DocketNumber: Docket No. 15104-80
Citation Numbers: 77 T.C. 837, 1981 U.S. Tax Ct. LEXIS 46
Judges: Goffe
Filed Date: 10/13/1981
Status: Precedential
Modified Date: 1/13/2023
*46
Petitioners and their children were the only shareholders of a "subchapter S corporation." The corporation distributed cash to the shareholders disproportionately to their stock ownership. Petitioners, on their income tax returns, allocated the dividends differently than they were actually distributed, relying upon
*837 The Commissioner determined the following deficiencies in petitioners' Federal income tax: *838
Taxable year | Deficiency |
1975 | $ 10,981.17 |
1976 | 22,856.96 |
1977 | 15,896.84 |
In the statutory notice of deficiency, the Commissioner determined several adjustments to petitioners' liability but the petition contained only an allegation of error as to one adjustment determined for each of the 3 years; therefore, only that adjustment is before the Court. The sole issue to be decided is whether petitioners are taxable in full upon the undistributed taxable income and cash distributions from a "subchapter S corporation" which they controlled, or whether undistributed taxable income*48 and cash distributions in a lesser amount are allocable to them as income under the provisions of
FINDINGS OF FACT
Some of the facts were stipulated. The stipulation of facts and attached exhibits are incorporated by this reference.
Petitioners are husband and wife and they resided in Columbus, Ind., when they filed their petition in this case. They filed joint Federal income tax returns for the taxable years involved with the Office of the Internal Revenue Service at Memphis, Tenn.
The Johnson Oil Co., Inc. (hereinafter referred to as Johnson Oil or the corporation), is a corporation organized and existing under the laws of the State of Indiana. On November 25, 1969, it elected to be taxed as a small business corporation under the provisions of subchapter S of the Internal Revenue Code of 1954, as amended. That election continued in effect to the date of filing the petition in this case. The corporation adopted a fiscal year and filed its Federal income tax returns on a taxable year ending October 31.
For all relevant periods of time, petitioners had two children, Richard L. Johnson, Jr., and Jennifer A. Johnson.
The issued and outstanding*49 capital stock of Johnson Oil, for all relevant periods of time, was owned in the following proportions: *839
Shareholder | Percentage |
Richard L. Johnson | 38.5 percent |
Ruth W. Johnson | 36.5 percent |
Richard L. Johnson, Jr | 12.5 percent |
Jennifer A. Johnson | 12.5 percent |
100.0 percent |
The tables on pages 840-842 reflect the distributions of cash by Johnson Oil to its shareholders for the taxable years of the corporation.
On their joint Federal income tax returns for the taxable (calendar) years involved, petitioners reported as their share of cash distributions and undistributed taxable income of Johnson Oil the following amounts:
Taxable year | Amount |
1975 | $ 117,101.41 |
1976 | 140,289.12 |
1977 | 147,999.22 |
In his statutory notice of deficiency mailed to petitioners, the Commissioner of Internal Revenue determined that petitioners should have reported on their income tax returns for the taxable (calendar) years involved as their share of cash distributions and undistributed taxable income of Johnson Oil the following amounts:
Taxable year | Amount |
1975 | $ 133,775.29 |
1976 | 174,638.87 |
1977 | 169,043.21 |
OPINION
Petitioners and their children owned all of*50 the capital stock of Johnson Oil, a "subchapter S corporation." As detailed in our findings of fact the corporation, controlled by petitioners, distributed cash to the shareholders disproportionately to their stock ownership. Petitioners, relying upon
*840 YEAR ENDED OCT. 31, 1975
Cash Distributions | |||||
Richard L. | Ruth W. | Richard L. | Jennifer A. | ||
Month | Totals | Johnson, Sr. | Johnson | Johnson, Jr. | Johnson |
11/74 | $ 127.94 | $ 127.94 | 0 | 0 | 0 |
12/74 | 355.12 | 355.12 | 0 | 0 | 0 |
1/75 | 13,113.13 | 11,690.63 | 0 | $ 711.25 | $ 711.25 |
Subtotals | 13,596.19 | 12,173.69 | 0 | 711.25 | 711.25 |
2/75 | 309.69 | 309.69 | 0 | 0 | 0 |
3/75 | 73.43 | 73.43 | 0 | 0 | 0 |
4/75 | 121,735.12 | 100,848.04 | 0 | 10,443.54 | 10,443.54 |
5/75 | 145.50 | 145.50 | 0 | 0 | 0 |
6/75 | 25,115.00 | 22,000.00 | 0 | 1,557.50 | 1,557.50 |
7/75 | 0 | 0 | 0 | 0 | 0 |
8/75 | 10,028.00 | 10,028.00 | 0 | 0 | 0 |
9/75 | 25,637.30 | 22,522.30 | 0 | 1,557.50 | 1,557.50 |
10/75 | 80.50 | 80.50 | 0 | 0 | 0 |
196,720.73 | 168,181.15 | 0 | 14,269.79 | 14,269.79 | |
Less: | |||||
Prior | |||||
year's | |||||
earnings | (13,596.19) | (12,173.69) | (0) | (711.25) | (711.25) |
183,124.54 | 156,007.46 | 0 | 13,558.54 | 13,558.54 | |
Less: | |||||
Return | |||||
of capital | (26,096.53) | (22,232.17) | (0) | (1,932.18) | (1,932.18) |
1975 Out | |||||
of current | |||||
earnings | |||||
(0.8574929) | 157,028.01 | 133,775.29 | 0 | 11,626.36 | 11,626.36 |
*51 *841 YEAR ENDED OCT. 31, 1976
Cash Distributions | |||||
Richard L. | Ruth W. | Richard L. | Jennifer A. | ||
Month | Totals | Johnson, Sr. | Johnson | Johnson, Jr. | Johnson |
11/75 | $ 25.08 | $ 25.08 | 0 | 0 | 0 |
12/75 | 395.20 | 395.20 | 0 | 0 | 0 |
1/76 | 2,728.47 | 1,213.47 | 0 | $ 757.50 | $ 757.50 |
Subtotals | 3,148.75 | 1,633.75 | 0 | 757.50 | 757.50 |
2/76 | 181.71 | 181.71 | 0 | 0 | 0 |
3/76 | 72.14 | 72.14 | 0 | 0 | 0 |
4/76 | 65,079.21 | 31,356.18 | $ 31,356.18 | 1,191.22 | 1,175.63 |
5/76 | 22,006.83 | 11,003.42 | 11,003.41 | 0 | 0 |
6/76 | 21,063.70 | 9,181.85 | 9,181.85 | 1,350.00 | 1,350.00 |
7/76 | 121.47 | 121.47 | 0 | 0 | 0 |
8/76 | 35,000.00 | 17,500.00 | 17,500.00 | 0 | 0 |
9/76 | 20,005.18 | 8,652.59 | 8,652.59 | 1,350.00 | 1,350.00 |
10/76 | 4,246.70 | 2,123.35 | 2,123.35 | 0 | 0 |
170,925.69 | 81,826.46 | 79,817.38 | 4,648.72 | 4,633.13 | |
Less: | |||||
Prior | |||||
year's | |||||
earnings | (3,148.75) | (1,633.75) | (0) | (757.50) | (757.50) |
167,776.94 | 80,192.71 | 79,817.38 | 3,891.22 | 3,875.63 | |
Add: | |||||
Undistributed | |||||
taxable | |||||
income | |||||
(pro rata) | 19,505.03 | 7,509.44 | 7,119.34 | 2,438.13 | 2,438.12 |
187,281.97 | 87,702.15 | 86,936.72 | 6,329.35 | 6,313.75 |
*52 *842 YEAR ENDED OCT. 31, 1977
Cash Distributions | |||||
Richard L. | Ruth W. | Richard L. | Jennifer A. | ||
Month | Totals | Johnson, Sr. | Johnson | Johnson, Jr. | Johnson |
11/76 | $ 314.33 | $ 157.17 | $ 157.16 | 0 | 0 |
12/76 | 4,152.93 | 2,076.46 | 2,076.47 | 0 | 0 |
1/77 | 22,840.82 | 8,670.41 | 8,670.40 | $ 2,750.00 | $ 2,750.00 |
Subtotals | 27,308.08 | 10,904.04 | 10,904.03 | 2,750.00 | 2,750.00 |
2/77 | 128.91 | 64.46 | 64.45 | 0 | 0 |
3/77 | 15,033.05 | 7,516.52 | 7,516.53 | 0 | 0 |
4/77 | 33,066.61 | 15,002.24 | 15,002.23 | 1,498.18 | 1,563.96 |
5/77 | 0 | 0 | 0 | 0 | 0 |
6/77 | 22,237.50 | 9,468.75 | 9,468.75 | 1,650.00 | 1,650.00 |
7/77 | 20,000.00 | 10,000.00 | 10,000.00 | 0 | 0 |
8/77 | 106.43 | 53.21 | 53.23 | 0 | 0 |
9/77 | 32,252.00 | 14,476.00 | 14,476.00 | 1,650.00 | 1,650.00 |
10/77 | 0 | 0 | 0 | 0 | 0 |
150,132.58 | 67,485.22 | 67,485.22 | 7,548.18 | 7,613.96 | |
Less: | |||||
Prior | |||||
year's | |||||
earnings | (27,308.08) | (10,904.04) | (10,904.04) | (2,750.00) | (2,750.00) |
122,824.50 | 56,581.18 | 56,581.18 | 4,798.18 | 4,863.96 | |
Add: | |||||
Undistributed | |||||
taxable | |||||
income | |||||
(pro rata) | 74,507.80 | 28,685.50 | 27,195.35 | 9,313.48 | 9,313.47 |
197,332.30 | 85,266.68 | 83,776.53 | 14,111.66 | 14,177.43 |
*53 *843 Respondent contends that petitioners cannot properly allocate part of the distributions they received to the other shareholders because
(a)
(b)
(c)
(d)
Subsection (a) of the regulation quoted above clearly states that the apportionment or allocation is pursuant to
(c) Treatment of Family Groups. -- Any dividend received by a shareholder from an electing small business corporation (including any amount treated as a dividend under section 1373(b)) may be apportioned or allocated by the Secretary or his delegate between or among shareholders of such corporation who are members of such shareholder's family (as defined in section 704(e)(3)), if he determines that such apportionment or allocation is necessary in order to reflect the value of services rendered to the corporation by such shareholders.
The Code makes it clear that the apportionment or allocation may be made by the Secretary.
In the instant case, the Internal Revenue Service made no allocation pursuant to
A taxpayer may not invoke the provisions of
*845 We accordingly hold that the allocation of distributions by petitioners was not authorized and the Commissioner is sustained in his determination.
*58
1. All section references are to the Internal Revenue Code of 1954 as amended.↩