B. Forman Company v. CIR
| Decision Date | 10 January 1972 |
| Docket Number | 35839,71-1026,Dockets 35434,No. 768-771,71-1027.,768-771 |
| Parties | B. FORMAN COMPANY, Inc., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. McCURDY & COMPANY, Inc., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. B. FORMAN COMPANY, Inc., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. McCURDY & COMPANY, Inc., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
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Ellsworth A. Van Graafeiland and Peter L. Faber, Rochester, N. Y. (Wiser, Shaw, Freeman, Van Graafeiland, Harter & Secrest, Richard B. Secrest and William M. Colby, Rochester, N. Y., of counsel), for taxpayers.
Stephen Schwarz, Atty., Tax Div. (Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks and Harry Baum, Attys., Tax Div., Dept. of Justice, Washington, D. C., of counsel), for the Commissioner.
Before CLARK, Associate Justice,* SMITH, Circuit Judge, and ZAVATT, District Judge.**
These are cross-appeals from a decision of the Tax Court, 54 T.C. 913 (1970), holding (1) that 26 U.S.C. § 482 () did not authorize the Commissioner to allocate to B. Forman Co., Inc. (Forman) and McCurdy & Co., Inc. (McCurdy) (both referred to herein as taxpayers) interest income attributable to interest free loans made by the taxpayers to Midtown Holdings Corp. (Midtown), because of the absence of the requisite § 482 control of Midtown by the taxpayers; and (2) that annual payments of $75,000.00 each made by taxpayers to Midtown were not ordinary and necessary business expenses deductible under 26 U.S.C. § 162. The Commissioner appeals from the first of these holdings; the taxpayers appeal from the second. We reverse the decision of the Tax Court as to the first and affirm as to the second of these holdings.
These consolidated cases involve the corporate income tax liability of Forman and of McCurdy for the fiscal years 1965, 1966 and 1967. Having disallowed the annual payments of $75,000.00 each year by the taxpayers to Midtown and having allocated as income to each taxpayer interest at the rate of 5% per annum on a $1,000,000.00 loan made by each taxpayer to Midtown prior to the fiscal years in question, the Commissioner assessed tax deficiencies against each taxpayer (now in dispute) as follows:
Forman McCurdy
1965 $ 62,425.55 $ 59,181.99
1966 58,775.14 59,643.92
1967 59,692.00 62,343.56
___________ ___________
Totals $180,892.69 $181,169.47
Following receipt of the Commissioner's notices of these deficiencies and on January 31, 1969, each taxpayer filed a petition with the Tax Court for a review of the respective tax deficiency determinations of the Commissioner, both of which petitions were consolidated.
For several years prior to and as of the date of incorporation of Midtown, McCurdy (a New York corporation since 1901) operated a retail general department store at 285 Main Street East, Rochester, New York and Forman (a New York corporation since 1912) operated a retail department store, specializing in men's and women's apparel, at 46 Clinton Avenue South, Rochester, New York. All of the stock of McCurdy was owned by or in behalf of members of the McCurdy family. All of the stock of Forman was owned by or in behalf of members of the Forman family. McCurdy and Forman had no common shareholders, directors or officers. Both corporations were competitors.
In an effort to stem declining incomes, McCurdy and Forman caused Midtown to be formed in 1958. On March 23, 1959 they entered into an agreement with reference to their participation in the building and development of a midtown shopping center in Rochester which would adjoin the rear entrances to their respective stores. By that time the Board of Directors and officers of Midtown consisted of the following:
Relationship to McCurdy
and Forman
Gilbert J. C. McCurdy (President — Chairman of the Board of
and Chairman of Board of Directors and President of McCurdy
Directors of Midtown)
Gordon W. McCurdy (Secretary — Vice-Chairman of the Board
and a Director of Midtown) of Directors and Senior
Vice-President of McCurdy
Maurice R. Forman (Vice-President — Chairman of the Board of
and a Director of Midtown) Directors and President of Forman
Fred Forman (Treasurer and a — Member of the Board of
Director of Midtown) Directors and Senior Vice-President
of Forman
Lynn Johnston (Vice-President and
General Manager of
Midtown)
It would appear from that agreement that when, in 1958, McCurdy and Forman decided to form Midtown and erect a shopping center in downtown Rochester, they each entered into lease agreements (with options to purchase) with the owners of the property on which they contemplated the construction of the shopping center. These properties are described in the appendices to the agreement of March 23, 1959. In and by that agreement McCurdy and Forman agreed to assign and transfer to Midtown their respective interests in these leases and options and to convey title to any such property already vested.
This agreement also provided for the control of Midtown by McCurdy and Forman by requiring each party thereto to vote its respective Midtown stock so as to provide for a Board of Directors consisting of three Directors designated by the Board of Directors of McCurdy and three Directors designated by the Board of Directors of Forman. At the request of either McCurdy or Forman, each party to the agreement undertook to vote its Midtown stock for a seventh Director. In the event they were unable to agree upon the seventh Director, McCurdy and Forman were to designate their respective representatives who would designate the seventh Director to be elected "by the parties hereto . ." In the event that these representatives were unable to agree upon a seventh Director, a Justice of the Appellate Division of the Supreme Court, Fourth Judicial Department, was to act with the two representatives and the seventh Director of Midtown was then to be designated by majority vote of the Justice and the two representatives of the parties.
The agreement also limited the right of the parties to dispose of their Midtown stock to detailed conditions set forth therein.
Although the agreement provided for the designation of three Midtown Directors each by the parties, there were only four. During all of the relevant times the officers and directors of Midtown were:
President and Director Gilbert J. C. McCurdy
Vice President and Director Maurice R. Forman
Secretary and Director Gordon W. McCurdy
Treasurer and Director Fred Forman (until his death)
Robert Aex (after Fred Forman's death)
Aex represented Forman's interests
Vice President and Lynn Johnston (to April 1, 1963)
General Manager
Angelo Chiarella (from May 27, 1963 on)
The shopping center, completed and opened for business in 1962, consisted of an eighteen story building, a four story building (adjoining the Mall), and a three level underground parking garage. Each taxpayer initially invested a total of $1,000,000.00 in return for Midtown stock. The original estimated cost of the shopping center was $8,000,000.00. The actual cost exceeded $18,000,000.00.
Construction commenced in 1959. The record does not reveal all of the financing for this project. It does show that Midtown entered into a building loan agreement with Lincoln Rochester Trust Company (Lincoln), dated April 18,...
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