Raynor v. Comm'r of Internal Revenue, Docket Nos. 3748-65

Decision Date26 August 1968
Docket Number5114-65.,Docket Nos. 3748-65
PartiesMILTON T. RAYNOR AND MURIEL RAYNOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTPETER DE MET AND LAURA DE MET, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

50 T.C. 762

MILTON T. RAYNOR AND MURIEL RAYNOR, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENTPETER DE MET AND LAURA DE MET, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 3748-65

5114-65.

Tax Court of the United States.

Filed August 26, 1968.


[50 T.C. 762]

Roger S. Baskes, for the petitioners.

Nelson E. Shafer, for the respondent.

Petitioners were shareholders in corporations which had elected to be free from tax under subch. S of chap. 1, I.R.C. 1954. During the years 1961-63, inclusive, petitioners advanced funds to the corporations on open account, and lent their credit to the corporations so that the corporations could obtain funds from third parties. The corporations suffered net operating losses in the years 1961-63, inclusive. Held, the advances by petitioners to the corporations did not create a ‘second class of stock.’ Held, further, petitioners are entitled to deduct the corporate net operating losses in proportion to their nominal stockholdings only to the extent of their direct advances to the corporations.

FEATHERSTON, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes for 1961-63, inclusive, as follows:

+------------------------------------------------+
                ¦Year ¦Docket No. 3748-65 ¦Docket No. 5114-65 ¦
                +------+--------------------+--------------------¦
                ¦ ¦ ¦ ¦
                +------+--------------------+--------------------¦
                ¦1961 ¦$12,933.66 ¦$224,956.60 ¦
                +------+--------------------+--------------------¦
                ¦1962 ¦30,831.65 ¦214,892.74 ¦
                +------+--------------------+--------------------¦
                ¦1963 ¦43,105.57 ¦220,721.93 ¦
                +------------------------------------------------+
                

Some of the items of the deficiencies have been settled by the parties. The issues remaining for decision are whether three corporations qualified as electing small business corporations under subchapter S of chapter 1 of the Internal Revenue Code of 1954, and, if so, the amount of corporate net operating losses deductible by petitioners under section 1374.1

[50 T.C. 763]

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and exhibits thereto are incorporated herein by this reference.

Milton T. Raynor and Muriel Raynor, petitioners in docket No. 3748-65, are husband and wife whose residence was in California when their petition was filed. They filed joint Federal income tax returns for the years 1961-63, inclusive, with the district director of internal revenue, Chicago, Ill.

Peter De Met and Laura De Met, petitioners in docket No. 5114-65, are husband and wife whose residence was in Florida when their petition was filed. They filed joint Federal income tax returns for the years 1961-63, inclusive, with the district director of internal revenue, Chicago, Ill.

Muriel Raynor and Laura De Met are petitioners herein solely by reason of having filed joint returns with their husbands. Milton T. Raynor and Peter De Met will sometimes hereinafter be referred to as Raynor, and De Met or petitioners.

In the years 1956 through 1961, Harold Vineberg (hereinafter ‘Vineberg’) of Miami Beach, Fla., and De Met organized five new bowling-alley ventures in the State of Florida: University Bowl, Inc. (hereinafter ‘University’); Coliseum Lanes, Inc. (hereinafter ‘Coliseum’); Lakeland Lanes, Inc. (hereinafter ‘Lakeland’); Sky Bowl, Inc. (hereinafter ‘Sky’); and Congress Lanes, Inc. (hereinafter ‘Congress'). Raynor invested in two of these, Lakeland and Sky, by the purchase in 1961 of stock from Stanley Peal.

Each of the five ventures was organized as a separate corporation. Each of the five corporations elected status under subchapter S of chapter 1 of the Internal Revenue Code.

University and Coliseum reported net income, and their status is not here challenged by the respondent. The other three corporations sustained net operating losses of which the distributive shares claimed by petitioners for the years 1961, 1962, and 1963 were as follows:

+-----------------------------------------+
                ¦RAYNOR, DOCKET NO. 3748-65 ¦
                +-----------------------------------------¦
                ¦ ¦1961 ¦1962 ¦1963 ¦
                +--------+----------+----------+----------¦
                ¦Lakeland¦$16,317.87¦$14,338.71¦$13,872.09¦
                +--------+----------+----------+----------¦
                ¦Sky ¦15,143.44 ¦4,127.40 ¦7,540.45 ¦
                +--------+----------+----------+----------¦
                ¦ ¦31,461.31 ¦18,466.11 ¦21,412.54 ¦
                +--------+----------+----------+----------¦
                ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------+
                
DE MET, DOCKET NO. 5114-65
                 1961 1962 1963
                Lakeland $38,073.71 $33,457.00 $13,872.09
                Sky 35,334.68 9,630.60 7,540.45
                Congress 42,394.61 21,155.41 30,270.80
                 115,803.00 64,243.01 51,683.34
                

Lakeland, Sky, and Congress each filed information returns (Form 1120-S) on a calendar year basis for the years 1961, 1962, and 1963 with the district director of internal revenue, Jacksonville, Fla.

[50 T.C. 764]

Under a written agreement dated March 21, 1961, Raynor sold 13 1/3 percent of his stock in Lakeland and Sky to De Met for a total of $17,913.33. Under an agreement dated January 2, 1963, De Met sold the stock back to Raynor for the same price. The two shareholders' accountant in Chicago was advised of the sales and the shareholders' records and tax returns consistently reflected such sales.

Taking account of the sales, the proportionate shareholdings of Lakeland, Sky, and Congress were as follows:

+----+
                ¦¦¦¦¦¦
                +----+
                
LAKELAND
                
 4/18/60— 1/3/61— 3/21/61— 1/2/63 and
                 1/3/61
...

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