Silverstein v. Comm'r of Internal Revenue, Docket No. 84182.
| Decision Date | 26 May 1961 |
| Docket Number | Docket No. 84182. |
| Citation | 36 T.C. 438 |
| Parties | L. L. SILVERSTEIN, ESTATE OF ROSE L. SILVERSTEIN, DECEASED, L. L. SILVERSTEIN, EXECUTOR, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Jack White, Esq., for the petitioners.
Wallace M. Wright, Esq., for the respondent.
Payment of petitioner's prior years' tax liabilities by a corporation of which petitioner was an officer and stockholder constitutes taxable income to petitioner.
Respondent determined deficiencies in the joint income tax of L. L. Silverstein and Rose L. Silverstein for 1955 and 1956 in the amounts of $2,632.61 and $2,575.22, respectively. The only issue is whether payments of $10,000 made by a corporation of which L. L. Silverstein was a one-third owner on prior years' tax liabilities of L. L. Silverstein are taxable to L. L. Silverstein as constructive dividends.
The stipulated facts are so found.
L. L. Silverstein and Rose L. Silverstein were husband and wife during the year 1955 and filed a joint Federal income tax return with the director of internal revenue for the district of South Carolina. Rose L. Silverstein died March 26, 1956; however, L. L. Silverstein (hereinafter referred to as petitioner) filed a joint Federal income tax return for the year 1956 with the director of internal revenue for the district of South Carolina under the provisions of section 6013(a)(3) of the Internal Revenue Code of 1954.
Petitioner was engaged, during the years 1942 to 1947, inclusive, in the operation of a jewelry business in Charleston, South Carolina, as an individual proprietorship. During those years, petitioner incurred substantial liabilities for unpaid Federal income and miscellaneous (jeweler's excise) taxes, additions to tax, and interest.
On July 6, 1950, two notices of Federal tax liens were filed by the collector of internal revenue in the office of the Register of Mesne Conveyance for Charleston County, South Carolina, one evidencing a total assessment in income tax against petitioner in the amount of $243,477.75, and the other evidencing a total assessment in excise tax against Leroy Jewelry Company, L. Leroy Silverstein, owner, in the amount of $111,441.54.
On December 2, 1952, petitioner submitted offers in compromise to settle the above-mentioned tax liabilities for a total of $100,000, the offers being based on petitioner's financial inability to pay the full amount due. On May 23, 1953, petitioner submitted amended offers in compromise increasing the total amount offered to $125,000. At the time the original offers in compromise were submitted, $75,000 cash was paid, and under the terms of the amended offers in compromise submitted May 23, the balance of $50,000 was to be paid in installments of $10,000 each, payable 1 year after the offers were accepted and in each of the succeeding 4 years.
On July 23, 1953, petitioner further amended the offers in compromise, expressly agreeing to the payment of interest on deferred installment payments not paid when due.
Petitioner was notified that both offers in compromise were accepted by the Commissioner of Internal Revenue by letter dated August 21, 1953.
On June 30, 1953, Leroy Jewelry Company, Inc. (hereinafter referred to as Leroy), was organized with 208 shares of its capital stock being issued on July 1, 1953, to petitioner and 1 qualifying share being issued to each of his sons-in-law, Marshall Berg and Haskell Widelitz. Petitioner's stock certificate was canceled and new certificates were issued to petitioner, Berg, and Widelitz on July 2, 1953, with the result that each thereafter held 70 shares of the total 210 shares of stock issued and outstanding. Thereafter the corporation carried on the business formerly conducted by petitioner as a sole proprietorship.
The balance sheet filed with Leroy's income tax return for its fiscal year ending June 30, 1954, listed assets totaling $175,515.59, liabilities totaling $154,515.59, and capital stock totaling $21,000, as of July 1, 1953.1
Petitioner's Federal tax liabilities were never carried on the books of Leroy as a liability.
The first $10,000 installment on the balance of petitioner's tax liabilities, under the terms of the accepted offers in compromise, was paid by Leroy on July 30, 1955. This payment was charged by Leroy to an expense account of taxes and license. The payment of the second installment was also made by Leroy on July 31, 1956. This payment was originally charged on Leroy's books to loans payable but subsequently, by means of an adjusting journal entry, the loans payable account was credited with the $10,000, an asset account designated goodwill was debited in the amount of $9,000, and an expense account of interest was debited in the amount of $1,000.
The earned surplus of Leroy, as reflected by its Federal income tax returns, at June 30, 1956, was $35,271.87 and at June 30, 1957, was $43,184.26.
Leroy borrowed $20,000 from the South Carolina National Bank, Charleston, South Carolina, evidenced by a collateral note dated March 19, 1956, signed by Leroy as promisor and guaranteed by petitioner, Berg, and Widelitz. The collateral securing this note was stated on the face thereof to be equity in cash value of life insurance assigned to the bank, having a cash value of approximately $24,000. Most of the indicated cash surrender value was from life insurance policies owned by petitioner and the balance was from life insurance policies owned by Berg and Widelitz. Renewal notes in the same amount, executed and endorsed in the same manner, were given from time to time, and the principal amount of the loan had not been paid at the time of trial. This $20,000 obligation was carried on the books of Leroy as loans payable.
The entire balance of the amounts due under the offers in compromise of petitioner's tax liabilities was paid and released of record by June 1958.
The payment by Leroy of petitioner's liabilities for Federal taxes constituted constructive dividends to petitioner, and the amount of $10,000 is taxable to petitioners as ordinary income in each of the years 1955 and 1956.
OPINION.Petitioner relies on two points to avoid having the payments made by Leroy on petitioner's individual income tax liabilities taxed to petitioner as income. The first is that the payments made by Leroy were made with funds borrowed on the security of the stockholders' individual...
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