24 T.C. 1 (1955), 47234, Jackson v. C.I.R.
|Citation:||24 T.C. 1|
|Opinion Judge:||WITHEY, Judge:|
|Party Name:||HOWARD A. JACKSON AND ELIZABETH D. JACKSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.|
|Attorney:||David W. Richmond, Esq., and Numa L. Smith, Jr., Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.|
|Case Date:||April 06, 1955|
|Court:||United States Tax Court|
1. The petitioners owned one-third of the capital stock of Empire. Late in 1947 personal differences as to the manner of obtaining loans for Empire developed between petitioner Howard A. Jackson and Julius H. Cohn, another stockholder of Empire, who had voting control of one-half of its stock. Thereafter and until April 1949 Jackson's and Cohn's relationship became increasingly strained. About the middle of April 1949 Cohn indicated his possible approval, subject to the working out of details, of a plan to reorganize the affairs of Empire whereby approximately one-third of its assets, including such as Jackson might desire, would be taken out of Empire. This was the first time Cohn had indicated his willingness to accept a solution of the differences between him and Jackson. Thereafter, on April 20, Delaware was organized to acquire for its capital stock a portion of the assets of Empire, and to be managed solely by Jackson. On April 27 Empire, in exchange for all of the capital stock of Delaware, transferred one-third of its net assets to Delaware, which thereafter carried on business. In the meantime, Jackson conferred with his then attorney, whom he had consulted at intervals since 1947 respecting his liability as sole personal guarantor on certain indebtedness of Empire. Pursuant to the attorney's advice, petitioners on April 21 organized Dumelle and on April 22 transferred their one-third of Empire's stock to Dumelle for all of its capital stock. On April 25 Dumelle accepted the offer of Belgrade, a corporation whose entire stock was owned by Mrs. Jackson and whose assets were less than $1,000, to purchase the one-third of Empire's stock for $470,000, payable $1,000 cash and $469,000 in installments over a long period of years. Pursuant to the settlement of the remaining matters of friction between Jackson and Cohn the one-third of Empire's stock was surrendered to Empire on April 29, 1949, in exchange for all of the stock of Delaware. Neither Dumelle nor Belgrade has ever carried on any business at any time. Held, that the corporate identities of Dumelle and Belgrade and the transactions by them involving Empire stock are to be disregarded. Held, further, that the corporate identity of Delaware is to be disregarded. Held, further, that the corporate identity of Delaware is to be recognized and that petitioners realized long-term capital gain on the surrender to Empire of one-third of its capital stock in exchange for all the capital stock of Delaware.
2. Held, that petitioner Howard A. Jackson did not receive any income in 1949 with respect to notes issued to him by Empire and the payment of which was assumed by Delaware.
The respondent determined a deficiency of $153,121.86 in the income tax of the petitioners for 1949. The issues are the correctness of the respondent's action in determining that during 1949 a certain corporation distributed one-third of its net assets to petitioners in exchange for their one-third stock in it and that as the result of the distribution the petitioners during 1949 (1) realized capital gain of $469,333.34 on stock of the corporation, (2) realized capital gain of $69,580 on certain corporate stock sold to the distributing corporation in 1946, and (3) realized capital gain of $74,118.13 on other corporate stock sold to the distributing corporation in 1947.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
The petitioners are husband and wife and reside in St. Thomas, Virgin Islands. They filed with the collector of internal revenue for the second district of New York a joint income tax return for 1949 showing thereon net income of $28,882.35 and a tax liability of $5,906.90.
At the beginning of 1949 and for several years prior thereto, Howard A. Jackson was a partner with Julius H. Cohn, Sidney E. Harris, and three other unrelated individuals in the accounting firm of J. H. Cohn & Co., which had offices in Newark, New Jersey, and New York, New York. Jackson's duties with the partnership were primarily those of business counsel to the firm's clients, advising them on financing, corporate reorganizations, and similar matters.
For some time prior to 1949 Jackson, Cohn, and Harris had also engaged in various business ventures together. These ventures were mainly centered in Empire Industries, Inc., sometimes hereinafter referred to as Empire, a Delaware corporation organized in 1946.
Initially Empire's total authorized capital stock of 50,000 shares was held as follows:
Number of shares
Howard A. Jackson 12,500
Elizabeth D. Jackson 4,166 2/3
Sidney E. Harris 12,500
Mrs. Harris (wife of Sidney E. Harris) 4,166 2/3
Julius H. Cohn and family 16,666 2/3
Page 3 In the early part of 1947 Empire was recapitalized and its capital stock increased to 200,000 shares. The increase in stock was distributed to its stockholders pro rata so that the proportionate interests of the Jackson, Harris, and Cohn families remained the same. After the recapitalization of Empire its capital stock was held as follows:
Number of shares
Howard A. Jackson 50,000
Elizabeth D. Jackson 16,666 2/3
Sidney E. Harris 50,000
Mrs. Harris (wife of Sidney E. Harris) 16,666 2/3
Julius H. Cohn and family 66,666 2/3
The shares of Empire stock owned by Mrs. Jackson, Mrs. Harris, Mrs. Cohn, and the Cohn children, both before and after the recapitalization, were represented by voting trust certificates, issued under a voting trust agreement, dated June 16, 1947, pursuant to which Julius H. Cohn was named sole voting trustee. The voting trust agreement was in effect through April 1949. By reason of the shares he owned personally in Empire and the voting rights he had under the voting trust agreement, Julius H. Cohn controlled the voting rights of one-half of the stock in Empire. At the time it was organized in 1946 Empire acquired a steel fabricating plant in Decatur, Alabama, and the stock of a subsidiary company with operations in Helena, Arkansas, and the stock of another subsidiary company with operations in Memphis, Tennessee. These subsidiary companies and another subsidiary company, which operated in New York, New York, and whose stock, thereafter and prior to 1949, was acquired by Empire, engaged in the distribution of industrial mill supplies. Other assets acquired by Empire prior to 1949 were a plant in which narrow gauge railroad cars were made for the lumbering and mining industries and a pump manufacturing plant in Shippensburg, Pennsylvania. In addition to the foregoing, Empire, in 1946, purchased all the capital stock of Charles J. Tagliabu Manufacturing Company from Jackson, Cohn, and Harris. Jackson had purchased 1,125 shares of the stock of that company on January 15, 1945, for $3,422.73 and sold them to Empire in 1946 at a total selling price of $82,788.07, payable as follows: $12,788.07 in cash and promissory notes, totaling $70,000, payable over the period ending June 1, 1948. In 1947, because certain liabilities of Tagliabu were assumed by Empire, the selling price of $82,788.07 was reduced to $72,788.07. The reduction was effected by Jackson surrendering to Empire, for cancellation, notes in the amount of $10,000. Jackson reported the gain from the sale of the Tagliabu stock on the installment basis in his income tax return for 1946. Page 4 During 1947 Empire purchased all the capital stock of Flextite, Inc. One-sixth of that stock was purchased from Jackson on June 23, 1947, for $83,333.33, of which $6,266.66 was paid in cash and the balance of $77,066.67 was represented by promissory notes maturing over a period of 5 years. Jackson had acquired his one-sixth of the stock on November 22, 1946, at a cost of $166.66. In his 1947 income tax return he reported on the installment basis the gain from the sale. From the time of its organization in 1946 until April 29, 1949, Jackson was president of Empire, Harris was vice president, and Cohn was chairman of the board of directors. However, Jackson was the only one who actively participated in the management and direction of the affairs of Empire and its subsidiaries and during the 2 years prior to 1949 devoted about 80 per cent or more of his time to such activities. Every undertaking entered into by Jackson, Cohn, and Harris, whether for the account of the partnership, or for Empire, or for themselves individually, was financed primarily with borrowed money. In the case of each loan, Jackson had been the sole, personal guarantor of the repayment of the borrowed funds. As a result, by the end of 1947 he was personal guarantor on indebtedness approximating 3 to 4 million dollars. However, Jackson's remuneration for his services and guarantees in connection with his association with Cohn and Harris in the various enterprises consisted solely of his distributive share of the profits earned by the accounting partnership. Throughout the period 1946 through April 29, 1949, Harris remained on friendly terms with Jackson and with Cohn. However, by the end of 1947 Jackson's relationship with Cohn had become strained. The difficulties Jackson experienced with Cohn arose principally from the personal guarantees given by Jackson. In November 1947 Jackson had nearly completed negotiations for the acquisition of the...
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