28 T.C. 64 (1957), 53272, Ortmayer v. C.I.R.
|Citation:||28 T.C. 64|
|Opinion Judge:||FISHER, Judge:|
|Party Name:||CARL G. ORTMAYER AND HILDA B. ORTMAYER, HUSBAND AND WIFE, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PETITIONERS,|
|Attorney:||Donald P. Zedler, Esq., for the petitioners. J. Bruce Donaldson, Esq., for the respondent.|
|Case Date:||April 17, 1957|
|Court:||United States Tax Court|
1. On July 2, 1948, Cunningham-Ortmayer Company issued 750 shares of $1-par-value common stock (having a market value of $350 per share) and 750 ten-year 6 per cent debentures in the face amount of $100 each (having a market value of $100 each) in a pro rata exchange for the surrender by its shareholders of the 750 outstanding $100-par-value shares of common stock and the payment of $1 with each share surrendered. Petitioners held and exchanged 748 shares of the company's 750 outstanding common stock. Of these shares, 374 had been acquired in 1945 from a deceased creditor's estate for $30,000 with funds which Carl G. Ortmayer borrowed from the company and in recognition of which indebtedness he executed and delivered to the company a series of promissory notes. Immediately following the exchange of stock and cash for stock and securities, in return for the company's cancellation of all outstanding indebtedness owed by petitioner ($95,561.52, being comprised of the aforesaid $30,000 plus a $65,561.52 balance in an account receivable-stockholder drawing account) he agreed to transfer back to the company 643 of its $100 debentures and surrender his right to $11,100 accrued salary and also agreed to the cancellation of a $20,851.76 balance shown on the company's books as capital loans (resulting from contributions made to the company's capital in the early 1930's). The company's bank did not insist upon the elimination of the stockholder's loan account or request the recapitalization. The transaction did not improve the company's financial position for credit purposes. The company had never declared or paid a taxable dividend. There was substantial earned surplus available at the time of the transactions involved. Held, the basic transaction did not constitute a recapitalization-reorganization within the meaning of section 112(g)(1)(E), I.R.C. 1939, and the pro rata distribution of the new stock and debentures to petitioners in exchange for the old stock (which old stock was then canceled) and $1 per share constituted a distribution essentially equivalent to a taxable dividend within the meaning of sections 22(a), 115(a), and 115(g) of the Code in the amount by which the fair market value of the debentures exceeded the cash paid. Held, further, in the transaction immediately following, the petitioner realized taxable income in the amount by which the indebtedness canceled by the company exceeded the aggregate amount of the debentures and accrued salary surrendered. Petitioner's advances to the company constituted capital contributions and not loans.
2. In September 1942, Carl G. Ortmayer and his former wife, Emily K. Ortmayer, were divorced pursuant to a decree of absolute divorce which specified, in addition to provisions for fixed alimony and support payments for the divorced wife and children of the marriage, that petitioner was to continue to pay the premiums on certain existing insurance policies carried on his life in which his wife was to be named irrevocable beneficiary. The wife had no right to change the beneficiary or assign the policies. Her interest in the policies ceased upon her death during his lifetime, in which event the children were to be the beneficiaries. Held, the premium payments were not received by petitioner's divorced wife, directly or constructively, within the meaning of section 22(k), 1939 Code, and were properly disallowed as deductions claimed under section 23(u) of the Code.
This proceeding involves deficiencies in income taxes determined against Carl G. and Hilda B. Ortmayer as follows:
By amended answer, respondent claims an increased deficiency for the year 1948 in the amount of $13,031.42. The material part of the claim is set forth in the margin. The respondent, in said amended answer, Page 66 also sets forth an alternative claim for increased deficiency in the amount of $450.72 for the year 1948 which it is unnecessary to set forth herein in the light of our determination. The issues to be decided are: (1) Does the transaction whereby the Cunningham-Ortmayer Company issued pro rata new stock and debentures in exchange for the surrender of its old stock, plus $1 per share so surrendered, qualify under section 112(g)(1)(E) and (b) (3) of the 1939 Code as a nontaxable reorganization, or does all or a part of it constitute a distribution taxable as a dividend within the purview of sections 22(a), 115(a), and 115(g) of the 1939 Code; (2) did the cancellation by the Cunningham-Ortmayer Company of the outstanding indebtedness owed by Carl G. Ortmayer to it, in exchange for petitioner's surrender to the company of certain of its debentures plus his cancellation of salary amounts owed him by the company, result in his realization of income measured by the excess of the canceled indebtedness over the surrendered debentures and salary; (3) were certain advances by petitioner to the company contributions to capital or loans; and (4) are the premiums paid by petitioner, Carl G. Ortmayer, on certain life insurance policies deductible as alimony under section 23 (u), 1939 Code? FINDINGS OF FACT. Some of the facts are stipulated and are incorporated herein by this reference. Petitioners Carl G. and Hilda B. Ortmayer are married individuals presently residing at Redlands, Colorado. During the calendar years 1948 and 1949, they resided in Milwaukee, Wisconsin. Petitioners filed timely joint Federal income tax returns for such years with the then collector of internal revenue for the district of Wisconsin. In 1924, Carl G. Ortmayer (hereinafter referred to as the company) and E. J. Cunningham were among those who caused the Cunningham-Ortmayer Company (hereinafter referred to as the company) to be incorporated in the State of Wisconsin. Since that time, it has been engaged in the distribution and sale of road-building equipment and large construction machinery. E. J. Cunningham was the president of the company from the date of its incorporation until his death in 1941. Petitioner has been an officer of the company at all times since its incorporation. Upon the death of E. J. Cunningham in 1941, petitioner became president of the company and remained in that capacity until the year 1952. During the period from 1928 until July 2, 1948, the company had issued stock which consisted of $100- Page 67 par-value common, 750 shares of which were outstanding. From 1928 until the death of E. J. Cunningham in 1941 these shares were held as follows:
E. J. Cunningham 374
Carl G. Ortmayer 374
Other stockholders 2
Total outstanding 750
Petitioner's basis for his 374 shares of stock was $18,204. During the period from January 1, 1924, until July 2, 1948, the Articles of Organization of the Company contained the following provision:
In the event that the holder of any common stock without par value desires to dispose of same, he shall first offer the said stock in writing to the said corporation at the then booked value of the said stock; said offer in writing must be sufficient to give the corporation at least ten days notice of the intention of said stockholder to dispose of the said stock.
During the period from January 1, 1924, to and including March 15, 1947, all certificates of common stock issued by the company contained a written notice of said restrictions as to the transfer of shares and the first offer rights of the company. Upon the death of E. J. Cunningham in 1941, his 374 shares of stock in the company passed to Ben A. Froeming (hereinafter referred to as Froeming) as a creditor. Froeming continued to hold said shares until his death in 1945. Froeming was, until his death, a substantial creditor of the company. Petitioner entered into an agreement with Froeming's estate to purchase the 374 shares for the sum of $30,000 of which $10,000 was to constitute a downpayment and the balance to be paid at the rate of $2,000 per month. Petitioner borrowed the purchase price of the stock from the company. As evidence of his borrowings, at various times during 1945 and 1946, he executed and delivered to the company 11 non-interest-bearing promissory notes (1 for $10,000 and 10 for $2,000) which were payable upon demand. The company issued its checks for each payment as it became due. The receipt signed by the executors of Froeming's estate, dated October 4, 1946, shows that the check was made payable to petitioner, who endorsed it to the order of the said executors. The remaining receipts are in substantially the following language: ‘ Received from C. G. Ortmayer (* * * Dollars) represented by check # * * * of Cunningham-Ortmayer Company.’ On the books and records of the company, the transaction was recorded in an asset account as follows: ‘ Stockholders' Loans * * * $30,000.00.’ Said asset account at various times also bore the designation ‘ officers and Employees Notes and Accounts Receivable.’ Petitioner made no repayment Page 68 or partial repayment of this indebtedness to the company prior to July 3, 1948. No formal assignment to petitioner appears on the stock certificate formerly owned by Froeming, but the transfer of his shares to petitioner was recorded in the stock record book of the company, and a new certificate was issued in petitioner's name...
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