Forrester v. Comm'r of Internal Revenue, Docket No. 2376-66.
| Decision Date | 20 February 1968 |
| Docket Number | Docket No. 2376-66. |
| Citation | 49 T.C. 499 |
| Parties | HOMER W. FORRESTER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Homer W. Forrester, pro se.
Edward B. Simpson, for the respondent.
SUBCHAPTER S— ELECTION OF SMALL BUSINESS CORPORATION AS TO TAXABLE STATUS.—Held, Apache Park Development Corp. was not entitled to be treated as a small business corporation under subchapter S, I.R.C. 1954, for the calendar year 1963, since no valid election was filed under sec. 1372(a) and (c)(1), I.R.C. 1954. Stock of Apache issued to petitioner on Apr. 23, 1962, was the community property of petitioner and his then wife. Both spouses were required to file timely consents. The consent filed by petitioner's wife was not timely.
Respondent determined a deficiency in income tax and additions to tax under sections 6651(a) and 6653(a), I.R.C. 1954, for the calendar year 1963, in amounts as follows:
+---------------------------------+
¦Deficiency ¦$2,783.99¦
+-----------------------+---------¦
¦Addition, sec. 6651 (a)¦139.20 ¦
+-----------------------+---------¦
¦Addition, sec. 6653 (a)¦152.16 ¦
+---------------------------------+
All the issues have been settled except one, namely, whether Apache Park Development Co., Inc., a small business corporation, hereinafter sometimes referred to as Apache, made a valid election in 1962 under subchapter S, secs. 1371 and 1372, I.R.C. 1954, not to be taxed as a corporation, so that petitioner might deduct in 1963, under section 1374, I.R.C. 1954, his distributive share of the net operating loss of Apache for the calendar year 1963.
Some of the facts were stipulated. The stipulation, together with all the exhibits attached thereto, is incorporated herein by reference.
Petitioner resided in Phoenix, Ariz., at the time of the filing of his petition. He and his then wife Bernice L. Forrester filed joint Federal income tax returns for the calendar years 1962 and 1963 with the district director of internal revenue in Phoenix, Ariz.
Under ‘Part V. Other Income or Losses' of Schedule B of the 1963 return, petitioner deducted $8,300 as his distributive share of the claimed net operating loss of Apache for the calendar year 1963. Respondent disallowed 1 the claimed deduction and, in the statement attached to the deficiency notice, explained the disallowance thus:
(b) The deduction of $8,300.00 claimed on your 1963 return as your distributive share of the net operating loss of Apache Park Development Co., Inc., is disallowed because it is determined that the corporation does not qualify as an ‘elected small business corporation’ for its taxable year ended December 31, 1963, or for any subsequent year under the provisions of section 1371(b) of the Internal Revenue Code of 1954 as there was no valid election by the corporation under the provisions of section 1372 of the code for any taxable year of the corporation.
Apache was incorporated in the State of Arizona on March 26, 1962.
On April 24, 1962, the district director of internal revenue, Phoenix, Ariz., received Internal Revenue Form 2553 (Election By Small Business Corporation as to Taxable Status Under Subchapter S of the I.R.C.) for Apache, dated April 23, 1962.
Form 2553 lists 30,500 as the number of Apache shares issued and outstanding. The form lists the following as ‘shareholders' along with their addresses and the number of shares:
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¦ ¦Number of ¦
+------------------------------------------------------+-----------¦
¦Name and address ¦shares ¦
+------------------------------------------------------+-----------¦
¦Robert C. Vanderlake, 1222 Garfield, Port Huron, Mich ¦5,000 ¦
+------------------------------------------------------+-----------¦
¦Doris I. Shafley, Minden City RFD, Mich ¦5,000 ¦
+------------------------------------------------------+-----------¦
¦John Woundenberg, 33 Thornwood Acres, Scottsdale, Ariz¦5,000 ¦
+------------------------------------------------------+-----------¦
¦Homer W. Forrester, 3526 E. Elm, Phoenix, Ariz ¦15,500 ¦
+------------------------------------------------------------------+
The form was signed by Homer W. Forrester, president.
Attached to Form 2553 were ‘Shareholder's Statement of Consent of Election Under Section 1372(a)‘ from Vanderlake, Shafley, Woudenberg, and petitioner, dated April 23, 1962. Petitioner's consent, which is identical with the other three consents except for names of shareholders, addresses, and number of shares, is as follows:
SHAREHOLDER's STATEMENT OF CONSENT OF ELECTION UNDER SECTION 1372(a)
To: DISTRICT DIRECTOR OF INTERNAL REVENUE
Federal Building
Pursuant to section 1372(a) of the Internal Revenue Code, notice is hereby given that the undersigned, being a shareholder in Apache Park Development Company, Inc., an Arizona corporation whose principal place of business is located at 7000 East Camelback Road, Scottsdale, Arizona, does consent to the filing of form 2553 of the U.S. Treasury Department Internal Revenue Service by the above named domestic corporation electing to be treated as a small business corporation for income tax purposes.
In further compliance with the code the undersigned declares that he is the owner of 15,500 shares of stock in the above-named corporation, acquired by him on the 23 day of April, 1962. That he resides at 3526 E. Elm St., in the City/Village of Phoenix in the State of Arizona, and that he is not a non-resident alien.
I declare under the penalty of perjury that the statements herein contained are true and correct to the best of my knowledge and belief.
(Signed) Homer W. Forrester HOMER W. FORRESTER, Shareholder.
During the years 1961, 1962, and 1963 petitioner and Bernice L. Forrester were married and domiciled in the State of Arizona.
On December 27, 1962, the district director of internal revenue at Phoenix received a shareholder's consent to election under section 1372(a), signed by Bernice L. Forrester, dated December 26, 1962, listing her as the owner of 15,000 shares in Apache. This consent was identical with the consent signed by petitioner except for the date thereof, the name of the stockholder, and the number of shares (15,000 instead of 15,500).
At the time Form 2553 was filed, stock had been issued in the name of Vanderlake (5,000 shares), Shafley (5,000 shares), Woudenberg (5,000 shares), and petitioner (15,500 shares). Each of the stock certificates to Vanderlake, Woudenberg, and petitioner (no copy of Shafley's certificate was filed with the stipulation) was signed by petitioner as president and by Bernice as secretary and certified that each of the named parties ‘is the owner’ of the shares of capital stock therein specified. Certificate No. 1 to Vanderlake was for value received, assigned and transferred by Vanderlake on February 4, 1963, ‘unto Homer W. Forrester, husband of Bernice L. Forrester as his sole and separate property.’ A similar assignment was executed by Woudenberg on February 7, 1963.
In February 1963, Doris I. Shafley sold her 5,000 shares of Apache to petitioner.
On October 8, 1965, Apache filed a U.S. Small Business Corporation Return of Income, Form 1120-S, for the year 1963 with the district director of internal revenue at Phoenix. This return was marked ‘Delinquent’ and showed a loss of $11,118.97.
On October 30, 1964, petitioner filed a complaint for divorce in the Superior Court, Maricopa County, Ariz., and on February 8, 1965, he filed an amended complaint. Both of these complaints, in paragraph 4, alleged in part as follows:
That the parties are the owners of the following community property, to-wit:
25,000 shares of Apache Park Development Company, Inc.
Petitioner practiced law in Michigan prior to 1959 and since 1959 he has been practicing law in Arizona.
Petitioner paid $15,500 for the 15,500 shares of Apache issued to him on April 23, 1962. Nine thousand five hundred dollars of the $15,500 was money petitioner borrowed from a bank on a nonsecured personal note; $6,000 of the $15,500 represented a commission due petitioner in another transaction which he turned over to Apache in part payment for the 15,500 shares of stock.
Petitioner and Bernice never had any formal agreement as to how earnings from any kind of property would be treated.
The 15,500 shares of Apache stock issued in the name of petitioner on April 23, 1962, were the community property of petitioner and his then wife, Bernice. The consent to election filed by Bernice with the district director on December 27, 1962, was not timely.
OPINIONOnly one issue remains, namely, whether Apache, a ‘small business corporation’ as that term is defined in section 1371(a), I.R.C. 1954, as amended, was a validly elected subchapter S corporation.2 The applicable provisions of sections 1371(b) and 1372, I.R.C. 1954, as amended, are in the margin.3 We must first determine whether the 15,500 shares of Apache stock acquired by petitioner on April 23, 1962, were the community property of petitioner and his then wife Bernice or the separate property of petitioner. If community, then Bernice was also a shareholder4 and, under section 2372(a), was required to consent to such election within the time specified in section 1372(c).
Section 25-211 of the Arizona Revised Statutes is entitled ‘Property acquired during marriage as community property; exceptions; disposition of personal property’ and provides:
A. All property acquired by either husband or wife during the marriage, except that which is acquired by gift, devise or descent, or earned by the wife and her minor children while she lives separate and apart from her husband, is the community property of the husband and wife.
B....
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