89 T.C. 816 (1987), 14330-85, Segel v. C.I.R.

Docket Nº:14330-85, 17211-85, 17212-85, 17213-85, 17214-85.
Citation:89 T.C. 816
Opinion Judge:WELLS, JUDGE:
Attorney:Mark S. Blaskey, Bennett G. Picker, and Peter R. Spirgel, for the petitioners. Eugene J. Wein and James P. Clancy, for the respondent.
Case Date:October 21, 1987
Court:United States Tax Court

Page 816

89 T.C. 816 (1987)




Nos. 14330-85, 17211-85, 17212-85, 17213-85, 17214-85.

United States Tax Court

October 21, 1987

Ps owned 100 percent of the stock of A, a subchapter S corporation. From time to time after the initial incorporation, Ps made payments to A in accordance with their proportionate stock interests. The payments were not evidenced by any written agreement, were not secured, were not repayable at any specific date or dates, and were not transferred under any understanding to pay interest. No interest in fact was ever paid on the payments. The payments were denominated as ‘ Loans from Shareholders‘ in filings with the state and Federal tax authorities and in the corporation's general accounting records. On unaudited financial statements prepared by an accounting firm, the payments were treated inconsistently - both as Loans from Shareholders and as Capital Contributions. HELD, under the objective test of Fin Hay Realty Co. v. United States, 398 F.2 d 694 (3d Cir. 1968), the payments constitute equity contributions because they were transferred under terms far more speculative than those an outside lender would require.

Page 817

During 1977 and 1978, A also disposed of section 38 property on which investment tax credits had been ‘ passed through‘ to and carried back in full by the shareholders, so that Ps had no credits remaining for carryover or carryback. The tax credits had been carried back to offset Ps' individual income tax liabilities during the tax years of 1972 through 1975. During certain of the years in which Ps used the credits to lower their tax, Ps also were subject to the add-on minimum tax of section 56 then in effect. As a result of taking the credits, Ps' minimum tax liabilities increased by as much as 10 percent of the investment credits taken by them, so that their net tax liabilities decreased by only 90 percent of the investment credits used. HELD, Ps have not shown any authority which would allow them to recapture upon early disposition of section 38 property less than the full amounts of the investment credits originally taken by them on such section 38 property. HELD FURTHER, Ps have shown no authority under which they are entitled to a decrease in minimum tax for that portion of the minimum tax for which they would not have been liable if the recaptured investment credits had never been taken. Sections 47(a), 58(h), and 111, as in effect during the years at issue, provide no statutory basis for a reduction in minimum tax or of the quantum of investment credits that must be recaptured.

Mark S. Blaskey, Bennett G. Picker, and Peter R. Spirgel, for the petitioners.

Eugene J. Wein and James P. Clancy, for the respondent.



By statutory notices of deficiency, respondent determined deficiencies in petitioners' income taxes for the taxable years as follows:

Docket no. Petitioner Year Deficiency
14330-85 Joseph M. and 1972 $29,363.00
Doris G. Segel 1974 40,570.00
1975 56,080.00
1977 5,832.00
1978 171,562.00
17211-85 Alan J. Segel 1972 7,497.55
1973 17,238.73
1975 5,677.00
1978 22,082.00
17212-85 Marvin L. Segel 1972 3,172.52
1974 30,371.00
1975 9,526.00
Marvin L. and 1977 1,550.00
Rhonda P. Segel[2] 1978 57,234.00
17213-85 Fannie B. Segel 1975 31.00
1977 310.00
1978 11,119.00
1979[3] 67.00
17214-85 Michael D. and 1978 25,402.00
Sandy Stern
Page 818 The issues for decision are (1) whether funds paid by petitioners to Presidential Airways Corporation, a subchapter S corporation, (hereinafter ‘ Presidential‘ ) at the time Presidential was established and from time to time thereafter, should be regarded as equity investments rather than loans for Federal income tax purposes; (2) if the payments are loans, whether petitioners recognized taxable income in 1977 and 1978 as a result of distributions they received in those years from Presidential; and (3) whether investment tax credits must be recaptured in full in 1977 and 1978, even though the use of the credits caused the imposition of an increased minimum tax in the years the investment tax credits were used. GENERAL FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation and exhibits thereto are incorporated herein by reference. Page 819 Petitioners Joseph M. and Doris G. Segel are husband and wife who resided in Merion, Pennsylvania, at the time they filed their petition. They filed joint Federal income tax returns for the taxable years 1972, 1974, 1975, 1977, and 1978. Petitioner Joseph Segel holds a bachelor of science degree from the Wharton School of Business Administration of the University of Pennsylvania. His major was in marketing. He also attended graduate business school at Wharton for two years, but did not receive a degree because he never wrote his thesis. Petitioner Joseph Segel is an experienced, knowledgeable businessman and has been involved with several business ventures, one of which traded under the name ‘ Franklin Mint.‘ He founded Franklin Mint in 1964, was responsible for taking the company public shortly thereafter, and retired from his position as Chairman of the Board in 1973. After retiring from Franklin Mint, Joseph Segel was involved primarily in public service work with the United Nations as Chairman of the Board of Governors of the United Nations Association of the United States and as a presidential appointee to the United States delegation to the United Nations General Assembly. Petitioner Alan J. Segel resided in Merion, Pennsylvania, at the time he filed his petition. Petitioner Alan Segel is the son of petitioners Joseph and Doris Segel. Petitioners Marvin L. and Rhonda P. Segel were husband and wife who resided in Cherry Hill, New Jersey, at the time they filed their petition. They filed joint Federal income tax returns for 1977 and 1978. Petitioner Marvin Segel filed Federal income tax returns as a single individual for the years 1972, 1974, and 1975. Petitioner Marvin Segel is the son of petitioner Joseph Segel. Petitioner Fannie B. Segel resided in Philadelphia, Pennsylvania, at the time she filed her petition. Petitioner Fannie Segel is the mother of petitioner Joseph Segel. Petitioners Michael D. and Sandy Stern are husband and wife who resided in Wynnewood, Pennsylvania, at the time they filed their petition. They filed a joint Federal income tax return for 1978. Petitioner Sandy Stern is the daughter Page 820 of petitioner Doris Segel and the stepdaughter of petitioner Joseph Segel. Respondent issued a statutory notice of deficiency to each of the petitioners setting forth determined deficiencies in income tax liability for the years and in the amounts shown above. Presidential was organized under the laws of Pennsylvania on or about September 2, 1975. It was established to operate a new charter aircraft service to serve the eastern seaboard. On or about September 11, 1975, the following individuals (hereinafter the ‘ shareholders‘ ) acquired the following interests in Presidential: Joseph Segel, 15 shares, or 30 percent; Doris Segel, 15 shares, or 30 percent; Marvin Segel, 10 shares, or 20 percent; Sandy Stern, 4 shares or 8 percent; Joseph Segel, custodian for Alan Segel, 4 shares, or 8 percent; and Fannie Segel, 2 shares, or 4 percent. Petitioner Joseph Segel was Chairman of the Board and President of Presidential from its inception in September of 1975 until petitioners later sold all their interests in Presidential. On or about September 11, 1975, Presidential filed a valid election to be treated as a small business corporation under subchapter S of the Internal Revenue Code. [4] On or about September 18, 1975, the following petitioners [5] made the following payments to acquire their respective stock interests in Presidential (hereinafter referred to as the ‘ initial capitalization‘ ):
Joseph M. Segel $360,000
Doris G. Segel 360,000
Marvin L. Segel 240,000
Sandy Stern 96,000
Alan J. Segel 96,000
Fannie B. Segel 48,000
Total 1,200,000
Page 821 Also on or about September 18, 1975, the shareholders made additional transfers of funds to Presidential in the aggregate amount of $2,035,000 in direct proportion to their stock interests. The shareholders made further transfers of funds to Presidential in proportion to their stockholdings in the following aggregate amounts:
Dec. 19__ Amount
1975 $2,220,000
1976 1,675,000
1977 646,000
1978 435,000
(The foregoing transfers of funds to Presidential in excess of the initial capitalization are hereinafter referred to as the ‘ payments‘ .) There was no written agreement between Presidential and the shareholders to evidence Presidential's intent to repay the payments, or to evidence any expectation of the shareholders that Presidential would repay the payments in any fixed manner or at any fixed date. The shareholders received no security for the payments. Presidential never paid interest to the shareholders with respect to the payments. Presidential filed a Small Business Corporation Income Tax Return, Form 1120S, for the period September 11, 1975, through December 31, 1975, and for calendar year periods 1976, 1977, and 1978. All four returns showed a loss for Presidential. Presidential's losses for such years were allocated to the shareholders and reported on the shareholders' individual income tax returns in accordance with their...

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