. 32">57 T.C. 32It is true that, in other contexts, we have minimized the importance of some of the factors relied on by respondent. For example, it is clear that a valid debt may exist even where no formal debt instrument exists.
Joseph Lupowitz Sons, Inc. v. Commissioner, supra .Litton Business Systems, Inc. v. Commissioner , 61 T.C. at 378Joseph Lupowitz Sons, Inc. v. Commissioner, supra .We now turn to the question whether, since no valid indebtedness was created, Gilbert realized a constructive dividend from the transfer. It is clear that neither the finding of an indebtedness nor the mere existence of common ownership is per *67 se determinative that the common shareholder realized a dividend. See
Joseph Lupowitz Sons, Inc. v. Commissioner , 497 F.2d at 868Rushing v. Commissioner , 52 T.C. at 893-894Rapid Electric Co. v. Commissioner , 61 T.C. at 239Kuper v. Commissioner , 533 F.2d 152 (5th Cir. 1976)61 T.C. 624">61 T.C. 624 (1974). Petitioners' argument that it was in Jetrol's interest to consolidate ownership of its landlord in friendly hands (due to planned expansion) does not withstand scrutiny. There is no evidence that the relationship between Gilbert and his brother, Henry, was unfriendly or that Jetrol would have encountered any difficulties if Henry had remained as a 50-percent shareholder of Realty. *163 SeeSammons v. Commissioner , 472 F.2d 449">472 F.2d 449But the absence of business purpose is not necessarily determinative that a constructive dividend occurred. Such a purpose merely refutes, or relegates to the status of incidental or indirect, any benefit to the common shareholder of the two corporations. Obviously, the primary purpose of the transfer in question herein was to redeem Henry's Realty stock, thus making Gilbert the sole shareholder of Realty. Since the funds with which such redemption was made represented fresh funds to Realty, they clearly enhanced the value of Gilbert's*164 Realty stock (even though they were paid out) if not offset by an *68 equivalent liability, and such enhancement could be considered a constructive dividend. *165 bank. Under the circumstances of this case, we think that this potential offset should not be taken into account. According to Gilbert, the bank was unwilling to make the loan to Realty unless the mortgage was refinanced. There is nothing in the record to indicate that the possibility of an unsecured loan to Realty with a personal guaranty by Gilbert would have been acceptable. On the other hand, the bank was willing to make the loan to Jetrol, albeit with the requirement of a personal guaranty by Gilbert. Gilbert testified that Jetrol was an expanding and fast growing business, and the balance sheets of Jetrol, as well as its subsequent acquisition of additional space, confirm this evaluation. From the foregoing, we infer that the bank looked to the primary obligor (Jetrol) for repayment and that Gilbert's guaranty was in effect simply a means of protecting the bank if its expectations were not capable of being realized. The fact that Gilbert personally borrowed the funds utilized to repay the bank at the time of the Pantasote transaction, some 2 1/2 years later, has little significance (compare our discussion on the "loan" issue, pp. 65 - 66
supra ). The reasons for handling*166 the repayment in the manner set forth in our findings of fact are not revealed in the record. Based upon the foregoing, we are of the opinion that Gilbert's contingent liability as a guarantor, as of February 1975, lacked sufficient substance to warrant taking it into account in determining whether Gilbert received a constructive dividend from Jetrol at that time; *69 The situation involving a redemption wherein liabilities of the shareholder being redeemed and on which the shareholder remains liable are assumed by the redeeming corporation is distinguishable. Under such circumstances, the shareholder was from the outset and remains the primary source of payment as far as the creditor is concerned, although, as between the shareholder and the redeeming corporation, the latter is ultimately responsible. SeeMaher v. Commissioner , 469 F.2d 225">469 F.2d 22555 T.C. 441">55 T.C. 441 , 456 (1970), andSupplemental Opinion, 56 T.C. 763">56 T.C. 763 , 764 (1971);Rev. Rul. 77-360, 2 C.B. 86">1977-2 C.B. 86 ;*167Rev. Rul. 78-422, 2 C.B. 129">1978-2 C.B. 129 . See also B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, p. 7-32 (4th ed. 1979).In sum, the benefits to Gilbert in 1975 were straightforward. He was able to obtain sole ownership of Realty without reducing the value of his interest in Realty's assets (see n. 11
supra ) and without investing additional personal funds which would have been subordinated to Realty's mortgage debt. Moreover, he was able to use Jetrol's borrowing power to obtain control of Realty. SeeRapid Electric Co. v. Commissioner , 61 T.C. at 239Decision will be entered for the respondent .Footnotes
1. The record contains no specific information as to the financial condition of Realty by way of a balance sheet, financial statement, etc.↩
2. The terms of the loan, e.g., interest rate or time or times of repayment, are not revealed by the record.↩
3. The stipulation states that "Jetrol
loaned the same $ 20,000 to G&H Realty Corp." (Emphasis added.) It is clear that the use of the term "loan" in the stipulation is not meant to determine the legal consequences of the transfer of funds, or this case would not have been litigated by respondent. To the extent the actual facts are contrary to the stipulation, the stipulation will be disregarded.Jasionowski v. Commissioner , 66 T.C. 312">66 T.C. 3124. See
Wilkof v. Commissioner , T.C. Memo. 1978-496Johnson v. Commissioner , T.C. Memo. 1979-7↩5.
Wilkof v. Commissioner, supra↩ n. 46. See also
Wilkof v. Commissioner, supra↩ n. 47. We refuse to speculate whether Henry's former ownership of Jet Rochester would have caused him to oppose his brother's efforts to obtain more space for Jetrol.↩
8. Compare
McLemore v. Commissioner , T.C. Memo. 1973-59494 F.2d 1350">494 F.2d 1350↩ (6th Cir. 1974).9. See
Wilkof v. Commissioner, supra n. 4Stevenhagen Co. v. Commissioner , T.C. Memo. 1975-198551 F.2d 106">551 F.2d 106 (6th Cir. 1977). See alsoSammons v. United States , 433 F.2d 728">433 F.2d 72810. In effect, Realty, not Jetrol as petitioners claim, was a conduit for the $ 20,000, with the result that, after the redemption of Henry's stock, Gilbert owned 100 percent of the same net assets of Realty as compared with the 50 percent he owned prior to the redemption.↩
11. Cf.
Columbus & Greenville Railway Co. v. Commissioner , 42 T.C. 834 (1964)358 F.2d 294">358 F.2d 294 (5th Cir. 1966);Albany Car Wheel Co. v. Commissioner , 40 T.C. 831">40 T.C. 831333 F.2d 653">333 F.2d 653↩ (2d Cir. 1964).
Document Info
Docket Number： Docket No. 8774-78
Citation Numbers： 74 T.C. 60, 1980 U.S. Tax Ct. LEXIS 150
Judges： Tannenwald
Filed Date： 4/15/1980
Precedential Status： Precedential
Modified Date： 11/14/2024