Beggs v. Commissioner, Docket No. 78771
| Decision Date | 08 May 1961 |
| Docket Number | 79715.,Docket No. 78771 |
| Citation | 1961 TC Memo 127,20 TCM (CCH) 626 |
| Parties | George R. Beggs and Frances Beggs v. Commissioner. |
| Court | U.S. Tax Court |
Sidney J. Matzner, Esq., 3450 Wilshire Blvd., Los Angeles, Calif., for the petitioners. Thomas J. Sullivan, Esq., for the respondent.
Respondent determined deficiencies in income tax of the petitioners, as follows:
Year Deficiency
1954 .................. $18,222.02
1955 .................. 19,438.72
The sole issue is whether petitioner George R. Beggs received a taxable dividend in the amount of $40,000, and if so, whether in the year 1954, when the directors altered the corporate records to cancel the accounts receivable owing from him and to retire 400 shares of stock, or in the year 1955, when the stock was actually given to the corporation.
Most of the facts were stipulated and are incorporated herein by this reference.
The petitioners, George R. and Frances Beggs, are husband and wife residing in Bakersfield, California. They filed joint income tax returns for the taxable years 1954 and 1955 with the district director of internal revenue at Los Angeles, California.
Since Frances Beggs is a petitioner herein only by virtue of having filed a joint return with her husband, the latter will hereinafter sometimes be referred to as petitioner or Beggs.
Petitioner and Thomas F. Thompson, hereinafter sometimes referred to as Thompson, formed a partnership on August 12, 1941, styled Empire Transportation Company, for the business of hauling petroleum products. Beggs and Thompson were equal partners, but Thompson was a "silent partner."
In March 1946 the partners agreed to dissolve the partnership. The dissolution agreement provided that the partners acquiesced in a transfer of the partnership assets by Beggs to a corporation to be formed for the purpose.
According to the "plan" and "understanding" mentioned in the dissolution agreement, all the shares of stock of the projected corporation (George R. Beggs, Inc., changed on August 13, 1948, to Empire Transportation Company, hereinafter referred to as the corporation), were to be issued initially to petitioner in his own right and as nominee of Thompson. This approach was adopted because Thompson had formerly been an employee of the Union Oil Company, with which the partnership had, and the corporation would continue to have, business dealings. Although Thompson was not an employee at the time of the dissolution and the formation of the corporation, it was thought unwise to disclose the past relationship or association.
It was the agreement of the parties that Thompson was to be made record holder of half the stock held initially by petitioner, as his nominee. Petitioner was not personally purchasing the assets of the partnership.
On April 10, 1946, petitioner offered the partnership assets to the corporation, and on June 12, 1946, the corporation accepted the offer and transferred 997 shares of its stock to petitioner, 2 shares to Louis Jacobson, and 1 share to Chloe Merrill.
The relationship between Beggs and Thompson seriously deteriorated and a dispute arose between them regarding their interests in the corporation. Thompson had never been made record holder of his share of the corporation's stock.
On January 8, 1948, petitioner, Thompson, and the corporation entered into an agreement resolving their differences regarding the respective interests of Thompson and petitioner in the corporation and Tri-State Oil Company, another and distinct partnership between petitioner and Thompson. This agreement recited that (1) the parties had agreed to the dissolution of the partnership and the subsequent transfer of the assets to the corporation; (2) Beggs had agreed to compensate Thompson for his share of the partnership assets; (3) a dispute had arisen as to the method of compensation, Thompson alleging that he was entitled to the stock and Beggs denying it; and (4) the agreement was to settle and compromise their differences.
According to the document, the parties also agreed that Thompson was to receive $40,000 cash, payable $25,000 cash upon the execution of the agreement and the balance of $15,000 in three yearly installments of $5,000 plus interest.
It was understood among the parties that the primary obligation rested with the corporation, and petitioner was to act only as a guarantor.
The agreement further recited that Thompson released all his claims to the partnership assets and released any claim to stock of the corporation.
At the time of the settlement with Thompson on January 8, 1948, the corporation had an earned surplus of $26,928.95.
On or about January 9, 1948, the corporation issued its check for $25,000 to petitioner, and on the same date petitioner issued a check to Thompson in the amount of $25,000. Some 19 days later the corporation issued another of its checks to petitioner in the amount of $16,000, and on the same day petitioner issued a check to Thompson in the amount of $15,036.90.
This method of paying Thompson was adopted because the parties were under the erroneous impression that a corporation could not at that time redeem its own stock. To be on the safe side, the petitioner acted as a conduit through which the payment flowed. This created the illusion and semblance of a loan and a purchase by petitioner of the stock rather than a direct redemption by the corporation. There was no indebtedness running from petitioner to the corporation.
On December 17, 1954, the corporation, at a meeting of its directors, voted to make certain adjustments in its records. The adjustments, as set forth in the minutes, are as follows:
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