Ach v. Comm'r of Internal Revenue, Docket Nos. 94162-94164.
| Decision Date | 15 April 1964 |
| Docket Number | Docket Nos. 94162-94164. |
| Citation | 42 T.C. 114 |
| Court | U.S. Tax Court |
| Parties | PAULINE W. ACH, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
William R. Seaman and Ronald E. Heinlen, for the petitioners.
Gerald W. Fuller, for the respondent.
1. Held: The Commissioner was warranted in allocating income of corporate petitioner to individual petitioner under section 482, I.R.C. 1954. Allocation approved as revised herein.
2. Held, individual petitioner acquired control of corporate petitioner for purpose of avoiding tax within meaning of section 269, I.R.C. 1954, and section 129, I.R.C. 1939.
Respondent determined deficiencies in income tax in these consolidated proceedings as follows:
+-----------------------------------------------+
¦ ¦ ¦ ¦Estate of Ernest ¦
+----+-------------+----------+-----------------¦
¦ ¦ ¦ ¦M. Ach, Deceased,¦
+----+-------------+----------+-----------------¦
¦Year¦The Ach Corp.¦Pauline W.¦Pauline W. Ach, ¦
+----+-------------+----------+-----------------¦
¦ ¦ ¦Ach ¦Sole Legatte, ¦
+----+-------------+----------+-----------------¦
¦ ¦ ¦ ¦Pauline W. Ach, ¦
+----+-------------+----------+-----------------¦
¦ ¦ ¦ ¦Surviving Wife ¦
+----+-------------+----------+-----------------¦
¦1954¦ ¦ ¦$19,695.24 ¦
+----+-------------+----------+-----------------¦
¦1955¦$14,576.30 ¦ ¦22,161.34 ¦
+----+-------------+----------+-----------------¦
¦1956¦16,591.44 ¦ ¦22,268.76 ¦
+----+-------------+----------+-----------------¦
¦1957¦15,155.52 ¦$23,562.53¦ ¦
+----+-------------+----------+-----------------¦
¦1958¦16,309.54 ¦26,894.31 ¦ ¦
+-----------------------------------------------+
The principal issues for decision are (1) whether income reflected in the corporation's returns from the operation of a dress business during the taxable years may be ascribed to petitioner Pauline W. Ach; and (2) whether net operating losses incurred prior to 1954 in the operation of a dairy business may be carried forward as deductions against corporate earnings realized in the conduct of a dress and apparel business.
Some of the facts have been stipulated; the stipulation of facts and all exhibits identified therein are incorporated by this reference.
Pauline W. Ach and her husband, Ernest M. Ach, resided in Hamilton, Ohio. He died on February 14, 1956. Pauline timely filed joint income tax returns with her husband, or his estate, for the years 1954, 1955, and 1956. She filed separate individual returns for 1957 and 1958. The Ach Corp., an Ohio corporation with its principal place of business in Cincinnati, Ohio, timely filed its corporate income tax returns for the years 1955-58. All of the foregoing returns were filed with the district director of internal revenue at Cincinnati. Pauline was the executrix of Ernest's will and his sole beneficiary.
Roger W. Ach is the son of Pauline and Ernest. During 1945 or early 1946 Roger and his father purchased the assets of a dairy business in Indiana and conducted a dairy business with those assets as a partnership in Rising Sun, Ind. The business was incorporated under the laws of Ohio in December 1946 as ‘Indiana Ideal Creamery Company,‘ but shortly thereafter, in January 1947, its name was changed to ‘Rising Sun Creamery Company.’ The statement of purpose or purposes for which the corporation was formed reads in its entirety as follows:
To buy, sell, manufacture, purchase, distribute and deal in milk, cream, butter, cheese, eggs, and all other products and derivatives of milk, cream and other dairy products of any kind, and the doing of all things incidental and necessary to carry out the purposes of this corporation.DP The only shares of stock issued were 300 shares oPf common to Roger and 200 shares of 4-percent noncumulative preferred to his father. The shares of preferred stock were transferred to someone else on December 31, 1951, and were surrendered for cancellation during the following year. All of the common stock was held continuously by Roger until July 14, 1953, when changes occurred, as hereinafter set forth.
Throughout the years 1947 through 1952 the Rising Sun Creamery Co.‘s principal business was the operation of a creamery plant in Rising Sun, Ind. Roger was its president and chief executive officer in charge of its daily operations. Neither of his parents participated in the management of the corporation. The business was unsuccessful, and the corporation's net operating losses during the years 1950-53 were as follows:
+----------------------------+
¦Year ¦Net operating loss ¦
+------+---------------------¦
¦1950 ¦$34,057.60 ¦
+------+---------------------¦
¦1951 ¦49,836.76 ¦
+------+---------------------¦
¦1952 ¦61,807.12 ¦
+------+---------------------¦
¦1953 ¦87,492.60 ¦
+----------------------------+
In an effort to help sustain his son's faltering enterprise, Ernest from time to time made loans to the corporation, evidenced by interest-bearing notes. The amount due on those notes as of the end of each of the years 1950-53 was as follows:
+----------------------------+
¦Year ¦Net operating loss ¦
+------+---------------------¦
¦1950 ¦$103,000 ¦
+------+---------------------¦
¦1951 ¦252,000 ¦
+------+---------------------¦
¦1952 ¦281,000 ¦
+------+---------------------¦
¦1953 ¦282,700 ¦
+----------------------------+
The corporation's balance sheet, as of December 31, 1952, reflected the following:
During the latter part of 1952, Roger went to his father and told him that it was time to give up the dairy and creamery business; Roger felt his father was too old to have to worry about continued losses and the continued backing of a losing cause. It was at approximately this time that it was decided to quit this business. The corporation ceased operating the dairy and creamery business at some undisclosed time prior to August 1, 1953, and sold its dairy and creamery equipment. Its principal remaining assets consisted of land and buildings in Rising Sun, Ind., which were being rented to persons not connected with the corporation.
On April 23, 1953, the corporation changed its name to the Ach Corp. and changed its stated corporate purposes from the operation of a creamery plant and related dairy business to broad, general purposes which would permit it to conduct a wide range of businesses authorized under the statutes in the State of Ohio. On or about July 14, 1953, Roger, pursuant to his parents' suggestion, transferred to his brother, S. Laurence Ach, 149 shares of the corporation's common stock; there was no consideration for this transfer.
For approximately 29 years prior to August 1, 1953, Pauline had owned and operated a sole proprietorship known as ‘Vogues and Vanities,‘ a successful retail dress and apparel business located in Cincinnati, Ohio. During this period there was never a year when the business lost money, even during the depression. Prior to August 1, 1953, the profits approximated $25,000-$30,000 per year; the trend of these profits was upward. Vogues and Vanities employed approximately 9 to 12 persons. On August 1, 1953, the net book value of its assets was $30,705.57.
The balance sheet of Vogues and Vanities, as of July 31, 1953, reflected the following:
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