Edmister v. Comm'r of Internal Revenue, Docket No. 747-65.

• Citation: 46 T.C. 651
• Decision Date: 22 August 1966
• Docket Number: Docket No. 747-65.
• Parties: WILLIAM K. EDMISTER AND ELIZABETH EDMISTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

46 T.C. 651

WILLIAM K. EDMISTER AND ELIZABETH EDMISTER, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 747-65.

Tax Court of the United States.

Filed August 22, 1966.

[46 T.C. 651]

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.

[46 T.C. 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 ¦shares owned¦
                ¦ ¦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

[46 T.C. 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 $6,227.03
                Savings fund 45,000.00
                Accounts receivable—
                Trade $65,222.19
                Officers and employees 328.54
                Others 3,528.31 69,079.04
                Interest receivable 262.50
                Inventory of materials—at lower of cost or market 59,053.27
                Prepayments—
                General insurance 1,751.50
                Group insurance 54.54
                Subscriptions 341.25
                Life insurance 279.67
                Sales tax stamps 62.50
                Dues and memberships 179.17 2,668.63
                Total current assets 182,290.47
                

 Accumulated
                Property, plant, and equipment Cost depreciation Net
                Buildings $24,410.46 $14,555.45 $9,855.01
                Machinery

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