The facts summarized above disclose what we consider to be the crucial factor in this issue - that is, (1) clause 6 of the stock purchase agreement provides, inter alia, for payment to Behlmer of certain amounts of corporate net income in the form of nonnegotiable promissory notes without any specification as to time of payment or deferral of payment and (2) the notes themselves (which were issued in each case after the right thereto was earned) provide that payment on each was to be deferred some three and four years after issuance thereof.
There is not sufficient evidence in the record to establish that the parties at the time of the execution of the stock purchase agreement (1) contemplated the deferral of payment on the notes for three and four years after date of issuance or (2) contemplated payment on the notes at any time other than (a) upon demand or (b) in the same calendar year in which each note was received. Although Emil Obegi was before this Court as a witness in the trial proceedings, his testimony gives no indication that the parties intended in the stock purchase agreement to defer payment on the notes provided for in clause 6 thereof beyond the years in which each was received. Nor did he imply that he had desired the amounts represented by the notes to remain in the corporation as a form of security until the buyers had completed payment on the purchase price. Emil Obegi merely testified that the notes were a method devised by his attorney (who also represents petitioners herein)to give Behlmer the profits of the corporation. Moreover, the first note received by Behlmer pursuant to the contract was issued by the corporation some four months after the stock purchase agreement was executed and does not serve to construe clause 6 of that agreement as intending deferred payment in the absence of any other reliable evidence tending to establish such fact. Despite any inferences that might be gleaned from the record indicating a contractual intention to defer payment, they are hardly adequate as a basis to sustain the Laramys when confronted, as we are, with a total dearth of any substantial and affirmative evidence to buttress such inferences.
Under California law pertaining to bills and notes, a promissory note which does not state time of payment is held to be payable on demand. *153 rise to a right to receive promissory notes, but fails to state the date on which such notes are payable, gives rise to a right to receive notes payable on demand. *154 were received. Furthermore, it appears to us that, in all probability, clause 6 of the stock purchase agreement was purposefully written without any specific deferred payment date so as to allow Behlmer to receive notes payable at any date he chose.
We can see no meaningful distinction in applying the doctrine of constructive receipt between (1) a taxpayer who at the end of Year I agrees by contract to receive payment in Year II for amounts earned prior to the execution of said contract and (2) a taxpayer who at the end of Year I accepts notes deferring payment until Year II on amounts earned prior to issuance of the notes under the circumstances presented herein.
The facts in Ray S. Robinson, 44 T.C. 20">44 T.C. 20 (1965), distinguish that case from the instant case. There, the employment contract which provided for the salary to be received by the taxpayer-employee specifically directed that a portion of the salary was to be deferred to years beyond those in which (1) the contract was executed and (2) the taxpayer-employee's services were rendered. In the case at bar, the stock purchase agreement covering Behlmer's compensation did not, specifically or otherwise, provide for the deferment of that portion of his salary to be received in the form of notes. We have found that it was only after his services had been rendered that deferred payment of the notes was agreed upon by the parties.
The Laramys have not attempted to show that at any time involved herein (1) the corporation was unable to make payment on the notes or (2) payment on the notes would result in financial hardship to the corporation. Moreover, the facts appear to be otherwise, to wit - Behlmer was able to withdraw cash amounts from the corporation in excess of the cash amounts owing him under clause 6 of the stock purchase agreement. *156 in those two years alone.
Since we have found that the face amounts of the two notes received by Behlmer in 1960 and 1961 constitute income in 1960 and 1961, respectively, to the Laramys on the theory of constructive receipt, we need not consider respondent's alternative argument that the face amounts of the two notes constitute income to said petitioners in 1961.
Because there was no issue raised as to whether the note received by Behlmer in 1959 constitutes income in that year to the Laramys, we must consider respondent's alternative argument that the face amount of such note constitutes income in 1961 when Behlmer received all of the outstanding shares of the corporation's stock from the sellers and thereafter cancelled all of the notes.
Respondent's alternative argument to the effect that the Laramys realized income in 1961 in the total face amount of the three promissory notes received by Behlmer was first raised by respondent in his amended answer. *157 but also all the material facts necessary to support his claims. Kimbell-Diamond Milling Co., 10 T.C. 7">10 T.C. 7 (1949).
We have found as a fact that the note issued by the corporation on May 1, 1959, was received by Behlmer in 1959. In order to constitute income under any legal theory in 1961 to the individual petitioners herein, the note received by Behlmer in 1959 must not have constituted income to said petitioners in such earlier year. Respondent has failed to prove that the note received by the individual petitioners in 1959 was not income to them in that year. Accordingly, we cannot possibly sustain his contention that the face amount of the 1959 note was income to these petitioners in 1961. Therefore, we hold for petitioners on this issue.
Respondent concedes that if receipt of the promissory notes by Behlmer is deemed to be "payment" in the years of receipt, the amounts in question were properly accrued and deductible by the corporation in the years in which the notes were issued. Due to our holding that the face amounts of the notes received by Behlmer in 1960 and 1961 were constructively received by the individual petitioners in those years, we need not consider respondent's second alternative argument that the face amount of the notes was not deductible by the corporation under section 267(a)(2), Internal Revenue Code of 1954, at least with respect to the notes received in 1960 and 1961. However, with respect to the note received by Behlmer in 1959, we must consider the applicability of section 267(a)(2) since the question of whether the face amount of the 1959 note was income to the individual petitioners in 1959 was not in issue.
The purpose of section 267 is to eliminate the former tax avoidance practice of a corporation accruing unpaid expenses and interest to a closely related taxpayer who, because he is on the cash basis, reports no income. Because of the relationship between the taxpayers, payment might never be required or might be postponed until the related taxpayer has offsetting losses. Young Door Co., Eastern Division, 40 T.C. 890">40 T.C. 890 (1963).
Under section 267(a)(2), no deduction is allowed for expenses otherwise deductible under section 162, Internal Revenue Code of 1954, (A) where such expenses are not paid during the taxable year of the taxpayer or within 2 1/2 months following the close thereof, and the amount of the expenses is not includable in the gross income of the person to whom payment is to be made; (B) if, by reason of the latter's method of accounting the amount is not, unless paid, includable in the latter's gross income for the taxable year in which or with which the taxable year of the taxpayer ends; and (C) if, at the close of the taxpayer's taxable year, or within 2 1/2 months thereafter, both the payor and the payee are related persons as defined in any of the enumerated categories set out in section 267(b). Thus, there are two questions that must be answered in the affirmative in order that section 267 applies, to wit - (1) whether the requisite relationship existed under section 267(b) and (2) whether the expenses were paid or constructively or otherwise received within the prescribed period. Section 267(a)(2); Regs. section 1.267(b).
The relevant portion of section 267(b) provides as follows:
(b) Relationships. - The persons referred to in subsection (a) are:
* * *
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
Although the corporation described in section 267(b)(2) is generally referred to as a "controlled corporation," the term is a misnomer, since the control, i.e., voting control, is not required. Voting control would have been required under the version of section 24(a)(6) of the Revenue Bill of 1934 (the forerunner of the present Code section 267(b)(2)) introduced in the House of Representatives, which referred to "more than 50 per centum of the voting stock." However, the bill was amended to its present form by the Senate to correspond with the test adopted by the House for personal holding company status. S. Rept. No. 558, to accompany H.R. 7835, 73d Cong., 2d Sess., p. 27 (1934). The Senate Report stated:
Its effect is to disallow a deduction for losses on sales or exchanges of property to corporations by those owning the majority in value of the stock of such corporations, even though actual control may be in a few individuals who own little stock.
The House accepted the Senate amendment in conference. H. Rept. No. 1385, 73d Cong., 2d Sess., p. 18 (1934).
It is respondent's position that the Laramys owned more than 50 percent in value of the corporation's stock and we agree with respondent's position.
We do not consider as controlling herein the fact that the sellers retained title to and possession of the corporation's outstanding stock until the buyers had paid in full the purchase price. The stock purchase agreement (those portions relative to this issue are set out in our findings of fact) vitiates any real authority which the sellers might have retained over the corporation by reason of being shareholders, directors, and officers.
A decisive factor tipping the balance of ownership in favor of the individual petitioners' ownership is the fact that Behlmer received all corporate net profits during the years in issue. After the execution of the stock purchase agreement, no amounts could be distributed to the sellers in their capacity as shareholders, officers, or directors of the corporation. Moreover, no amounts were, in fact, distributed to the sellers after said contract's execution. Additionally, Emil Obegi considered that Behlmer took over the business upon execution of the stock purchase agreement. Thus, it would appear that Behlmer alone had the right to the proprietary reward from the corporation's business regardless of how such reward was characterized by the parties. On the basis of the foregoing, we believe that the retention of the corporation's stock by the sellers constituted, in essence, merely a form of security interest and, consequently, that Behlmer owned in excess of 50 percent in value of the outstanding stock of the corporation for purposes of section 267(b)(2).
We must now determine whether the amount represented by the note issued May 1, 1959, was actually paid to, or was constructively or otherwise received by, Behlmer in 1959 or at any time within 2 1/2 months thereafter. Section 267(a); Regs. section 1.267(b). It is clear that such amount was not actually paid to Behlmer during the prescribed period. With regard to the question of receipt, constructively or otherwise, the burden is on the corporate petitioner. Although we have earlier held that Behlmer constructively received the notes issued to him by the corporation in 1960 and 1961, that holding was based upon the Laramys' failure to meet their burden of proving that the face amounts of those notes were not constructively received in 1960 and 1961, respectively. On the other side of the coin, the corporate petitioner has failed to prove that the amounts were constructively or otherwise received by Behlmer within the prescribed period. section 267(a)(2) with respect to the note received by Behlmer in 1959.
The final issue for our consideration is whether certain deductions for entertainment and automobile expenses are allowable to petitioners in Docket No. 3173-64 in 1959, 1960, and 1961.
Respondent's objection to the Laramys' deduction for entertainment expenses is that Behlmer's testimony was vague, general, and uncorroborated by other witnesses or records. Respondent does not deny that such expenditures, if actually incurred, would not be ordinary and necessary business expenses. The issue involves a question of fact which we must determine on the evidence presented.
We are convinced by Behlmer's testimony that the claimed entertainment expenses were actually incurred in the amounts testified to by Behlmer. Contrary to respondent's assertion, Behlmer's testimony was neither vague nor general; he testified specifically as to the purpose of entertaining customers, the successful results thereof, and the names of some of the customers so entertained.
Although Behlmer's testimony was uncorroborated, his testimony was uncontradicted and we have no reason to disbelieve him. Therefore, we hold that the Laramys are entitled to deduct the amounts claimed for entertainment expenses during 1959, 1960, and 1961.
Respondent is on firmer ground in challenging the deductions claimed by the Laramys arising from the use of Behlmer's car in carrying out the corporation's business. Although Behlmer's testimony is clear as to the use to which his car was put, there is nothing in the record to establish the proper amount of the deductions claimed. There is no evidence of the make of the car, its model, year, or cost, or the amounts attributable to repairs or insurance. Thus, we have no basis for ascertaining or even estimating what amount, if any, constitutes a reasonable deduction for automobile expenses. Therefore, we hold for respondent with respect to the automobile expense deduction.
Decisions will be entered under Rule 50.
Document Info
Docket Number： Docket Nos. 3173-64, 3174-64.
Filed Date： 6/28/1966
Precedential Status： Non-Precedential
Modified Date： 11/20/2020
