Dougherty v. Comm'r of Internal Revenue, Docket No. 2400-69.
| Decision Date | 18 September 1973 |
| Docket Number | Docket No. 2400-69. |
| Citation | 60 T.C. 917 |
| Parties | ALBERT L. AND CHARLOTTE K. DOUGHERTY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
60 T.C. 917
ALBERT L. AND CHARLOTTE K. DOUGHERTY, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 2400-69.
United States Tax Court
Filed September 18, 1973.
[60 T.C. 917]
Thomas J. Donnelly, Jr., and John A. Hazelwood, for the petitioners.
Robert T. Hollohan, for the respondent.
Held, that a U.S. shareholder of a controlled foreign corporation must include in gross income his pro rata share of such corporation's increase in earnings invested in U.S. property for the taxable year to the extent of the corporation's current and accumulated earnings and profits, including earnings and profits accumulated prior to the effective date of subpart F, I.R.C. 1954. Held, further, there is no constitutional bar to such operation of the statute. Held, further, the taxable year of the controlled foreign corporation herein is determined to be the calendar year for purposes of subpart F. Held, further, the amount of such corporation's increase in earnings invested in U.S. property for the taxable year determined. Held, further, petitioner shareholder made an effective election under sec. 962 to be taxed at corporate rates on the amount includable in his gross income for the taxable year under sec. 951(a)(1)(B), I.R.C. 1954.
TANNENWALD, Judge:1Respondent determined a deficiency of $412,241.87 in petitioners' income tax for 1963. Petitioners contest the inclusion in their gross income for that year of any amount under section 951(a)(1)(B).2
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners are husband and wife whose legal residence was in Paoli, Ind., when they filed their petition in this case. They filed a joint Federal income tax return for the calendar year 19633 with the district director of internal revenue, Chicago, Ill. Charlotte K. Dougherty is a party to this case only because she filed the joint return with her husband. Albert L. Dougherty will hereinafter be referred to as the petitioner.
Petitioner was the president and sole shareholder of Dougherty Overseas, Inc. (hereinafter Liberia). Liberia was a corporation organized on September 12, 1956, under the laws of the Republic of Liberia for the purpose of engaging in the construction business outside the
[60 T.C. 918]
United States. Its annual accounting period was the calendar year. Liberia completed its first and only construction project, the building of a road in Afghanistan, during 1962 and was liquidated on October 26, 1965.
Liberia had no current earnings and profits during 1963. Its accumulated earnings and profits were $1,887,272.75 as of December 31, 1962, and $1,785,868.18 as of December 31, 1963.
Petitioner was also the sole shareholder of A. L. Dougherty Overseas, Inc. (hereinafter Indiana), a corporation organized in June 1952 under the laws of the State of Indiana. Indiana was engaged in the business of constructing roads and airfields within and without the United States. Its taxable year was the fiscal year ending May 31.
During 1963 and for many years previously, petitioner was engaged as a sole proprietor in the business of road construction in the United States under the name of A. L. Dougherty Co. The proprietorship (hereinafter Company) used the calendar year as its annual accounting period.
In addition to his interest in the three Dougherty construction enterprises, petitioner was the president and owned 60 percent of the capital stock of Illinois Basin Oil Association, Inc. (hereinafter IBOA), a corporation organized on June 20, 1960, under the laws of the State of Delaware. Petitioners' son owned 10 percent of the capital stock of IBOA and the remaining 30 percent was owned by unrelated persons. IBOA was engaged in the business of exploring and drilling for petroleum. Its taxable year was the fiscal year ending June 30.
Indiana, Company, and IBOA were indebted to Liberia in the following amounts at the close of 1962 and 1963:
+---------------------------------------+
¦ ¦Dec. 31, 1962 ¦Dec. 31, 1963 ¦
+-------+---------------+---------------¦
¦ ¦ ¦ ¦
+-------+---------------+---------------¦
¦Indiana¦$74,495.22 ¦$91,646.38 ¦
+-------+---------------+---------------¦
¦IBOA ¦62,000.00 ¦536,026.00 ¦
+-------+---------------+---------------¦
¦Company¦203,719.57 ¦35,314.07 ¦
+-------+---------------+---------------¦
¦Total ¦$340,214.79 ¦$662,986.45 ¦
+---------------------------------------+
The following transactions took place between Liberia, Indiana, Company, and IBOA during 1963 and 1964:
1. Indiana.— In May and October of 1963, Liberia loaned Indiana the sum of $17,151.16. None of that indebtedness was repaid by Indiana to Liberia within 1 year from the time it was incurred.
2. Company.— On April 8, 1963, Company repaid in full its then outstanding debt to Liberia ($203,719.57). Between that date and the end of 1963 Liberia made additional loans to Company in the sum of $37,167.07 and Company made repayments to Liberia in the sum of $1,853. During 1964 and within 1 year from the time such indebtedness was incurred, Company repaid Liberia $1,263.31.
[60 T.C. 919]
3. Liberia.— On December 11, 1962, the board of directors of Liberia resolved to make additional loans to IBOA not in excess of $300,000 to be repaid by December 31, 1963, with interest at 4 percent per annum. At that time, Liberia was not actively engaged in business and had idle cash deposited in checking accounts within the United States. The purpose of the proposed loans was to enable IBOA to finance the production of oil on its leasehold (hereinafter referred to as the Lynn lease) in Hopkins County, Ky. It was expected that the loans would be repaid at maturity out of the proceeds of the oil production.
In accordance with the foregoing, Liberia loaned to IBOA the sum of $52,000 on December 30, 1962, $10,000 on December 31, 1962, and further sums aggregating $280,000 between January 2 and March 7, 1963. IBOA gave Liberia its 90-day interest-bearing promissory notes.
Because IBOA needed additional financing for its production on the Lynn lease, Liberia's board of directors on April 5, 1963, authorized additional loans to IBOA not in excess of $250,000 to be repaid by December 31, 1963, with interest at 4 percent per annum. Pursuant to this resolution, Liberia loaned IBOA the additional sum of $199,826 between April 8 and July 15, 1963. IBOA gave Liberia its interest-bearing notes due on or before December 31, 1963.
On October 15, 1963, IBOA made a payment of $5,800 for the account of Liberia, which was credited on Liberia's books against the amounts owed by IBOA.
By July 8, 1963, the oil wells on the Lynn lease proved to be less productive than previously expected. Petitioner had been advised by counsel that Liberia's loans to IBOA should be repaid within 1 year from the time they were incurred. Petitioner decided that IBOA should sell its Lynn lease in order to raise the money for the repayment of the loans from Liberia.
On August 18, 1963, IBOA approached Humble Oil & Refining Co. (hereinafter Humble) with an offer to sell the Lynn lease. Humble expressed its interest and proceeded to make its evaluation of the Lynn lease. IBOA made available to Humble its facilities and data for the purpose of the evaluation, which was completed in October 1963.
At a meeting held in December 1963, Humble offered $450,000 for the Lynn lease. Petitioner, as president of IBOA, demanded $750,000. Petitioner was satisfied that the lease was worth at least $750,000 and that Humble would eventually pay that price. He, therefore, rejected Humble's offer of $450,000 and decided that IBOA should wait for Humble to raise its offer to $750,000. Liberia was also satisfied that IBOA's Lynn lease was worth at least $750,000 and that it would not be prudent business practice to force IBOA to sell at a lower price in order to effect an immediate repayment of Liberia's loans.
[60 T.C. 920]
IBOA's balance sheet as of December 31, 1963, was as follows:
+-------------------------------------------------------------------+
¦Assets: ¦ ¦ ¦
+-------------------------------------------+----------+------------¦
¦Cash ¦$80,859.66¦ ¦
+-------------------------------------------+----------+------------¦
¦Accounts receivable ¦3,790.65 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Deferred expenses ¦4,594.74 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Total current assets ¦ ¦$169,245.05 ¦
+-------------------------------------------+----------+------------¦
¦Investment in nonproducing leases ¦71,854.82 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Leasehold estates, producing leases ¦3,492.33 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Equipment (depreciated) on producing leases¦157,051.00¦ ¦
+-------------------------------------------+----------+------------¦
¦Office furniture and fixtures ¦984.04 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Field equipment (depreciated) ¦3,294.46 ¦ ¦
+-------------------------------------------+----------+------------¦
¦ ¦ ¦ ¦
+-------------------------------------------+----------+------------¦
¦Total other assets ¦ ¦236,676.65 ¦
+-------------------------------------------+----------+------------¦
¦Total assets ¦ ¦405,921.70 ¦
+-------------------------------------------+----------+------------¦
¦ ¦ ¦ ¦
+-------------------------------------------+----------+------------¦
¦Liabilities: ¦ ¦ ¦
+-------------------------------------------+----------+------------¦
¦Accounts payable ¦9,827.69 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Account payable—A. L. Dougherty Co ¦96,285.48 ¦ ¦
+-------------------------------------------+----------+------------¦
¦Account payable—A. L. Dougherty Overseas, ¦ ¦ ¦
+-------------------------------------------+----------+------------¦
¦Inc. (Liberia)...To continue reading
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