Adams v. Comm'r of Internal Revenue , Docket No. 12238-78.
| Decision Date | 03 April 1980 |
| Docket Number | Docket No. 12238-78. |
| Citation | 74 T.C. 4 |
| Parties | MARVIN R. ADAMS, JR., and JEANNE H. ADAMS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A small business corporation issued all its stock to a third party. One and one-half years later, the corporation repurchased all its stock and then immediately resold some stock to petitioner's brother who caused the corporation to retire the remaining stock to the status of authorized but unissued stock and to adopt a sec. 1244 plan. Three weeks later, petitioners contracted to purchase a portion of the remaining stock. Five months later, they made final payment on the stock and the corporation issued the stock to them. They have held the stock continuously since that date. Held, petitioners have continuously held the stock from the date of issuance within the meaning of sec. 1.1244(a)-1(b), Income Tax Regs. Held, further, petitioners are not entitled to ordinary loss treatment under sec. 1244, I.R.C. 1954, because they failed to prove that the corporation received any new funds by virtue of the stock sale. Joseph C. Ferrell, for the petitioners.
Avery B. Cousins III, for the respondent.
Respondent determined a deficiency of $22,995 in petitioners' Federal income tax for the year 1975.
At issue is whether petitioners can treat the loss on their corporate stock as an ordinary loss under section 12441 when the stock had been previously issued to a third party, later repurchased by the corporation which returned it to the status of authorized but unissued stock, and then resold it to petitioners.
This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by this reference. The pertinent facts are set forth below.
Marvin R. Adams, Jr., and Jeanne H. Adams (petitioners) resided in Bradenton, Fla., at the time they filed their petition in this case. They filed a joint Federal income tax return for 1975 with the Internal Revenue Service Center, southeast region, Chamblee, Ga.
In early 1973, W. Carroll DuBose (DuBose) helped found Adams Plumbing Co., Inc. (Adams Plumbing), whose offices are located in Margate, Fla. Adams Plumbing was incorporated in Florida on July 25, 1973. It had an authorized capital of 100 shares of common stock, with a par value of $1 per share. The corporate minutes show that the stock was issued to DuBose on July 25, 1973. The first officers were William R. Adams (brother of petitioner Marvin R. Adams, Jr.), president, and J. Lucille Adams, secretary.
On August 5, 1974, DuBose was elected chairman of the board of directors of Adams Plumbing, and William R. Adams was elected a director. As of that date, William R. Adams was still the president of the corporation, and then also became vice president; Francine Adams was the secretary-treasurer.
On February 10, 1975, Adams Plumbing repurchased the 100 shares from DuBose. On the same day, William R. Adams purchased 10 of the 100 shares of Adams Plumbing.
On February 11, 1975, the corporation, pursuant to State law, retired its remaining 90 repurchased shares to the status of authorized but unissued stock. In addition, a written plan complying with the procedural requirements of section 1244 was adopted to issue these 90 shares as section 1244 stock. The corporation at that time was a small business corporation as defined in section 1244.
On March 1, 1975, Adams Plumbing and petitioners (denominated Rodney J. Adams and Jean Adams in the agreement) entered into a sales agreement2 for 80 of the 90 shares. Pursuant to the terms of the agreement, 80 shares of the corporate stock were issued to petitioners in their joint names on August 1, 1975. They paid $120,000 for the 80 shares. The 80 shares have been held continuously since August 1, 1975.
On August 9, 1975, the remaining 10 shares were sold to Richard F. Wynkoop and his wife, Marlene. Richard Wynkoop was a friend of petitioner Marvin R. Adams, Jr.
An outline of the stock issued by Adams Plumbing is as follows:
+-------------------------------------------------------------------------+
¦Stock ¦ ¦ ¦ ¦
+-------------+-----------+------------------------------------+----------¦
¦certificate ¦Number of ¦ ¦Date of ¦
+-------------+-----------+------------------------------------+----------¦
¦No.- ¦shares ¦Recipient ¦transfer ¦
+-------------+-----------+------------------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+-------------+-----------+------------------------------------+----------¦
¦1 ¦100 ¦W. Carroll DuBose1 ¦7/25/73 ¦
+-------------+-----------+------------------------------------+----------¦
¦2 ¦voided ¦--- ¦--- ¦
+-------------+-----------+------------------------------------+----------¦
¦3 ¦voided ¦--- ¦--- ¦
+-------------+-----------+------------------------------------+----------¦
¦4 ¦10 ¦William R. Adams ¦2/10/75 ¦
+-------------+-----------+------------------------------------+----------¦
¦5 ¦voided ¦--- ¦--- ¦
+-------------+-----------+------------------------------------+----------¦
¦6 ¦10 ¦Richard R. and Marlene B. Wynkoop ¦8/9/75 ¦
+-------------+-----------+------------------------------------+----------¦
¦7 ¦60 ¦Rodney Adams, Jr., and Jean Adams3 ¦8/1/75 ¦
+-------------+-----------+------------------------------------+----------¦
¦82 ¦20 ¦Rodney Adams, Jr., and Jean Adams3 ¦8/1/75 ¦
+-------------+-----------+------------------------------------+----------¦
¦9 ¦20 ¦Rodney Adams, Jr., and Jean Adams3 ¦8/1/75 ¦
+-------------------------------------------------------------------------+
The common stock of Adams Plumbing became worthless in the year 1975. On their joint Federal income tax return for 1975, the petitioners claimed a loss on their investment in Adams Plumbing. They claimed $50,000 as an ordinary loss under the provisions of section 1244, and an additional $70,000 as a capital loss on worthless securities on the Schedule D attached to the return.
On April 20, 1976, Francine Adams tendered her resignation as secretary-treasurer of Adams Plumbing, and William R. Adams tendered his resignation as president, vice president, and director of the corporation.
Section 1244 provided during the year involved herein that in the case of an individual, a loss on “section 1244 stock” issued to such individual shall be treated as an ordinary loss to the extent of $50,000 for a husband and wife filing a joint return.3
One of the elements of the definition of section 1244 stock is that the stock must be issued by the corporation, pursuant to a plan, for money or other property other than stock and securities. Sec. 1244(c)(1)(D). The regulations promulgated under section 1244 provide that in order to claim a deduction under section 1244 the individual “must have continuously held the stock from the date of issuance.” Furthermore, an individual who acquires stock from a shareholder by purchase, gift, devise, or in any other manner is not entitled to an ordinary loss under section 1244 with respect to such stock. 4
The stipulation of facts and the attached exhibits show that petitioners purchased common stock from Adams Plumbing, a corporation qualified as a small business corporation under section 1244. The corporation had initially sold all of its 100 authorized shares of common stock to DuBose in 1973. On February 10, 1975, the corporation repurchased the 100 shares from DuBose, and then sold 10 of the 100 shares to William R. Adams. The remaining 90 shares were retired to the status of authorized but unissued stock.5 On the next day, February 11, 1975, the corporation adopted a written plan under section 1244 to issue the 90 shares.
On March 1, 1975, petitioners contracted to buy 80 shares of the corporation's common stock with the consideration to be paid before December 31, 1975. The purchase contract provided that the parties agreed that Marvin's brother, William R. Adams, was president of the corporation, managed all operations, and that the petitioners' stock was to be voted exclusively by William R. Adams on all matters under any and all conditions.
On August 1, 1975, the corporation issued two certificates of stock to petitioners pursuant to the contract: one certificate for 60 shares and the other for 20 shares. Petitioners held these shares in their joint names continuously from August 1, 1975. The stock became worthless in December 1975.
On these facts, the petitioners argue that they are entitled to ordinary loss treatment under section 1244 on their stock because section 1244(a), section 1244(c)(1)(D), and section 1.1244(a)-1(b), Income Tax Regs., state only that the stock must be issued to an individual and such individual must hold the stock continuously from the date of issuance. Petitioners contend that they have in fact held stock issued by the corporation continuously from the date of issuance to the date of loss. They argue that it is irrelevant that DuBose held all the stock of the corporation prior to its resale back to the corporation and that the corporation retired the stock from treasury stock into authorized but unissued stock.
Because neither the Internal Revenue Code nor the regulations expressly prohibit, or even address, shares which were previously issued to a third party, then reacquired by the corporation, and retired to the status of authorized but issued, from being eligible for section 1244...
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