Altmann v. C.I.R., 010268 FEDTAX, 1162-65

Docket Nº:1162-65.
Opinion Judge:ATKINS, Judge:
Attorney:Eugene F. Roth, for the petitioners. J. Q. Smith, for the respondent.
Case Date:January 02, 1968
Court:United States Tax Court

27 T.C.M. (CCH) 1 (1968)

T.C. Memo. 1968-1




No. 1162-65.

United States Tax Court.

January 2, 1968

Eugene F. Roth, for the petitioners.

J. Q. Smith, for the respondent.


ATKINS, Judge:

Determined deficiencies in income taxes of $7,350.91 for the taxable year 1957, and $4,647.46 for the taxable year 1958.

The issues presented are (1) whether the petitioner, Hans C. Altmann, realized in each year ordinary income, rather than longterm capital gain, as a result of endorsing over to a bank certain notes and receiving a credit to his account of an amount representing the face amount of the notes less a discount, and (2) whether he received constructive dividends on account of automobile and entertainment expenditures made by Bernard Altmann International, Incorporated.


Petitioners are husband and wife, who, at the time of filing the petition, resided at Harrison, Westchester County, New York. They filed joint income tax returns for the taxable years 1957 and 1958 with the district director of internal revenue for the Manhattan District of New York. Hereinafter the husband will be referred to as the petitioner.

In 1953 and prior years the petitioner and his father, Bernard Altmann, owned stock of corporations engaged in the business of manufacturing and selling cashmere products, woolens and worsted goods, and sweaters in the United States and abroad. Such corporations had been purchasing yarn for their domestic operations from other companies and then sending it to their manufacturing facilities in San Antonio, Texas. Although there were a large number of companies in the United States in the business of spinning yarn, there were only about 6 or 7 producing high quality yarn. Since the petitioner and his father had experienced difficulty in obtaining good quality yarn, they decided that they would purchase a plant to produce high quality yarn. They considered about 20 mills as prospective purchases.

In January 1954 they began negotiations with Susquehanna Mills, Incorporated (hereinafter referred to as Susquehanna), regarding the acquisition of its wholly owned subsidiary, High Rock Mills (hereinafter referred to as High Rock). High Rock had been engaged in the spinning and weaving of silk bags, but had not done any business since December 31, 1953. It had net operating losses for its taxable years 1951, 1952, and 1953. The books and records of High Rock showed, as of January 1, 1954, an excess of assets over liabilities of $197,003.78. They showed accounts payable at that time of $393,300.29, of which about $123,000 was payable to Susquehanna and about $270,000 was payable to others. Petitioner and his father were in no way related to Susquehanna, and all of their dealings with that corporation were at arm's length.

On January 15, 1954, the petitioner (acting for himself and his father equally) entered into an agreement with Susquehanna to purchase from it 50,000 shares of common stock of High Rock (being all the outstanding stock of High Rock) and the entire obligations of High Rock to Susquehanna which might exist on the date of closing.[1] The agreement stated that such obligations from High Rock to Susquehanna would be evidenced by unsecured promissory notes as provided in paragraph 4.2(a)(ix) and (x), namely, an unsecured promissory demand note of High Rock to the order of Susquehanna, endorsed without recourse to the order of the petitioner, in the sum of $370,043.14, plus all net advances made by Susquehanna to High Rock from July 31, 1953, to the date of closing, less the sum of $270,000, and another unsecured nonnegotiable promissory note of High Rock to Susquehanna in the sum of $60,000 payable 6 years after the closing date, to be assigned by Susquehanna to the petitioner without recourse (such note to recite that it was subject to offset in the amount of any payment made by High Rock to the petitioner as mortgagee on notes in the amount of $320,000 to be given by High Rock to him). It was provided that Susquehanna would give High Rock a general release as to all its obligations to Susquehanna except those to be evidenced by the above notes. It was further provided that the purchase price to be paid for the stock should be $2,500 and that the purchase price for the existing obligations of High Rock to Susquehanna should be $10,000. In the contract it was recited that as a further consideration for the sale petitioner would loan to High Rock upon the closing date the sum of $270,000 for which High Rock would issue to his order notes in the total amount of $320,000 in registered form or with interest coupons attached, maturing in the amount of $20,000 on February 1, 1955, and in the amount of $50,000 on August 1, and February 1 of each year thereafter until paid, such notes to be secured by a mortgage given by High Rock to him, which would be a first lien upon all the fixed assets of High Rock.

The above contract resulted from weeks of bargaining to fix the price to be paid for the High Rock stock and High Rock's obligations to Susquehanna.

The closing date fixed in the agreement was January 29, 1954. At the closing the petitioner and his father paid $12,500 and there was endorsed over by Susquehanna to them notes executed by High Rock totaling $93,189.33, pursuant to the provisions of paragraph 4.2(a)(ix) of the agreement.

On December 29, 1955, the petitioner and his father each held a demand note of High Rock in the amount of $46,594.67 (or a total of $93,189.33). Pursuant to an agreement of that date between them and High Rock, which recited that the parties desired to ‘ extend the payment of said notes,’ each surrendered his note to High Rock and each received from High Rock 3 non-interest bearing promissory notes, payable to their order, in the amounts of $15,500 due June 30, 1957, $15,500 due June 30, 1958, and $15,594.67 due June 30, 1959.[2]

On March 8, 1957, petitioner endorsed in blank the note payable June 30, 1957, and delivered it to the First National City Bank of New York with...

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