Perry v. CIR
| Decision Date | 28 March 1968 |
| Docket Number | No. 18801.,18801. |
| Citation | 392 F.2d 458 |
| Parties | William H. PERRY and Marian E. Perry, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
William H. Perry, III, of Myers, Webster & Perry, Webb City, Mo., for petitioners; William C. Myers, Jr., Webb City, Mo., on the brief.
Jonathan S. Cohen, Attorney, Department of Justice, Washington, D. C., for respondent; Mitchell Rogovin, Asst. Atty. Gen., and Attorneys Lee A. Jackson and Harry Baum, Washington, D. C., on the brief.
Before VAN OOSTERHOUT, Chief Judge, and MEHAFFY and HEANEY, Circuit Judges.
William H. Perry and Marian E. Perry, taxpayers, petition for a review of the decision of the Tax Court determining a deficiency in their federal income tax for the year 1961 in the amount of $2,118.96. The Tax Court's opinion, written by Judge Forrester, is officially reported in 47 T.C. 159. Our jurisdiction is conferred by § 7482 of the Internal Revenue Code of 1954, 26 U.S.C. § 7482. We affirm.
The taxpayers owned 2,999 shares of stock in Cardinal Castings, Inc., a Missouri corporation which was organized and commenced business operations in March, 1960 with a total of 3,000 shares outstanding. Their son owned the other outstanding share. On March 21, 1960, Cardinal made a timely election to be taxed as a small business corporation under Subchapter S of the Revenue Code of 1954, 26 U.S.C. §§ 1371 et seq.1
Cardinal filed its tax returns on the accrual basis for fiscal years ending on October 31. For the first taxable year from March 30, 1960 through October 31, 1960, Cardinal had a net operating loss of $9,294.30. For the next fiscal year ending October 31, 1961, it had a net operating loss of $6,069.53. Under the provisions of 26 U.S.C. § 1374(a), (b), a Subchapter S corporation does not deduct its net operating losses, but the losses it sustains may be claimed by the shareholders on their individual returns on the basis of their proportionate equity in the ownership of the corporation.2 This loss, however, is limited by 26 U.S.C. § 1374 (c) (2) to the sum of the adjusted basis of their stock plus the adjusted basis of any indebtedness owed them by the corporation.3 Cardinal occupied a building owned by the taxpayers and was indebted to them for rent thereon amounting to $700.00 for the fiscal year ending October 31, 1960, and in the amount of $1,200.00 for the fiscal year ending October 31, 1961. Additionally, Cardinal owed the taxpayers $1,421.50 for cash advanced during the fiscal year ending October 31, 1961, for which it had executed a promissory note to taxpayers, payable on demand, dated August 26, 1961. Taxpayers were allowed deductions for these items.
The taxpayers also added to the basis of indebtedness which they claimed from Cardinal a promissory note in the sum of $7,942.33, executed by Cardinal, dated October 31, 1961, and payable January 1, 1964. In return for this note, the taxpayers gave to Cardinal their promissory note in the same amount, also dated October 31, 1961, but payable on demand. This transaction resulted in a tax advantage to the taxpayers, which was disallowed by the Commissioner and upheld by the Tax Court, who found that the notes were executed after the close of the corporation's fiscal year ending October 31, 1961, and predated, and that, therefore, the taxpayers were not entitled to include the $7,942.33 note from Cardinal in arriving at the basis of their indebtedness. The issue here is whether the Tax Court was justified in finding that the exchange of these notes in the amount of $7,942.33 each did not in fact take place prior to the end of Cardinal's fiscal year on October 31, 1961, and, in the event it is found that the court was justified in so holding, whether, under the circumstances here, the taxpayers are precluded from adding their note from Cardinal to their basis of indebtedness for that year.
In the trial to the Tax Court, taxpayers made the additional contention that they were entitled to claim as deductions certain Cardinal debts which they had guaranteed and for which they were assertedly liable. Taxpayers did not pay any of these debts, which they guaranteed, and this issue has been abandoned on appeal. They have also abandoned any contest with regard to their tax liability for the fiscal year 1960, and, therefore, the issue presently before us involves merely the question of whether the Tax Court correctly found that the taxpayers did not meet their burden of proof in establishing that the $7,942.33 notes exchanged between them and Cardinal were executed and delivered to each other prior to the close of the corporation's 1961 fiscal year. In this connection, the Tax Court found:
Further, in connection with this issue the Tax Court stated in its opinion at page 164:
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