DocketNumber： Docket Nos. 2848, 2849, 2850
Judges： Arundell,Opper
Filed Date： 12/13/1945
Status： Precedential
Modified Date： 11/14/2024
1945 U.S. Tax Ct. LEXIS 23">*23
1. Income -- Family Trusts. -- The income of trusts created by the petitioner for members of his family,
2. Dividends -- Transfer of Assets for Less Than Fair Market Value. -- G Corporation transferred securities at less than fair market value to trusts created by the controlling stockholders of Y Corporation. Y Corporation owned all of the stock of G Corporation.
5 T.C. 1251">*1251 The Young-Wolf Corporation was in existence during all of the fiscal year ended November 30, 1937. Subsequently, it became the Gary Theatre Corporation. The Commissioner made the following determination against that corporation for the fiscal year ended November 30, 1937 (Docket No. 2849):
| Tax | Deficiency | Delinquency |
| penalty | ||
| Income | $ 52,011.25 | |
| Excess profits | 4,552.58 | |
| Personal holding company surtax | 31,913.34 | $ 1,595.67 |
He also determined that the Gary Theatre Corporation was liable as a transferee of Young-Wolf Corporation for the amounts set forth above (Docket No. 2850). He determined a deficiency in income tax against V. U. Young in the amount of $ 99,204.69 for the calendar year 1937 (Docket No. 2848).
The issues in the Gary Theatre Corporation cases are (1) whether the statute of limitations had run at the time the notices were mailed and (2) whether Young-Wolf Corporation received a taxable dividend as a result of sales of securities made by its wholly owned subsidiary, Gary Theatre Co., for less than the fair market value of the securities 5 T.C. 1251">*1252 to trusts created by1945 U.S. Tax Ct. LEXIS 23">*26 its principal stockholders, Young and Wolf. Gary Theatre Corporation concedes that it is liable for any taxes and penalties which have been properly determined for the year in question. Petitioner Young contends that the income of the four trusts which he created in 1937 for the benefit of his children and grandchildren was erroneously included in his income, and he also contends that the Commissioner erred in holding that he received a dividend as a result of the sales of securities made by the Gary Theatre Co. to the four trusts for less than the fair market value of those securities.
FINDINGS OF FACT.
Petitioner V. U. Young is an individual who resides in Gary, Indiana. He filed his income tax return for the calendar year 1937 with the collector of internal revenue at Indianapolis, Indiana.
Petitioner Gary Theatre Corporation is a corporation organized under the laws of Indiana. It was known as Young-Wolf Corporation during the fiscal year ended November 30, 1937. It was admittedly a personal holding company within the definition contained in section 351 (b) (1) of the Revenue Act of 1936. It filed its corporation income and excess profits tax return and its personal holding1945 U.S. Tax Ct. LEXIS 23">*27 company return for the fiscal year ended November 30, 1937, with the collector of internal revenue for the district of Indiana. Those returns were filed under the name of Young-Wolf Corporation. The income and excess profits tax return was filed on February 15, 1938. The personal holding company return was filed on March 15, 1938. The gross income shown on the income tax return amounted to $ 40,821.06. Consents were filed extending the time for determining the deficiency in income and excess profits tax to June 30, 1944, provided section 275 (c) of the Revenue Act of 1936 applied, i. e., if gross income had been omitted from the return in excess of 25 percent of the amount of gross income shown on the return. The notice of deficiency was mailed on June 9, 1943.
Young-Wolf Corporation owned, during the year 1937, all of the stock of Gary Theatre Co. except three qualifying shares which were held one each by C. J. Wolf, Young, and Mrs. Young. The cost of the stock as shown on the books of Young-Wolf Corporation was $ 331,272.48.
The outstanding stock of Young-Wolf Corporation was held as follows on November 9, 1937:
| Preferred | Common | |
| V. U. Young | 770 | 19,540 |
| Charles J. Wolf | 770 | 19,540 |
| 12 other persons | 460 | 920 |
1945 U.S. Tax Ct. LEXIS 23">*28 5 T.C. 1251">*1253 The son of Young was one of the twelve other persons referred to in the above table and owned some of the preferred and some of the common stock.
Gary Theatre Co. was the owner on November 9, 1937, of 1,000 shares of stock of Theatrical Managers, Inc., which had cost it $ 15,828. The value of the 1,000 shares of stock at that time was in excess of $ 100,000.
The annual meeting of the stockholders of Gary Theatre Co. was held on November 1, 1937. The chairman stated that he deemed it advisable to sell the stock of Theatrical Managers, Inc., at a price involving no loss to the company in view of the fact that personal holding companies would probably be subjected to additional taxes, whereupon officers were authorized to negotiate a sale of the 1,000 shares of Theatrical Managers, Inc., stock at a price involving no loss to the company.
V. U. Young executed four trusts on November 3, 1937, one each for the benefit of his son, daughter, grandson, and granddaughter. The son was 32 years of age at that time. He resided in Indianapolis and had sufficient independent income from salary received from Theatrical Managers, Inc., to support himself and his one-year-old son, another1945 U.S. Tax Ct. LEXIS 23">*29 of the trust beneficiaries. The petitioner's daughter was 35 years of age in 1937 and resided with her 14-year-old daughter, another beneficiary, in Gary. The record does not show whether or not they lived with her father at that time. The petitioner named himself as sole trustee of each of the trusts.
The following provisions of the trust for the son are typical of all four trusts:
1. I am to have the power at any time, and from time to time, to sell any of the trust property or estate for such price or prices as I may determine. Any money coming into my hands as the proceeds of any such sale or otherwise and forming a part of the principal of said trust estate, shall as soon as practical, be reinvested by me. In making such investments, I am to have full power to purchase any property, real or personal, (including notes and/or securities) which I may think desirable to acquire or hold as a part of the said trust estate, and I am not to be restricted to the purchase of such property as is ordinarily deemed advisable for trust property. I am likewise to have the power to rent or lease any and all real estate which may be included in said trust property for terms of any duration, 1945 U.S. Tax Ct. LEXIS 23">*30 whether such terms shall extend to a time beyond the termination of this trust or not. I am likewise to have full power and authority at my discretion to borrow money and secure the sums so borrowed by pledge or mortgage of any and all portions of said trust estate and I may, out of the corpus or income of said trust estate, or out of both such corpus and/or income repay the sums so borrowed. I am to have full authority to invest or re-invest any sums so borrowed; and to collect and receive the rents, income and profits arising from the trust estate therein created. It being my intention to retain as Trustee, such rights, power and authority in respect to the management, control and distribution of said trust estate for the use and benefit of the beneficiary, as I have with respect to property absolutely owned by me.
5 T.C. 1251">*1254 2. Out of the income and revenue accrued from said trust estate I shall have power to pay all taxes, expenses necessary or properly incident to its care, preservation and management; and all other reasonable or necessary charges incident to the administration of the trust created hereby. Any income not distributed, shall be added to the principal of the1945 U.S. Tax Ct. LEXIS 23">*31 trust estate.
3. In case of emergency, or illness of said beneficiary, requiring a greater sum than that accruing as income or revenue, I shall have power to use as much of the principal of said trust estate as may be necessary.
4. Any receipt given by the beneficiary of this trust to me for any sum paid to him by me shall be in full acquittance and discharge for the payment mentioned in such receipt.
5. The foregoing provisions for my said son, Robert Rex Young, shall be for his sole and separate use free from all statutory and marital rights of his wife; and free from his debts and without the right on his part to assign, pledge, hypothecate, or anticipate, or in any way create a lien upon any of the income or corpus of the trust estate hereby created before he shall receive the same, nor shall any of the said income or corpus be subject to any claims of any persons who may at any time be creditors of my said son, Robert Rex Young.
(a) If the said beneficiary should die before my death then this trust estate shall thereupon revert to me and become mine immediately and absolutely, or
(b) If I should die after said beneficiary reaches the age of 30, then this property shall thereupon1945 U.S. Tax Ct. LEXIS 23">*32 become his immediately and absolutely and be turned over to him and in either case this trust shall cease.
* * * *
The other trust contained identical provisions except for the names of the beneficiaries, and the trusts for the two grandchildren provided for successor trustees to carry on the trusts until the beneficiary should reach the age of 30 in case the petitioner should die before that time.
The petitioner transferred $ 15,000 in cash to each trust during November 1937. He transferred to each trust, before the close of 1937, shares of preferred and common stock owned by him in Young-Wolf Corporation and received from each trust an amount which represented the cost of that stock to him. Each trust had over $ 11,000 of income during 1937. The petitioner borrowed money from each trust on his interest-bearing promissory notes. He repaid all loans with interest. A separate bank account was maintained for each trust and separate accounts were kept of the transactions of each trust. $ 1,824.65 was distributed to the son in 1937, but no other distributions were made from any of the trusts. The four trusts were terminated in 1944, at which time all of the assets were distributed1945 U.S. Tax Ct. LEXIS 23">*33 to the beneficiaries.
Gary Theatre Co. on November 9, 1937, transferred to each of the 4 trusts created by Young, 125 shares of the stock of Theatrical Managers, Inc., and 100 shares of that same stock to each of the 5 trusts created by Wolf, receiving from the trustees of the 9 trusts cash in the total amount of $ 15,828.
5 T.C. 1251">*1255 The return of Young-Wolf Corporation showed a deficit of $ 1,774.35 at November 30, 1937.
The Commissioner, in determining the deficiencies against Gary Theatre Corporation, held that it had constructively received a dividend in the amount of $ 254,172 from Gary Theatre Co. in the form of common stock of Theatrical Managers, Inc., which was passed on to and utilized by two of its common stockholders, Young and Wolf.
The Commissioner, in determining the deficiency against Young, held that he had received a dividend of $ 127,086 from Young-Wolf Corporation, and that net income of the four trusts amounting to $ 45,200 was taxable to Young under the provisions of
Incorporated herein by this reference1945 U.S. Tax Ct. LEXIS 23">*34 and made a part hereof are all of the stipulations filed by the parties in these three proceedings, together with additional facts stipulated into the record and documents admitted in evidence without objection.
OPINION.
The Commissioner has held that the income of the four trusts created by Young is all taxable to him. He argues that this determination was proper under
The Commissioner has held and he contends that Gary Theatre Co. transferred the stock of Theatrical Managers, Inc., to the trusts created by Young and Wolf for an amount grossly disproportionate to the value of the stock at the time of the transfer. We have made a finding that the value of the stock was in excess of $ 100,000 on November 9, 1937. The deficiencies are based upon a value of $ 270,000 for the stock. There is evidence which tends to support that determination. However, the only witness who expressed an opinion as to the value of the stock on the date in question, the respondent's own witness, stated that the value of the stock was $ 225 a share, or $ 225,000. The petitioner argues that the value of the stock was not in excess of $ 123,231.39. It is not necessary to determine the exact value of the stock. It is apparent that Gary Theatre Co. transferred the securities 5 T.C. 1251">*1256 which it owned to the trusts created by Young and Wolf for an amount which was much less than the value of those securities.
The Commissioner argues further that this sale must be treated as the distribution of a dividend by the Gary1945 U.S. Tax Ct. LEXIS 23">*36 Theatre Co., and this dividend must be traced through Young-Wolf Corporation, the sole stockholder of Gary Theatre Co., to Young and Wolf, the controlling stockholders of Young-Wolf Corporation. The evidence shows that Young and Wolf were the controlling stockholders of Young-Wolf Corporation. They owned 97.7 percent of the common. Some shares of the preferred and common stock of that corporation were owned by twelve other persons. The record does not show who they were, except that Young's son owned some of the preferred and common stock. If interests unrelated to Young and Wolf owned any of the common, they certainly would have had a right to complain about the sale here in question, but there is no evidence that anyone objected to it.
The Commissioner has provided in article 22 (a)-1 of Regulations 94 that, if property is transferred by a corporation to a shareholder for an amount substantially less than its fair market value, the shareholder shall include in gross income the difference between the amount paid for the property and the amount of its fair market value. The case of
The substance of the transaction determines its character for purposes of taxation; and we need only inquire whether the Columbia corporation transferred to the taxpayer and its other stockholders without cost a part of its earnings and profits so that they were severed from and ceased to be a part of the corporate property in which the stockholders had an indirect undivided interest and became their separate and independent holding, of which they could dispose at will.
Here, Young-Wolf Corporation, the sole stockholder of the selling corporation, 1945 U.S. Tax Ct. LEXIS 23">*38 Gary Theatre Co., in turn made a disposition, all as a part of the same transaction. That is, it did not receive the benefits of the transfer directly into its own hands, but caused them to be received by its nominees. Those nominees were tools of its two controlling stockholders just created by Young and Wolf a few days previously. 5 T.C. 1251">*1257 We have already held that four of those trusts are not to be distinguished from Young for income tax purposes. The Supreme Court, in
Clearly, the effect of the sales here in question was to distribute the accumulated earnings and profits of Gary Theatre Co. to persons chosen by or on behalf of its stockholder, and such must have been the intent of Young and Wolf who brought it about. If the sale had been to Young-Wolf Corporation, the two cases just cited would be directly in point. This case differs from those 1945 U.S. Tax Ct. LEXIS 23">*39 cases only in that here the sale was not to Young-Wolf Corporation, the stockholder of the distributing company, but to the controlling stockholders of Young-Wolf Corporation. These trusts must be considered as having been selected by Young-Wolf Corporation for the purpose of distributing the property of Gary Theatre Co. The rule enunciated in
The parties have stipulated 1945 U.S. Tax Ct. LEXIS 23">*40 facts from which it appears that the earnings and profits of Gary Theatre Co. available for the distribution of a taxable dividend on December 31, 1937, amounted to a little over $ 75,000. They do not show what the figure was on November 9, 1937. The Commissioner argues that Gary Theatre Co. realized an additional profit from the distribution of the stock of Theatrical Managers, Inc. He concedes that
The Commissioner, in his notice of deficiency to Young, explained that Young had received the dividend in question from Young-Wolf Corporation. A distribution by Young-Wolf Corporation would be taxable to the extent of the earnings of that corporation available for the distribution of a taxable dividend at the time of the distribution. The Commissioner has never contended that Young-Wolf Corporation, by the transaction here in question, distributed earnings which it had accumulated from other sources. The evidence shows that it had a deficit at the end of November 1937. It distributed its current income to its preferred stockholders. We would not feel justified in holding, under the circumstances of this case, that the amount received by Young as a taxable dividend was any more than one-half of the amount which we have held that Young-Wolf Corporation, now Gary Theatre Corporation, received as a dividend. The additional amount which he received may1945 U.S. Tax Ct. LEXIS 23">*42 properly offset the cost to him of his Young-Wolf Corporation stock. The Commissioner does not contend that he has realized any gain in that connection.
The statutory period of limitation for assessment and collection of the deficiencies determined against Gary Theatre Corporation, the successor to Young-Wolf Corporation, provided in section 275 (a) of the Revenue Act of 1936, had expired prior to the mailing of the deficiency notice. The parties agree, however, that if an amount was omitted from the gross income as shown on the return which exceeds 25 percent of the amount of gross income shown on the return, then the notice of deficiency was timely under section 275 (c). It is clear from the stipulated facts that the amount which is to be included in the income of Young-Wolf Corporation for the year in question is considerably more than 25 percent of the gross income shown on its return. Therefore, the statute of limitations had not run when the notice of deficiency was mailed. Gary Theatre Corporation concedes that it is a transferee of the assets of Young-Wolf Corporation. The only remaining issue is whether the 5 percent addition for delinquency in filing the personal holding1945 U.S. Tax Ct. LEXIS 23">*43 company return was properly imposed. It is conceded that the return was delinquently filed and the record does not show that the late filing was due to reasonable cause and not to willful neglect. A 5 percent addition is therefore proper under section 291 of the Revenue Act of 1936.
5 T.C. 1251">*1259 Kern,
I agree with the majority opinion that the "trusts must be considered as having been selected by Young-Wolf Corporation for the purpose of distributing the property of Gary Theatre Co." and that the rule enunciated in
However, it is my opinion, contrary to that of the majority, that Young-Wolf Corporation can not be considered as having constructively declared a dividend itself of the dividend which it constructively received when it directed or authorized the so-called sales to trusts created by its own stockholders, and that its own stockholders can not be considered as having constructively received from it a dividend which it originally constructively received by reason of the actual receipt of the dividend in question by the trusts created by these same stockholders.
Where Mr. A and Mr. B own in equal proportions the stock of the X Co., which, in turn, owns all of the stock of Y Co., and at a stockholders' meeting of Y it is resolved that Y sell certain of its property at far less than market value to A and B in equal proportions, and this is done, it might be considered1945 U.S. Tax Ct. LEXIS 23">*45 that A and B have received a taxable dividend by ignoring the corporate entity of X and considering A and B as, in reality, the stockholders of Y to whom Y has distributed a dividend; or it might be considered that A and B have received the dividend effected by the sales as the nominees of X, so that X is to be treated as having constructively received a taxable dividend, in which case the corporate entity of X will not be ignored; but I am unable to agree with the majority that one actual receipt of property as a result of a so-called sale can be the basis of two different consecutive constructively received dividends.
I would, therefore, conclude contrary to the majority that, while Young-Wolf Corporation received a dividend from the Gary Theatre Co. as a result of the so-called sales by the latter company to the trusts created by petitioner Young and Wolf, this was the only dividend received or paid in the transaction involved in this proceeding.
5 T.C. 1251">*1260 Opper,
If there were greater doubt as to this proposition, it would have to be dispelled by the Tax Court's recent opinion in
The assumption that there were no earnings to cover the increase in value seems to me inadmissible in the present case for at least two reasons. In the first place the record indicates that the property in question was purchased from earnings. Certainly, if the dividend stock represented an investment1945 U.S. Tax Ct. LEXIS 23">*48 of capital, petitioner, upon whom the burden lay, has failed to show it. Accordingly, the increment in value is not an increase of capital, but is itself an additional earning.
5 T.C. 1251">*1261 In the second place, we are dealing here not with an outright property distribution, but with a bargain sale. The doctrine of
Assume, for example, that a corporation's accumulated earnings of $ 10,000 are used to purchase an investment which in the following year becomes worth $ 20,000. This is now "sold" to the stockholders for the original cost of $ 10,000. Clearly, under the
Considering that it was the increment in value which constituted the dividend, it seems to me inescapable that the earnings and profits embraced that increment, as well as the original investment which was not wiped out but remained to be distributed. It follows that at least under the present facts there must have been earnings and profits of the declaring corporations sufficient to constitute the entire distribution a dividend.
1. See Wallace, "A Dissent,"