373 F.2d 91 (5th Cir. 1967), 22174, Turnbull, Inc. v. Commissioner of Internal Revenue

Docket Nº:22174.
Citation:373 F.2d 91
Party Name:TURNBULL, INC., Transferee (Formerly J. Gordon Turnbull, Inc.), Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:February 01, 1967
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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373 F.2d 91 (5th Cir. 1967)

TURNBULL, INC., Transferee (Formerly J. Gordon Turnbull, Inc.), Petitioner,



No. 22174.

United States Court of Appeals, Fifth Circuit.

February 1, 1967

Rehearing Denied March 22, 1967.

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Robert Edwin Davis, Wentworth T. Durant, Ronald M. Mankoff, Durant, Mankoff & Davis, Dallas, Tex., for petitioner.

Lester R. Uretz, Chief Counsel, I.R.S., Glen E. Hardy, Atty., I.R.S., Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Crombie J. D. Garrett, Melva M. Graney, Attys., Dept. of Justice, Washington, D.C., Richard M. Roberts, Acting Asst. Atty. Gen., for respondent.

Before RIVES, WISDOM and AINSWORTH, Circuit Judges.

AINSWORTH, Circuit Judge:

This taxpayer's petition for review of an adverse decision of the Tax Court involves a complicated set of facts in which three corporations, J. Gordon Turnbull, Inc., taxpayer, H. R. Henderson and Company and Price Construction Company, as well as two individuals, Cameron McElroy, Jr. and H. R. Henderson, are the principal participants.

The story begins chronologically with the incorporation of J. Gordon Turnbull, Inc. (JGT) under the laws of Ohio in August 1941. The corporation was authorized to furnish engineering, architectural and construction management services in connection with the building of large structures. Its controlling stockholder, president and chief executive was J. Gordon Turnbull, who died on April 1, 1953.

H. R. Henderson and Company (Henderson), a Texas corporation, was organized on January 3, 1946 and continued in existence through December 31, 1957, when it was merged into its subsidiary, J. Gordon Turnbull, Inc., and the name of the surviving corporation was changed to Turnbull, Inc. (taxpayer). Price Construction Company (Price), a Texas corporation, was organized on May 1, 1948.

On December 15, 1953, Henderson's Board of Directors authorized its president, Cameron McElroy, Jr., to investigate the possibility of purchasing the stock of JGT. 1 On December 18, 1953, Price Construction Company authorized Ernest F. Smith to investigate the possible purchase of JGT's accounts receivable and of assuming certain potential tort liabilities. Smith made an investigation, discussing the possible tort liabilities of JGT with attorneys for various defendants, and reported to Price on January 15, 1954 that he believed the cases could be disposed of for a reasonable amount.

On January 27, 1954, Mrs. Turnbull, individually, and on behalf of the Estate of J. Gordon Turnbull, accepted an offer of B. C. McElroy and Cameron McElroy to purchase all of the outstanding shares of JGT for the sum of $975,000. Pursuant to this agreement, Henderson acquired all of the outstanding shares of JGT and the funds were provided by borrowing $25,000 from Cameron McElroy and H. R. Henderson, $801,108.37 from JGT, and by JGT redeeming stock in the sum of $148,891.63 as treasury shares, a total of $975,000, which was paid to Mrs. Turnbull and the Estate for the stock.

At the time, in fact from December 31, 1946 through April 15, 1958, the outstanding stock of Henderson was owned by H. R. Henderson, 32 per cent; Cameron MeElroy, Jr., 48 per cent; B. C. McElroy, Sr., 10 per cent; and E. Key, III, 10 per cent.

On February 4, 1954, Price purchased the JGT accounts receivable of $420,526.98 by paying $50,000 cash plus a 90-day promissory note for $150,000 with interest at 4 per cent, a total of $200,000, plus assumption of any liability determined against JGT as the result

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of (1) a claim for damages pending in a federal court in Arkansas in the sum of $3,950; (2) a claim for damages in the amount of $38,250; and (3) a claim for damages growing out of an accident at the Reynolds Metals plant at Gregory, Texas, on...

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