Sec. Trust Co. v. Comm'r of Internal Revenue (In re Estate of Stoll)

• Decision Date: 09 May 1962
• Docket Number: 77167.,Docket Nos. 77166
• Citation: 38 T.C. 223
• Parties: ESTATE OF JOHN G. STOLL, DECEASED, SECURITY TRUST COMPANY, EXECUTOR, AND VIRGINIA D. STOLL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LEXINGTON HERALD-LEADER CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

38 T.C. 223

ESTATE OF JOHN G. STOLL, DECEASED, SECURITY TRUST COMPANY, EXECUTOR, AND VIRGINIA D. STOLL, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LEXINGTON HERALD-LEADER CO., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 77166

77167.

Tax Court of the United States.

Filed May 9, 1962.

[38 T.C. 224]

James Park, Esq., Joseph L. Rothchild, Esq., and Gayle A. Mohney, Esq., for the petitioners.

Hubert E. Kelly, Esq., for the respondent.

John G. Stoll owned the Lexington Herald and the Lexington Leader, which published a daily morning and afternoon newspaper, respectively, as well as a combined Sunday edition. The newspapers were operated as an individual proprietorship until October, 1953, at which time the Lexington Herald-Leader Co. was formed. To this corporation were transferred the operating assets of the newspapers. Stoll took back all of the stock. In addition, the corporation assumed a total of $1,015,000 of his liabilities, composed of $600,000 obtained in refinancing just prior to incorporation and secured by mortgages on property assigned to the corporation, and $415,000 secured by life insurance policies with cash surrender values in excess of $415,000, which policies were not assigned to the corporation. Held, the assumption by the corporation of the $600,000 indebtedness is not to be considered as ‘other property or money’ received by Stoll within the meaning of section 112(c) and (k), I.R.C. 1939, and that such assumption does not prevent the exchange from being within the provisions of section 112(b)(5), I.R.C. 1939. Held, further, the assumption by the corporation of the $415,000 indebtedness is to be considered as ‘money received’ by Stoll upon the exchange, within the meaning of section 112(c) and (k), I.R.C. 1939, and as such is to be considered in computing the gain to be recognized upon the exchange.

BRUCE, Judge:

Respondent determined deficiencies in petitioners' income taxes and additions to taxes for the years and in the amounts which follow:

+--------------------------------------------------------------+
                ¦ ¦ ¦ ¦Additions to tax ¦
                +----------+------------+-----------+--------------------------¦
                ¦Docket No.¦Taxable year¦Deficiency ¦ ¦ ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦ ¦ ¦Sec. 293(b),¦Sec. 6653(b),¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦ ¦ ¦I.R.C. 1939 ¦I.R.C. 1954 ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦(1953 ¦$335,626.88¦$167,813.44 ¦ ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦(1954 ¦219,445.55 ¦ ¦$109,722.78 ¦
                +----------+------------+-----------+------------+-------------¦
                ¦77166 ¦(1955 ¦45,950.84 ¦ ¦22,975.42 ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦(1956 ¦108,516.38 ¦ ¦54,258.19 ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦(9/30/54 ¦54,843.52 ¦27,421.76 ¦ ¦
                +----------+------------+-----------+------------+-------------¦
                ¦77167 ¦(9/30/55 ¦32,456.50 ¦ ¦16,228.25 ¦
                +----------+------------+-----------+------------+-------------¦
                ¦ ¦(9/30/56 ¦33,578.88 ¦ ¦16,789.44 ¦
                +--------------------------------------------------------------+
                

By their supplemental stipulation of facts the parties have limited the issues to the following: (1) Whether the transfer by John Stoll of the assets of his newspaper business with a basis of $663,879.95 to the Lexington Herald-Leader Co. in exchange for all of its stock and the assumption by it of his liabilities in the amount of $1,015,000 was a nontaxable exchange within the provisions of section 112(b)(5), L.R.C. 1939;¹ and (2) whether there was a valid assumption of the indebtedness by the corporation so that principal and interest payments made by the corporation toward the liquidation of the liabilities did not constitute distributions in the nature of dividends.

FINDINGS OF FACT.

Some of the facts have been stipulated and are incorporated herein by this reference.

Petitioners in Docket No. 77166 are the Estate of John G. Stoll, Deceased, Security Trust Company, of Lexington, Kentucky, Executor, and Virginia D. Stoll (sometimes hereinafter referred to as Virginia). John G. Stoll (sometimes hereinafter referred to as Stoll) and Virginia were husband and wife and resided in Lexington, Kentucky. They filed joint Federal income tax returns with the district director of internal revenue for the district of Kentucky for the years 1953 through 1956 on the cash basis of accounting. Stoll died testate on August 26, 1959. Besides Virginia, by whom he had no children,

[38 T.C. 225]

he left surviving him three daughters by a former marriage, 12 grandchildren, and 23 great-grandchildren.

The joint Federal income tax returns filed by Stoll and Virginia for the years 1953 through 1956 reflect the following details.

+-----------------------------------------------------------------------------+
                ¦ ¦1953 ¦1954 ¦1955 ¦1956 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Salary, Lexington Herald-Leader, ¦$8,333.34 ¦$50,000.00¦$50,000.00¦$50,000.00¦
                ¦Inc ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Dividends ¦7,719.90 ¦21,187.96 ¦32,869.08 ¦115,305.49¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Interest income ¦ ¦1,201.92 ¦658.29 ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Net profit from operation of ¦ ¦ ¦ ¦ ¦
                ¦Lexington Herald-Leader, ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦a proprietorship ¦529,967.48¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Gain (loss) from sale or exchange¦ ¦(379.34) ¦ ¦6,512.61 ¦
                ¦of property ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Net rental income ¦22,138.86 ¦32,121.54 ¦32,865.18 ¦33,678.66 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Other income ¦7,695.93 ¦3,816.00 ¦1,548.30 ¦2,241.21 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Adjusted gross income ¦575,855.51¦107,948.08¦117,940.85¦207,737.97¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Less: Itemized deductions ¦66,413.63 ¦26,609.17 ¦28,353.09 ¦31,447.32 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦ ¦509,441.88¦81,338.91 ¦89,587.76 ¦176,290.65¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Less: Personal exemptions ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦1,800.00 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Taxable income ¦507,641.88¦79,538.91 ¦87,787.76 ¦174,490.65¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Joint Federal income tax ¦420,462.52¦38,564.35 ¦43,298.79 ¦105,673.67¦
                ¦liability ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Paid by: ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Withholding ¦2,083.34 ¦12,500.04 ¦12,500.04 ¦12,500.04 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Declaration of estimated tax ¦460,000.00¦66,862.46 ¦27,500.00 ¦31,000.00 ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Overpayment credited and/or ¦41,620.82 ¦40,798.15 ¦ ¦ ¦
                ¦refunded ¦ ¦ ¦ ¦ ¦
                +---------------------------------+----------+----------+----------+----------¦
                ¦Balance of tax paid ¦ ¦ ¦3,298.75 ¦62,173.63 ¦
                +-----------------------------------------------------------------------------+
                

John Stoll was born in Lexington, Kentucky, on September 7, 1878. His father and grandchildren before him were associated in the ownership of the Lexington Leader, a daily afternoon newspaper, from the year 1884. Stoll acquired sole ownership of this newspaper in 1921 and continued its operation as a sole proprietorship.

On September 15, 1937, Stoll purchased, for $407,200 the Lexington Herald, a morning newspaper published in Lexington, and the following entries were recorded on the proprietorship books of account for the newspaper business:

+----------------------------------------------+
                ¦ ¦Debit ¦Credit ¦
                +-----------------------------+-------+--------¦
                ¦Equipment ¦$82,300¦ ¦
                +-----------------------------+-------+--------¦
                ¦Associated Press Debentures ¦250 ¦ ¦
                +-----------------------------+-------+--------¦
                ¦Associated Press Membership ¦10,000 ¦ ¦
                +-----------------------------+-------+--------¦
                ¦Goodwill ¦314,650¦ ¦
                +-----------------------------+-------+--------¦
                ¦John G. Stoll Capital Account¦ ¦$407,200¦
                +----------------------------------------------+
                

On September 15, 1937, Stoll caused bonds to be issued in the total amount of $500,000, known as The Lexington Leader-The Lexington Herald (John G. Stoll, Owner) 5% Serial Bonds, which were secured by a first mortgage upon the Lexington Leader building owned by him, a first mortgage on all of his printing presses, machinery, and equipment used in the printing and publishing of its newspapers, and by an assignment of $200,000 of the proceeds of a life insurance trust created by him on August 3, 1932, with the Security Trust Company, of Lexington, Kentucky, as trustee. Thereafter, on September

[38 T.C. 226]

15, 1944, Stoll refinanced this bond issue with a new issue of $600,000 of 5-percent serial bonds, using the same security. As of October 31, 1953, there were bonds of this issue unpaid and outstanding in the principal amount of $184,500 and accrued interest of $4,612.50.

From September 15, 1937, until October 31, 1953, Stoll carried on his newspaper business under the name of the Lexington Herald-Leader Co., John G. Stoll, Proprietor, publishing the Lexington...