Pridemark, Inc. v. Comm'r of Internal Revenue, Docket Nos. 93303-93307.
| Decision Date | 15 June 1964 |
| Docket Number | Docket Nos. 93303-93307. |
| Citation | 42 T.C. 510 |
| Parties | PRIDEMARK, INC. (FORMERLY PREFAB HOMES AND SUPPLIERS, INC.), ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Jack C. Merriman, for the petitioners.
Stuart E. Seigel, for the respondent.
1. Held, that certain 1958 and 1959 transactions of petitioners Pridemark, Inc., and Pridemark, Inc., of Connecticut, and their respective stockholders, did not effect complete liquidations of said corporations within the meaning of section 337 of the 1954 Code, because such transactions were incidental to a reorganization of the continuing business enterprise within the meaning of section 368(a)(1)(F) of the Code. Accordingly, held, further, that gains which said corporations realized from sales of assets during their fiscal periods ended in 1958, must be recognized for income tax purposes; and that cash distributions which Pridemark, Inc., made to the individual husband-petitioners in 1958 are taxable as ordinary dividends.
2. Held, that gains which said corporations realized from sales to another corporation of certain of their completed customer contracts are taxable to said corporations as ordinary income.
3. Held, that amounts of certain customer deposits which said corporations retained for their own benefit at the time they sold the customer contracts to which these deposits related, are includable in the incomes of said corporations for the years in which the contracts were sold.
4. Held, that the amounts of legal fees which petitioner Pridemark, Inc., incurred in connection with the sale of certain assets must be treated as offsetting adjustments in computing the gain from said sale.
5. Held, that the amounts deductible by petitioner Pridemark, Inc., as reasonable compensation to two of its officers, are as determined.
These proceedings involve deficiencies in income tax determined by the Commissioner as follows:
+-----------------------------------------------------------------------------+
¦Docket ¦Taxable ¦Petitioner ¦Deficiency¦
¦No. ¦ ¦ ¦ ¦
+--------+-----------+---------------------------------------------+----------¦
¦ ¦year ended ¦ ¦ ¦
+--------+-----------+---------------------------------------------+----------¦
¦93303 ¦Feb.¦29, ¦Pridemark,Inc. (formerly Prefab Homes & ¦$8,919.18 ¦
¦ ¦ ¦1956 ¦Supplies, Inc.) ¦ ¦
+--------+----+------+---------------------------------------------+----------¦
¦ ¦Feb.¦28, ¦-----do ¦83,219.38 ¦
¦ ¦ ¦1958 ¦ ¦ ¦
+--------+----+------+---------------------------------------------+----------¦
¦93304 ¦May ¦31, ¦Pridemark, Inc., of Connecticut ¦12,298.81 ¦
¦ ¦ ¦1958 ¦ ¦ ¦
+--------+----+------+---------------------------------------------+----------¦
¦93305 ¦Dec.¦31, ¦Eugene Blitz and Eleanor Blitz ¦38,406.77 ¦
¦ ¦ ¦1958 ¦ ¦ ¦
+--------+----+------+---------------------------------------------+----------¦
¦93306 ¦Dec.¦31, ¦Jules E. Blitz and Barbara J. Blitz ¦1,974.54 ¦
¦ ¦ ¦1958 ¦ ¦ ¦
+--------+----+------+---------------------------------------------+----------¦
¦93307 ¦Dec.¦31, ¦Gershan L. Thiman and Joan G. Thiman ¦1,846.43 ¦
¦ ¦ ¦1958 ¦ ¦ ¦
+-----------------------------------------------------------------------------+
All these cases were consolidated for trial.
Decision in docket No. 93303 respecting the fiscal period ended in 1956 will be deferred until the recomputation of tax under Rule 50. The issue for this 1956 period involves the amount deductible by Pridemark, Inc., as a net operating loss carryback from a subsequent taxable period; and such amount will depend on the outcome of other issues before us.
The issues to be here decided are:
(1) Whether certain 1958 and 1959 transact.ons of Pridemark, Inc., Pridemark, Inc., of Connecticut, and their respective stockholders, effected complete liquidations of said corporations within the meaning of section 337 of the 1954 Code;2 or whether such transactions were incidental to a reorganization of the continuing business enterprise.
Determination of this issue will provide the answer to two other underlying questions, to wit:
(a) Do the gains which said corporations realized from sales of certain assets during their taxable periods ended in 1958, qualify for nonrecognition for income tax purposes under section 337(a)?
(b) Do the distributions of cash which petitioners Eugene Blitz, Jules E. Blitz, and Gershan K. Thiman received from Pridemark, Inc., in 1958, qualify for capital gains treatment as liquidating dividends; or are these distributions taxable to them as ordinary dividends?
(2) Irrespective of the applicability or nonapplicability of section 337:
(a) Whether gains which each of the above-named corporations realized from sales to another corporation of certain of their uncompleted customer contracts are taxable to said corporations as ordinary income; and
(b) Whether any part of the proceeds which Pridemark, Inc., received upon its disposition of said customer contracts was consideration for the sale of goodwill.
(3) Whether the amounts of certain customer deposits, which the two corporations retained for their own benefit at the time they disposed of the customer contracts to which these deposits related, are includible in the taxable incomes of said corporations for their taxable years ended February 28, 1958, and May 31, 1958, respectively.
(4) Whether legal fees which Pridemark, Inc., incurred in connection with its above-mentioned sale of miscellaneous assets, are deductible by said corporation as ordinary and necessary business expenses; or whether the amounts of these fees should be treated as an offsetting adjustment in computing its gains from said sale.
(5) Whether Pridemark, Inc., is entitled to deduct for its taxable period ended on January 7, 1959,3 any amounts paid as salaries to Eugene Blitz and Jules E. Blitz in excess of $8,700 and $5,590, respectively.
We shall hereinafter consider these several issues, consecutively.
Some of the facts have been stipulated. The stipulation of facts and all exhibits identified therein are incorporated herein by reference.
Petitioner Pridemark, Inc. (hereinafter called Pridemark), is a dissolved Maryland corporation, which was organized in 1946 under the name of Prefab Homes and Suppliers, Inc. At all times relevant, it kept its books of account and filed its income tax returns on an accrual basis. Its income tax returns for all fiscal periods here involved were filed with the district director of internal revenue at Baltimore.
Petitioner Pridemark, Inc., of Connecticut (hereinafter called Connecticut) also is a dissolved corporation. It was organized in 1952 under the laws of Connecticut, with the name of Prefab Homes & Suppliers Corp. It kept its books of account on an accrual basis; and its income tax returns for all periods here involved were filed with the district director of internal revenue at Hartford.
The individual petitioners, Eugene and Eleanor Blitz, Jules E. and Barbara J. Blitz, and Gershan K. and Joan G. Thiman are, respectively, husbands and wives residing in Baltimore. Each of these couples filed a joint income tax return for the calendar year 1958 with the district director of internal revenue at Baltimore. The wives are parties to the present proceedings solely by reason of their having joined in the filing of said joint returns.
Issue 1. Background Facts
In about February 1946, petitioner Eugene Blitz and two other individuals named Jack Gottlieb and Leo Linton, organized a Maryland corporation, which was initially named Prefabricators, Inc., but which thereafter changed its name to Golden Key Homes, Inc. (Said corporation is hereinafter called Golden Key.) The three incorporators contributed capital of $3,000 each and became the sole and equal stockholders. The initial purpose of this corporation was to engage in the designing and manufacture of unassembled prefabricated houses, and to itself directly handle the sale of its products to prospective homeowners. However, in March 1946, which was shortly after the date of Golden Key's incorporation, the same three individuals organized (again as equal shareholders, and with capital of about $6,000 represented by 5,000 shares without nominal or par value) a second corporation to act as the exclusive dealer for Golden Key's products. This second corporation was petitioner Pridemark. Thereafter and until 1958, Golden Key centered its principal activities in designing and manufacturing prefabricated houses at a plant located in or near Baltimore; and in selling its products under contracts with separately incorporated dealers, such as Pridemark.
On about March 1, 1950, which was approximately 4 years after Golden Key and Pridemark has thus been organized, the three stockholders of these two corporations entered into an arrangement, under which Eugene Blitz transferred all his stock interest in Golden Key to his associates Jack Gottlieb and Leo Linton; and under which the two latter individuals at the same time transferred all their stock interests in Pridemark to Eugene Blitz. Thus, Eugene Blitz thereupon became the sole stockholder of Pridemark. Also he became the president; his son, petitioner Jules E. Blitz, became the secretary and treasurer; and both of them, together with two other persons...
To continue reading
Request your trial
-
Greenstein v. Comm'r of Internal Revenue (In re Estate of Munter)
...494 (C.A. 9, 1970), affirming 49 T.C. 338 (1968); Pridemark, Inc. v. Commissioner, 345 F.2d 35, 42-45 (C.A. 4, 1965), affirming 42 T.C. 510, 536-538 (1964); Coast Coil Co., 50 T.C. 528, 535 (1968) (alternative holding), affirmed per curiam 422 F.2d 402 (C.A. 9, 1970); Frank W. Verito, 43 T.......
-
Lammerts v. Comm'r of Internal Revenue (In re Estate of Lammerts) , Docket Nos. 6819-65
...a Memorandum Opinion of this Court. Finally, in distinguishing Berghash from the facts which were presented to us in Pridemark, Inc., 42 T.C. 510 (1964), affirmed in part and reversed in part 345 F.2d 35 (C.A. 4, 1965), we made the following observation at page 754 relating to the fact that......
-
Abegg v. Comm'r of Internal Revenue
...situation was involved in Pridemark, Inc. v. Commissioner, 345 F.2d 35 (C.A. 4, 1965), reversing in part and affirming in part 42 T.C. 510 (1964), relied upon by the petitioners. The Court of Appeals there expressed the view that to have a liquidation, the corporation must have ceased to be......
-
ALTEC CORPORATION v. Commissioner, Docket No. 6378-73.
... ... filed with the District Director of Internal Revenue, Chicago, Illinois, for the taxable and ... subsidiary under the name of Alvis Ward, Inc. (hereinafter referred to as Delaware), which ... 2d 244 (10th Cir. 1966), and Pridemark, Inc. v. Commissioner 65-1 USTC ¶ 9388, 345 F ... ...