CASWAL CORPORATION v. Commissioner, Docket No. 75127.
| Decision Date | 30 June 1960 |
| Docket Number | Docket No. 75127. |
| Citation | 19 TCM (CCH) 757,1960 TC Memo 143 |
| Parties | Caswal Corporation v. Commissioner. |
| Court | U.S. Tax Court |
H. A. Smith, pro se, 516 Felt Bldg., Salt Lake City, Utah. Norman H. McNeil, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
This proceeding involves deficiencies in income tax for the calendar years 1954, 1955 and 1956 in the respective amounts of $1,779.18, $1,850.63 and $1,756.03. The question presented is whether petitioner in computing its taxable income may deduct, as trustee, net income of a trust currently distributed to the beneficiaries.
All of the facts have been stipulated by the parties, and are hereby found accordingly.
Petitioner, a Utah corporation organized June 3, 1953, filed its Federal corporation income tax returns for the calendar years 1954, 1955 and 1956 with the district director of internal revenue at Salt Lake City, Utah.
Dan Morrison Meat Pies, Inc., hereinafter called Morrison, was incorporated in Utah on September 12, 1929.
Morrison owned and occupied one parcel of improved real estate in Salt Lake City as its business premises. The other parcel of improved real estate which Morrison owned in Salt Lake City was leased to the General Electric Company, X-Ray Department, on April 25, 1951. This lease provided for an annual rental of $4,080 for a term of 5 years.
In 1953, the stockholders, shares held by each (at a par value of $1 per share) and officers of Morrison were as follows:
Shares Office
Stockholders Held
Director and
H. A. Smith ............... 3,200 President
Gilbert Wallace ........... 3,000 Director and
Leonard H. Carr ........... 3,000 Treasurer
Bertha Carr* ......... 200 Director and
Ernest Blakemore** ... 200 Vice-President
* Sister of Leonard H. Carr
** The corporation's accountant since 1929
Morrison's business for many years prior to 1953 had been both successful and profitable.
In 1952, upon preparation of Morrison's Federal income tax return, it was determined that a tax in the amount of $1,100 was due. This was the first occasion when the corporation was required to pay an income tax in such an amount, which fact caused Smith to enter into discussion with Wallace and Carr and recommend to them that the business need not be operated in corporate form which required the payment of corporation income taxes. It was then determined that the corporation should be dissolved to avoid the further payment of both corporation and individual income taxes on the business profits.
As a result of these discussions, plans and procedures were initiated looking towards the dissolution of Morrison. The process of dissolution under consideration by Smith, Carr and Wallace contemplated that the parcels of improved real estate would be deeded to them as tenants-in-common. However, they recognized that, in the event of the death of any partner, a probate of the estate would follow and involve extra costs and the problem of changes in legal title to the parcels of real estate. They recognized that the corporate form of doing business with the corporation holding title to the improved real estate obviated the need for concern over probate of the real estate in their individual estates.
About the time it was determined that Morrison should be dissolved, Smith, who is an attorney-at-law, became involved in a local probate matter concerning a decedent's estate wherein real estate had been placed in trust for the benefit of survivors. Smith understood from this proceeding that currently distributable income of a trust was not taxable for Federal income tax purposes.
Smith proceeded to draft a proposed trust instrument wherein the two parcels of real estate were deeded in trust from Morrison to a local bank and the trustee was to distribute net rental income to Smith, Carr and Wallace. After reviewing the trust instrument, the bank's trust department advised Smith that its charges would be about $400 a year for administering such a trust. Smith, Carr and Wallace rejected this plan as being too expensive and then determined that a corporation formed by them could serve as trustee. They contemplated that such a corporation would take title to the real estate and assumed it would not be subject to Federal corporation tax on rent received and distributed under the trust.
Without considering the value of the improved real estate and exclusive of goodwill, Morrison's assets on May 31, 1953 were as follows:
Cash .............................. $5,130.53
Accounts Receivable ............... 93.60
Inventory of Raw Material ......... 777.75
Chevrolet Truck No. 1 at book ..... 499.83
Chevrolet Truck No. 2 at book ..... 471.55
Machinery & Equipment at book ..... 261.00
Walk-in Refrigerator at book ...... 50.00
As of the close of business May 31, 1953, Morrison had no outstanding liabilities.
Smith, Carr and Wallace were desirous of continuing the operation of the meat-pie business carried on by Morrison, and they determined that a partnership form of business, utilizing the working assets of the corporation, would serve their purpose. As of June 1, 1953, Smith, Carr and Wallace formed a partnership to carry on the meat-pie business formerly carried on by Morrison with the assets above described.
Smith, Carr and Wallace contemplated that Leonard H. Carr would purchase the minority interest of his sister, Bertha Carr, and that Gilbert Wallace would purchase the interest of Ernest Blakemore in Morrison. The real estate owned and then used by Morrison as its business premises would be leased to the partnership composed of Smith, Carr and Wallace.
On May 27, 1953, Morrison, by formal document, leased to Smith, Carr and Wallace, doing business as "Dan Morrison Meat Pies," a co-partnership, the improved real estate which Morrison was then using as its business premises. The lease agreement provided for a term of 5 years and that the co-partnership would pay annual rental to Morrison in the amount of $3,300 at the rate of $275 per month.
Also on May 27, 1953, the stockholders of Morrison resolved to dissolve as of the close of business on May 31, 1953. The written resolution for dissolution further recited that the real estate then owned by Morrison was to be conveyed to petitioner as trustee, referred to a trust agreement, and that the meat-pie business and assets (to include cash for working capital) of Morrison, other than the real estate, be transferred to a partnership consisting of Smith, Carr and Wallace. On May 27, 1953, petitioner had not been formally organized.
Also on May 27, 1953, an application for corporate dissolution of Morrison was prepared and filed in the district court for Salt Lake County. On July 16, 1953, the above district court dissolved Morrison as of the close of business on May 31, 1953.
On May 28, 1953, by warranty deed, Morrison conveyed to petitioner for a stated consideration in money and other valuable consideration, the title to the real estate which it occupied as its business premises. The deed noted the real estate was subject to a lease (presumably the lease to the co-partnership of Smith, Carr and Wallace) but made no reference to a trust.
On May 29, 1953, by warranty deed, Morrison conveyed to petitioner for a stated consideration in money and other valuable consideration, the real estate which was then occupied by General Electric Company under lease. The deed noted the real estate was subject to a lease but made no reference to a trust.
On May 29, 1953, the articles of incorporation of petitioner were formally executed by its incorporators and the subscribers of the capital stock, who were Smith, Carr and Wallace with their respective wives. The articles of incorporation provided, in part, as follows:
A sworn acknowledgment by Smith, Carr and Wallace at the conclusion of the petitioner's articles of incorporation states as follows:
"That * * * each is one of the incorporators named in the foregoing Articles of Incorporation; that it is their bona fide intention to commence and carry on the business mentioned in the foregoing Articles of Incorporation; that...
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