Bullock's Department Store, Inc. v. Commissioner
| Decision Date | 15 November 1973 |
| Docket Number | Docket No. 7463-71,7464-71. |
| Citation | 1973 TC Memo 249,32 TCM (CCH) 1168 |
| Parties | Bullock's Department Store, Inc. v. Commissioner. William G. and Doris Bullock v. Commissioner. |
| Court | U.S. Tax Court |
John N. Stull and John L. Kane, Jr., 1700 Broadway, Denver, Colo., for the petitioners. Thomas M. Ingoldsby, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent has determined the following deficiencies in and addition to petitioners' Federal income taxes:
_________________________________________________________________________________________________
Sec. 6651(a)1
Petitioner TYE Deficiency Addition
_________________________________________________________________________________________________
Bullock's Department Store, Inc. ........... 1/31/67 $ 660.00
1/31/68 443.00 $22.002
1/31/69 4,685.00
William G. and Doris Bullock ............... 12/31/66 119.00
12/31/67 3,298.00
12/31/68 8,974.00
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Petitioners William G. and Doris Bullock have claimed an overpayment of at least $1,285 for their 1968 calendar year.
The issues for our decision are:
(1) Whether respondent properly classified as taxable dividends certain advances from Bullock's Department Store to William G. Bullock in 1966, 1967, and 1968;
(2) Whether respondent properly disallowed, under section 267, deductions claimed by Bullock's for bonuses authorized for William G. Bullock in the amount of $3,000 for fiscal 1967, $2,000 for fiscal 1968, and $10,000 for fiscal 1969;
(3) If we find that respondent erred in denying Bullock's under section 267, a $10,000 deduction for William's 1969 fiscal year bonus, whether such amount is instead nondeductible as unreasonable compensation;
(4) Whether in connection with an airplane he owned, William G. Bullock could, for 1968:
(5) The amounts of entitlement under 4(a) and (b), supra, if any.
Some of the facts have been stipulated and are so found.3
Petitioners William G. Bullock (William) and Doris Bullock (Doris) are husband and wife, who, at all times relevant to the instant case, resided in Glenwood Springs, Colorado. William and Doris are calendar year, cash basis taxpayers, who filed joint Federal income tax returns for the 1966, 1967, and 1968 calendar years with the district director of internal revenue, Denver, Colorado.
Petitioner Bullock's Department Store, Inc. (Bullock's, the store, or the corporation), is a closely-held Colorado corporation which had its principal place of business in Glenwood Springs, Colorado, at all relevant times. The store offers a wide variety of soft goods, including a full line of men's, women's and children's wear, western clothing, ski wear, and domestic items (towels, sheets and piece goods). Shoes and ski equipment are also sold. Bullock's is an accrual basis taxpayer, keeping its books and filing its Federal income tax returns on the basis of a fiscal year ending January 31. It filed Federal income tax returns for its 1967, 1968, and 1969 fiscal years with the district director of internal revenue, Denver, Colorado. At all relevant times, Bullock's board of directors included William, who was president and general manager and owned 99.9 percent of the corporate stock, Doris, who was secretary-treasurer and a full-time employee, and William's mother.
William, who was in his later 40's during the taxable years involved in the instant case, has been in the retail sales business in Glenwood Springs since the mid-1940's. In late 1947, subsequent to his attendance at the University of Wyoming, William entered into partnership with his father, and they operated a department store in Glenwood Springs. On January 27, 1964, the business — Bullock's Department Store — was incorporated, and the following year William bought out his father's 50 percent interest in the corporation for $96,000. His father, who desired to retire from the department store business, accepted as payment William's personal note in the face amount of $96,000.
From time to time, Bullock's board of directors authorized the corporation to make advances to William. On March 3, 1964, the board authorized Bullock's to advance up to $35,000 to William during the period March 3, 1964 to January 31, 1965. The sum total of such advances, the resolution provided, was to be acknowledged by William's promissory note, to be executed and delivered to Bullock's on January 31, 1965. The note was to be a demand instrument, with interest of four percent per annum payable semiannually commencing in June of 1965. Advances totaling $8,840 were in fact made during the period covered by the resolution, and a note of the form described above in the face amount of $29,763.73 (such amount including advances during the period plus the outstanding balance of William's advances as of March 3, 1964) was delivered to Bullock's by William on March 1, 1965. A second and similar resolution was passed by the board in March of 1967, allowing additional advances to William of up to $50,000 through January 31, 1968. At the same time, the board required William to execute a note to Bullock's dated January 31, 1967, in the face amount of $40,603.73, to reflect additional net withdrawals made by William between January 31, 1965, when the prior authorization lapsed, and March of 1967.
Additional withdrawals were in fact made by William, both during and after the period specified in the second resolution, and notes in the form described above were occasionally executed to acknowledge the outstanding principal amounts of the advances. Each of such notes would in effect operate to "pay" the prior note, and, in addition, reflect the increase or decrease in amount of advances outstanding.4
The following schedule lists the advances and credits, and the approximate dates on which records of such were entered into the corporate books. It is to be noted that the outstanding balance of the advances was reflected in Bullock's 1967 and 1968 fiscal year returns as "loans to stockholders," while in the 1969 return, such balance was carried as "other assets."
Date of
entry on
corporate
books Advances Credits Balance
pre-1/31/65 ........ $20,923.73 ......... $20,923.73
1/31/65 ............ 8,840.00 ......... 29,763.73
1/31/66 ............ 8,640.00 $ 6,000.00 32,403.73
1/31/67 ............ 8,200.00 ......... 40,603.73
1/31/68 ............ 3,692.71 ......... 44,296.44
8/31/68 ............ 5,000.00 ......... 49,296.44
1/31/69 ............ 8,450.00 ......... 57,746.44
7/ 1/69 to
12/31/695 ... ........ 15,000.00 42,746.55
7/31/69 ............ ........ 800.00 41,946.44
1/31/71 ............ 3,980.00 ......... 45,926.44
8/31/71 ............ 920.00 850.00 45,996.44
1/31/72 ............ 860.00 21,294.00 25,562.44
6/30/72 ............ 796.05 ......... 26,358.49
The advances recorded for 1965 and 1966 were made in order that William might pay principal and interest on the note he had executed to his father. His use of the other advances listed is not established by the record.
While all the notes executed carried interest of four percent, interest was not accrued on the books of the corporation, nor were any of William's credits allocated in any part to interest. As indicated on the above schedule there were no repayments entered on the books between January 31, 1966, and, at the earliest, several months after April 15, 1969. Such failure to make the semiannual interest payments on the notes rendered the notes due and collectible at once, both principal and interest. Bullock's however, never demanded such full, or even partial payment.
In the March 1967 resolution, Bullock's required William to pledge 200 shares of the stock of the Bank of Glenwood, and 200 shares of Glenwood Bank Building Corporation as security for the note for $40,603.73 which was to be executed as of January 31 of that year. Such shares were later required to secure the note for $44,296.44, executed on January 31, 1968. On March 31, 1969, William secured his then outstanding note for $42,000 by a pledge of 800 shares of the Bank of Glenwood, 800 shares of the Glenwood Bank Building Corporation and 82 shares of Rocky Mountain Savings & Loan Association. The record does not establish the value of any of such shares of stock.
Pursuant to such resolution, the board voted William the following bonuses:
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