Dean v. Comm'r of Internal Revenue
| Decision Date | 06 October 1971 |
| Docket Number | Docket No. 1323-68. |
| Citation | 57 T.C. 32 |
| Parties | WALTER K. DEAN AND LAURIN D. DEAN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Hugh R. Dowling, Patrick G. Emmanuel, and Michael W. Fisher, for the petitioners.
Vernon J. Owens, for the respondent.
1. Dean was the sole stockholder of Warrington, a corporation engaged in the business of developing residential subdivisions in the Pensacola-Fort Walton area of Florida. The houses constructed were sold on the open market. FHA and VA, upon which Warrington depended for its financing, required that the houses be serviced by water and sewer facilities approved by the State Board of Health. After building a number of houses with septic tanks and a number through use of the facilities of a private utility, Warrington was compelled to build its own sewer facilities to service its Garnier Beach and Mayfair subdivisions. Thereafter, Warrington transferred its Garnier Beach and Mayfair sewer facilities to Florida Utility, in consideration of the latter's agreement to operate the facilities and maintain service to the homeowners. Held, the transfers of the sewer facilities from Warrington to Florida Utility did not constitute dividend distributions to Dean.
2. Held, further, upon consideration of all the facts and circumstances present, that certain advances made by Warrington to Dean over a number of years, consisting of cash withdrawals and the payment of personal obligations, were not loans and the increases in the balance of the personal account of Dean in 1963 and 1964 constituted taxable dividends to petitioners.
3. Held, further, the claimed interest expenses on the above advances are not deductible under sec. 163 of the Internal Revenue Code of 1954.
Respondent determined deficiencies in the income taxes of petitioners for the years and in the amounts as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1962 ¦$14,005.34 ¦
+------+-------------¦
¦1963 ¦11,286.70 ¦
+------+-------------¦
¦1964 ¦183,940.00 ¦
+--------------------+
Concessions have been made by both parties and the issues remaining for decision are: (1) Did petitioners receive a dividend distribution as the result of the transfer of certain sewer facilities by Warrington Home Builders during 1964? (2) Did advances made to Walter K. Dean constitute taxable dividends to the petitioners during the years 1962 and 1963 in the amounts of $16,085.10 and $1,014.21, respectively? (3) Should claimed interest expense on the alleged indebtedness of Walter K. Dean to Warrington Home Builders, Inc., in the amounts of $6,343.35 and $6,588 in 1963 and 1964 respectively, be allowed as deductions?
If the answer to number (1) above is in the affirmative, petitioner further contends that the sewer facilities transferred had no fair market value on the date of transfer, with the result that the value of the dividend would be zero.
The stipulation of facts and the exhibits attached thereto are incorporated herein by reference.
The petitioners, Walter K. Dean (hereinafter referred to as Dean) and Laurin D. Dean (also known as Dale T. Dean), are husband and wife. Their legal residence as of the date of the petition herein was filed was Pensacola, Fla. Petitioners timely filed joint income tax returns for the years in question with the district director of internal revenue at Jacksonville, Fla.
Warrington Home Builders, Inc. (hereinafter referred to as Warrington), was incorporated under the laws of Florida on September 8, 1948. During the years 1962, 1963, and 1964, all of the outstanding stock of Warrington was owned by Dean.
Warrington is engaged in the business of buying unimproved land in the Pensacola-Fort Walton Beach area of Florida, building houses thereon, and selling them in the open market. In the building of such houses, Warrington depended upon the use of Federal Housing Administration (FHA) insurance and Veterans' Administration (VA) guarantees for its financing. The improvements put on the land by Warrington consisted of the installation of the streets, curbs, utilities (including water and sewer facilities), and the houses.
In order to secure FHA or VA financing it was necessary that the houses be constructed in accordance with FHA standards, which required (among other things) that the houses be serviced by adequate water and sewer facilities. The FHA would not approve sewer and water plans that had not previously been approved by the Florida State Board of Health.
During the mid-1950's Warrington began developing a subdivision called Garnier Beach in Okaloosa County near the city of Fort Walton Beach, Fla. Around the same time Warrington acquired several hundred acres of raw land near the city of Pensacola in Escambia County, to develop a subdivision called Mayfair.
At that time there were no county-wide sewer or water systems in either Okaloosa or Escambia County to serve the homes being built. Because of this, Warrington developed approximately the first 150 homes in the Mayfair and Garnier Beach subdivisions with septic tanks. After that the FHA and the Florida State Board of Health stopped Warrington from building houses with septic tanks for sewerage disposal because of the health hazard they created.
In 1957, Warrington contracted with a nearby private utility, Pen Haven Sanitation Co. (Pen Haven) whereby Pen Haven would allow Warrington the use of its sewer facilities for the Mayfair subdivision provided Warrington would put in sewerlines and turn them over to Pen Haven free of charge, and pay Pen Haven a fee of $100 per house connected to the plant. After approximately 150 houses were connected to Pen Haven's system, the Florida State Board of Health stopped Pen Haven from taking on any more homes unless it expanded the system. As a result, Warrington was compelled to discontinue use of Pen Haven facilities for any more building.
After efforts to procure adequate sewer facilities for the homes from private utility companies proved fruitless, Warrington constructed its own sewer system to accommodate the remainder of the homes to be constructed at Mayfair and at Garnier Beach. It built sewerage disposal plants in both areas to service only those homes to be built by Warrington. Warrington did not furnish sewer service to any other party.
The FHA requires that legal title to the water or sewer systems be transferred to a trustee to insure performance of the duty of the owner to supply services to lot customers. Pursuant to this requirement, the legal title to each of the sewer systems in question was transferred to an FHA-approved trustee, by trust deeds to Florida National Bank of Jacksonville.
May First Corp. (hereinafter referred to as May First) was incorporated under the laws of the State of Florida on May 9, 1958. It was incorporated for the purpose of acquiring some 300 acres of land known as the Wedgewood subdivision (hereinafter referred to as Wedgewood) for development outside the city of Pensacola.
No sewer or water facilities were available in that area when May First acquired this land. Because May First's development and financing depended on FHA and VA approval, it was necessary to supply water and sewer facilities for the development.
Florida Utility Co. (hereinafter referred to as Florida Utility) was established for the purpose of providing water and sewer service for lots that were to be developed in Wedgewood. Florida Utility was organized under the laws of the State of Florida in October of 1963 and was granted a water and sewer franchise by the Escambia County Board of County Commissioners for the Wedgewood area.
From the date of Florida Utility's incorporation and during all of the calendar year 1964, all of its stock was owned by May First.
During the calendar years 1962, 1963, and 1964 all of the stock of May First was held by the following individuals in the following capacities and in the following amounts:
+-----------------------------------------------------------------------+
¦Shareholder ¦Number of shares ¦
+----------------------------------------------------+------------------¦
¦Charles B. Webb, Jr ¦25 ¦
+----------------------------------------------------+------------------¦
¦Dale T. (Laurin) Dean ¦12 1/2 ¦
+----------------------------------------------------+------------------¦
¦Dale T. (Laurin) Dean, trustee for John Fleming Dean¦ ¦
+----------------------------------------------------+------------------¦
¦Trust ¦12 1/2 ¦
+----------------------------------------------------+------------------¦
¦Total ¦50 ¦
+-----------------------------------------------------------------------+
Dean has never been a stockholder, officer, or director of May First or Florida Utility. Charles B. Webb, Jr., was the son-in-law of the petitioners during the period from before January 1, 1962, to October 1966. John Fleming Dean is the son of the petitioners. Dean loaned his wife money with which to purchase her stock in May First. May First never developed the Wedgewood subdivision, as originally planned.
The sewer systems built by Warrington to service the houses in Mayfair and Garnier Beach proved to be a liability to Warrington in several ways. They required continuous maintenance and repair and there was always the threat of pollution caused by the systems, and the adverse publicity resulting therefrom. In addition, because these systems were encumbered by trust deeds, the ability of Warrington to borrow funds could be impaired.
Florida Utility, through its president, Charles B. Webb, Jr., approached Warrington offering to operate the sewer facilities owned by Warrington. On March 23,...
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