Ferguson v. Comm'r of Of Internal Revenue, Docket No. 92137.

• Citation: 26 T.C.M. (CCH) 168,47 T.C. 11
• Decision Date: 17 October 1966
• Docket Number: Docket No. 92137.
• Parties: JOSEPH B. FERGUSON, PETITIONER v. COMMISSIONER OF OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

26 T.C.M. (CCH) 168

47 T.C. 11

JOSEPH B. FERGUSON, PETITIONER

v.COMMISSIONER OF OF INTERNAL REVENUE, RESPONDENT

Docket No. 92137.

Tax Court of the United States.

Filed October 17, 1966.

Leonard Belford and Harvey M. Sklaver, for the petitioner.

Warren S. Shine and Paul H. Frankel, for the respondent.

Petitioner owned an automobile dealership business and all of the stock of a corporation which owned three parcels of real estate. The automobile business was conducted in one of the buildings owned by the real estate corporation. In 1955 petitioner sold his automobile business to a corporation (owned by unrelated persons), referred to as Enterprises, under an arrangement whereby a portion of the gross sales of the business was to be paid by Enterprises into a so-called experimental department, the funds to be used ‘for experimental purposes.’ Petitioner had complete control over the experimental department and the use of its funds. In 1958 petitioner and Enterprises entered into a new agreement under which the percentage-of-sales arrangement was retained but with an annual minimum of $75,000, to be paid to the real estate corporation as rent for use of the building in which the business was conducted. Any excess of the designated percentage of sales over the $75,000 minimum was to be paid into the experimental department. In 1959 $75,000 was paid to the real estate corporation, which expended these funds for the benefit of the experimental department. An additional $57,592.57 was paid either directly to the experimental department or to the real estate corporation which expended it for the benefit of the experimental department. Held:

1. Petitioner— not Enterprises— was the owner of the so-called experimental department and all amounts paid to or for the benefit of said experimental department were income to petitioner.

2. The $75,000 paid by Enterprises to the real estate corporation (and expended by that corporation for the benefit of the experimental department) was rent income to the corporation and a constructive dividend to petitioner to the extent of the current earnings and profits of said corporation.

3. Amount of current earnings and profits of real estate corporation determined. Current earnings and profits of cash basis corporation are not reduced by accrued Federal income tax on current year's taxable income. Helvering v. Alworth Trust, 136 F.2d 812 (C.A. 8, 1943), reversing46 B.T.A. 1045 (1942), followed.

4. The additional $57,592.57 paid by Enterprises in 1959 was income to petitioner whether said amount was received by the experimental department directly or as a constructive dividend from the real estate corporation.

HOYT, Judge:

Respondent determined an income tax deficiency against petitioner, Joseph B. Ferguson, for the year 1959 in the amount of $1,191.52. In various amendments to his answer filed herein, respondent asserted certain increased deficiencies totaling in excess of $310,000.

After various concessions by respondent at trial and on brief, the only questions remaining for decision are: (1) Whether certain payments totaling $132,592 made by Fergus Imported Cars, Inc., in 1959 represented taxable income to petitioner, and (2) whether interest income earned in 1959 by funds on deposit in a certain savings account was taxable to petitioner.

FINDINGS OF FACT

Some of the facts have been stipulated in writing, and some by oral stipulation at trial. All stipulated facts are incorporated herein by this reference.

Petitioner is an individual residing at 1717 Broadway in New York City. His Federal income tax return for the taxable year 1959 was filed with the district director, Manhattan, N.Y.

Petitioner is judicially separated from his wife pursuant to a final judgment, dated April 21, 1941, entered in a New York State court. Since 1941 petitioner has been in court many times in controversies with his wife concerning the amount of alimony to be paid to her. Sometime prior to the tax year here in question petitioner opened and thereafter used a bank account in the name of his deceased brother. This name was used so that petitioner's wife would not know of the account's existence.

Petitioner was born in 1880 near Belfast, Northern Ireland. As a youngster he was interested in mechanics and farm machinery, and at age 15 he began working in a Belfast machine shop, where he remained employed for 6 years. He left this apprenticeship in 1901 and opened his own mechanical repair shop. At this time the automobile was in its infancy and there were very few of them in Belfast. Petitioner took a keen interest in the then modern wonder of motor-driven vehicles, and his repair shop specialized in work on motorcycles and automobiles. In 1906 petitioner joined with his brother in opening up a larger shop so that they could get into the business of buying and selling cars on a bigger scale than theretofore.

Through several years of experience, petitioner and his brother became familiar with the mechanical and engineering shortcomings of the early automobiles, and they developed several improvements, on many of which they acquired patents. In 1914 they began construction of anew automobile, incorporating many of their improvements into what they though would be the ‘ideal car.’ This new car, called the Fergus, had the following improvements over its contemporaries: The lubrication points were cut from 70 to about 10; the engine was suspended in rubber rather than attached directly to the frame, thus reducing vibration; the engine was smaller, yet developed more power than conventional engines; it had overhead valves rather than side valves.

The new Fergus received substantial publicity and in 1915 petitioner arranged to bring the car to the United States for public exhibition at the Grand Central Palace in New York. As a result of this exhibit petitioner received backing from certain New York interests and a new corporation was formed in 1916, with a factory in Newark, N.J., to manufacture and improve the Fergus car. This corporation was called Fergus Motors of America, Inc. During and after the First World War, this corporation, led by petitioner, was called upon by the U.S. Government to carry out various developmental projects, primarily involving improvements in aircraft engines. Fergus Motors of America, Inc., received a citation from the War Department of the United States for distinguished service aiding materially in obtaining victory for the arms of the United States in World War I.

After the war, petitioner and his colleagues returned their attention to automobiles, and in 1921 they introduced at the Motor Sports Show in New York, a new, improved model of the Fergus. This car was an improvement on the original 1914 Irish Fergus in that it contained a 6-cylinder engine instead of a 4-cylinder one, and it further decreased the number of lubrication points. The 1921 model was the first car ever to employ a thermostatically controlled automatic choke on the carburetor. The 1921 Fergus was advertised at $10,000, complete chassis only, f.o.b. Newark, with a 5-year comprehensive guarantee.

During his early years in America, petitioner was consulted by others in the automotive industry concerning various improvements which he and/or Fergus Motors of America, Inc., had developed. Chrysler Corp. paid for consultation concerning the rubber mounting of the automobile engine as originated on the 1914 Irish Fergus. Petitioner and his company did all the front suspension work on the Cord automobile. In a patent-infringement suit concerning an automatic choke carburetor petitioner was paid by General Motors and other defendants to appear as a defense witness and testify that he had displayed such a carburetor in the 1921 exhibit of the original Fergus, 10 years prior to the date the plaintiff in the case claimed to have invented it.

In 1940 petitioner formed Fergus Motors, Inc., a New York corporation (herein called Fergus Motors), and for many years prior to June 29, 1955, he was the sole owner of its stock and was its president. Fergus Motors was engaged primarily in the business of buying, selling, and servicing foreign cars. In their spare time, particularly on Saturdays, petitioner and some of the Fergus Motors employees would engage in experimental work on automobiles. Petitioner was also, for many years prior to June 29, 1955, the owner of all of the stock of 444 West 55th Street Corp., a New York corporation (herein called 444), which on that date owned three parcels of improved commercial real property as follows:

(a) 1717 Broadway, New York City (between West 54th and West 55th Streets), consisting of a basement used for an office and petitioner's residence, a main (street level) floor used by Fergus Motors for displaying automobiles, and a second floor rented to a third party.

(b) 444 West 55th Street, New York City, a six-story building occupied by Fergus Motors, and

(c) 183-140 West 54th Street, New York City, consisting of a five-story garage rented to a third party.

In addition to its space in the buildings listed above, Fergus Motors occupied a branch showroom on Park Avenue.

During 1954 Fergus Motors employed, inter alia, the following key men: Guy M. Stanfill, service manager; Milton Gold, parts manager; and Louis Santelli, Park Avenue salesroom manager. Peter Fritz Dube had also been employed as assistant to the petitioner from January 1952 to March 1953.

Sometime prior to September 1954, when petitioner was approximately 75 years old, he approached Stanfill, Gold, and Santelli and told them that he was considering closing up his automobile business. He said that he was losing money, that he was getting old and tired, and that he wanted to spend more time with the automotive inventions and experimental work which had occupied much of his spare time over the years. He indicated that he would like to work out an arrangement with these key employees whereby, subject to certain...