Cox v. Comm'r of Internal Revenue
| Decision Date | 13 September 1971 |
| Docket Number | Dockets Nos. 4052-70,4069-70,4082-70. |
| Citation | 56 T.C. 1270 |
| Parties | TIRZAH A. COX, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Herman Ginsburg and Rodney P. Cathcart, for the petitioners.
Roy S. Fischbeck, for the respondent.
In 1961, C & D corporation borrowed money from a bank in order to Purchase two notes from Commonwealth corporation, S. E. Copple, controlling shareholder of both corporations, endorsed C & D's bank note. The two notes later became worthless. In 1966, at a time when C & D was insolvent, Commonwealth repurchased the notes and thereby enabled C & D to discharge its debt. Held, the amounts transferred from Commonwealth to C & D in 1966 constituted constructive dividends to S. E. Copple and are taxable as such under sec. 301(c)(1), I.R.C. 1954. Held, further, other petitioners who were shareholders in both corporations did not receive constructive dividends.
In these consolidated cases respondent determined the following deficiencies in petitioners' Federal income taxes for 1966:
+----------------------------------------------------------------+
¦Petitioners ¦Docket No. ¦Deficiency ¦
+--------------------------------------+------------+------------¦
¦ ¦ ¦ ¦
+--------------------------------------+------------+------------¦
¦Tirzah A. Cox ¦4052-70 ¦$4,422.18 ¦
+--------------------------------------+------------+------------¦
¦S. E. Copple and Tekla R. Copple ¦4069-70 ¦22,474.90 ¦
+--------------------------------------+------------+------------¦
¦S. Edward Copple and Mary Helen Copple¦4082-70 ¦4,770.40 ¦
+----------------------------------------------------------------+
Certain concessions have been made by the parties and will be given effect in the Rule 50 computations. The only question to be decided is whether the petitioners realized taxable income in the form of constructive dividends as a consequence of two payments made by the Commonwealth Co. to C & D Construction Co. in 1966.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Tirzah A. Cox is a single person who filed her Federal income tax return for 1966 with the district director of internal revenue at Omaha, Nebr. She was a resident of Lincoln, Nebr., at the time she filed her petition herein.
S. E. Copple and Tekla R. Copple and S. Edward Copple and Mary Helen Copple, respectively, are husband and wife. Both families filed joint income tax returns for 1966 with the district director of internal revenue at Omaha, Nebr. Both families were residents of Lincoln, Nebr., at the time they filed their petitions herein. S. Edward Copple is the son of S. E. Copple.
Two companies were involved in the transactions relevant to this case— the Commonwealth Co. and C & D Construction Co., Inc. At all times relevant to these cases, the affairs of both companies were controlled by S. E. Copple.
The Commonwealth Co. (hereinafter sometimes called Commonwealth) was incorporated in Nebraska in 1933. It was licensed by the Nebraska Department of Banking as an industrial loan and investment company and subject to the department's general supervision and control. During the years 1961 to 1967, S. E. Copple and Tekla R. Copple were president and secretary-treasurer, respectively, of Commonwealth, as well as members of its board of directors along with S. Edward Copple and Helen Cariotto. Tirzah Cox was a long-time employee of Commonwealth. During the same period Commonwealth had outstanding 2,100 shares of common stock owned as follows:
+-----------------------------------------------+
¦Shareholder ¦Number of shares ¦
+----------------------------+------------------¦
¦S. E. Copple ¦1,098.50 ¦
+----------------------------+------------------¦
¦Edward, Inc ¦213.19 ¦
+----------------------------+------------------¦
¦Tekla R. Copple ¦3.19 ¦
+----------------------------+------------------¦
¦Helen Cariotto ¦14.87 ¦
+----------------------------+------------------¦
¦Copple Insurance Agency, Inc¦500.00 ¦
+----------------------------+------------------¦
¦S. E. Copple Investment, Inc¦259.00 ¦
+----------------------------+------------------¦
¦Tirzah A. Cox ¦10.00 ¦
+----------------------------+------------------¦
¦Marv Copple ¦1.25 ¦
+-----------------------------------------------+
As of April 15, 1961, Commonwealth had outstanding 434 shares of preferred stock owned as follows:
+------------------------------------------------+
¦Shareholder ¦Number of shares ¦
+-----------------------------+------------------¦
¦ ¦ ¦
+-----------------------------+------------------¦
¦Nellie L. & Mildred Ohslund ¦110 ¦
+-----------------------------+------------------¦
¦Susan T. Madden ¦6 ¦
+-----------------------------+------------------¦
¦C. B. Burbridge ¦50 ¦
+-----------------------------+------------------¦
¦Zelda Dreger ¦1 ¦
+-----------------------------+------------------¦
¦Tirzah Cox ¦30 ¦
+-----------------------------+------------------¦
¦Ruth F. Cox ¦5 ¦
+-----------------------------+------------------¦
¦Kathryn G. Cox ¦12 ¦
+-----------------------------+------------------¦
¦Dorothy J. Bures ¦40 ¦
+-----------------------------+------------------¦
¦Betty Rexilius ¦30 ¦
+-----------------------------+------------------¦
¦Frank Rexilius ¦20 ¦
+-----------------------------+------------------¦
¦Ruth Dunn ¦5 ¦
+-----------------------------+------------------¦
¦Melba Hoc ¦2 ¦
+-----------------------------+------------------¦
¦S. E. Copple Investments, Inc¦2 ¦
+-----------------------------+------------------¦
¦Robert Bullock ¦4 ¦
+-----------------------------+------------------¦
¦S. Edward Copple ¦10 ¦
+-----------------------------+------------------¦
¦Tekla R. Copple ¦7 ¦
+-----------------------------+------------------¦
¦E. F. Schwedhelm ¦100 ¦
+------------------------------------------------+
As of March 24, 1966, Commonwealth had outstanding 410 shares of preferred stock owned as follows:
+-----------------------------------+
¦Shareholder ¦Number of shares ¦
+----------------+------------------¦
¦ ¦ ¦
+----------------+------------------¦
¦Susan T. Madden ¦6 ¦
+----------------+------------------¦
¦C. B. Burbridge ¦50 ¦
+----------------+------------------¦
¦Zelda Dreger ¦1 ¦
+----------------+------------------¦
¦Tirzah Cox ¦95 ¦
+----------------+------------------¦
¦Kathryn G. Cox ¦12 ¦
+----------------+------------------¦
¦Frank Rexilius ¦20 ¦
+----------------+------------------¦
¦Ruth Dunn ¦5 ¦
+----------------+------------------¦
¦Melba Hoc ¦2 ¦
+----------------+------------------¦
¦S. Edward Copple¦10 ¦
+----------------+------------------¦
¦Tekla R. Copple ¦7 ¦
+----------------+------------------¦
¦E. F. Schwedhelm¦100 ¦
+----------------+------------------¦
¦S. E. Copple ¦2 ¦
+----------------+------------------¦
¦Leon Beers ¦100 ¦
+-----------------------------------+
As of June 21, 1966, Commonwealth had outstanding 608 shares of preferred stock owned as follows:
+-----------------------------------+
¦Shareholder ¦Number of shares ¦
+----------------+------------------¦
¦ ¦ ¦
+----------------+------------------¦
¦Susan T. Madden ¦6 ¦
+----------------+------------------¦
¦C. B. Burbridge ¦50 ¦
+----------------+------------------¦
¦Zelda Dreger ¦1 ¦
+----------------+------------------¦
¦Tirzah Cox ¦95 ¦
+----------------+------------------¦
¦Kathryn G. Cox ¦12 ¦
+----------------+------------------¦
¦Frank Rexilius ¦20 ¦
+----------------+------------------¦
¦Ruth Dunn ¦5 ¦
+----------------+------------------¦
¦Melba Hoc ¦2 ¦
+----------------+------------------¦
¦S. Edward Copple¦10 ¦
+----------------+------------------¦
¦Tekla Copple ¦7 ¦
+----------------+------------------¦
¦E. F. Schwedhelm¦100 ¦
+----------------+------------------¦
¦Leon Beers ¦100 ¦
+----------------+------------------¦
¦Ida Bice ¦200 ¦
+-----------------------------------+
Each outstanding share of common and preferred stock referred to above was entitled to one vote. S. E. Copple, during the years 1961 to 1967, owned Copple Insurance Agency and S. E. Copple Investment, Inc. His son, S. Edward Copple, owned Edward, Inc. Mary Copple is another son of S. E. Copple.
The C & D Construction Co., Inc. (hereinafter sometimes called C & D), was incorporated in Nebraska in 1954 for the purpose of constructing homes. In 1959, C & D left the construction business and entered the business of purchasing commercial paper. S. Edward Copple, S. E. Copple, and Tirzah A. Cox were president, vice...
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