Bixby v. Comm'r of Internal Revenue
| Decision Date | 10 August 1972 |
| Docket Number | Docket Nos. 4085-65,5105-65,6221-65— 6239-65,5787-66— 5789-66.,5104-65 |
| Citation | 58 T.C. 757 |
| Parties | MARK BIXBY AND HUDYTHE BIXBY, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner Converse Rubber Corp. caused certain Bermuda trusts to be interposed in a transaction between itself and a seller of the assets of another corporation, Tyer. In form, the seller sold the assets to Bermuda trusts for x dollars and the trusts resold the assets to petitioner for x & y dollars; and y dollars was paid to the trusts in long-term highly subordinated notes. The accounts receivable of Tyer, which were guaranteed by Tyer, were entered on petitioner's books at face value. Held, the three-party purchase transaction was a sham. In substance, petitioner purchased the assets from the seller for x dollars. Held, further, petitioner's cost basis for the acquired assets does not include the amount paid to the Bermuda trusts. Held, further, amounts paid by petitioner as interest on some notes are deductible to a limited extent only; amounts paid on other notes are not deductible. Held, further, the accounts receivable were properly entered on petitioner's books.
2. Eight individual petitioners purchased ‘private annuities' from the Bermuda trusts. The trusts were established by nominal settlors for the benefit of petitioners' families. Petitioners maintained effective control over the assets transferred in exchange for the annuities. Held, petitioners were the true settlors; the annual payments were distributions falling within sec. 677(a)(1), I,R.C. 1954; and petitioners are taxable on income received by the trusts during the taxable year under sec. 671, I.R.C. 1954.
3. Sec. 6653(a), I.R.C. 1954, additions to tax against petitioners in two dockets are sustained for failure of proof. Alford P. Rudnick, Jack H. Calechman, Harold Lavien, and Carl E. Axelrod, for the petitioners.
Robert B. Dugan and William T. Hayes, for the respondent.
These consolidated cases involve deficiencies in the Federal income tax of each of the individual petitioners for the taxable year 1961, of Converse Rubber Corp. for the taxable years ended December 30, 1961, and December 29, 1962, and of Tyer Rubber Corp. and Granite State Rubber Co. for the taxable year ended December 29, 1962. The deficiencies determined by respondent are as follows:
+-----------------------------------------------------------------------------+
¦Petitioners ¦Docket ¦Year ¦Deficiency ¦
+-------------------------------------------------+-------+-------+-----------¦
¦ ¦No. ¦ended ¦ ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Mark and Hudythe Bixby ¦4085-65¦1961 ¦$105,293.68¦
+-------------------------------------------------+-------+-------+-----------¦
¦Reva G. Stone, deceased ¦5104-65¦1961 ¦90,392.04 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Dewey D. and Anne A. Stone ¦5105-65¦1961 ¦91,127.76 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Philip C.S. Cowan ¦6221-65¦1961 ¦50,386.37 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Spencer M. Cowan, Jr. ¦6222-65¦1961 ¦50,386.37 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Jack S. and Thelma B. Finn ¦6223-65¦1961 ¦48,943.49 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Lillian J. Glazer ¦6224-65¦1961 ¦41,240.96 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Sidney A. and Rita J. Govenar ¦6225-65¦1961 ¦34,347.39 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Alfred E. and Ruth F. Gutman ¦6226-65¦1961 ¦8,357.66 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Myron I. and Katharine W. Jaffe ¦6227-65¦1961 ¦32,889.12 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Irving and Ruth S. Mann ¦6228-65¦1961 ¦119,176.14 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Milton E. and Evelyn W. Robinson ¦6229-65¦1961 ¦33,835.12 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Alford P. Rudnick and Estate of Charlotte ¦6230-65¦1961 ¦50,179.89 ¦
¦Rudnick, deceased ¦ ¦ ¦ ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Celia E. Stone ¦6231-65¦1961 ¦1,959.06 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦David G. and Faye G. Stone ¦6232-65¦1961 ¦122,254.62 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Hugh D. and Sandra D. Stone ¦6233-65¦1961 ¦110,586.78 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Judah M. and Carol T. Stone ¦6234-65¦1961 ¦46,007.25 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Stephen A. and Sybil F. Stone ¦6235-65¦1961 ¦134,578.10 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Josef E. and Miriam F. Teplow ¦6236-65¦1961 ¦30,102.59 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Theodore H. and Charlotte L. Teplow ¦6237-65¦1961 ¦32,302.25 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Arthur T. and Etta W. Wasserman ¦6238-65¦1961 ¦37,410.00 ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Converse Rubber Corp ¦6239-65¦12/30/ ¦691,699.15 ¦
¦ ¦ ¦61 ¦ ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Converse Rubber Corp ¦5787-66¦12/29/ ¦80,612.64 ¦
¦ ¦ ¦62 ¦ ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Tyler Rubber Corp ¦5788-66¦12/29/ ¦16,556.69 ¦
¦ ¦ ¦62 ¦ ¦
+-------------------------------------------------+-------+-------+-----------¦
¦Granite State Rubber Co ¦5789-66¦12/29/ ¦23,825.23 ¦
¦ ¦ ¦62 ¦ ¦
+-----------------------------------------------------------------------------+
Additions to tax under section 6653(a), I.R.C. 1954, were determined by respondent against the following petitioners:
+--------------------------------------------------+
¦Petitioners ¦Docket ¦Year ¦Amount ¦
+--------------------------+-------+-----+---------¦
¦ ¦No. ¦ended¦ ¦
+--------------------------+-------+-----+---------¦
¦Reva G. Stone, deceased ¦5104-65¦1961 ¦$4,519.60¦
+--------------------------+-------+-----+---------¦
¦Dewey D. and Anne A. Stone¦5105-65¦1961 ¦4,556.34 ¦
+--------------------------------------------------+
Numerous issues raised in the pleadings have been settled by the parties and can be given effect in the Rule 50 computations. Two major issues, however, remain to be decided. The first major issue is whether the purchase of the assets of Tyer Rubber Co. by Converse Rubber Corp. from the Stone Family Bermuda Trusts was a real transaction in substance serving legitimate business purposes or a sham. Related to this issue are several subsidiary issues, namely, whether Converse Rubber Corp. is entitled to the cost basis which it claimed with respect to the Tyer Rubber Co. assets; whether Converse Rubber Corp. or its subsidiary, Tyer Rubber Corp., is entitled to a deduction for depreciation based on the above basis; and whether Converse Rubber Corp. is entitled to deductions for interest paid or accrued in connection with two series of debentures issued to the Bermuda trusts. Another related issue is whether the purchase price of the Tyer assets must be reallocated. This issue concerns the value to be given guaranteed accounts receivable. If we decide that the purchase transaction was a sham but the debentures nevertheless had some value, we must also determine whether each of the individual petitioners received a taxable constructive dividend.2 The second major issue is whether certain individual petitioners who purchased so-called private annuities from the Stone Family Bermuda Trusts are subject to tax on all income received by the trusts.3 The question of how to tax the annual payments, if they are found to be true annuity payments, is not in issue. A final issue concerns additions to tax under section 6653(a).
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
The individuals named as petitioners are involved in these proceedings either by virtue of the fact that they are beneficiaries of the ‘simple’ trust which is the sole shareholder of Converse Rubber Corp. or because they purchased ‘private annuities' from certain foreign situs trusts. All of these individuals resided in Massachusetts at the time of filing their petitions with ...
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