Miele v. Comm'r of Internal Revenue
| Decision Date | 21 June 1971 |
| Docket Number | 421-70— 423-70.,Dockets Nos. 405-70 |
| Citation | 56 T.C. 556 |
| Parties | JOSEPH MIELE, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Martin D. Cohen and Samuel Klein, for the petitioners.
Robert N. Ginsburg, for the respondent.
A corporation issued certificates labeled as ‘preferred stock’ as a means of obtaining additional capital. Later the preferred stock was redeemed in a prorata redemption which left the shareholders of the corporation in exactly the same relationship with respect to the ownership of the corporation as they occupied prior to the redemption. Held: (1) The certificates
issued by the corporation were preferred stock and not evidence of indebtedness. (2) The prorata distributions made by the corporation in redemption of its preferred stock were essentially equivalent to a dividend and do not qualify as a distribution or payment in exchange for stock under sec. 802(a).
Petitioners in docket Nos. 421-70 and 423-70 transferred funds between themselves and a wholly owned corporation through accounts carried in the general ledger of the corporation as loans. Held, (3) At all times petitioners intended to repay the amounts withdrawn from the corporation, and the withdrawals by the petitioners were bona fide loans and do not constitute dividends.
The respondent determined deficiencies in the Federal income taxes due from the petitioners as follows:
The issues presented for decision are:
(1) As to all dockets, whether petitioners, who own 100 percent of the voting stock of a corporation, are required to treat the prorata redemption of nonvoting stock held in proportion to their common stock holding as a dividend rather than as a return of capital.
(2) As to docket Nos. 421-70 and 423-70, whether petitioners must treat withdrawals from a corporation, 100 percent of the stock of which is owned by the petitioners, as dividends rather than loans.
Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Joseph Miele, petitioner in docket No. 405-70, is an individual residing in West Orange, N.J. Anthony P. Miele and Maria E. Miele, petitioners in docket No. 422-70, are individuals, husband and wife, also residing in West Orange, N.J.
V. James Spiniello and Gloria Spiniello, petitioners in docket No. 421-70, are individuals, husband and wife, residing in Short Hills, N.J. Luke C. Spiniello and Grace Spiniello, petitioners in docket No. 423-70, are individuals, husband and wife, also residing in Short Hills, N.J.
Petitioner Joseph Miele filed individual income tax returns for the taxable years 1965 and 1966 with the district director of internal revenue, Newark, N.J. Petitioners Anthony and Maria Miele, V. James and Gloria Spiniello, and Luke C. and Grace Spiniello filed joint income tax returns with the district director of internal revenue, Newark, N.J. All of the returns were filed on the cash basis.
Maria E. Miele, Gloria Spiniello, and Grace Spiniello are parties to this proceeding solely by virtue of the joint income tax returns which they filed with their respective husbands for the taxable years here involved.
I. Findings Related to the Preferred Stock Redemption Issue
A & S Transportation Co. (hereinafter referred to as A & S) was incorporated under the laws of New Jersey on January 17, 1945. The original authorized capital of A & S, as provided for in its certificate of incorporation, consisted of 1,000 shares of common stock having a par value of $100 per share.
For some time prior to April 1959, there were 132 issued and outstanding shares of A & S common stock (as described above) which were held as follows:
+------------------------------------------------------------+
¦Joseph Miele ¦21¦Joseph LaFera, Jr ¦1 ¦
+------------------+--+-----------------------------------+--¦
¦Anthony Miele ¦21¦LaFera Coal & Construction Co., ¦ ¦
+------------------+--+-----------------------------------+--¦
¦Luke Spiniello ¦21¦Inc. ¦42¦
+------------------+--+-----------------------------------+--¦
¦James Spiniello ¦22¦Virgilio Spiniello (Father of James¦ ¦
+------------------+--+-----------------------------------+--¦
¦J. Franklyn Ficken¦2 ¦and Luke) ¦2 ¦
+------------------+--+-----------------------------------+--¦
¦Joseph LaFera, Sr ¦1 ¦ ¦ ¦
+------------------------------------------------------------+
On June 23, 1949, J. Franklyn Ficken sold and assigned his two shares of A & S stock to Joseph and Anthony Miele. The said two shares were transferred to Richard J. Miele, son of Anthony Miele, on August 26, 1962. Virgilio Spiniello died on January 20, 1962, bequeathing by will his share2 of A & S stock to Luke Spiniello, who has since held a total of 22 shares.
LaFera Coal & Construction Co. was an equipment rental company owned by Joseph LaFera, Sr. and Joseph LaFera, Jr. On October 1, 1962, LaFera Coal & Construction Co. became a wholly owned subsidiary of LaFera Contracting Co. (hereinafter referred to as Contracting) in a tax-free reorganization. Thereafter, on September 3, 1963, LaFera Coal & Construction Co. was liquidated in accordance with a plan adopted on August 30, 1963, and Contracting succeeded to all of the assets of LaFera Coal & Construction Co., including the 47 shares of A & S stock which it held.
At all times since its incorporation, A & S has been engaged in the business of moving sludge out to sea by means of one or more seagoing barges. For some time prior to April 1959, A & S carried on its business activities by the operation of a single barge called the Dykes.
By approximately 1956, the Dykes was in such a poor state of repair that maintenance costs were exceeding the value of the vessel. At a meeting of the board of directors of A & S held on September 15, 1957, it was noted that key employees of A & S had accepted notes in lieu of salary in order to free funds for the repair of the Dykes.
The management of A & S ascertained that a new vessel to replace the Dykes would cost approximately $545,000. Since A & S could not afford to make such a purchase without financing from outside sources, it entered into negotiations with the U.S. Maritime Commission (hereinafter sometimes referred to as the Maritime Commission or the Commission). This Commission, in furtherance of public policy, was empowered by applicable law to guarantee, in proper cases, fully secured first-mortgage loans made to domestic shipping companies to finance the purchase of seagoing vessels.
The Maritime Commission advised A & S that at least $150,000 of additional capital from private sources would have to be invested in the corporation before the loan could be guaranteed. The Maritime Commission also advised A & S that this requirement of additional private capital could be satisfied in either of the following ways:
(1) An unsecured loan for $150,000 which would be subordinated to the loan to be guaranteed by the Maritime Commission or
(2) The issuance of nonvoting, nondividend-paying, noncumulative preferred stock, having an aggregate par value of $150,000, which could not be redeemed until after full payment of the proposed first-mortgage loan.
The principals of A & S, including Anthony and Virgilio Spiniello, preferred the alternative of making an unsecured loan. However, they accepted the opinion of their adviser (one Samuel Klein, an attorney and certified public accountant) that the issuance of preferred stock would accomplish their entire purpose in the shortest time, and on March 30, 1959, by action of its board of directors, the certificate of incorporation of A & S was amended in pertinent part to provide as follows:
The total authorized capital stock of this corporation is Two Hundred Fifty Thousand ($250,000.00) Dollars, divided into three hundred (300) shares of preferred stock, of a par value of Five Hundred ($500.00) Dollars each, and One Thousand shares of common stock of the par value of One Hundred ($100.00) Dollars each.
The preferred stock shall be non-voting, non-dividend and non-cumulative and shall be redeemed by the corporation in full at par value ten years after April 15, 1959 and may be redeemed by the corporation at par value on or after July 15, 1964.
On April 13, 1959, A & S issued preferred stock to its common shareholders for cash as follows:
+----------------------------------------------------+
¦ ¦Number ¦ ¦
+-----------------------------+-----------+----------¦
¦Issued to ¦of shares ¦Par valu ¦
+-----------------------------+-----------+----------¦
¦ ¦ ¦ ¦
+-----------------------------+-----------+----------¦
¦Joseph Miele ¦50 ¦$25,000 ¦
+-----------------------------+-----------+----------¦
¦Anthony Miele ¦50 ¦25,000 ¦
+-----------------------------+-----------+----------¦
¦Luke C. Spiniello ¦50 ¦25,000 ¦
+-----------------------------+-----------+----------¦
¦V. James Spiniello ¦50 ¦25,000 ¦
+-----------------------------+-----------+----------¦
¦LaFera Coal & Construction Co¦100 ¦50,000 ¦
+-----------------------------+-----------+----------¦
¦Total ¦300 ¦150,000 ¦...To continue reading
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