DocketNumber: Docket No. 15585-90
Judges: TANNENWALD
Filed Date: 12/26/1991
Status: Non-Precedential
Modified Date: 11/21/2020
*696
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in and additions to petitioners' Federal income tax for 1986 as follows:
Additions To Tax | |||
Deficiency | Sec. 6653(a)(1)(B) | Sec. 6661 | |
$ 24,790.00 | $ 1,240.00 | $ 6,198.00 |
The main issue for decision is whether petitioners, having elected to liquidate Peter A. Johnson Associates, Inc. (PAJA), under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found; the stipulation and the accompanying exhibits are incorporated herein by reference.
Petitioners, Peter A. Johnson (Johnson) and Claire P. Lyon (Lyon), husband and wife, were residents of Hanover, New Hampshire, at the time their petition was filed. They filed a joint Federal income tax return on the cash basis for 1986 with the Internal Revenue Service Center, Andover, Massachusetts.
PAJA is a management consulting firm through which Johnson rendered consulting services. At all pertinent times, all of PAJA's issued and outstanding shares were owned by Johnson, Lyon, and the Peter A. Johnson Associates, Inc. Pension Trust (Pension Trust). Johnson is also a certified public accountant.
Through PAJA, Johnson consulted on a full-time basis until 1985. At that time, he accepted a full-time position with the Dartmouth-Hitchcock Medical Center in New Hampshire. As a result, Johnson was no longer as available to render consulting services.
A shareholder resolution authorizing the liquidation of PAJA under
At the same time that the Forms 964 and 966 were prepared and filed, Johnson prepared balance sheets of PAJA for the periods ending June 30, 1986, and December 28, 1986, respectively. Each of the balance sheets disclosed retained earnings of $ 96,311.33. Johnson completed and filed a Form 1120-A Federal corporate income tax return for PAJA for the year ending June 30, 1986, with the Internal Revenue Service Center, Andover, Massachusetts, on January 8, 1987. The balance sheet of PAJA for the period ending June 30, 1986, was reflected on that return.
At the same time, Johnson prepared a Form 1120 for PAJA for the short tax year ending December 28, 1986. It was not filed with the Internal Revenue Service Center, Andover, Massachusetts, until February 2, 1988. *699 sheet was included in that return but was furnished to respondent on or about April 6, 1988; it showed retained earnings of $ 96,311.33.
After reserving $ 18,000 for tax liabilities of PAJA, cash distributions in liquidation were made to PAJA shareholders on December 28, 1986, as follows:
Johnson | $ 64,607.32 |
Lyon | 63,232.69 |
Pension Trust | 9,622.37 |
In addition to the foregoing, the following checks payable to PAJA were deposited in petitioners' personal bank account on January 8, 1987:
(1) Check dated December 22, 1986, from Collier, Shannon, Rill & Scott, in the amount of $ 2,400.00,
(2) Check dated October 21, 1986, from the U.S. Treasury in the amount of $ 2,240.08,
(3) Check dated October 28, 1986, from Spriggs, Bode & Hollingsworth in the amount of $ 2,287.00.
On March 26, 1987, there was deposited*700 in petitioners' personal bank account a check, dated March 18, 1987, from Spriggs, Bode & Hollingsworth, payable to PAJA, in the amount of $ 6,727.00 in payment of services during the period November 1, 1986, through March 10, 1987.
In May 1988, petitioners received a check from the U.S. Treasury Department payable to PAJA in the amount of $ 6,661.64, representing a tax refund. The check was returned by Johnson to the Internal Revenue Service on July 10, 1988.
On their 1986 tax return, petitioners reported only the total of the amounts received from PAJA on December 28, 1986, i.e., $ 127,840.01, as proceeds from the sale of PAJA stock. The return contained no reference to the liquidation.
Following PAJA's liquidation, Johnson continued to provide consulting services in his individual capacity and reported his consulting activities on Schedule C of petitioners' tax returns. Consulting income received in 1987 was deposited directly into petitioners' joint checking account.
PAJA's bank account was closed on January 23, 1987.
The 1985 and 1986 Federal income tax returns of both PAJA and petitioners were audited by the Internal Revenue Service. As a result of the audit, on April*701 6, 1988, Johnson filed an amended Form 966 seeking to revoke the original
PAJA was reincorporated in February 1991.
OPINION
The principal issue before us is whether the proceeds received by petitioners on the liquidation of PAJA should be taxable, in part, as ordinary income and, in part, as long-term capital gain as provided in
Petitioners assert that: (1) The
(a) Distributions In Complete Liquidation Treated As Exchanges. -- Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.
If the stock is a capital asset, as is the case herein, gain recognized in a
Under
*704
Petitioners initially argue that the PAJA shareholders' election to liquidate under
This Court has consistently refused to allow taxpayers to escape the consequences of a
In
The Court of Appeals for the Fifth Circuit interpreted the phrase "relied upon" to connote reliance in good faith without knowledge of the true facts and concluded that the stipulation constituted an agreement by respondent that the taxpayer had made an excusable mistake of fact.
Petitioners' reliance on
The corporate Federal income tax return of PAJA for the year ending June 30, 1986, was completed at or about the same time as the: (1) Stockholder Resolution declaring the shareholders' intention to liquidate PAJA under
Petitioners next point to the inaccurate reporting of the ownership of PAJA shares. PAJA's three shareholders, Johnson, Lyon, and the PAJA Trust in fact owned 51, 49, and 8 shares, respectively, in December 1986. The Forms 964 filed with the IRS, however, indicated shareholder ownership of 47, 46, and 7 shares, respectively. Petitioners contend that this was a mistake of fact entitling*709 them to revoke the election. We disagree. The fact of the matter is that
Another theory on which petitioners seek to revoke the election focuses on the instructions accompanying Form 966, which provide in part as follows: If the resolution or plan is amended or supplemented after Form 966 is filed, file an additional Form 966 within 30 days after the amendment or supplement is adopted. The additional form will be sufficient if you show the date the earlier form was filed and attach a certified copy of the amendment or supplement and all other information required by Form 966 and not given in the earlier form.
Petitioners contend that, by permitting amendment or supplementation of the plan of liquidation, the instructions allow a taxpayer to liquidate the corporation under an entirely different section. Petitioners misconstrue the instructions' purpose. The instructions simply provide that *710 in the event the plan of liquidation is amended or supplemented, an amended Form 966 should be filed disclosing any such modifications to the plan. They do not permit revocation of the election under one section in favor of an election under another.
Finally, petitioners ask us to consider notions of fairness and equity. Although fairness and equity are indeed important considerations in appropriate circumstances, they have no bearing upon the validity or revocability of petitioners' election. The most that can be said is that petitioner simply made an unfortunate mistake, blame for which lies with them and cannot be excused based on notions of fairness and equity. Moreover, as we have stated previously, in respect of another type of election, "Even if we were inclined to determine that petitioner was entitled to such equitable relief, we would be powerless to grant it, for as we have previously stated, this Court does not have equity jurisdiction."
Petitioners ask us to consider*711 various circumstances surrounding the election which they contend are fatal to its validity:
(1) All shares of PAJA were not subject to the election;
(2) Supplemental reporting requirements of
(3) 80 percent of the shareholders did not elect under
(4) PAJA was not dissolved under State law;
(5) Liquidation of PAJA did not occur within one calendar month;
(6) Clients of PAJA were not informed of its liquidation;
(7) Bylaws of PAJA prohibited the payment of dividends; and
(8) Forms 966 and 964 were not filed within the 30-day period following adoption of the plan of liquidation.
The reasons presented in (1) and (2) are merely procedural errors and do not affect the election's validity. Petitioners' inaccurate reporting of shares owned by the electing shareholders was corrected and, in any event, is not material. The fact that only 100 shares instead of 108 shares were specified in the Forms 964 is irrelevant in view of the fact that all the shareholders executed the form. See
Given the fact that Forms 964 were previously filed, failure thereafter to file copies with petitioners' personal return likewise has no material effect upon the election's validity. Evidence of an "affirmative intent" on the part of the taxpayer to make the election is controlling.
Petitioners also argue that the 80-percent requirement of
Although Lyon was a shareholder of PAJA, she relied totally upon Johnson to manage the affairs of the corporation, including her ownership interest therein. Johnson acted on her behalf throughout the liquidation process, making the election, completing the necessary forms, and distributing the corporate assets. The degree of control which Johnson exercised over Lyon's shares and PAJA leads us to conclude that her shares, ignoring technical legal ownership, should be treated as his shares insofar as the election under
Petitioners further argue that the election is invalid due to PAJA's failure properly to liquidate under State law, because there were no meetings of the board of directors or stockholders, the articles of dissolution were not filed with the Maryland authorities, and creditors were not notified during the period specified in (2) If a transaction constitutes a distribution in complete liquidation within*715 the meaning of the Code and satisfies the requirements of
Whether there was a liquidation is a question of fact, and we are satisfied that the actions taken herein provide sufficient substance to satisfy us that PAJA was in fact liquidated. See
Petitioners' assertion that the
Petitioners further argue that the requirements of
Petitioners' reliance on
Petitioners' final argument for invalidating the election focuses on what they contend is an untimely filing of Forms 964 and 966. They assert that the decision to liquidate PAJA was made in November of 1986, that the filings of Forms 964 and 966 were not made within 30 days, and were therefore untimely with the result that the election was invalid. However, the evidence clearly establishes December 28, 1986, as the date of adoption of the plan of liquidation. Therefore, the filings were timely and the election valid.
If it is determined the election was valid, petitioners present an alternative argument, namely that the election was rendered void when PAJA reincorporated in 1991. Here again, the authorities which petitioners cite in support of their position miss their mark.
For purposes of
Petitioners seek to offset any liability which may be imposed upon them by this Court by a 1991 payment of $ 23,000 and by claimed increased withholdings in 1987, 1988, and 1989. As to the $ 23,000, respondent has indicated that it will be taken into account in assessing any deficiency based upon our decision herein. As to the claimed withholdings in subsequent years, those years are not before the Court, and we *722 have no jurisdiction in respect thereto. Beyond this, it appears that the bulk of those withholdings were used to pay petitioners' reported tax liabilities for those later years. Moreover, to the extent that the withholdings resulted in a claim by petitioners that they were entitled to refunds, there is no evidence that such refunds were not in fact made.
* * *
The record herein reflects a sad scenario of error by petitioners based upon a fundamental mistake by Johnson as to the impact of an election under
Oversight, poor judgment, ignorance of the law, misunderstanding of the law, unawareness of the tax consequences of making an election, miscalculation, and unexpected subsequent events have all been held insufficient to mitigate the binding effect of elections made under a variety of provisions of the Code. *723 * * * [
In order to enable certain technical adjustments to be made in the computations,
1. All statutory references are to the Internal Revenue Code as amended and in effect for 1986, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
*. 50 percent of the interest due on the deficiency. ↩
2. We note that while the Form 1120-A for the period ending June 30, 1986, contained a Dec. 28, 1986, date of signature, the Form 1120 for the period ending Dec. 28, 1986, contained no date of signature.↩
3. The regulation provides that the election "cannot be withdrawn or revoked," with exceptions not relevant herein. A predecessor regulation under
4. See S. Rept. 627, 78th Cong., 1st Sess. 48-49 (1943),
5. (a) General Rule. -- In the case of property distributed in complete liquidation of a domestic corporation (other than a collapsible corporation to which section 341(a) applies), if -- (1) the liquidation is made in pursuance of a plan of liquidation adopted, and (2) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within one calendar month, then in the case of each qualified electing shareholder (as defined in subsection (c)) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subsections (e) and (f).
* * * (c) Qualified Electing Shareholders. -- For purposes of this section, the term "qualified electing shareholder" means a shareholder (other than an excluded corporation) of any class of stock (whether or not entitled to vote on the adoption of the plan of liquidation) who is a shareholder at the time of the adoption of such plan, and whose written election to have the benefits of subsection (a) has been made and filed in accordance with subsection (d), but -- (1) in the case of a shareholder other than a corporation, only if written elections have been so filed by shareholders (other than corporations) who at the time of the adoption of the plan of liquidation are owners of stock possessing at least 80 percent of the total combined voting power (exclusive of voting power possessed by stock owned by corporations) of all classes of stock entitled to vote on the adoption of such plan of liquidation, * * *
* * * (d) Making and Filing of Elections. -- The written elections referred to in subsection (c) must be made and filed in such manner as to be not in contravention of regulations prescribed by the Secretary. The filing must be within 30 days after the date of the adoption of the plan of liquidation. (e) Noncorporate Shareholders. -- In the case of a qualified electing shareholder other than a corporation -- (1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under section (a)(2), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all property under the liquidation is completed; * * *↩
6. See also
7. We have applied the rule of
8. Respondent has not asserted any increased deficiency based upon the inclusion of these items and/or the 1986 checks in petitioners' 1986 income as amounts received in the liquidation of PAJA. Nor has respondent disputed petitioners' assertion that both categories of items were reported by petitioners as ordinary income in their 1987 return.↩
9. Cf.
Loren T. Raymond and Corrine Raymond v. United States ( 1959 )
Osenbach v. Commissioner of Internal Revenue ( 1952 )
Atlantic Veneer Corporation v. Commissioner of Internal ... ( 1987 )
Sol C. Siegel v. United States of America, Ethel B. Siegel ... ( 1972 )
Meyer's Estate v. Commissioner of Internal Revenue. (Three ... ( 1952 )
Kennemer v. Commissioner of Internal Revenue ( 1938 )
Frank T. Shull and Ann R. Shull v. Commissioner of Internal ... ( 1961 )
pridemark-inc-formerly-prefab-homes-and-suppliers-inc-pridemark ( 1965 )