46 T.C. 65 (1966), 4779-62, Meyer v. C. I. R.

Docket Nº:4779-62, 4780-62.
Citation:46 T.C. 65
Opinion Judge:KERN, Judge:
Party Name:LEON R. MEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT[1] LUCILE H. MEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Attorney:Joseph A. Hoskins and Philip J. Erbacher, for the petitioners. Merrill R. Talpers, for the respondent.
Case Date:April 21, 1966
Court:United States Tax Court
 
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Page 65

46 T.C. 65 (1966)

LEON R. MEYER, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT [1]

LUCILE H. MEYER, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Nos. 4779-62, 4780-62.

United States Tax Court.

April 21, 1966

Page 66

[Copyrighted Material Omitted]

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Joseph A. Hoskins and Philip J. Erbacher, for the petitioners.

Merrill R. Talpers, for the respondent.

In 1946 petitioners, Leon and Lucile, husband and wife, who were coowners of a partnership caused the organization of a corporation, Jewelry, to which they transferred the partnership assets in exchange for the assumption of the partnership liabilities and the issuance to them in equal amounts of Jewelry's capital stock (designated as class A stock) and notes totaling in par and face value the net value of the net value of the partnership assets so transferred. In 1947 the notes were capitalized by the issuance to Leon and Lucile of class B stock of Jewelry which had at that time voting rights and some preference over class A stock. In 1956 Jewelry had financial difficulties and in a bankruptcy proceeding a composition with creditors was arranged under chapter XI of the Bankruptcy Act, whereby approximately $189,000 of its debts were discharged. Some 3 days before the entry of the order effecting this discharge and in contemplation thereof, Jewelry caused an appraisal of its assets to be made. It credited an amount purporting to be equivalent to the amount of its forgiven debts (less certain adjustments) to an account designated ‘ Contributed capital’ on its balance sheet and included in certain expense items on its income statement amounts totaling the amount of the write-downs of its assets to fair market value resulting from the appraisal thereof. As part of the arrangement under chapter XI, Leon was required to contribute $25,000 to Jewelry, a part of which ($15,000) he borrowed from a bank on his personal notes secured by stock in Thiokol Corp. owned by him. Jewelry was required to borrow and did borrow from the same bank $100,000 on its note of which Leon and substantial friends of his were guarantors. In 1958 all distinctions between the class A and class B stock of Jewelry were obliterated by appropriate corporate action. In the latter part of that year a plan was evolved by Leon and Lucile and their advisors for Leon to contribute some of this Thiokol stock to Jewelry, for Jewelry to sell the stock which had tremendously increased in value and from the proceeds to pay the $50,000 balance on its note to the bank, for Jewelry to distribute the balance of the proceeds to Lucile, for Lucile in return therefore to surrender her stock in Jewelry for redemption, and for Lucile to pay Leon's $15,000 note to the bank from such distribution. Accordingly, in the early part of 1959 Leon duly endorsed and transferred to Jewelry and Jewelry accepted 700 shares of his Thiokol stock, and Jewelry authorized the sale of the 700 shares by its broker. The management of the sale was left to Leon. Sales of 638 shares of this stock were made by Jewelry in the early part of April 1959, and certificates for these shares were eventually transferred on the stock record books of Thiokol from the name of Leon to the names of those purchasing the stock from Jewelry. On May 4, 1959, the brokers at Leon's request had the certificate for the remaining 62 shares in Leon's name and two for 15 shares in the names of his son and spouse and daughter and spouse, respectively. After Leon had donated the 700 shares of Thiokol stock to Jewelry and shortly before the sales of 638 shares by Jewelry, Thiokol voted a 3 for 1 split of its stock, the new stock to be issued to the stockholders of record of Thiokol as of April 20, 1959, when Leon was still the stockholder of record of the 700 shares. The new Thiokol stock distributable on account of the 638 shares sold by Jewelry were delivered in due course to the purchasers thereof, while the new stock (124 shares) distributable on account of the 62 shares not sold by Jewelry were received by Leon on April 30, 1959, and were retained by him. The distributions by Jewelry to Lucile (of the excess of the proceeds from its sales of the 638 shares of Thiokol stock over the amount required for the payment of its bank note) in the total amount of $31,328 were charged to an account receivable on its books under Lucile's name. Immediately after the receipt of the distributions Lucile made the payments therefrom contemplated by the plan. In the latter part of 1959 (after June 30, but before December 31) Lucile surrendered all of her stock in Jewelry for redemption at its par value of $29,000, which amount was credited to her account by Jewelry as of December 31. The balance of $2,328 contained in her account owing to Jewelry was never paid. No interest was charged thereon and no security therefor was asked or given. At the time of the distribution, Lucile served as a salaried officer of Jewelry. She continued to serve in this capacity through the year ended June 30, 1962. Respondent determined deficiencies against Leon on the grounds that the capital gains realized on sales of the Thiokol stock were taxable to him, that the distributions to Lucile were taxable to him, and that the 62 shares of Thiokol stock constituted a distribution to Leon from Jewelry, and in the case of Lucile, on the ground that the distributions from Jewelry received by her constituted income taxable to her. At the trial respondent conceded that Jewelry sold the Thiokol stock, and gains therefrom were not taxable to Leon. Held: 1. Respondent's notices of deficiency were valid and presumptively correct in spite of inconsistencies and confession of error as to one ground. 2. Earnings and profits of Jewelry increased by amount of its debts forgiven in bankruptcy proceeding in excess of amount available for reduction of basis of its assets; and such amounts and Jewelry's earnings and profits are determined. 3. Under various provisions of sections 301, 302, 316, and 318, I.R.C. 1954, distributions by Jewelry to Lucile were equivalent to dividends and taxable as such to Lucile. 4. Sixty-two shares of Thiokol stock issued to Leon and his donees pursuant to his instructions of May 4, 1959, and 124 shares of Thiokol stock received by him on April 30, 1959, as a split of such stock held in his name on books of Thiokol and retained by him constituted dividend distributions to Leon from Jewelry and value of such stock determined as of such dates.

Respondent originally determined a deficiency in the income tax liability of petitioner Leon R. Meyer (hereinafter sometimes referred to as Leon) for the year 1959 in the sum of $40,101.55 and a deficiency in the income tax liability of petitioner Lucile H. Meyer (hereinafter sometimes referred to as Lucile) for the year 1959 in the sum of $17,402.09.

The statement attached to the notice of deficiency addressed to Leon indicated the increase of his taxable income as disclosed in his return by the addition thereto of the following items: (1) Capital gains totaling $39,766.39, realized from the sale of 638 shares of Thiokol stock made in the name of Meyer Jewelry Co., a corporation of which most of the stock was owned by Leon and Lucile (sometimes hereinafter referred to as Jewelry) and to which the Thiokol stock had been transferred by Leon shortly before its sale as a contribution to Jewelry's capital; (2) an alleged distribution to Leon from Jewelry on April 13, 1959, of $7,920.50, representing the value on that date of 62 shares of Thiokol stock originally included in the Thiokol stock contributed by Leon to Jewelry but which was eventually reissued in the names of and delivered to Leon and/or his nominees; and (3) the

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alleged ‘ payments to (Leon), or on (his) behalf,‘ of $31,328.17 by Jewelry, representing payments made by Jewelry to Lucile, the wife of Leon and a principal stockholder of Jewelry, a large part of which payments were used by her shortly after their receipt by her to make payments to Leon or in satisfaction of Leon's obligations. Because of these increases in Leon's taxable income respondent disallowed a deduction claimed by Leon as a medical expense.

The statement attached to the notice of deficiency addressed to Lucile indicated the increase of her taxable income as disclosed in her return by the addition thereto of the payments made to her by Jewelry in the total amount of $31,328.17.

These cases were consolidated for hearing and opinion.

At the trial herein respondent conceded error in adding to Leon's taxable income the capital gains derived from the sale of the 638 shares of Thiokol stock made by Meyer Jewelry Co. At the close of the hearing respondent moved for leave to amend his answer to conform to the proof by allegations to the effect that the Thiokol stock alleged to have been received by Leon from Jewelry was received by him on April 30, 1959, and May 4, 1959, in the amounts of 124 and 62 shares, respectively, and the total value of such stock on these dates was $10,013. A written amendment to the answer was later filed by respondent to this effect with the leave of the Court.

FINDINGS OF FACT

Petitioner Leon R. Meyer is a resident of Johnson County, Kans., whose separate income tax return for the calendar year 1959 was filed with the district director of internal revenue at Kansas City, Mo.

Petitioner Lucile H. Meyer is a resident of Johnson County, Kans., whose separate income tax return for the calendar year 1959 was filed with the district director of internal revenue at Kansas City, Mo.

Meyer Jewelry Co. was incorporated in the State of Missouri on July 29, 1946. The authorized capital stock of Jewelry at the date of its incorporation was: 1,250 class A shares- $100 par value, and 1,250 class B shares-...

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