Estate of Mixon v. United States
| Decision Date | 05 July 1972 |
| Docket Number | No. 71-2666.,71-2666. |
| Citation | 464 F.2d 394 |
| Parties | ESTATE of Travis MIXON, Jr., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
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Ira De Ment, U. S. Atty., Kenneth E. Vines, Asst. U. S. Atty., Montgomery, Ala., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Gilbert Andrews, Daniel B. Rosenbaum, Harry Baum, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.
Griffith Pitcher, William Bew White, Jr., James William Lewis, James W. Gewin, Birmingham, Ala., for plaintiff-appellee; Bradley, Arant, Rose & White, Birmingham, Ala., of counsel.
Before THORNBERRY, COLEMAN and INGRAHAM, Circuit Judges.
The frequently litigated issue of whether funds supplied to a business are, in substance, debt or equity and consequently whether reimbursement is to be considered for federal income tax purposes as a loan repayment or a dividend distribution arises once again in the instant case.1 The instant appeal involves federal income taxes, penalties, and interest for the year 1963 in the amount of $126,964.54. After an assessment in this amount was paid in full by the taxpayer, he filed a claim for refund which was disallowed by the Commissioner. On December 18, 1969, taxpayer instituted this suit in the district court; and on March 31, 1971, judgment was entered in his favor, 324 F.Supp. 977. This appeal by the government followed.2 Finding no error in the district court's judgment, we affirm.
As in most cases of this type, the facts here are both complicated and significant. As stipulated and found by the district court, they are as follows.
During the period beginning March 8, 1958, and ending January 9, 1963, taxpayer was President and one of five directors of the Bank of Graceville, Florida (the Bank). The authorized capital stock of the Bank consisted of 1,000 shares of common stock having a par value of $100 per share and represented on the Bank's balance sheet by $100,000 in capital stock and $100,000 of surplus. From March 8, 1958 to March 20, 1962, the ownership of the stock was as follows:
Relationship
Number of to
Shares Name Taxpayer
20 Dr. R. L. Miller None
142 Travis Mixon, Jr.3 The Taxpayer
11 Travis Mixon, III Son
27 John R. Mixon Nephew
12 T. J. Harris Nephew-in-law
20 J. M. Cooper Brother-in-law
81 J. M. Cooper, Jr. Nephew
95 Lena Cooper Sister
45 Elizabeth M. Doonan Niece
10 Linda D. Doonan Grand Niece
12 Mary Frances Harris Niece
27 Marie Mixon Hoffman Niece
120 J. J. Jones None
10 Coker Mixon Brother
20 Inez Mixon Sister-in-law
12 James T. Mixon Nephew
12 Grace Mixon Grand Niece
115 P. E. Mixon Nephew
27 Ottis Mixon, Jr. Nephew
27 Dorothy M. Otto Niece
95 Janie M. Price Sister
20 R. L. Price Brother-in-law
10 Henry Zipperer Grand Nephew
10 Lester D. Zipperer Grand Nephew
10 Patricia Zipperer Grand Niece
10 William Zipperer Grand Nephew
____________
1,000 shares
On April 11, 1960, the Office of the Commissioner of Banking for the State of Florida made a routine examination of the Bank's affairs. The examiners found no irregularities and required the Bank to write off only $1,326 in outstanding loans. Less than two and a half months later the Federal Deposit Insurance Corporation (F.D.I.C.), through its examiner Mr. Peoples, made a special examination of the Bank, at which time it was disclosed that J. M. Cooper, Jr., an officer and director had embezzled some $907,000 from the Bank. During July and August of 1960, personnel of the F.D.I.C. and Mr. J. V. Chapman, the Deputy Commissioner of Banking, spent considerable time at the Bank examining its assets and supervising its affairs. The joint examination by federal and state authorities resulted in a further determination that through faulty banking practices, the Bank had made improperly secured loans totalling approximately $118,000. These loans were ordered written off.4
In spite of the fact that the Bank had fidelity bonds in the principal amounts of $150,000 and $1,000,000 insuring it against losses resulting from embezzlement, the bank examiners were concerned about the Bank's immediate cash position because of an expected run on the Bank. It was determined that approximately $400,000 in cash was needed to open for business the following day. In order to meet this immediate cash requirement, the Bank obtained $300,000 in loans from other area banks, as follows:
Date Date
Borrowed Lender Amount Repaid
6/30/60 Atlantic National Bank $100,000 9/26/60
(Jacksonville, Fla.)
6/30/60 C & S Bank & Trust Co. 100,000 9/26/60
(Atlanta, Georgia)
7/ 2/60 First Bank & Trust Co. 100,000 7/29/60
(Pensacola, Fla.)
Throughout the month of July, the Bank attempted to enlarge its endangered assets without incurring short term liabilities. Taxpayer and other directors made substantial deposits in their personal checking accounts. In an effort to attract new depositors the Bank on July 5, 1960, began paying interest on time deposits; and directors and large depositors were requested to convert their short term savings accounts into longer term certificates of deposits. Bank officers at the same time pushed for a final settlement with the bonding company. Despite these efforts, the position of the Bank remained somewhat tenuous pending collection of the charged-off loans and the fidelity bond.
The plan for a new issue of stock was ultimately abandoned because of the Bank's large number of small shareholders with pre-emptive rights. It was determined instead that three of the five directors, Dr. R. L. Miller, John R. Mixon, and taxpayer, would temporarily advance $200,000 to the Bank.5 This was accomplished pursuant to the provisions of a Resolution-Agreement dated July 26, 1960, which provided that the funds were to be placed in an account designated "Reserve for Contingencies" for the benefit of the Bank, the shareholders, and state and federal banking authorities. No withdrawals could be made without the consent of the Deputy Commissioner and the F.D.I.C.6
On July 26, 1960, the contributing directors owned the following percentages of the Bank's stock:
No. of % of Shares Amount
Shares Owned Contributed
Taxpayer 1537 15.3 $160,000
R. L. Miller 20 2.0 20,000
John R. Mixon 27 2.7 20,000
___ ____ ________
200 20.0 $200,000
Two directors and the owners of the remaining stock in the Bank made no contribution to the fund.
Thus, at this point, the primary objective of the $200,000—providing temporary operating capital—appears to have yielded somewhat to a secondary objective—ensuring the directors' careful attention to efficient banking procedures.
By the end of 1960, the Bank had received a total of $873,388.75 from the bonding company; and in early 1961 it received an additional payment of $30,000 on its claim, bringing the total cash collection on the bond claims to $903,388.75. After this latter collection on March 8, 1961, the directors again requested permission to withdraw $100,000 from the account. On April 4, 1961, the Deputy Commissioner agreed to release $50,000; and on April 20, 1961, the F.D.I.C. approved the release. On April 26, 1961, $50,000 was withdrawn from the contingency account and repaid to the directors as follows:
John R. Mixon $20,000
R. L. Miller 10,000
Taxpayer 20,000
At this time, the Bank was prohibited from paying dividends without the consent of state and federal banking authorities. No request to pay any such dividend had been made; and it is undisputed that the $50,000 withdrawal was charged against the reserve account and had no effect on undivided profits. Distribution of the $50,000 was determined by the director's individual needs at the time of withdrawal. On April 26, taxpayer owned 15.3 percent of the Bank's stock, Dr. Miller owned 2 percent, and John R. Mixon owned 2.7...
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