42 T.C. 601 (1964), 568-62, Nat Harrison Associates, Inc. v. C. I. R.
|Docket Nº:||568-62, 91482, 567-62, 949-62, 962-62.|
|Citation:||42 T.C. 601|
|Opinion Judge:||DRENNEN, Judge:|
|Party Name:||NAT HARRISON ASSOCIATES, INC., ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT|
|Attorney:||Richard E. Thigpen and Richard E. Thigpen, Jr., for the petitioners. Kenneth G. Anderson, for the respondent.|
|Case Date:||June 23, 1964|
|Court:||United States Tax Court|
1. A domestic partnership entered into three contracts for construction of facilities used at missile-tracking stations in the Caribbean. It assigned the job of performing the work at the jobsites to a Panamanian corporation owned by the parties. The partnership subsequently transferred all of its assets and current business, except one contract, to a domestic corporation. The Panamanian corporation performed the major part of the work under the contract, but the partnership remained liable as the prime contractor under the contracts and the partnership, and subsequently the domestic corporation, performed various services in connection with the contracts. Respondent allocated the entire net profits on all three contracts from the Panamanian corporation to the domestic partnership and/or the domestic corporation. Held: Respondent was authorized to allocate a part of the net profit on the three contracts to the domestic companies, but allocation of the entire net profits to them was unreasonable. Reasonable allocation of the net profits between the various entities determined
2. As of December 26, 1958, petitioner Adams owed Prudential Insurance Co. of America $340,000, plus $9,019.44 accrued interest, on a note secured by a mortgage on Florida lands. On that date he borrowed an additional $260,000 from Prudential and gave another note in that amount secured by the same collateral. Prudential drew one check for $9,019.44 payable to itself, which it applied to pay the accrued interest, and another check to Adams for the balance of the $260,000 loan. Held, Adams is entitled to a deduction of $9,019.44 for interest ‘ paid’ in 1958.
3. Held, petitioner Smith failed to prove error in respondent's determination of the amount of the deduction allowable under section 691(c), I.R.C. 1954, for estate tax attributable to income in respect of a decedent.
In these consolidated proceedings respondent determined the following deficiencies in income tax:
Docket Petitioner Taxable Deficiency
91482 Nat Harrison Associates, Inc Apr. 1 to Sept. $189,953.97
568-62 Nat Harrison Associates, Inc FYE Sept. 30, 1958 156,596.93
567-62 Nat G. Harrison, Jr., and Elaine Harrison 1957 108,455.05
949-62 Jan R. Smith and Mary Crum Smith 1957 39,492.02
962-62 Alto Adams and Carra Adams 1957 24,229.91
The issues for decision are: (1) Whether the net income from three contracts for construction of missile-tracking stations in the Caribbean was the income of, or can be allocated to, Nat G. Harrison, Jr. and Associates, an American partnership comprised of Nat G. Harrison, Jr., Jan R. Smith, and Alto Adams, and/or Nat Harrison Associates, Inc., an American corporation, organized to take over the partnership business, or was the income of Nat G. Harrison Overseas Corp., a Panamanian corporation owned and controlled by the above three individuals. (2) Whether petitioners Alto Adams and Carra Adams are entitled to a deduction in the year 1958 in the amount of $9,019.44 for interest paid the Prudential Insurance Co. of America (hereafter called Prudential); and (3) Whether petitioners Jan R. Smith and Mary Crum Smith are entitled to a deduction in the year 1957, under section 691(c), I.R.C. 1954, for estate tax paid in respect of a decedent in an amount greater than the $4,638.14 allowed by respondent. Other issues presented by the pleadings have been disposed of by agreement of the parties. Page 603 GENERAL FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. For clarity the facts, other than those relating to the petitioners generally, with respect to each issue will be related separately, followed by the opinion relating to that issue. Nat Harrison Associates, Inc., is a corporation organized under the laws of Florida. It filed Federal income tax returns for its fiscal years ending September 30, 1957 and 1958, with the district director of internal revenue, Jacksonville, Fla. Nat G. Harrison, Jr. (hereafter referred to as Harrison), and Elaine Harrison are husband and wife residing in Miami, Fla. They filed joint Federal income tax returns for the calendar years 1957 and 1958 with the district director of internal revenue, Jacksonville, Fla. Jan R. Smith (hereafter referred to as Smith) and Mary Crum Smith are husband and wife residing in Roswell, Ga. They filed joint Federal income tax returns for the calendar year 1957 and 1958 with the district director of internal revenue, Jacksonville, Fla. Alto Adams (hereafter referred to as Adams) and Carra Adams are husband and wife residing in Fort Pierce, Fla. They filed joint Federal income tax returns for the calendar years 1957 and 1958 with the district director of internal revenue, Jacksonville, Fla. Harrison and Smith both graduated from Georgia Institute of Technology with degrees in engineering, Harrison in 1939 and Smith in 1948. Except for periods of service in the Navy, both have been engaged in the contracting business in Florida or elsewhere since graduation. Adams graduated from law school and was admitted to practice law in 1921, was appointed a justice of the Supreme Court of Florida in 1940, and served as chief justice for a term of 2 years. He resigned from the court in 1952 and has since been engaged in several businesses, including ranching, real estate, insurance, and construction. Harrison is the son-in-law of Adams; nether is related to Smith. ISSUE 1. CONTRACTING INCOME- ALL DOCKETS FINDINGS OF FACT On or about April 1, 1955, Harrison, Smith, and Adams organized a partnership to engage in the contracting business under the name of Nat G. Harrison, Jr., and Associates (hereafter referred to as Associates) with offices in Miami, Fla. At first the partnership was conducted informally, and there was no written partnership agreement. However, under date of July 28, 1958, Harrison, Smith, and Adams executed an instrument termed a ‘ Memorandum of Partnership agreement’ in which it was stated that the parties desired to set forth their oral understanding for the conduct of the partnership business which Page 604 had been conducted by the partners since April 1, 1955. It was agreed that partnership profits and losses had been, and would continue to be, shared as follows:
During the period under review, the distributive shares of the partners were as set forth above. Harrison was the managing partner. Smith's principal duties were making estimates and preparing bids and at times supervising jobs in the field. It was further recited in the partnership agreement that at the close of business on March 31, 1957, certain assets and liabilities of the partnership, shown on a balance sheet attached to the agreement, had been transferred to a corporation, Nat Harrison Associates, Inc. (hereafter referred to as the domestic corporation), as paid-in surplus. It was stated that the partnership had an equity of $150,000 in these assets transferred to the corporation, and that after the transfer the capital accounts of the partners were as follows:
Adams knew little about the contracting business, but he owned real estate and his substantial net worth made it easier for Associates to obtain bonds for construction contracts. His primary interest in the business of the partnership was offering counsel and credit rating. He realized that the partners' individual liability on construction bonds, and for the obligations of the partnership generally, was broad and in the early part of 1957 he suggested that Associates be incorporated so that the partners could limit their liability to their investments. The parties agreed to form a corporation, Nat Harrison Associates, Inc., and to transfer to it most of the business of the partnership, and it was intended that the corporation be activated as of April 1, 1957. However, financial statements of the partnership were not prepared by that date. On May 9, 1957, a certificate of incorporation for the domestic corporation, authorizing 2,000 shares of common stock of a par value of $10 each, was filed with the office of the secretary of state for the State of Florida. During the period here involved Harrison owned 55 percent, Smith 25 percent, and Adams 20 percent of the stock of the domestic corporation. It was not until July 28, 1958, that Harrison and Adams, as directors of the domestic corporation, held a special meeting of the board of directors of the corporation to formally accept, on behalf of the corporation, a bill of sale for certain assets, subject to liabilities, which Page 605 had been the property of Associates on March 31, 1957. The balance sheet attached to the bill of sale listing these assets and liabilities was the same as that attached to the partnership agreement of July 28, 1958, and was as follows:
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