Army Times Sales Co. v. Comm'r of Internal Revenue, Docket Nos. 71150

• Decision Date: 31 January 1961
• Docket Number: 71151.,Docket Nos. 71150
• Citation: 35 T.C. 688
• Parties: ARMY TIMES SALES COMPANY, FORMER NAME ARMY AND NAVY BULLETIN, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MELVIN RYDER AND FLORENCE RYDER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

35 T.C. 688

ARMY TIMES SALES COMPANY, FORMER NAME ARMY AND NAVY BULLETIN, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MELVIN RYDER AND FLORENCE RYDER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 71150

71151.

Tax Court of the United States.

Filed January 31, 1961.

SEC. 129, I.R.C. 1939, AND SEC. 269, I.R.C. 1954: (1) CORPORATE TAXPAYER'S CLAIMED DEDUCTIONS FOR LOSS CARRYOVERS AND FOR INTEREST ON DEBENTURE BONDS ISSUED IN SUBSTITUTION FOR WORTHLESS PROMISSORY NOTES DENIED; (2) INDIVIDUAL TAXPAYER'S CLAIMED CAPITAL GAINS TREATMENT OF DISTRIBUTION IN REDEMPTION OF DEBENTURE BONDS DENIED.— Corporate petitioner was organized in 1945 and engaged in publishing a magazine for servicemen, sustained net operating losses for each fiscal year 1946 through 1952, and in 1952 had a deficit of approximately $500,000 in earned surplus and an outstanding worthless promissory note for $207,787.88 for advances for current operating expenses. In 1952 Melvin Ryder acquired control of corporate petitioner in a ‘package deal’ purchase of all its stock and its note. Shortly thereafter the publication was terminated; the note was converted into debenture bonds; the corporate name was changed to reflect its new sales activity; and under a contract with another corporation controlled by Ryder, corporate petitioner engaged in selling activities theretofore successfully conducted by such other corporation. Held, Melvin Ryder's principal purpose for acquiring control of corporate petitioner and its worthless note was to evade or avoid Federal income tax by securing to himself, as sole stockholder and possessor of the note, the benefit of deductions, credits, or other allowances which he would not otherwise have enjoyed and, further, section 129, I.R.C. 1939, and section 269, I.R.C. 1954, prohibit the allowance of corporate petitioner's claimed deductions for interest and net loss carryovers and individual petitioners' claimed capital gains treatment of distributions received in redemption of the corporation's debenture bonds. Temple W. Seay, Esq., for the petitioners.

Neil J. O'Brien, Esq., for the respondent.

In these consolidated proceedings the respondent determined deficiencies in income and excess profits taxes against the corporate petitioner in Docket No. 71150 and a deficiency in income tax against the individual petitioners in Docket No. 71151 in the amounts and for the taxable year as follows:

+-------------------------------------+
                ¦Docket¦Taxable year ended—¦Deficiency¦
                +------+-------------------+----------¦
                ¦No.   ¦                   ¦          ¦
                +------+-------------------+----------¦
                ¦      ¦(July 31, 1953     ¦$15,231.77¦
                +------+-------------------+----------¦
                ¦71150 ¦(July 31, 1954     ¦26,662.28 ¦
                +------+-------------------+----------¦
                ¦      ¦(July 31, 1955     ¦2,347.82  ¦
                +------+-------------------+----------¦
                ¦71151 ¦Dec. 31, 1953      ¦3,049.32  ¦
                +-------------------------------------+
                

The issues presented are whether the respondent erred in determining that, under section 129 of the Internal Revenue Code of 1939, because the principal purpose of the acquisition of control of the corporate petitioner was the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which would not otherwise be enjoyed, (1) the corporate petitioner is not entitled to claimed deductions for (a) net operating loss carryovers for the years ended July 31, 1953 and 1954, and (b) alleged interest on debenture bonds for the years ended July 31, 1953, 1954, and 1955, and, further, (2) the individual petitioners are not entitled to the benefits of long-term capital gains provisions relative to the distribution by the corporate petitioner allegedly in retirement and redemption of its debenture bonds and that such distribution constituted ordinary income for the year 1953.

FINDINGS OF FACT.

Some of the facts have been stipulated by the parties. We find them to be as stipulated and incorporate herein by this reference the stipulation together with the exhibits attached thereto.

The petitioner Army Times Sales Company is a corporation with its principal place of business at 2020 M Street NW., Washington, D.C. It filed its Federal tax returns for the fiscal years ended July 31, 1953, 1954, and 1955, on an accrual basis, with the district director of internal revenue, Baltimore, Maryland. This petitioner was incorporated under the name of Army and Navy Bulletin, Inc., and engaged in the publishing business under that name until its present name was adopted in November 1952, shortly after all of its outstanding capital stock was acquired by Melvin Ryder.

The petitioners Melvin Ryder and Florence Ryder are individuals, husband and wife, residing in Washington, D.C. They filed a joint Federal income tax return for the year 1953 with the district director of internal revenue, Baltimore, Maryland.

Melvin Ryder (hereinafter referred to as Ryder) participated in the circulation department of the military newspaper Stars and Stripes during World War I, and since that time he has been interested in publications for military personnel. Since 1933 Ryder has been engaged in the publishing business in Washington, D.C. In 1933 the Civilian Conservation Corps authorized Ryder to publish a newspaper for that organization and he incorporated the Happy Days Publishing Company (hereinafter referred to as Happy Days) with its principal office located in Washington, D.C. That company published the newspaper Happy Days for the CCC from 1933 to 1940. From date of incorporation and at all times material herein Ryder has owned 100 percent of the voting stock of Happy Days.

In 1940 Ryder organized the Army Times Publishing Company (hereinafter referred to as Publishing Company), a Delaware corporation with principal offices in Washington, D.C. Since the organization of Publishing Company the majority of its outstanding common stock has been owned by Happy Days and Ryder has been its president and has managed its affairs. In 1940 Publishing Company started publication of Army Times a weekly tabloid newspaper which sought to serve as a listening post in reporting news from military headquarters in Washington and other areas, and also transfers, directives, regulations, various features, etc., of particular interest to military personnel. At various times subsequent to 1940 Publishing Company published additional similar newspapers for the different branches of the armed services. Those publications were sustained through paid advertising and circulation revenue derived from annual subscriptions costing about $5 and sales of individual copies at 10 cents a copy.

In 1952 Publishing Company had approximately 7,800 shares of common stock issued and outstanding of which 6,000 shares were owned by Happy Days. The balance of such shares were held in varying amounts by Raymond Hunsehe, Larry Lynch, Isaac Aronoff, Ferne H. Hunsehe, Allan S. Waldo, Frederick Kerby, Tom Streit, and Robert La Roux. Except for Aronoff, all of those persons were full-time employees of Publishing Company. The minor shareholdings of Streit and La Roux were subsequently retired.

In 1952 Publishing Company was publishing several weekly newspapers including Army Times, Air Force Times, Veterans Edition started at the end of World War II, and Navy Times started in 1951. It also published Military Market a military trade publication having less than 3,000 paid subscriptions among businesses interested in selling merchandise to military post exchanges and commissary stores, and having a total circulation of about 15,000 including the personnel who operated such exchanges and commissaries. In 1952 the approximate number of subscribers to the above-mentioned weekly publications was 110,000 for Army Times, 60,000 for Air Force Times, 100,000 for Veterans Edition, and 40,000 for Navy Times. Those publications were sold to both officers and enlisted men. A large part of the circulation was obtained through military unit subscriptions and after the men left the service individual subscriptions were obtained directly through the mail and also through independent catalog agencies which were paid a commission of from 20 to 30 percent depending on the number of subscriptions, and such agencies paid their own expenses. After the war newsstand sales were started and grew to substantial numbers. In 1952 the general offices of Publishing Company were located at 3132 M Street NW., Washington, D.C., and it had branch offices in the cities of New York, Chicago, Detroit, San Francisco, Los Angeles, London, and Paris. The branch offices handled subscriptions, advertising, and editorial work. The publications were printed in various places, namely, Pacific editions in Tokyo, Japan; European editions in Frankfurt, Germany; West Coast editions in San Diego, California; and other editions in Philadelphia, Pennsylvania. In 1952 Publishing Company had several hundred employees including about 10 salesmen.

The petitioner which now has the name of Army Times Sales Company was incorporated in Maryland on July 26, 1945, under the name of Army and Navy Bulletin, Inc. (hereinafter sometimes referred to as Bulletin and sometimes as Sales Company), to conduct, inter alia, a general printing and publishing business. It had an authorized capital stock of 10,000 shares without nominal or par value. The original stock issue embraced 3,100 shares for which $31,000 cash was paid in during September and October 1945, and such shares were issued in the amounts of 1,400 shares to Thurmond Chatham, 1,000 to Lewis L. Straus, 500 shares to W. W. Rapley, 100 shares to Arthur L. Rubin, and 100 shares to charles G. Moore. Subsequently during July and August 1946 and for a total of $46,880 cash paid in, as hereinafter mentioned, Bulletin issued an additional 4,688 shares to Thurmond Chatham, making a total of 7,788...