Bartel v. Comm'r of Internal Revenue
| Decision Date | 14 January 1970 |
| Docket Number | Docket No. 1750-67. |
| Citation | 54 T.C. 25 |
| Parties | IRVING BARTEL AND ELAINE MELMAN BARTEL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles W. Tuckman and Warren Wertheimer, for the petitioners.
Harry Morton Asch, for the respondent.
The petitioner was the sole shareholder of a corporation which was liquidated in 1964. Among the corporate assets distributed to him was an account reflecting funds disbursed to him by the corporation over a period of years. For income tax purposes, the petitioner and the corporation had consistently treated those disbursements as loans, but the petitioner now contends that they were in fact payments of compensation or dividends. Held, under the circumstances, such disbursements shall be treated as loans for purposes of computing gain on the liquidation.
The respondent determined a deficiency of $9,864 in the income tax of the petitioners for the taxable year 1964. Upon liquidation of a corporation in which he held all the stock, the petitioner, Irving Bartel, received an account reflecting disbursements that had been made to him during the preceding 11 years and that had been treated by him and the corporation as loans for income tax purposes. The issue to be decided is whether, in computing the gain on the liquidation, the distribution of such account is to be treated as a cancellation of indebtedness or whether the petitioners may prove that some of such disbursements were in fact payments of compensation or dividends.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Irving Bartel and Elaine Bartel, are husband and wife, who maintained their legal residence in Atherton, Calif., at the time the petition was filed in this case. For the taxable year 1964, they filed their joint Federal income tax return, using the accrual method of accounting, with the district director of internal revenue, San Francisco, Calif. Mr. Bartel will be referred to as the petitioner.
I. Bartel, Inc. (the corporation), was formed in 1946 to engage in the retail business of selling ladies' ready-to-wear; it was liquidated on November 30, 1964. Throughout the existence of the corporation, the petitioner was its president and a member of its board of directors. From the organization of the corporation until March 8, 1954, the petitioner owned 90.8 percent of its stock, and on that date, he acquired the remaining stock.
On the liquidation of the corporation, all of its assets were distributed to the petitioner in exchange for his stock. His cost of the stock was $100,800. The fair market value of the assets received by the petitioner (other than account No. 36) was $242,957. Account No. 36 on the books and records of the corporation was entitled ‘Advances to Irving Bartel,‘ and at the time of liquidation, the amount of such account was $94,010. The liabilities of the corporation at the time of the liquidation were $52,627. On their tax return for 1964, the petitioners reported receiving assets in excess of liabilities in the amount of $205,999, including a value of $15,669 for account No. 36. However, the respondent determined that such account constituted loans to the petitioner which were being canceled and that the cancellation of such loans resulted in the petitioners receiving income of $54,010.
Account No. 36, which was established in February 1954, reflected 79 disbursements to the petitioner between that date and the liquidation of the corporation, for a total of $312,130.03. Of the disbursements, only six were described in any manner. They were:
+-------------------------------------------+
¦Date ¦Amount ¦Description ¦
+-------------+--------+--------------------¦
¦ ¦ ¦ ¦
+-------------+--------+--------------------¦
¦Dec. 8, 1954 ¦$10,000 ¦Loan. ¦
+-------------+--------+--------------------¦
¦Dec. 16, 1954¦5,000 ¦Loan. ¦
+-------------+--------+--------------------¦
¦Aug. 17, 1955¦15,000 ¦Advance. ¦
+-------------+--------+--------------------¦
¦Jan. 2, 1957 ¦6,000 ¦Loan. ¦
+-------------+--------+--------------------¦
¦Jan. 14, 1959¦1,000 ¦(Paid to Director of¦
+-------------+--------+--------------------¦
¦ ¦10,000 ¦( Internal Revenue. ¦
+-------------------------------------------+
With the exception of a disbursement of $5,000 on December 2, 1955, the other disbursements to the petitioner in the years 1954 and 1955 were regular as to time and amount. On February 26, 1954, $1,000 was transferred to him, and for each of the remaining months of 1954 and for the first 9 months of 1955, $1,000 a month was transferred to him— $500 about the middle of the month and $500 at the end of the month. However, the disbursements to the petitioner during the succeeding years were not consistent as to time and amount. The smallest disbursement was $44.25 on November 30, 1960, and the largest was $60,000 on June 30, 1961. There was no pattern as to the times or amounts of the disbursements in those years.
Account No. 36 also reflected 20 credits for repayments made by the petitioner to the corporation for a total of $218,120.03. Only $5,000 was credited to the account prior to 1958.
The books and records of the corporation included an account No. 75 entitled ‘Due from Irving Bartel.’ The original entries in that account reflected the petitioner's capital contribution to the corporation and his receipt of stock therefor. The later entries reflected some personal expenses of the petitioner which were paid by the corporation for his benefit.
In addition, the petitioner had an interest in Irving-Frederick, Inc., which was organized in 1937 to engage in the retail business of selling ladies' ready-to-wear. Throughout the existence of I. Bartel, Inc., the petitioner was also the president and controlling shareholder of Irving-Frederick, Inc.
Personal books and records were maintained by the petitioner, and they included an account No. 211 entitled ‘Advances from I. Bartel, Inc.’ Such account included entries correlative to those in account No. 36 of the corporation. The petitioner's personal books and records also included an account No. 210 entitled ‘advances from Irving-Frederick, Inc.’; but all the advances reflected in that account were repaid by the petitioner to Irving-Frederick. His personal books and records included an account No. 40 entitled ‘Due from I. Bartel, Inc.,‘ which corresponded to account No. 75 in the corporation's books and records. No provision was made for the petitioner to pay interest on the balances in the account Nos. 40, 210, or 211 in his personal books and records, and no promissory notes or other evidence of indebtedness were given in connection with these accounts. According to the personal books and records of the petitioner and those of the corporation, no dividends were ever paid by the corporation.
The petitioner devoted a normal workweek to supervising and managing the business of the corporation, including the handling of purchasing, the selection of employees, and the supervision of the day-to-day operations of the business. From the time of the organization of the corporation until 1952, his salary was set at $2,500 a month plus 2 percent of the net sales. However, by action of the board of directors on July 1, 1952, reaffirmed by the board on January 6, 1954, the petitioner accepted a reduction in his salary, but it was provided that the board of directors could, in its discretion, when the business had improved and the cash became available, restore his salary retroactively. According to his books and records, he received the following amounts as salary from the corporation:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1946 ¦$12,500.00 ¦
+------+-----------¦
¦1947 ¦56,157.99 ¦
+------+-----------¦
¦1948 ¦48,168.51 ¦
+------+-----------¦
¦1949 ¦44,254.08 ¦
+------+-----------¦
¦1950 ¦41,280.18 ¦
+------+-----------¦
¦1951 ¦31,028.06 ¦
+------+-----------¦
¦1952 ¦15,000.00 ¦
+------+-----------¦
¦1953 ¦15,000.00 ¦
+------+-----------¦
¦1954 ¦ ¦
+------+-----------¦
¦1955 ¦ ¦
+------+-----------¦
¦1956 ¦800.00 ¦
+------+-----------¦
¦1957 ¦1,800.00 ¦
+------+-----------¦
¦1958 ¦ ¦
+------+-----------¦
¦1959 ¦ ¦
+------+-----------¦
¦1960 ¦9,167.00 ¦
+------+-----------¦
¦1961 ¦833.00 ¦
+------+-----------¦
¦1962 ¦7,791.67 ¦
+------+-----------¦
¦1963 ¦19,958.33 ¦
+------+-----------¦
¦1964 ¦6,950.00 ¦
+------------------+
The petitioner is aware of the difference between a salary, a dividend, and a loan. He claims not to have known, at the time the entries were made and at the time his returns were prepared, how the disbursements in account No. 36 were treated in his books and records and his tax returns. The books and records for the corporation and his personal books and records were maintained under the supervision of his accountant, Ross Perkins, a certified public accountant, who also prepared the tax returns for the corporations and for the petitioner. Mr. Perkins performed these duties for the petitioner and his corporations from 1932 until January 1, 1965. In the books and records of the corporation and of the petitioner, such disbursements were treated as loans; and they were not reported as taxable compensation or dividends in the returns of the petitioner, nor were they treated as compensation or dividends in the returns of the corporation.
The respondent mailed the petitioner a notice of deficiency dated August 31, 1962, in which he determined that the increases in account No. 36 during the years 1956 and 1957 were in fact dividends. The petitioner filed a petition with the Court, which was prepared by Ross Perkins and verified by the petitioner. In that petition, it was alleged that the...
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