58 T.C. 757 (1972), 4085-65, Bixby v. Commissioner of Internal Revenue

Docket Nº:4085-65, 5104-65, 5105-65, 6221-65- 6239-65, 5787-66-5789-66.
Citation:58 T.C. 757
Opinion Judge:DAWSON, Judge:
Party Name:MARK BIXBY AND HUDYTHE BIXBY, ET AL.,[1] PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Attorney:Alford P. Rudnick, Jack H. Calechman, Harold Lavien, and Carl E. Axelrod, for the petitioners. Robert B. Dugan and William T. Hayes, for the respondent.
Case Date:August 10, 1972
Court:United States Tax Court
 
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Page 757

58 T.C. 757 (1972)

MARK BIXBY AND HUDYTHE BIXBY, ET AL., [1] PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Nos. 4085-65, 5104-65, 5105-65, 6221-65- 6239-65, 5787-66-5789-66.

United States Tax Court

August 10, 1972

1. Petitioner Converse Rubber Corp. caused certain Bermuda trusts to be interposed in a transaction between itself and a seller of the assets of another corporation, Tyer. In form, the seller sold the assets to Bermuda trusts for x dollars and the trusts resold the assets to petitioner for x & y dollars; and y dollars was paid to the trusts in long-term highly subordinated notes. The accounts receivable of Tyer, which were guaranteed by Tyer, were entered on petitioner's books at face value. Held, the three-party purchase transaction was a sham. In substance, petitioner purchased the assets from the seller for x dollars. Held, further, petitioner's cost basis for the acquired assets does not include the amount paid to the Bermuda trusts. Held, further, amounts paid by petitioner as interest on some notes are deductible to a limited extent only; amounts paid on other notes are not deductible. Held, further, the accounts receivable were properly entered on petitioner's books.

2. Eight individual petitioners purchased ‘ private annuities' from the Bermuda trusts. The trusts were established by nominal settlors for the benefit of petitioners' families. Petitioners maintained effective control over the assets transferred in exchange for the annuities. Held, petitioners were the true settlors; the annual payments were distributions falling within sec. 677(a)(1), I,R.C. 1954; and petitioners are taxable on income received by the trusts during the taxable year under sec. 671, I.R.C. 1954.

3. Sec. 6653(a), I.R.C. 1954, additions to tax against petitioners in two dockets are sustained for failure of proof.

Page 758

Alford P. Rudnick, Jack H. Calechman, Harold Lavien, and Carl E. Axelrod, for the petitioners.

Robert B. Dugan and William T. Hayes, for the respondent.

DAWSON, Judge:

These consolidated cases involve deficiencies in the Federal income tax of each of the individual petitioners for the taxable year 1961, of Converse Rubber Corp. for the taxable years ended December 30, 1961, and December 29, 1962, and of Tyer Rubber Corp. and Granite State Rubber Co. for the taxable year ended December 29, 1962. The deficiencies determined by respondent are as follows:

Petitioners Docket Year Deficiency

No. ended

Mark and Hudythe Bixby 4085-65 1961 $105,293.68

Reva G. Stone, deceased 5104-65 1961 90,392.04

Dewey D. and Anne A. Stone 5105-65 1961 91,127.76

Philip C.S. Cowan 6221-65 1961 50,386.37

Spencer M. Cowan, Jr. 6222-65 1961 50,386.37

Jack S. and Thelma B. Finn 6223-65 1961 48,943.49

Lillian J. Glazer 6224-65 1961 41,240.96

Sidney A. and Rita J. Govenar 6225-65 1961 34,347.39

Alfred E. and Ruth F. Gutman 6226-65 1961 8,357.66

Myron I. and Katharine W. Jaffe 6227-65 1961 32,889.12

Irving and Ruth S. Mann 6228-65 1961 119,176.14

Milton E. and Evelyn W. Robinson 6229-65 1961 33,835.12

Alford P. Rudnick and Estate of Charlotte Rudnick, deceased 6230-65 1961 50,179.89

Celia E. Stone 6231-65 1961 1,959.06

David G. and Faye G. Stone 6232-65 1961 122,254.62

Hugh D. and Sandra D. Stone 6233-65 1961 110,586.78

Judah M. and Carol T. Stone 6234-65 1961 46,007.25

Stephen A. and Sybil F. Stone 6235-65 1961 134,578.10

Josef E. and Miriam F. Teplow 6236-65 1961 30,102.59

Theodore H. and Charlotte L. Teplow 6237-65 1961 32,302.25

Arthur T. and Etta W. Wasserman 6238-65 1961 37,410.00

Converse Rubber Corp 6239-65 12/30/61 691,699.15

Converse Rubber Corp 5787-66 12/29/62 80,612.64

Tyler Rubber Corp 5788-66 12/29/62 16,556.69

Granite State Rubber Co 5789-66 12/29/62 23,825.23

Page 759 Additions to tax under section 6653(a), I.R.C. 1954, were determined by respondent against the following petitioners:

Petitioners Docket Year Amount

No. ended

Reva G. Stone, deceased 5104-65 1961 $4,519.60

Dewey D. and Anne A. Stone 5105-65 1961 4,556.34

Numerous issues raised in the pleadings have been settled by the parties and can be given effect in the Rule 50 computations. Two major issues, however, remain to be decided. The first major issue is whether the purchase of the assets of Tyer Rubber Co. by Converse Rubber Corp. from the Stone Family Bermuda Trusts was a real transaction in substance serving legitimate business purposes or a sham. Related to this issue are several subsidiary issues, namely, whether Converse Rubber Corp. is entitled to the cost basis which it claimed with respect to the Tyer Rubber Co. assets; whether Converse Rubber Corp. or its subsidiary, Tyer Rubber Corp., is entitled to a deduction for depreciation based on the above basis; and whether Converse Rubber Corp. is entitled to deductions for interest paid or accrued in connection with two series of debentures issued to the Bermuda trusts. Another related issue is whether the purchase price of the Tyer assets must be reallocated. This issue concerns the value to be given guaranteed accounts receivable. If we decide that the purchase transaction was a sham but the debentures nevertheless had some value, we must also determine whether each of the individual petitioners received a taxable constructive dividend.[2] The second major issue is whether certain individual petitioners who purchased so-called private annuities from the Stone Family Bermuda Trusts are subject to tax on all income received by the trusts.[3] The question of how to tax the annual payments, if they are found to be true annuity payments, is not in issue. A final issue concerns additions to tax under section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. Page 760 The individuals named as petitioners are involved in these proceedings either by virtue of the fact that they are beneficiaries of the ‘ simple’ trust which is the sole shareholder of Converse Rubber Corp. or because they purchased ‘ private annuities' from certain foreign situs trusts. All of these individuals resided in Massachusetts at the time of filing their petitions with this Court and all filed their Federal income tax returns for the calendar year in question, 1961, with the district director of internal revenue, Boston, Mass. Tyer Rubber Corp. is an affiliate of Converse Rubber Corp., and its principal office at the time of filing its petition herein was located in Andover, Mass. It filed a separate Federal income tax return in 1962 with the district director of internal revenue, Boston, Mass. Granite State Rubber Co. is likewise an affiliate of Converse Rubber Corp. Its principal office at the time of filing was Malden, Mass.; and it, too, filed its 1962 return with the district director of internal revenue, Boston, Mass. Converse Rubber Corp. (herein called Converse) is a family-run Massachusetts corporation which manufactures rubber and canvas footwear. It had its principal office in Malden, Mass., when it filed its petition herein. For its taxable year ended December 30, 1961, Converse filed with the district director of internal revenue, Boston, Mass., a consolidated Federal income tax return including the following affiliated corporations: Converse Rubber Corp., Granite State Rubber Co., Tyer Rubber Corp., Plastiform Footwear, Inc., and Limerick Manufacturing Co. For the taxable year ended December 29, 1962, Converse and its affiliates filed separate returns. The following persons were officers of Converse throughout calendar years 1960, 1961, and 1962, except as otherwise noted:

President Henry C. Berlin (until his death on Sept. 6, 1961)

Albert H. Wechsler (elected president on Sept. 21, 1961)

General Manager Albert H. Wechsler (until Jan. 23, 1962)

Stephen A. Stone (named general manager on Jan. 23, 1962)

Treasurer Stephen A. Stone

Vice president Albert H. Wechsler (until Sept. 21, 1961)

Vice president and

assistant treasurer Abraham Stone

Vice president and

clerk David G. Stone

Vice president Alford P. Rudnick

Vice president Edward F. Casey

During the same years the following persons were members of Converse's board of directors: Harry K. Stone, Dewey D. Stone, Abraham Stone, Stephen A. Stone, David G. Stone, Irving Mann, Albert H. Wechsler, Hugh D. Stone, Spencer M. Cowan, Edward F. Page 761 Casey, Henry C. Berlin, and Alford P. Rudnick. Henry C. Berlin served as director until his death on Sept. 6, 1966. Alford P. Rudnick was elected to the board on April 30, 1962. All of the outstanding and issued common stock of Converse during the years in question was held under a trust indenture dated November 27, 1946, and created in the name of N. Louis Stone. The trustees of this ‘ simple’ trust were, at the time of its creation, Dewey D. Stone (Louis' brother), Harry K. Stone (Louis' brother), and Stephen A. Stone (Louis' nephew). The trust instrument designates as ‘ life beneficiaries' Reva G. Stone (Harry's wife), Anne A. Stone (Dewey's wife), Celia E. Stone (wife of Joseph Stone, Louis' brother), and James Stone...

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