Rushing v. Comm'r of Internal Revenue , Docket Nos. 389-66
| Decision Date | 28 August 1969 |
| Docket Number | Docket Nos. 389-66,390-66. |
| Citation | 52 T.C. 888 |
| Parties | W. B. RUSHING AND MOZELLE RUSHING, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTMAX TIDMORE AND CATHERINE TIDMORE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edward R. Smith and Charles B. Jones, for the petitioners.
H. L. Cook, for the respondent.
1. Held, a sole shareholder of two corporations did not receive a constructive dividend when one corporation advanced funds to the other.
2. Held, further, petitioners did not realize additional gain when they sold certain notes evidencing loans to corporations whose stock petitioners sold in the same transactions.
3. Held, further, certain disputed amounts are not includable by petitioners in their computations of ‘gross profit’ and ‘total contract price’ under sec. 453, I.R.C. 1954.
4. Held, further, petitioners failed in their burden of proof to show that they did not receive certain amounts as dividend income in 1962 from two corporations.
5. Held, further, petitioners are not taxable on liquidating dividends resulting from their installment sales of stock in two corporations after the corporations had adopted plans of complete liquidation under sec. 337, I.R.C. 1954, but prior to the date of distribution.
Respondent determined deficiencies in petitioners' Federal income taxes for the calendar years 1962 and 1963 in the following amounts:
+-----------------------------------------------------+
¦Petitioners ¦Year ¦Deficiency ¦
+---------------------------------+------+------------¦
¦ ¦ ¦ ¦
+---------------------------------+------+------------¦
¦W. B. Rushing and Mozelle Rushing¦( 1962¦$144,281.13 ¦
+---------------------------------+------+------------¦
¦ ¦( 1963¦128,237.59 ¦
+---------------------------------+------+------------¦
¦Max Tidmore and Catherine Tidmore¦( 1962¦536.15 ¦
+---------------------------------+------+------------¦
¦ ¦( 1963¦116,190.96 ¦
+-----------------------------------------------------+
After numerous issues were settled by the parties, the issues which remain for decision are: (1) Whether W. B. and Mozelle Rushing received construction dividends of $62,892.40 in 1962 and $2,900 in 1963 as a result of advances from one wholly owned corporation to another wholly owned corporation; (2) whether petitioners in each docket should have reported in 1963 as additional gain upon their sales of stock in two corporations the amounts of $71,000 and $8,969.09; (3) whether petitioners in each docket must include in their computations under the installment method an additional $50,000 upon their sale of K & K and P & R stock; (4) whether petitioners in each docket received dividends of $2,130 in 1962; and (5) whether petitioners in each docket were taxable on a liquidating dividend of $304,750 in 1963 resulting from their sales of stock in two corporations after the corporations had adopted plans of complete liquidation but prior to the date of distribution.
Some of the facts have been stipulated and are found accordingly.
W. B. Rushing (Rushing) and Mozelle Rushing are husband and wife. They resided in Lubbock, Tex., at the time both their Federal income tax returns and their petition were filed in the instant case. Their Federal joint income tax returns for the calendar years 1962 and 1963 were filed on the cash basis of accounting with the district director of internal revenue, Dallas, Tex.
Max Tidmore (Tidmore) and Catherine Tidmore are husband and wife. They resided in Lubbock, Tex., at the time both their Federal income tax returns and their petition were filed in the instant case. Their Federal joint income tax returns for the calendar years 1962 and 1963 were filed on the cash basis of accounting with the district director of internal revenue, Dallas, Tex.
Rushing and Tidmore have been associated in various real estate and construction ventures since 1945. On January 1, 1953, they organized as equal partners a partnership known as the R-T Building Account. The partnership is a ‘clearing’ account for the partners.
There are many corporations which Rushing and/or Tidmore have used in their real estate activities. Lubbock Commercial Building, Inc. (L.C.B.), was organized in February 1947. Rushing has been its sole shareholder since its incorporation. Briercroft & Co. (Briercroft) was organized in July 1959 with a capitalization of $1,000. Rushing has also been its sole shareholder since its incorporation.
Rushing organized Briercroft to purchase 87.02 acres near 50th Street and Avenue Q in Lubbock. Rushing intended to develop the acreage for residential purposes. Upon its incorporation in 1959, Briercroft consequently contracted to purchase the 87.02 acres. These acres adjoined a tract which L.C.B. was developing as a shopping center. Rushing's idea was to enhance the population surrounding the shopping center with residences built by Briercroft.
The construction of homes on these 87.02 acres was Rushing's first real estate venture outside the commercial area. He therefore anticipated having to invite other developers more knowledgeable about residential properties to participate with him in this venture. However, Rushing did not want to sell any of his shares in L.C.B. to outsiders. That would make them coowners also of his commercial real estate properties. For these reasons he formed Briercroft as a separate corporation to purchase the 87.02 acres. Subsequently it became unnecessary for Rushing to seek the assistance of other developers. Briercroft proved successful in its efforts to develop the acreage.
The cost to Briercroft for the 87.02 acres was $409,788. As payment, Briercroft gave a purchase-money note for that amount. Although L.C.B. cosigned the note at the request of the sellers, only Briercroft acquired title to the land.
Between September 1, 1959, and December 31, 1962, L.C.B. loaned funds to Briercroft. The parties treated these transactions as accounts receivable since the advances were not evidenced by notes. Briercroft never paid interest on these loans. One such transaction occurred in July 1962 when L.C.B. advanced to Briercroft $64,052.40. Briercroft, in the meantime, was repaying earlier advances as it succeeded in selling improved lots out of the original 87.02 acres. Briercroft applied $62,252.40 as its final payment on the above-mentioned purchase-money note. Another transaction occurred in 1963 when L.C.B. advanced $2,900 to Briercroft.
Neither Briercroft nor L.C.B. has ever declared or paid a dividend.
In January 1965 Briercroft merged into L.C.B. A principal purpose of the reorganization was to eliminate Briercroft's outstanding debts to L.C.B.
K & K, Inc. (K & K), was organized in June 1952. Its total capitalization was $800 and consisted of 80 shares of common stock with a par value of $10 per share. Rushing and Tidmore each owned 20 shares.
K & K was organized to buy 45 acres of land in the city of Wichita Falls, Tex., for $285,000 and to build and operate a shopping center on this land. The money to pay for this land was obtained by loans from banks and also from stockholders in proportion to their stock ownership:
+------------------------------------+
¦ ¦Number ¦ ¦
+--------------+-----------+---------¦
¦Stockholder ¦of shares ¦Amount ¦
+--------------+-----------+---------¦
¦ ¦owned ¦of loan ¦
+--------------+-----------+---------¦
¦ ¦ ¦ ¦
+--------------+-----------+---------¦
¦C. H. Parker ¦20 ¦$35,000 ¦
+--------------+-----------+---------¦
¦Garnett Parker¦10 ¦17,500 ¦
+--------------+-----------+---------¦
¦Jack G. Parker¦10 ¦17,500 ¦
+--------------+-----------+---------¦
¦Rushing ¦20 ¦35,000 ¦
+--------------+-----------+---------¦
¦Tidmore ¦20 ¦35,000 ¦
+--------------+-----------+---------¦
¦ ¦ ¦ ¦
+--------------+-----------+---------¦
¦ ¦ ¦140,000 ¦
+--------------+-----------+---------¦
¦Banks ¦ ¦145,000 ¦
+--------------+-----------+---------¦
¦ ¦ ¦ ¦
+--------------+-----------+---------¦
¦Total ¦ ¦285,000 ¦
+------------------------------------+
K & K issued demand notes to evidence the foregoing loans from shareholders. The notes provided for an interest rate of 4 1/2 percent. K & K has never declared or paid a dividend.
On May 28, 1959, the shareholders of K & K organized P & R, Inc. (P & R). They paid a total of $1,200 for their stock. On that same date the shareholders transferred 8 1/2 acres of land to P & R in exchange for notes totaling $35,876.36. Rushing and Tidmore together held 50 percent of P & R's outstanding stock. They each received a demand note for $8,969.09 as consideration for transfer of their interest in the land to P & R.
The notes to Rushing and Tidmore remained unpaid in January 1963. On January 29, 1963, Rushing and Tidmore created trusts for their children. they named the Republic National Bank of Dallas, Tex. (Republic), as trustee. On January 30, 1963, the settlors funded each of their respective trusts respective trusts with $5,000. Republic, as trustee, purchased all of the stock which the settlors held in K & K and P & R. The bank issued to each of them trust notes dated January 31, 1963, in the amount of $325,000. The trustee also acknowledged an additional liability to Rushing and Tidmore for a total of $200,000. The trustee further acknowledged liability to the R-T Building Account for the outstanding notes evidencing the shareholders' loans to K & K and P & R. As a result of such acknowledgement, Rushing and Tidmore were each entitled to receive $71,000 from the trustee.
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