Albert v. C.I.R., 121880 FEDTAX, 5808-77
|Opinion Judge:||WILBUR, Judge:|
|Party Name:||KENNETH D. ALBERT and JEWEL B. ALBERT, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Kenneth D. Albert, pro se. Michael R. Moore, for the respondent.|
|Case Date:||December 18, 1980|
|Court:||United States Tax Court|
MEMORANDUM FINDINGS OF FACT AND OPINION
The Commissioner determined deficiencies in petitioners' Federal income taxes for the taxable years 1973 and 1974 in the amounts of $2,057.08 and $490.85, respectively. Respondent having conceded certain adjustments, the following issues remain for our decision:
(1) Whether, for purposes of section 1374(a) and section 1374(c)(2), petitioners are entitled to increase their basis in their Merrimack Marine, Inc., (hereinafter Merrimack) stock as a result of their personally guaranteeing a portion of a bank loan made to Merrimack, when petitioners were never called upon to repay any portion of this loan as a result of their guaranty.
(2) What petitioners' basis in Merrimack is, as of the end of calendar years 1972 and 1973, for purposes of determining the amount of small business corporation losses which could be deducted by petitioners in respect of their ownership interest in Merrimack.
(3) Whether a loan of $1,074 made by petitioners to Merrimack in 1973 was properly deducted on their 1973 return as a miscellaneous itemized deduction, or whether such loan constituted an indebtedness of the corporation to petitioners which should be treated as an adjustment to their basis in Merrimack for purposes of section 1374(c)(2)(B).
(4) Whether petitioners' January 1974 loan of an outboard motor, which cost $1,608, and was placed on a boat manufactured by Merrimack and for which petitioners were not reimbursed, gave rise to a business bad debt deductible under section 166(a), or created an indebtedness of the corporation to petitioners under section 1374(c)(2)(B) increasing petitioners' basis in Merrimack; or whether, on the other hand, such unreimbursed loan gave rise to a nonbusiness bad debt under section 166(d).
(5) Whether petitioners' sale of their Merrimack stock in June 1973, qualified for installment sales treatment under section 453.
(6) Whether petitioners derived a long-term capital gain in the amount of $10,710 in 1973 as a result of their sale of Merrimack stock.
(7) Whether the loss sustained by petitioners in 1974 as a result of the sale of Merrimack stock in 1973 was properly deducted on their 1974 return as a net operating loss sustained by a small business corporation, or whether it should have been deducted as a long-term capital loss.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits are incorporated herein by this reference.
Petitioners Kenneth D. and Jewel B. Albert are husband and wife whose legal residence, at the time they filed their petition in this case, was Yorktown, Virginia. Petitioners timely filed joint Federal income tax returns for taxable years 1973 and 1974 with the Internal Revenue Service Center, Memphis, Tennessee.
Merrimack was incorporated on August 5, 1971, in Virginia. Merrimack's operations were based in Newport News, Virginia, until January 1973, when the corporation moved its operation to Greenville, North Carolina. During its entire period of existence, Merrimack was a Subchapter S corporation and was engaged in the business of building small pleasure boats in the 16 to 21-foot class, buying engines for these boats, and marketing the finished product.
From August 1972 until June 1, 1973, petitioner Kenneth Albert was vice president and director of Merrimack. He received no compensation in his capacity as a director or an officer of Merrimack. Petitioner Jewel Albert was bookkeeper for the company, and she, too, received no compensation for her work.
In August of 1972, 1,430 shares of stock in the corporation were issued to the petitioners for $10,000. In January of 1973, 100 more shares were issued to petitioners for $710. Also, in January of 1973, all of the stock was recalled because the authorized sale price of the stock was $5 per share while the stock had been sold for approximately $7 per share. Consequently, petitioners were issued 2,142 shares of Merrimack stock at $5 per share to reflect a total investment of $10,710. The total number of shares of Merrimack stock which were issued and outstanding as of January 1973 at $5 per share, was 9,959.
In 1972, petitioners loaned Merrimack $7,987 for payroll purposes. This loan was repaid by Merrimack in June 1978. In 1973, petitioners loaned Merrimack $1,074 for payroll and miscellaneous expenses. This loan was never repaid, and petitioners claimed the amount of this loan as a miscellaneous itemized deduction on line 33 of Schedule A of their 1973 income tax return. Respondent disallowed this deduction.
In January 1974 petitioners purchased an outboard engine at a cost of $1,608 to be used in connection with the display of a Merrimack boat in a boat show. This expense was not reimbursed by Merrimack. Petitioners claimed this expense as a miscellaneous itemized deduction on line 33 of Schedule A of their 1974 income tax return. Respondent disallowed this deduction.
On January 15, 1973, Merrimack borrowed $100,000 from the North Carolina National Bank. This loan was guaranteed by the Small Business Administration. Petitioners guaranteed $35,000 of this $100,000 amount, and also pledged three parcels of real property in Florida as collateral.
The deeds to these parcels of real property were delivered to a Mr. Hendricks, an officer of the North Carolina National Bank, in May 1973. To effectuate the pledge, petitioners executed a Deed of Trust on April 10, 1973 in favor of the North Carolina National Bank. The hypothecation agreement was canceled on June 29, 1973. Although the Deed of Trust was canceled on August 28, 1973, the title to the property was not returned to petitioners. In May of 1974, the property was sold because the real estate taxes were unpaid. In 1975, petitioners redeemed this property.
In 1973, Merrimack executed a " line agreement" (a floor plan financing arrangement) with a $75,000 maximum line of credit with North Carolina National Bank. Petitioners and three other officers of Merrimack guaranteed this loan. Petitioners personally guaranteed $18,750 of this loan, one quarter of the $75,000 loan amount.
While petitioners acted as guarantors for a portion of both the Small Business Administration loan and the $75,000 " line agreement" with North Carolina National Bank, they were never called upon as guarantors to satisfy any of the liabilities of Merrimack as a result of those loans. Nevertheless, in computing their basis in their Merrimack stock, petitioners increased their basis by the amount of the $18,750 portion of the " line agreement" which they had personally guaranteed.
On June 1, 1973, petitioners sold their 2,142 shares of stock in Merrimack to Wayland J. and Marilyn S. Sermons. In consideration for the shares of stock, the Sermons agreed to pay the petitioners the sum of $10,710. In addition to this sum, the Sermons agreed to indemnify petitioners in regard to their $35,000 guarantee of the Small Business Administration loan. The Sermons further agreed to indemnify petitioners for their $18,750 portion of the " line agreement" loan.
In respect of the sale of Merrimack stock, the Sermons paid petitioners $4,308.64 in November 1973, and an additional payment of $5,710 in April 1974 for a total of $10,018.64. Petitioners received no further payments in respect of this sale. The $10,018.64 amount received by petitioners was $691.76 less than the agreed upon $10,710 sales price. In 1974, petitioners determined that the $691.76 due from the Sermons was uncollectible. Petitioners subsequently claimed this difference as a small business loss, in the amount of $710, on line 31 of their 1974 income tax return. Respondent disallowed petitioners' claim of this deduction as a small business loss.
During 1972, Merrimack sustained a loss as a result of its business operations. Petitioners deducted their aliquot portion of this loss, and respondent allowed this deduction. However, during 1973, when Merrimack again sustained a loss in its business operations, and petitioners claimed a deduction of $8,467 in 1973 as their aliquot portion of this loss, respondent allowed $7,231 of this loss and disallowed the balance.
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