DocketNumber: Docket Nos. 16200-79, 18455-80, 18493-80.
Citation Numbers: 47 T.C.M. 1100, 1984 Tax Ct. Memo LEXIS 607, 1984 T.C. Memo. 74
Filed Date: 2/13/1984
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
WILBUR,
Docket No. | Year | Deficiency | |
Sanford P. Burnstein | 16200-79 | 1974 | $19,527.15 |
and Irene Burnstein | 1975 | 31,161.54 | |
1976 | 4,906.98 | ||
James W. Boy and | 18455-80 | 1974 | 8,740.00 |
Virginia C. Boy | 1975 | 15,494.00 | |
1976 | 6,209.00 | ||
Thomas E. Boy and | 18493-80 | 1974 | 8,740.00 |
Patricia R. Boy | 1975 | 12,737.00 | |
1976 | 1,956.00 |
These cases have been consolidated for trial, briefing, and opinion. Petitioners have conceded certain adjustments made in the notices of deficiency. The issues remaining for decision are:
(1) Whether petitioners are entitled to claimed deductions in 1974 and 1975 under
(2) Whether petitioners Sanford P. Burnstein and Irene Burnstein are entitled to a long-term capital loss as a result of the 1976 redemption of their stock in National Jets, Inc.; and
(3) Whether petitioners Sanford P. Burnstein and Irene Burnstein may deduct a payment to Concare Aircraft Leasing Corporation in 1976 in the amount of $116,707.42 as a loss from a transaction entered into for profit under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioners Sanford P. Burnstein (Burnstein) and Irene Burnstein resided in Tulsa, Oklahoma, at the time they filed their petition in the instant case.They filed their Federal income tax returns for the taxable years 1974, 1975, and 1976 with the Internal Revenue Service Center, Southwest Region, Austin, Texas.
Petitioners James W. Boy and Virginia*610 C. Boy resided in Fort Lauderdale, Florida, at the time they filed their petition in the instant case. They filed their Federal income tax returns for the taxable years 1974, 1975, and 1976 with the Internal Revenue Service Center, Southeast Region, Atlanta, Georgia.
Petitioners Thomas E. Boy and Patricia R. Boy resided in Fort Lauderdale, Florida, at the time they filed their petition in the instant case. They filed their Federal income tax returns for the taxable years 1974, 1975, and 1976 with the Internal Revenue Service Center, Southeast Region, Atlanta, Georgia.
During 1974, 1975, and until March 25, 1976, Sanford Burnstein owned 50 percent and James W. Boy and Thomas E. Boy (the Boy brothers) each owned 25 percent of the outstanding common stock of two small business corporations, Concare Aircraft Leasing Corporation (Concare) and National Jets, Inc., (National). (Burnstein and the Boy brothers will hereinafter be referred to as "petitioners.") The number of shares owned by each of the petitioners in Concare and National and the original consideration paid in cash for the shares were as follows:
Concare | National | |||
No. of | No. of | |||
Shareholder | Shares | Consideration | Shares | Consideration |
Sanford P. Burnstein | 500 | $500 | 500 | $500 |
James W. Boy | 250 | 250 | 250 | 250 |
Thomas E. Boy | 250 | 250 | 250 | 250 |
Total | 1,000 | $1,000 | 1,000 | $1,000 |
*611 The petitioners were officers in Concare and National during the years in issue as follows:
Concare | |
President | Sanford P. Burnstein |
Vice-President | James W. Boy |
Secretary-Treasurer | Thomas E. Boy |
National | |
President | Sanford P. Burnstein |
Secretary | James W. Boy |
Treasurer | Thomas E. Boy |
Concare was incorporated on October 16, 1967, and elected to be treated as a small business corporation on February 24, 1969. It adopted a fiscal year ending January 31. Concare is in the business of purchasing, selling, and leasing used aircraft and aircraft parts.
National was incorporated on July 19, 1974, and, on the same date, elected to be treated as a small business corporation. It adopted a calendar year. National is in the business of owning and operating Lear Jet Aircraft for a passenger charter service.
National was organized by the petitioners as a separate corporation from Concare for valid business reasons. All aircraft owned by a passenger charter service must be certified by the Federal Aviation Administration. Since Concare's business involved the purchase, sale, and lease of aircraft which would otherwise not require such certification, *612 petitioners incorporated National to operate the charter service.
Concare advanced $131,535.84 to National in 1974, and $98,879 in 1975. These funds were used to pay for some of National's expenses such as supplies, tires, and other operating and naintenance expenses. None of these funds were transferred from petitioners' personal bank accounts.
National did not give Concare any promissory notes nor pledge any collateral as a result of the funds transferred in 1974 and 1975. In addition, Concare did not set up a repayment schedule nor charge National any interest in connection with the funds advanced. National paid no interest on these funds and Concare made no demand for repayment.
When the funds were transferred from Concare to National in 1974 and 1975, they were recorded on the books of Concare as an account receivable due from National, and on the books of National as an account payable.
During the years in issue, John D. Schuler, a certified public accountant, prepared income tax returns and financial statements for National and Concare. As part of his duties, he was authorized to make adjusting and closing entries to the books of National and Concare for the purpose*613 of preparing such returns and statements.
Mr. Schuler made adjusting journal entries to the books of National as of December 31, 1974 and December 31, 1975 which reclassified the funds transferred by Concare to National as accounts payable due petitioners, as follows:
Accounts Payable | 12/31/74 | 12/31/75 |
Due Sanford P. Burnstein | $65,767.92 | $49,439.50 |
Due James W. Boy | 32,883.96 | 24,719.75 |
Due Thomas E. Boy | 32,883.96 | 24,719.75 |
Total | $131,535.84 | $98,879.00 |
Mr. Schuler made corresponding adjusting journal entries to the books of Concare as of December 31, 1974 and January 31, 1976 which reclassified the funds transferred by Concare to National as accounts receivable due from petitioners as follows:
Accounts Receivable | 12/31/74 | 1/31/76 |
Due from Sanford P. Burnstein | $65,767.92 | $50,939.50 |
Due from James W. Boy | 32,883.96 | 25,469.75 |
Due from Thomas E. Boy | 32,883.96 | 25,469.75 |
Total | $131,535.84 | $101,879.00 |
The financial statements of Sanford Burnstein for the period ending June 30, 1975 and September 30, 1975 report an indebtedness from National to Burnstein of $65,768.
National did not give petitioners any promissory notes*614 nor pledge any collateral as a result of the funds transferred by Concare to National in 1974 and 1975. In addition, petitioners did not set up a repayment schedule nor charge National any interest in connection with the funds advanced.
Concare made no demand for repayment either upon National or upon petitioners and petitioners made no demand for payment upon National as a result of the funds transferred by Concare to National.
During 1974 and 1975, no payments on the amounts transferred by Concare to National were made to Concare or to the petitioners by National.
National experienced a net operating loss of $57,387.78 in 1974 and $95,572.39 in 1975. In his notice of deficiency, respondent disallowed petitioners' claimed share of these losses since he determined that petitioners' adjusted bases in National stock and indebtedness of National to them was not sufficient to cover such losses.
In 1976, petitioner Burnstein's stock in National was redeemed by National for $73,627.34 cash. The redemption price was determined as follows:
Amount paid for capital stock | $500.00 | |
Additions: Account receivable at 12/31/75 | 115,207.42 | |
Increase in agreed value of Lear | ||
Jet owned by National: | ||
Value at 12/31/75 | $440,000.00 | |
Value per books | 371,200.00 | |
68,800.00 | ||
One-half | x.5 | 34,400.00 |
$150,107.42 | ||
Deductions: Losses of National | ||
1974 | 57,387.78 | |
1975 | 95,572.39 | |
152,960.17 | ||
One-half | x.5 | 76,480.08 |
Redemption price | $73,627.34 |
*615 On April 13, 1976, the petitioners each paid in full to Concare the following amounts which were recorded on Concare's books as accounts receivable from them:
Sanford P. Burnstein | $116,707.42 |
James W. Boy | 58,353.71 |
Thomas E. Boy | 58,353.71 |
Petitioner Burnstein drafted a check to Concare for $167,064.95 which included the above-noted payment of $116,707.42. Concare did not make a demand upon Burnstein to make such payment, and Burnstein had no obligation to write the check.
OPINION
During 1974 and 1975, petitioners owned all of the stock in two subchapter S corporations (Concare and National) in the same proportions. Concare advanced funds to National in 1974 and 1975 and National experienced net operating losses in each of those years.
The primary question we must resolve herein is whether petitioners' bases in National for purposes of
Petitioners maintain that Concare made the advances on behalf of its shareholders and thus the transaction in substance was a transfer of funds from Concare to petitioners who in turn transferred the funds to National. Therefore, petitioners*616 contend that the amounts owed by National as a result of the advances were actually owed to the shareholders in proportion to their ownership interests and should be taken into account in determining the amount of National's net operating loss that petitioners may deduct. Respondent asserts, however, that since the amounts were advanced by Concare to National, any debt created was not an indebtedness of National running to the petitioners within the meaning of
We agree with respondent.
As applicable to the years herein,
(A) the adjusted basis (determined without regard to any adjustment under
(B) the adjusted basis (determined without regard to any adjustment under
It is well settled that adjusted basis in an electing corporation's indebtedness under
It is not the proportionability of ownership interests that is determinative. Rather, it is the crucial fact that the partnership made the loan and the partners, to the extent of their partnership interest, participated therein. If the corporation should default on the loan its effects will be felt by the partners as creditors rather than the partners as shareholders.
The existence of the partnership cannot be ignored here even though the partners were simultaneously shareholders in the subchapter S corporation. If the partners had directly loaned the money to the subchapter S corporation or treated it as an addition to capital, the result would be different. See
Similarly, where the sole beneficiary*619 of an estate was the stockholder of a subchapter S corporation owing a debt to the estate, we denied the shareholder the loss pass through because the debt did not run directly to her.
Petitioners rely heavily on Burnstein's testimony that when they caused Concare to transfer money to National, they intended and believed they were actually transferring their own money.Petitioners also point out that since Concare had no financial interest in National, the funds were obviously advanced on behalf of the shareholders. Thus, they argue that made the necessary economic outlay which allows them to acquire a basis in the indebtedness from National. Petitioners' argument is without merit and contrary to the judicial interpretation of
The "concept of indebtedness of the corporation to the shareholders*621 as employed in the statute was intended to be comparable to actual capital investment by the shareholders,"
The situations where the indebtedness has been guaranteed, or runs directly to a trust or an estate, have all resulted in a denial of the loss passthrough to the extent of the debt. We think that a loan made by a partnership to the subchapter S corporation should receive the same treatment. If Congress should deem it appropriate to change the language of
The record is unclear as to why Concare made the advances. Concare may have had sound business reason for doing so. Even if they were made on the shareholders' behalf, there certainly is no basis upon which to conclude that Concare was an agent or mere conduit of the petitioners. 4 Thus, the indebtedness here simply did not run to the shareholders so as to qualify under
*623 Petitioners insist, however, that they made the necessary economic outlay to acquire a basis in the amount of funds transferred by Concare to National by later assuming responsibility to repay such amount to Concare. We reject such contention. The transfers were initially recorded on the books of Concare as accounts receivable due from National and on the books of National as accounts payable due Concare. Thus, at the time of such advances, National was not indebted to petitioners and we do not believe that petitioners ever assumed any obligation to repay such debt. All petitioners really did was make journal adjustments at the end of each year (when it could be determined that National would have a net operating loss) to reclassify the transferred funds on the books of Concare as accounts receivable due from petitioners and on the books of National as accounts payable due petitioners. See
In any event, such reclassification is insufficient to create an "indebtedness of the corporation to the shareholder" within the meaning of
In a long list of cases, it has been held that basis-giving indebtedness for the purposes of
Significantly, it is the payment by the guarantor of the guaranteed obligation that gives rise to indebtedness on the part of the debtor to the guarantor. The mere fact that the debtor defaults and thereby renders the guarantor liable is not sufficient. Similarly, the fact that Albuquerque executed a $110,000 note to Underwood is not sufficient to give him an adjusted basis in indebtedness within the meaning of
Assuming again, that the adjusting entries reflected what actually happened, out situation is governed by
*627 Finally, petitioners argue that since they could have used the circuitous route of borrowing the money from Concare and thereafter transferring it to National instead of having Concare make the loan direct to National, the loans should be considered their own personal obligations. Again, we disagree. "A transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred." See
In
We must view this case not with an eye to what could have been done but rather what was in fact done. Hence the key question is whether or not the debt of the corporation runs "directly to the shareholder." The loan must in fact have been*628 made by the shareholder and not merely guaranteed by him. See
See also
Accordingly, we hold that under the transaction herein, there was no indebtedness which increases petitioners' bases under
*630
Petitioners Burnstein in an amendment to their petition, have offered two additional contentions with respect to their 1976 taxable year. Initially, they claim that even if the indebtedness from National did not constitute an adjustment to basis for purposes of deducting Burnstein's share of National's net operating losses for 1974 and 1975, it should increase his basis in his National stock in order to determine the amount of gain on redemption of his National stock in 1976. For reasons discussed above, this argument must fail. The debt ran from National to Concare and Burnstein's status as a shareholder in both corporations involved in the transaction does not warrant an increase in basis with respect to his National stock, either under
The Burnsteins next claim that they are entitled to a loss deduction under
We thus deny the Burnsteins' claims with respect to their 1976 taxable year.
1. Cases of the following petitioners are consolidated herewith: James W. and Virginia C. Boy, docket No. 18455-80; Thomas E. Boy and Patricia R. Boy, docket No. 18493-80.↩
2. Unless otherwise noted, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years at issue.↩
3. Congress has recently enacted the Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669, substantially revising the provisions of Subchapter S. However, that Act has no application to the years before us.↩
4. See
5. Respondent argues that the advances from Concare to National lacked any indicia of indebtedness, i.e. repayment schedule, note, rate of interest, and thus did not even constitute a true debt. We assume, however, for purposes of this case that a debt was created but rest our holding on the basis that any indebtedness did not run directly to the shareholders within the intendment of
6. Petitioners made payment to Concare in 1976 which they claim was in satisfaction of their obligation to repay the advances. Even if such contention were true and analyzing this situation in terms of a guarantee, the payment made in 1976 would still not give petitioners enough bases as of the close of the 1974 and 1975 taxable years to deduct their share of National's net operating losses for those years. See
7. Petitioners argue further that their assumption of the indebtedness constituted indirect contributions of capital to National and thereby provides sufficient bases for deduction of National's losses.
8. As noted in our findings of fact, the shareholders made payments to Concare on the same date exactly proportional to their shareholdings in Concare.↩
Nathan Hauptman, Trustee v. Director of Internal Revenue, ... , 309 F.2d 62 ( 1962 )
Television Industries, Inc. v. Commissioner of Internal ... , 284 F.2d 322 ( 1960 )
William H. Perry and Marian E. Perry v. Commissioner of ... , 392 F.2d 458 ( 1968 )
paul-g-cornelius-mary-m-cornelius-as-of-the-estate-of-paul-g , 494 F.2d 465 ( 1974 )
Frederick G. Brown v. Commissioner of Internal Revenue , 706 F.2d 755 ( 1983 )
Morris G. Underwood and Jackie Underwood, Individuals v. ... , 535 F.2d 309 ( 1976 )
Putnam v. Commissioner , 77 S. Ct. 175 ( 1956 )
Don E. Williams Co. v. Commissioner , 97 S. Ct. 850 ( 1977 )
Neal v. United States , 313 F. Supp. 393 ( 1970 )