Bone v. Comm'r of Internal Revenue, Docket Nos. 3750-67

• Decision Date: 08 September 1969
• Docket Number: Docket Nos. 3750-67,3751-67.
• Citation: 52 T.C. 913
• Parties: THOS. E. BONE AND VERONICA S. BONE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTTHOS. E. BONE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

52 T.C. 913

THOS. E. BONE AND VERONICA S. BONE, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTTHOS. E. BONE, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 3750-67

3751-67.

Tax Court of the United States.

Filed September 8, 1969.

Thos. E. Bone, pro se.

Joel A. Sharon, for the respondent.

Held, for a new corporation to be treated as an ‘electing small business corporation’ for its first taxable period, its election under sec. 1372, I.R.C. 1954, must be filed no later than 1 month after it acquires assets or begins business operations. Such time is not postponed by reason of a delay in the corporation receiving authorization to issue stock.

SIMPSON, Judge:

The respondent determined deficiencies in the petitioners' income tax as follows:

+--------------------------------------------------------------------+
                ¦Docket ¦Year ending  ¦Petitioner                         ¦Deficiency¦
                +-------+-------------+-----------------------------------+----------¦
                ¦No.    ¦             ¦                                   ¦          ¦
                +-------+-------------+-----------------------------------+----------¦
                ¦3750-67¦Dec. 31, 1964¦Thomas E. Bone and Veronica S. Bone¦$596.19   ¦
                +-------+-------------+-----------------------------------+----------¦
                ¦3751-67¦Dec. 31, 1965¦Thomas E. Bone                     ¦379.78    ¦
                +--------------------------------------------------------------------+
                

The issue for decision is whether or not the petitioner Thomas E. Bone is entitled to deductions for losses sustained in a farming enterprise. The answer depends on whether the enterprise was conducted by a corporation or a partnership and, if by a corporation, whether that corporation filed a valid election under section 1372 of the Internal Revenue Code of 1954.¹

FINDINGS OF FACT

Some of the facts were stipulated, and those facts are so found.

Thomas E. Bone is an individual who resided in Terra Bella, Calif., at the time his petitions were filed in this case. Veronica S. Bone is an individual who resided at Camp Nelson, Tulare County, Calif., at the time her petition was filed in this case. Thomas E. Bone and Veronica S. Bone filed a joint individual income tax return for the taxable year 1964, and Thomas E. Bone, an individual income tax return for the taxable year 1965, with the district director of internal revenue, San Francisco, Calif. Thomas E. Bone will hereinafter be referred to as the petitioner.

In 1959, the petitioner, with financial assistance from his father, Sidney W. Bone, acquired a 33.48-acre parcel of land located in Tulare County, Calif., for $25,127. Title to the land was taken in the name of the petitioner, who intended to develop it as a citrus grove. During 1962, the petitioner began to cultivate the property and to plant nursery stock thereon, which was to be used in establishing a citrus orchard. During 1962 and 1963, the petitioner furnished most of the labor for the enterprise, and Sidney provided most of the financial support. The petitioner and Sidney filed a partnership income tax return for the enterprise for the years 1962 and 1963.

In 1962, Sidney discussed the citrus grove enterprise with a friend of his, Russell E. Q. Johnson, an attorney. Mr. Johnson expressed concern over Sidney's exposure as a partner to unlimited liability for claims against the partnership and suggested the possibility that a ‘tax-option corporation’ be formed to run the business, so that Sidney could have the benefits of limited liability, while being able to report his proportionate share of profits and losses on his personal return. Acting on this suggestion, Sidney and the petitioners decided to form a corporation. On August 16, 1963, Tom Bone Citrus, Inc. (TBC), filed its articles of incorporation in the office of the secretary of state of the State of California. On the same day, the secretary issued to TBC a certificate of incorporation, which stated: ‘That on the 16th day of August, 1963, TOM BONE CITRUS, INC. became incorporated under the laws of this State by filing its Articles of Incorporation in my office.’

Also on the same day, a meeting of the original incorporators of TBC was duly held, and the following corporate business took place: (1) It was agreed that a certificate of incorporation should be filed in the office of the county clerk for Tulare County; (2) bylaws were adopted; (3) the resignations of the original incorporators were accepted; and (4) the petitioner, Sidney, and Veronica S. Bone were elected as directors.

On August 22, 1963, a special meeting of the board of directors of TBC was held. At that meeting— (1) The petitioner was elected president and treasurer, Sidney, vice president, Mrs. Bone, secretary, and Mr. Johnson, assistant secretary and general counsel; (2) an executive committee, composed of the petitioner and Sidney, was formed; (3) a corporate seal was adopted; (4) a specimen certificate for corporate shares of stock was approved; (5) the secretary was authorized to procure the proper corporate books; (6) the treasurer was authorized to open a corporate bank account, and the president was authorized to sign checks; (7) the fiscal year of the corporation was designated as September 1 to August 31; (8) the petitioner was designated as agent of the corporation for service of process; and (9) the corporate officers were authorized to apply to the commissioner of corporations of the State of California for a permit to sell and issue shares of capital stock.

At the same meeting, the petitioner as president recounted an offer by Sidney to purchase 100 shares of the corporation's $10 par common stock for $1,000, conditioned on the corporation's receipt from the commissioner of corporations of a permit to issue such shares; and the board authorized the officers to issue such shares, after receipt of the permit and receipt of the $1,000. The petitioner also informed the board of directors of the offer he had made to sell to the corporation the 33-acre parcel located in Tulare County. This offer provided that the petitioner would transfer title to the property to the corporation ‘in consideration of the issuance to me of nineteen hundred (1,900) Common shares, having an aggregate par value of Nineteen Thousand Dollars ($19,000.00).'² The offer further provided:

If this officer is accepted, the above mentioned nineteen hundred (1,900) Common shares are to be issued to me (the petitioner) or my nominee upon the delivery to your corporation of the said property or of proper instruments of transfer and conveyance of the above described property.

The board accepted the offer by a resolution.

On October 7, 1963, the petitioner and Mrs. Bone delivered to TBC a deed covering the Tulare County parcel, and on the same day that deed was recorded in the Tulare County recorder's office. At the time of the conveyance, the petitioner received no stock from TBC.

Also on October 7, 1963, TBC executed an ‘Application for Permit to Sell and Issue Stock.’ However, this application was not filed with the commissioner of corporations until March 12, 1964. This application stated: ‘Applicant at present has no assets or liabilities other than organization expenses and has conducted no business; therefore, no financial statement can be prepared or submitted at this time.’ It also provided that: ‘Upon issuance of a permit by the Commissioner of Corporations of the State of California, applicant proposes to issue Two Thousand (2,000) shares of its capital stock.’ One hundred shares were to be issued to Sidney, and 1,900 to the petitioner, in accordance with the offers accepted at the August 22, 1963, board meeting. On September 25, 1964, TBC executed an amendment to this application, and on October 22, 1964, such amendment was filed with the commissioner of corporations. The amendment provided in pertinent part:

That a certificate for 100 shares of said stock has been issued to Sidney W. Bone and certificates for 1900 (600 and 1300) shares of said stock has been issued to Thomas E. Bone, both issued in cancellation of the indebtedness of the corporation to the extent of $1,000 to Sidney W. Bone and.$19,000 to Thomas E. Bone. The certificate for 1300 shares was assigned to Sidney W. Bone and reissued in the latter's name.

On October 28, 1964, a permit to sell and issue stock was issued to TBC by the Division of Corporations of the State of California. This permit provided that TBC was authorized to sell and issue stock, not to exceed 2,000 shares, to Sidney and the petitioner, in consideration for the transfer to the corporation of the property and cash described in the application. On October 29, 1964, TBC issued to Sidney stock certificate No. 1, evidencing 100 shares, and to the petitioner certificate No. 2, evidencing 600 shares, and certificate No. 3, evidencing 1,300 shares. Sometime thereafter, certificate No. 3 was canceled, and on December 9, 1964, certificate No. 4, evidencing 1,300 shares, was issued to Sidney so that he owned 70 percent of TBC's stock and the petitioner owned 30 percent.

During the period from August 16, 1963, to October 28, 1964, TBC functioned as a corporation, although during that period it did not have a permit to issue and sell shares of stock. It held directors meetings and kept minutes thereof. On or about March 1, 1964, TBC entered into four agreements with Carl Snyder for the purpose of raising capital to develop the citrus acreage. Under these agreements, TBC as seller, agreed to sell the parcel to Mr. Snyder, subject to an option to repurchase, and TBC then leased back the property for a nominal rental. Neither the petitioner nor Sidney was obligated as an individual under these agreements. The agreements were ‘subject to’ TBC's receipt of a permit to issue stock.

On or about September 13, 1963, TBC opened a corporate bank account at the Anglo-Crocker Bank of California with a deposit by Sidney of $800. During the subsequent 13 months, the...