Simpson v. Comm'r of Internal Revenue, Docket Nos. 1245-63

• Decision Date: 30 March 1965
• Docket Number: 2169-63.,Docket Nos. 1245-63
• Citation: 43 T.C. 900
• Parties: W. H. B. SIMPSON AND KATHERINE M. SIMPSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

43 T.C. 900

W. H. B. SIMPSON AND KATHERINE M. SIMPSON, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 1245-63

2169-63.

Tax Court of the United States.

Filed March 30, 1965.

[43 T.C. 900]

Joseph E. McAndrews and Thomas A. Frazier, Jr., for the petitioners.

Winfield A. Gartner, for the respondent.

Petitioner transferred the assets of two retail dry goods businesses and stock and securities having a fair market value considerably in excess of petitioner's basis therein to a newly formed corporation solely in exchange for stock of the corporation which petitioner controlled immediately after the exchange. As a part of the consideration for the exchange the corporation assumed liabilities, of petitioner's, or received property subject to petitioner's liabilities totaling in amount slightly less than petitioner's basis in the properties transferred in exchange. Held: Petitioner's principal purpose with respect to the assumption by the corporation of the liabilities, and with respect to the acquisition by the corporation of properties subject to liabilities, was not to avoid income tax on the exchange and was a bona fide business purpose. Section 357(b), I.R.C. 1954, is not applicable and no gain or loss is to be recognized to petitioner on the transactions under section 351, I.R.C. 1954.

DRENNEN, Judge:

In these consolidated proceedings respondent determined deficiencies in petitioners' income tax for the taxable years 1958 and 1959 in the respective amounts of $233,532.55 and $231,899.97.

The only issue for decision is whether petitioners realized long-term capital gain in the amount of $908,697.95¹ upon the transfer of stocks, securities, and other property to Collins-Crain Co. (hereafter referred to as Collins-Crain) upon its incorporation in a transaction by which Collins-Crain issued 498 of its 500 shares of outstanding stock to petitioner W. H. B. Simpson and assumed liabilities to which the stocks,

[43 T.C. 901]

securities, and other property were subject at the time of the transfer.

Because of uncertainties as to when the transfers took place, respondent determined that petitioner W. H. B. Simpson realized a gain on the transaction in both the years 1958 and 1959, but concedes that the gain should be taxed in one year or the other but not both.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners are husband and wife, residing in Greenville, S.C. They filed joint Federal income tax returns for the taxable years 1958 and 1959 with the district director of internal revenue, Columbia, S.C. Hereafter, W. H. B. Simpson will be referred to as petitioner.

Petitioner is a successful retailer with a substantial interest in the outstanding stock of 29 corporations comprising the Belk-Simpson department store chain which operates a number of department stores, principally in the Southeast. During the periods in issue, petitioner was an executive officer in, and received salaries, dividends, and director's fees in substantial amounts from, these corporations.

At an early age petitioner became associated with W. H. Belk, Sr., the founder and owner of the Belk chain of department stores throughout the South. In 1929 petitioner was given the opportunity to purchase a Belk store which had been losing money, by assuming its indebtedness. Petitioner did so, and moved the store to Greenville, S.C., where he operated it under the name ‘Greenville Bargain House.’ The store was successful in Greenville under petitioner's management, and petitioner was given the further opportunity to open additional Belk stores and accept a minority stock interest in the corporations which operated the stores. These stores became the Belk-Simpson chain.

In 1932 petitioner incorporated the Greenville Bargain House, becoming the owner of over 80 percent of the stock of the corporation. W. H. Belk Sr., later bought some of the stock of Greenville Bargain House, but petitioner remained the majority stockholder and controlled the policies of the corporation. Greenville Bargain House continued to be successful, and petitioner followed a policy of investing surplus funds of the corporation in stocks and securities (hereafter referred to collectively as securities). He considered that it was good business to have the funds of Greenville Bargain House invested in the stock of mills and other suppliers because it could buy merchandise from these suppliers at bargain prices which would not have been available to the corporation without owning stock in the suppliers. He also believed that it was important for the corporation to own marketable securities that could be used by the corporation as collateral to obtain bank loans when the corporation needed working capital or funds for expansion, without the personal endorsements of its stockholders.

[43 T.C. 902]

He found that the appreciation in value of the securities, plus dividends and interest received from them, generally exceeded interest charges on loans which were secured by the securities. Petitioner also considered that it was good business for Greenville Bargain House to purchase stock of banks with which it dealt in borrowing money.

Petitioner also felt that it was advisable for the Belk-Simpson stores, in which he held a minority interest, to purchase securities with excess funds. W. H. Belk, Sr., concurred in petitioner's views and, during the lifetime of W. H. Belk, Sr., this policy of investing funds in the stocks of banks, suppliers, and other corporations was followed by the Belk-Simpson corporations.

During 1954 Greenville Bargain House purchased five branch stores at a cost of over $730,000. Despite the fact that the corporation then owned securities having a total cost of over $600,000 and a market value in excess of that amount, these branch store purchases were financed with borrowed funds, the securities owned by the corporation being used as collateral for the loans.

As of December 31, 1954, Greenville Bargain House was merged into and with the Belk-Simpson, Co. of Greenville, S.C. (hereafter referred to as Belk-Simpson, Greenville), and petitioner became a substantial, although minority, stockholder in the surviving corporation. At this time much of the net worth of Greenville Bargain House was reflected in the securities owned by it, and their market value made the merger attractive to the Belk interests.

From the time he first began in business petitioner made it a practice to invest his own funds in securities, not only of the Belk-Simpson corporations but also of local corporations with which he was familiar, as well as publicly held corporations. He often purchased securities with borrowed funds, and he borrowed money from various banks throughout North Carolina. South Carolina, Georgia, and Florida to finance his purchases. Also, he often used securities which he owned as collateral for loans, the proceeds of which he used for loans to Belk-Simpson corporations for working capital. Petitioner was quite successful in his choice of investments.

In February 1952, petitioner's longtime associate, W. H. Belk, Sr., died. His interests in the Belk-Simpson corporations were inherited by his surviving widow and his six children, one of whom was W. H. Belk, Jr., who became president of most of the Belk corporations. Personality and policy differences arose among the Belk children and Belk, Jr., was gradually removed from the presidency of many of the Belk corporations. Petitioner, realizing that he was not a controlling stockholder in any of the Belk-Simpson corporations, became somewhat apprehensive about his own position in these companies and

[43 T.C. 903]

particularly about the influence he could exert on management policies of the corporations.

By 1956 serious differences among the directors of Belk-Simpson, Greenville, developed, particularly in regard to financial matters. Petitioner urged that the corporation continue to follow the policy of borrowing funds to meet corporate needs, using the stocks and securities owned by it as collateral for the loans. However, a majority of the directors disagreed and at a meeting on May 7, 1956, adopted a resolution empowering and directing the officers of Belk-Simpson, Greenville, ‘to sell, for fair market value, all of the stocks and securities or real estate owned by this corporation, which are not related to the principal business of the corporation, namely the mercantile business, said sale and liquidation to be accomplished in an orderly manner so as not to sacrifice said securities or depress the market price.’ At this meeting of the board, the directors voted on three motions; petitioner's vote was in the minority on each.

Petitioner did not comply literally with this action of the directors and at the annual meeting of the stockholders of Belk-Simpson, Greenville, in 1957, petitioner pointed out that had he complied literally with such resolutions adopted in the past by the directors, the financial stability of the corporation would have been endangered and a loss of $100,000 would have been sustained on the sale of one particular block of stock. But despite this statement, the disagreement over the financial policies of the company persisted and the corporate bylaws were amended to reserve to the stockholders control of the purchase and sale of stocks and securities by the corporation.

Petitioner, finding himself in disagreement with the majority of the directors of the Belk-Simpson corporations, decided to enter a business which would be independent of the Belk interests. He had a substantial net worth at the time, with his principal assets being stocks and securities, and this net worth made feasible his investment in a business without the necessity of seeking financing from the Belk interests. Petitioner felt he should enter the retail dry goods business since he was experienced in this business, and he anticipated that he could make a success of a business which he...