DocketNumber: Docket No. 8703-74.
Citation Numbers: 36 T.C.M. 85, 1977 Tax Ct. Memo LEXIS 423, 1977 T.C. Memo. 18
Filed Date: 1/27/1977
Status: Non-Precedential
Modified Date: 11/20/2020
1977 Tax Ct. Memo LEXIS 423">*423
MEMORANDUM FINDINGS OF FACT AND OPINION
SIMPSON,
Year | Deficiency |
1968 | $38,060.25 |
1969 | 161.00 |
1971 | 17,383.97 |
1972 | 2,903.00 |
FYE | Deficiency |
May 31, 1967 | $ 1,243.00 |
May 31, 1968 | 550.00 |
May 31, 1969 | 7,355.00 |
May 31, 1970 | 912.00 |
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Earl W. Fugate and Faye Fugate, husband and wife, maintained their legal residence in Janesville, Wis., when they filed the petition herein. They filed their joint Federal income tax returns for the years 19681977 Tax Ct. Memo LEXIS 423">*425 through 1972 with the Internal Revenue Service Center, Kansas City, Mo. Earl W. Fugate will sometimes be referred to as the petitioner.
The petitioner controlled various corporations which either engaged in the hauling of freight by air or provided facilities and services necessary for such business. Midwest Aviation, Inc. (Midwest), formed in 1966, was actually engaged in the hauling of freight by air and was the pivotal corporation upon which all of the other corporations depended. It made its headquarters in Janesville, Wis., the location of its primary customer, a division of General Motors Corporation (GM). Air Charters, Inc. (Air Charters), a Michigan corporation, provided loading and unloading services for Midwest at the Flint, Mich., airport. Such services were extremely important for Midwest because many of GM's fabricators, in addition to large parts warehouses, were located near such airport. During the years in issue, the petitioner was president of Air Charters and owned 60 percent of its stock. The remaining 40 percent was owned equally by his two brothers. Another of the petitioner's corporations, Aero-Services, Inc., purchased airplanes and leased them to1977 Tax Ct. Memo LEXIS 423">*426 Midwest, and Manufacturer's Air Transport Services, Inc., provided air transport for the Peoria, Ill., area.
Although Midwest started in 1966 with only one airplane, soon it was in need of more planes and other equipment because GM was satisfied with its services and gave it additional business. As a consequence, throughout the period 1966 through 1969, Midwest and the other corporations economically related to it continued to expand. The financing for such expansion came, in large part, from the petitioner personally borrowing funds for the corporation or by his guaranteeing the indebtedness of the corporation.
On October 18, 1968, Air Charters sold an airplane and received $30,000 for it. The petitioner withdrew such funds and used them to make a payment on his personal note which he owed the First National Bank of Janesville. During the next 2 months, Air Charters transferred additional funds totaling $15,000 to the petitioner or on his behalf. In connection with each withdrawal by the petitioner, he executed a promissory note which provided for interest at the rate of 7-1/2 percent per annum. The notes did not provide for a fixed maturity date; rather, they were payable1977 Tax Ct. Memo LEXIS 423">*427 on demand. No collateral was provided for such withdrawals, and no repayment plan was specified in the notes or otherwise. The petitioner has never paid interest on any of these notes, nor has he ever repaid any of these withdrawals. On its Federal corporation income tax returns and its books and records, Air Charters treated such advances as loans. At the time the petitioner made such withdrawals, he was solvent.
Air Charters needed a loading ramp, and the petitioner borrowed some funds early in 1969 and purchased such a ramp for approximately $4,000. He turned the ramp over to Air Charters and, in return, received a $4,000 note. In late May 1970, the ramp was repossessed, and the petitioner then executed a promissory note to Air Charters in the amount of $3,468.
The petitioner prepared a statement of his financial condition as of March 1969 for the purpose of supporting the value of guarantees he made to various banks where his companies sought credit. The petitioner testified that such statement represented an accurate description of his financial condition as of that date. Such statement did not show the petitioner as indebted to Air Charters for the withdrawals he1977 Tax Ct. Memo LEXIS 423">*428 made less than 6 months previously. However, such statement listed Air Charters as owing the petitioner a $2,500 note and $300 in rents.
In late 1969, Midwest suffered a rapid decline in its business affairs as a result of reverses in the automobile industry, and shortly thereafter, loans were called which it could not pay. The collapse of Midwest also caused the demise of Air Charters because it was without an air carrier to provide it with any business. The petitioner testified that as a consequence of the economic decline of his corporations and the additional financial burdens which were placed on him because of his personal guarantees, he became insolvent and thus was never able to repay the amounts he had withdrawn from Air Charters. Air Charters wrote off the withdrawals as wholly worthless bad debts in its 1971 taxable year and, as a consequence, deducted $44,468 on its return for such year. Such deduction resulted in a net operating loss, which was carried back to the years 1968, 1969, and 1970, and refund claims were filed with its return for its 1971 taxable year. In addition, the carryback of losses made available an unused investment credit, which was carried back1977 Tax Ct. Memo LEXIS 423">*429 to 1967. As of May 31, 1971, Air Charters had ceased business, and it listed no assets on its Federal income tax return for the period ending on that date. Subsequently, it received Federal income tax refunds totaling $5,954.31, which were transferred to the petitioner for no consideration.
In his notice of deficiency, the Commissioner determined that the petitioner received, in 1968, a distribution from Air Charters in the amount of $45,000. Alternatively, the Commissioner determined that the petitioner received, in 1971, cancellation of indebtedness income of $44,468, or a liquidating dividend in that amount. In the notice of liability issued to the petitioner as transferee of Air Charters, the Commissioner determined that such corporation was not entitled to a bad debt deduction for the petitioner's withdrawals, and that deficiencies resulted for all of the years affected by the loss carrybacks.
OPINION
The first issue we must decide is whether the withdrawals made by the petitioner from Air Charters were bona fide loans or corporate distributions within the meaning of
After a careful consideration and evaluation of all of the facts and circumstances of this case, we hold that the withdrawals in question were not bona fide loans but were corporate distributions. In this case, no collateral was given for the withdrawals, no fixed maturity date was specified, no interest was ever paid, no payment schedule was ever established, no payments were ever made, and no evidence was presented to show that Air Charters ever sought the repayment of such withdrawals. Such facts tend to show that bona fide indebtedness was not intended.
Such conclusion is clearly and decisively demonstrated when we consider the way the petitioner treated withdrawals from Air Charters in his dealings with1977 Tax Ct. Memo LEXIS 423">*433 unrelated third parties. Such transactions, conducted at arm's length, are free from the suspicions which inhere in dealings between a shareholder and his controlled corporation and provide an excellent objective view of his actual intent with respect to such withdrawals. In a financial statement setting forth the petitioner's assets and liabilities as of March 31, 1969, less than 6 months after he made the withdrawals, he madeno mention of any liability to Air Charters, although he did represent that such corporation owed him $2,800. The fact that he mentioned the liability of Air Charters to him shows that he did not simply forget Air Charters and his dealings with it. His complete disregard of any liability to Air Charters in representations to unrelated third parties clearly demonstrates that he felt he could ignore them and provides very convincing objective evidence that he did not intend to create bona fide indebtedness.
The petitioner makes several arguments in support of his contention that the withdrawals were loans. First, he asserts that he made a $4,000 repayment by his transfer to Air Charters of a loading ramp. We reject this argument for a number of reasons. First1977 Tax Ct. Memo LEXIS 423">*434 of all, the transfer of the ramp was not treated as a repayment by the petitioner and Air Charters or a reduction in the amount he owed the corporation; instead, it was treated as creating a liability of $4,000 on the part of such corporation. In addition, after the ramp was repossessed, the petitioner executed a note for almost $3,500. Thus, when the transaction was completed, Air Charters was without the ramp and indebted to him for an amount in excess of $500 because of it. Such circumstances surely do not demonstrate that the petitioner intended bona fide loans when he made the withdrawals.
Next, the petitioner argues that both he and Air Charters strictly adhered to all the formalities of treating the withdrawals as loans to him, but when, as here, the borrowing shareholder controls the lending corporation, such evidence bears little weight.
Since we have concluded that the withdrawals by the petitioner were not bona fide loans, it follows that such1977 Tax Ct. Memo LEXIS 423">*436 corporation is not entitled to a bad debt deduction for them.Thus, Air Charters is liable for the deficiencies arising from the disallowance of such deduction.
The last issue we must decide is whether the petitioner is liable, as a transferee of property from Air Charters, for any part of such corporation's Federal income tax deficiencies.
In this case, it is undisputed that the petitioner received, for no consideration, $5,954.31 from Air Charters in the form of Federal tax refunds. Such transfer was made by Air Charters after the close of its 1971 taxable year, at which time it had no other assets, although its contingent liability for Federal income taxes was already in existence. Under the Wisconsin Uniform Fraudulent Conveyance Act, a transfer, such as the one herein, which renders the transferor insolvent and is made for no consideration, is fraudulent as to creditors without regard to the transferor's intent.
1. All statutory references are to the Internal Revenue Code of 1954.↩
2. Since we have accepted the Commissioner's position that the withdrawals by the petitioner from Air Charters were not bona fide loans, it follows that the receipt by the petitioner of such notes does not constitute an additional transfer of property by such corporation. Moreover, the Commissioner does not contend that the petitioner received any other property from Air Charters.↩
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Wilson Bros. & Co. v. Commissioner of Internal Revenue , 170 F.2d 423 ( 1948 )
Commissioner v. Stern , 78 S. Ct. 1047 ( 1958 )
Estate of E. W. Chism, Deceased, Clara Chism, and Clara ... , 322 F.2d 956 ( 1963 )