Alvord v. Comm'r of Internal Revenue

• Decision Date: 03 April 1959
• Docket Number: 64407.,Docket Nos. 62747
• Citation: 32 T.C. 1
• Parties: ELLSWORTH C. ALVORD AND KATHARYN W. ALVORD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 1

ELLSWORTH C. ALVORD AND KATHARYN W. ALVORD, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 62747

64407.

Tax Court of the United States.

Filed April 3, 1959.

[32 T.C. 2]

Harry L. Brown, Esq., for the petitioners.

William Schwerdtfeger, Esq., for the respondent.

1. Patenotre owned 95 per cent of the shares of Hekor, a Canadian corporation, whose assets consisted of securities held for its account in New York City by Hutton & Co. On September 29, 1949, Patenotre assigned the 9,500 shares to the Treasury as security for substantial tax liabilities of his and his mother's for the years 1931 to 1949, inclusive, in consideration for tax clearance to leave the United States. On October 26, 1949, Patenotre agreed to assign at some future date the 9,500 shares to petitioner, a United States citizen ‘free and clear of any prior liabilities and assignment’ for $475,000 and cancellation of a $700,000 liability. It was also agreed that Hekor's assets would not be used to pay Patenotre's liabilities. In July 1951, Patenotre died and on September 8, 1951, petitioner became the holder and owner of the 9,500 shares of Hekor previously owned by Patenotre, subject to whatever liens the Treasury had against the stock. During 1951, 1953, and 1954, the Treasury, on account of the liens which it held against Hekor's assets and against the 9,500 shares of Hekor's stock formerly owned by Patenotre, refused to allow Hekor to pay dividends equal to its undistributed earnings. Respondent determined that Hekor was a foreign personal holding company and that 95 per cent of its undistributed Supplement P earnings is includible in the gross income of petitioner for those years. Held, that Hekor was a foreign personal holding company under section 331(a), I.R.C. 1939, and similar provisions of the 1954 Code, and petitioner is taxable on his proportionate part of the Supplement P net income of Hekor under section 337, 1939 Code, for the taxable years as determined by the Commissioner.

2. Petitioner contends in the alternative, should we hold that he is taxable on his proportionate part of Hekor's Supplement P net income for the year 1951, that nevertheless he would be taxable only on his proportion of Hekor's Supplement P net income for that year as would be embraced in the period from September 8, 1951, to the end of the calendar year 1951, the corporation being on the calendar year basis. Petitioner's contention in this respect is based on the fact that he did not become the owner of 9,500 shares of the 10,000 shares of outstanding stock of Hekor until September 8, 1951. Held, petitioner is not sustained in this alternative contention. Under the terms of section 337, 1939 Code, and similar provisions in the 1954 Code, petitioner is taxable on 95 per cent of Hekor's Supplement P net income for the entire year 1951 and not just for the period claimed.

The respondent determined deficiencies in income tax as follows:

+-------------------------------+
                ¦Docket No. ¦Year ¦Amount ¦
                +-------------+------+----------¦
                ¦62747 ¦1951 ¦$50,081.94¦
                +-------------+------+----------¦
                ¦64407 ¦(1953 ¦53,571.60 ¦
                +-------------+------+----------¦
                ¦ ¦(1954 ¦59,735.22 ¦
                +-------------------------------+
                

The deficiency for each year is due on one adjustment, viz, the addition of ‘Foreign Personal Holding Company’ income. The adjustment for 1951 is explained in the notice of deficiency as follows:

(a) It is held that the amount of $58,485.61, representing your share of the undistributed net income of Hekor Investment Holding Company, Ltd., a foreign personal holding company as defined by section 331 of the Internal Revenue Code of 1939, is taxable to you under the provisions of section 337.

The explanations for the years 1953 and 1954 are similar except for amount and except that the explanation for 1954 refers to the applicable provisions of the Internal Revenue Code of 1954.¹

By appropriate assignments of error the entire deficiencies are placed in issue.

FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by this reference.

Ellsworth C. Alvord, hereinafter sometimes referred to as Alvord or petitioner, and Katharyn W. Alvord, husband and wife, with a business address at 918 Sixteenth Street NW., Washington 6, D.C., filed their individual Federal income tax returns jointly on the cash basis for the calendar years 1951, 1953, and 1954, with the district director of internal revenue at Baltimore, Maryland.

Hekor Investment Holding Company, Ltd., sometimes hereinafter referred to as Hekor, is a corporation organized on April 26, 1934, under the laws of the Dominion of Canada. At all times material hereto it had outstanding 10,000 shares of authorized common stock, representing its entire capital stock issue. Its statutory head office is at 105 St. James Street, West, Montreal, Canada. Hekor maintains its books and records and reports its income for Federal tax purposes on the calendar year basis and on the cash basis of accounting.

[32 T.C. 3]

During all times relevant hereto 500 shares of Hekor's capital stock were owned by Pierre du Pasquier, who was at all times relevant, a citizen and resident of France.

Prior to September 8, 1951, 9,500 shares of Hekor's capital stock were owned by Raymond Patenotre, hereinafter referred to as Patenotre, who was at all times material hereto a citizen of France. During the period February 14, 1947, to September 30, 1949, he was a resident of the United States and at all other times material hereto he was a resident of France.

The assets of Hekor, which consisted mainly of securities, were held by E. F. Hutton & Co., hereinafter referred to as Hutton & Co., a New York stockbrokerage firm. J. P. Morgan & Co., hereinafter referred to as Morgan & Co., New York City, at all times relevant held securities and other assets for the account of Patenotre and Eleanor Patenotre, hereinafter referred to as Eleanor, mother of Patenotre.

On March 1, 1943, respondent made a jeopardy assessment of income tax, additions thereto, and interest for the calendar year 1930 against Eleanor, as follows:

+-------------------------------+
                ¦Tax ¦$1,279,465.87¦
                +-----------------+-------------¦
                ¦Additions to tax ¦639,732.94 ¦
                +-----------------+-------------¦
                ¦Interest ¦917,762.62 ¦
                +-----------------+-------------¦
                ¦Total ¦2,836,961.43 ¦
                +-------------------------------+
                

A notice of deficiency was issued pursuant to the jeopardy assessment and a petitioner for redetermination, Docket No. 1492, was filed with the Tax Court of the United States on May 1, 1943. With respect to such jeopardy assessment, a notice of lien, No. 433359, in the amount of $2,842,557.62, was filed with Morgan & Co. on March 15, 1943. Another notice of lien, No. 453521, in the amount of $3,345,088.42, including interest to date, was filed with Morgan & Co. on February 14, 1946. A third notice of lien, No. 493761, also in the amount of $3,345,088.42, was filed with Hutton & Co. on September 22, 1949. The notice to Hutton & Co. stated, inter alia, that it ‘applied to any right, title, or interest which Eleanor E. Patenotre may have in any securities or cash held by you for * * * Hekor.’

On February 8, 1946, respondent made a jeopardy assessment of income tax, personal holding company surtax, and interest to that date aggregating $544,470.04 against Hekor for the taxable years 1934 through 1942. On March 29, 1946, respondent issued a deficiency notice to Hekor determining that of the $544,470.04, $27,809.24 had been assessed in error. Appeal was taken to the Tax Court, Docket No. 19313. A notice of lien with respect to the jeopardy assessment made against Hekor was filed with Hutton & Co. on September 22, 1949.

[32 T.C. 4]

On March 23, 1948, respondent made a jeopardy assessment of income tax and additions thereto totaling #324,789.48 against Patenotre for the taxable years 1934 through 1940, as follows:

+---------------------------------------+
                ¦ ¦ ¦Additions to tax ¦
                +----+----------+-----------------------¦
                ¦Year¦Deficiency¦ ¦ ¦
                +----+----------+-----------+-----------¦
                ¦ ¦ ¦50 per cent¦25 per cent¦
                +----+----------+-----------+-----------¦
                ¦1934¦$551.88 ¦$275.94 ¦$137.97 ¦
                +----+----------+-----------+-----------¦
                ¦1935¦6,114.81 ¦3,057.41 ¦1,528.70 ¦
                +----+----------+-----------+-----------¦
                ¦1936¦4,003.22 ¦2,001.61 ¦1,000.81 ¦
                +----+----------+-----------+-----------¦
                ¦1937¦88,059.38 ¦44,029.69 ¦22,014.85 ¦
                +----+----------+-----------+-----------¦
                ¦1938¦45,912.31 ¦22,956.16 ¦11,478.08 ¦
                +----+----------+-----------+-----------¦
                ¦1939¦36,326.98 ¦18,163.49 ¦9,081.75 ¦
                +----+----------+-----------+-----------¦
                ¦1940¦4,625.39 ¦2,312.70 ¦1,156.35 ¦
                +---------------------------------------+
                

 185,593.97 92,797.00 46,398.51
                

Jeopardy assessment was also made of interest in the amount of $101,943.30. On April 9, 1948, respondent mailed his notice of deficiency to Patenotre asserting taxes and additions thereto in the amounts assessed. Appeal was taken to the Tax Court, Docket No. 19543. A notice of lien, No. 483645-C, with respect to the jeopardy assessment made against Patenotre was served upon Morgan & Co. on March 25, 1948, in the amount of $426,732.78. Another notice of lien, No. 493760, in the same amount, was served upon Hutton & Co. on September 22, 1949. The latter notice stated, inter alia, that it ‘affects all right, title and interest of Raymond Patenotre to any securities or cash held by you for the account of Hekor.’

On January 6, 1947, Patenotre stated that his sister, Yvonne de Castellane, was possessed of an interest in the assets in the account of Eleanor held at Morgan & Co. amounting to approximately 30 per cent thereof. In February 1947, Yvonne created two trusts to which her interest was assigned, delivery of which could not then be effected because of the various tax liens against the property. In 1949, Yvonne revoked such assignments to permit Patenotre to pledge the account to secure the asserted tax...