Barbourville Brick Co. v. Comm'r of Internal Revenue, Docket No. 79558.
| Decision Date | 09 October 1961 |
| Docket Number | Docket No. 79558. |
| Parties | THE BARBOURVILLE BRICK COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
D.Paul Alagia, Jr., Esq., for the petitioner.
Bart A. Brown, Jr., Esq., for the respondent.
Payment by petitioner corporation to its majority stockholder, the widow of its deceased president, pursuant to corporate resolution adopted after his death, held, on the facts, to be a dividend not deductible by petitioner.
This proceeding involves a deficiency in Federal income tax for 1954 in the amount of $1,530. The issue is whether certain payments to the widow of the deceased president of petitioner are deductible under the provisions of section 162(a) or section 404(a), I.R.C. 1954.
All the facts have been stipulated. They are so found and are incorporated herein by this reference.
The Barbourville Brick Company was incorporated under the laws of the Commonwealth of Kentucky in 1936 for the purpose of producing structural clay products and selling all of the clay it mined in the form of burnt brick. Its principal office and place of business was in Barbourville, Kentucky. Its Federal income tax return for the year 1954 was filed with the district director of internal revenue, Louisville, Kentucky.
Petitioner regularly kept its books and records and reported its income for Federal income tax purposes on an accrual method of accounting and filed its Federal income tax return on a calendar year basis.
From January 1941 until his death on July 2, 1954, J. R. Bacon continuously held the office of president of petitioner and, throughout these years, assumed the primary and full responsibility for the management and operation of petitioner's business. On July 2, 1954, the only members of J. R. Bacon's immediate family were his wife, Avanelle E. Bacon, his two sons, Richard R. and Barry W. Bacon, and his father, D. G. Bacon. None of these was qualified or in a position to assume the management and responsibility of the operation of petitioner.
Immediately after the death of J. R. Bacon on July 2, 1954, the capital stock of petitioner consisted of 180 shares of common stock which was held as follows:
+-----------------------------------------------------------------------------+
¦ ¦Number ¦
+-----------------------------------------------------------------+-----------¦
¦Shareholder ¦of shares ¦
+-----------------------------------------------------------------+-----------¦
¦Estate of J. R. Bacon, Avanelle E. Bacon, administratrix ¦63 ¦
+-----------------------------------------------------------------+-----------¦
¦Avanelle E. Bacon ¦32 ¦
+-----------------------------------------------------------------+-----------¦
¦Richard R. Bacon (son of J. R. and Avanelle E. Bacon), guardian, ¦38 ¦
¦Avanelle E. Bacon ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦Barry W. Bacon (son of J. R. and Avanelle E. Bacon), guardian, ¦35 ¦
¦Avanelle E. Bacon ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦D. G. Bacon (father of J. R. Bacon) ¦12 ¦
+-----------------------------------------------------------------+-----------¦
¦ ¦--- ¦
+-----------------------------------------------------------------+-----------¦
¦ ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦Total ¦180 ¦
+-----------------------------------------------------------------------------+
On August 20, 1954, a meeting of petitioner's board of directors was held. According to the minutes of this meeting Avanelle E. Bacon, D. G. Bacon, and R. T. Baker were present. The minutes state as follows:
A discussion was had with respect to the services which had been rendered to the corporation by Mr. J. R. Bacon as its President during the past years and until his death July 2, 1954, and attention was called to the fact that there had never been any employment contract between Mr. Bacon and the corporation or any provision for any death benefits to be paid to his widow in case of his death. Mrs. Avanelle E. Bacon discussed the standards of living, health and general welfare of his family which had been established by Mr. Bacon, and her need for obtaining funds, preferably a fixed income, with which to maintain the household and carry on the established standards of living for her family. After a discussion of these matters and upon motion made, seconded and carried, the following resolution was adopted:
RESOLVED: That in recognition of the financial needs of Avanelle E. Bacon (widow of J. R. Bacon, deceased), and in order to give financial security for her to maintain her standard of living and general welfare, voluntary payments are hereby authorized to be made by this corporation to the widow of J. R. Bacon in an amount equal to her late husband's monthly salary of $850.00 per month, beginning with the month of July, 1954, and to be continued for a period of six months from date of death of her late husband, unless changed by order of this Board of Directors.
Pursuant to the resolutions passed by petitioner's board of directors on August 20, 1954, petitioner, on each of the dates October 13, 1954, and January 17, 1955, made a payment of $2,550, or a total of $5,100, to Avanelle.
The amount of $5,100 was recorded on petitioner's books and records as an expense for its taxable year 1954 and was claimed as a deduction on petitioner's income tax return for that year. The explanation on the journal entry reads in part as follows: ‘To record continuation of Mr. Bacon's salary to Mrs. Bacon * * * .’
Petitioner did not have an employment contract with J. R. Bacon, nor did the petitioner prior to August 20, 1954, have any provision for payment of benefits to his widow in case of his death.
The minutes of the meeting of petitioner's board of directors held on August 20,1954, record that Avanelle E. Bacon reported to the board that she had been approached by certain parties who were interested in purchasing the petitioner's inventory, machinery, and equipment, and its lease with Union College for $15,000. The balance sheet made a part of the petitioner's 1954 income tax return shows that petitioner had completely liquidated its inventories by December 31, 1954.
On February 20, 1955, a meeting of the petitioner's board of directors was held. Avanelle E. Bacon, D. G. Bacon, and R. T. Baker were present at this meeting. The minutes state as follows:
The Chairman stated that since the death of the company's President, Mr. J. R. Bacon, on July 2, 1954, the company's machinery and equipment and lease with Union College have been sold; that the company has ceased to manufacture and sell brick and that consideration should be given by the directors to the voluntary dissolution of the company. After a discussion of the matter and upon motion duly made, seconded, and unanimously carried, it was resolved that the company proceed to liquidate its remaining assets, pay and discharge its liabilities, wind up its affairs and distribute its remaining funds and assets pro rate per share to the holders of the shares of the outstanding capital stock of the company upon surrender of said outstanding shares to the Secretary of the company; that the question of the proposed dissolution of the company be submitted to a vote at a meeting of the shareholders to be called on the 2nd day of March, 1955, upon notice of the specific purpose of the meeting called in the manner provided in Section 271.295 of the Kentucky Revised Statutes; and that upon the approval of the dissolution of the company by the vote of the shareholders at such meeting, the Secretary-Treasurer of the corporation shall be, and hereby is, authorized to take necessary legal steps to dissolve the corporation and distribute its assets according to the laws of the Commonwealth of Kentucky.
On March 2, 1955, a meeting of the petitioner's stockholders was held. Avanelle E. Bacon and D. G. Bacon, representing all of the stock of the corporation, were present as this meeting. The minutes of this meeting state as follows:
Because of the death of the company's President, Mr. J. R. Bacon, on July 2, 1954, the Secretary-Treasurer of the company, with the approval of the Board of Directors, sold the machinery and equipment and lease with Union College and proceeded to collect all outstanding accounts and generally wind up the company's affairs. After a discussion of the resolution of the Board of Directors to dissolve the corporation, the following resolution was adopted by the unanimous vote of all of the stockholders:
RESOLVED: That the company proceed to liquidate its assets, pay and discharge its liabilities, wind up its affairs and distribute its remaining funds and assets pro rata per share to the holders of the shares of outstanding capital stock of the company upon the surrender of the said outstanding shares to the Secretary of the company; and that the Secretary-Treasurer of the corporation shall be, and she hereby is, authorized to take the necessary legal steps to dissolve the corporation and distribute its assets according to the laws of the Commonwealth of Kentucky.
Petitioner's accumulated earned surplus on December 31, 1953, was $69,782.07. For the year 1954, after deducting the payment to Avanelle Bacon, petitioner's taxable net income was $24,549.88. Peti...
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