46 T.C. 651 (1966), 747-65, Edmister v. C. I. R.

Docket Nº:747-65.
Citation:46 T.C. 651
Opinion Judge:DRENNEN, Judge.
Party Name:WILLIAM K. EDMISTER AND ELIZABETH EDMISTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Attorney:Robert H. Albert, for the petitioners. John H. Menzel, for the respondent.
Case Date:August 22, 1966
Court:United States Tax Court
 
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Page 651

46 T.C. 651 (1966)

WILLIAM K. EDMISTER AND ELIZABETH EDMISTER, PETITIONERS,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

No. 747-65.

United States Tax Court.

August 22, 1966

Robert H. Albert, for the petitioners.

John H. Menzel, for the respondent.

In a series of transactions forming a part of an integrated plan to eliminate the other two stockholders of a corporation, petitioner William surrendered all of his stock to the corporation in exchange for the real estate upon which corporation's plant was located. Petitioners mortgaged the real estate and used the proceeds, plus funds of their own, to buy all the stock of one of the stockholders for less than book value. The corporation redeemed all the stock of the other stockholder at the same price for cash, leaving petitioners as owners of all the capital stock of the corporation. The real estate was leased to the corporation and the rent was applied to payments on the mortgage. Held, the distribution of the real estate to petitioner William was essentially equivalent to a dividend and was taxable to William as a dividend.

Page 652

DRENNEN, Judge.

Respondent determined a deficiency in petitioners' income tax for the year 1961 in the amount of $18,056.58. The only issue remaining for decision is whether property received by petitioners in 1961 was a distribution essentially equivalent to a dividend.

FINDINGS OF FACT

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

Petitioners William K. Edmister (hereinafter referred to as William) and Elizabeth Edmister (hereinafter referred to as Elizabeth) were husband and wife at all times during 1961, and they filed a joint Federal income tax return for the year 1961 with the district director of internal revenue, Cincinnati, Ohio.

The Capital Elevator & Manufacturing Co. (hereinafter referred to as Capital) is an Ohio corporation which was incorporated June 20, 1920, and since that time has been engaged in the business of manufacturing passenger and freight elevators. Prior to 1936 Capital operated under the name of the Capital Lift & Manufacturing Co. From March 17, 1959, to October 23, 1961, the outstanding stock of said corporation was owned by the following named individuals:

Number of Percent total

shares owned shares owned

by each by stockholders

stockholder

Guy R. Blackwood 378 28

William K. Edmister 513

Elizabeth Edmister 18

Total shares owned by the petitioners, William K. and Elizabeth

Edmister 531 39.3

Dorothy B. Edmister 76 1/2

Dorothy B. Edmister, guardian of Nancy Ann Edmister 121 1/2

Dorothy B. Edmister, guardian of James Z. Edmister 121 1/2

Dorothy B. Edmister, guardian of Jane D. Edmister 121 1/2

Total shares owned by Dorothy B. Edmister, individually and as

guardian 441 32.7

Total shares issued and outstanding 1,350 100

Capital had only one class of stock outstanding during its existence, namely, common stock having a par value of $100 per share. All of the shares of this corporation had voting rights and there were no preferences between shares. Voting control of this corporation could be effected on all issues by a simple majority of all issued and outstanding shares of this corporation. During the 20 years preceding 1961, all the shares of Capital were owned by William R. Edmister, father of William, by lineal descendants of William R. Edmister and their spouses, and by Guy R. Blackwood (hereinafter referred to as Blackwood). Immediately prior to October 23, 1961, Blackwood was president and William was secretary and treasurer of Capital. Both of these men Page 653 were active participants in the operation and management of Capital. Immediately prior to October 23, 1961, the board of directors of Capital consisted of Blackwood, William, and Edmund M. Kagay, attorney for the corporation. Dorothy B. Edmister (hereinafter referred to as Dorothy) is the widow of James Edmister, deceased brother of William. Nancy Ann Edmister, James Z. Edmister, and Jane D. Edmister are the three minor children born of the marriage between Dorothy and James Edmister. Dorothy and her three minor children were not, at any time, active in the operation or management of Capital, although immediately prior to October 23, 1961, Dorothy was vice president of the corporation. At all times during 1961, Dorothy was the duly appointed and acting guardian of her three minor children, having been appointed guardian by the Probate Court of Stevens County, Minn. At all times during 1961, Dorothy and her three minor children resided at Morris, Minn. The interests of Dorothy and her minor children will hereinafter be referred to collectively as Dorothy's interest. The balance sheet of Capital as of December 31, 1960, indicates the following financial condition of the corporation at that time.

ASSETS

Current assets

Cash

Savings fund

Accounts receivable-

Trade

Officers and employees

Others

Interest receivable

Inventory of materials-at lower of cost or market

Prepayments-

General insurance

Group insurance

Subscriptions

Life insurance

Sales tax stamps

Dues and memberships

Total current assets

Accumulated

Property, plant, and equipment Cost depreciation Net

Buildings $24,410.46 $14,555.45 $9,855.01

Machinery and equipment 13,377.20 11,720.33 1,656.87

Tools 2,049.12 668.17 1,380.95

Office furniture and fixtures 5,247.19 2,981.95 2,265.24

Patterns 334.09 137.70 196.39

Auto equipment 4,969.32 2,965.21 2,004.11

50,387.38 33,028.81 17,358.57

Land

Other assets

Industrial insurance deposit

Cash value life insurance

Traveling advances

Deposits on plans

Deferred charges

214,782.82

LIABILITIES

Current liabilities

Accounts payable

Accruals-

Withholding tax

State unemployment tax

Social security tax

Federal unemployment tax

Payroll

City income tax-employees

Welfare fund expenses

Workmen's compensation

State sales and use taxes

Payroll savings

Real estate taxes

Other expenses

Total current liabilities

Reserve for replacement of fixed assets

Shareholders' investment:

Common capital stock issued and outstanding 1,350

shares

Earned surplus, accumulated undivided profits

214,782.82

Page 655 The balance sheet of Capital as of December 31, 1961, indicates the following financial condition of the corporation at that time:

ASSETS

Current assets

Cash

Certificates of deposit

Accounts receivable-

Trade

Officers and employees

Interest receivable

Inventory-at lower of cost or market

Prepayments

Total current assets

Accumulated

Equipment Cost depreciation Net

Machinery and equipment $13,419.34 $11,735.95 $1,683.39

Tools 2,101.89 735.91 1,365.98

Furniture and fixtures 5,607.19 3,551.18 2,056.01

Patterns 803.00 175.01 627.99

Auto equipment 4,969.32 3,686.89 1,282.43

26,900.74 19,884.94 7,015.80

Other assets

Cash value-life insurance

Deposits

Traveling advances

Deferred charges

243,269.52

LIABILITIES

Current liabilities

Note payable

Accounts payable

Accruals-

Withholding taxes

Payroll taxes

Real estate taxes

Payroll

State sales and use taxes

Payroll savings

Welfare fund expenses

Other expenses

Total current liabilities

Shareholders 1 investment

Capital stock-

Common-par value, $100; authorized,

1,500 shares; issued, 1,350

shares

Less: 513 shares in treasury, at par

value

Outstanding, 837 shares

Capital surplus

Retained earnings

Shareholders' undistributed taxable income

243,269.52

FN1 Denotes red figure.

Page 656 Blackwood was 72 years of age in 1961 and because of his age and state of health he wished to retire and dispose of his interest in Capital. Persons not associated with Capital offered Blackwood a price of $110 per share for his stock of the corporation on the condition that they could acquire a controlling interest. Blackwood discussed this offer with William and Kagay. William was 50 years of age in 1961. He wished to remain an active participant in the operation of Capital but felt that it would have been improbable that he could have remained with the corporation if control was...

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