Cont'l Bankers Life Ins. Co. of the South v. Comm'r of Internal Revenue
| Decision Date | 12 July 1989 |
| Docket Number | Docket Nos. 3643-85,29843-85. |
| Citation | 93 T.C. No. 6,93 T.C. 52 |
| Parties | CONTINENTAL BANKERS LIFE INSURANCE COMPANY OF THE SOUTH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
F directly owned 100 percent of the stock of both P (a life insurance company) and C, and 56.32 percent of the stock of CBN. C directly owned 20 percent of the stock in CBN. P acquired all of F's stock and C's stock in CBN with property. HELD, P's acquisitions of F's stock and C's stock in CBN are treated as distributions in redemption of P's stock under sec. 304(a)(1). HELD FURTHER, P made distributions under sec. 815 resulting in phase III taxable income under sec. 802(b)(3) to the extent made out of its policyholders' surplus account.
P claimed an operations loss carryover deduction in 1976 attributable to a bad debt deduction claimed in an earlier year. HELD, P has failed to prove the year in which the debts became worthless, and, consequently, is denied an operations loss carryover deduction in 1976. O. Jan Tyler and Charles D. Wilson, for the petitioner.
Daniel J. Wiles and Judy Jacobs, for the respondent.
Respondent determined deficiencies in and additions to petitioner's Federal income tax as follows:
+-------------------------------------------------+
¦ ¦ ¦Additions to tax ¦
+---------------+------------+--------------------¦
¦Calendar year ¦Deficiency ¦sec. 6651(a)(1) 1 ¦
+---------------+------------+--------------------¦
¦1976 ¦$310,400 ¦--- ¦
+---------------+------------+--------------------¦
¦1977 ¦168,893 ¦--- ¦
+---------------+------------+--------------------¦
¦1978 ¦97,144 ¦$24,286 ¦
+---------------+------------+--------------------¦
¦1979 ¦30,260 ¦1,513 ¦
+---------------+------------+--------------------¦
¦1980 ¦356,297 ¦--- ¦
+-------------------------------------------------+
After concessions, the issues for decision are: (1) Whether petitioner's acquisitions of its parent and sister corporations' stock in Continental Bankers Life Insurance Company of the North are treated as distributions in redemption of petitioner's stock under section 304(a)(1), and, if so, whether petitioner made distributions under section 815 resulting in phase III taxable income under section 802(b)(3) to the extent made out of its policyholders' surplus account; and (2) whether petitioner is entitled to an operations loss carryover deduction in 1976 attributable to a $126,049.26 bad debt deduction originally claimed on its 1973 Federal income tax return.
Some of the facts have been stipulated and are so found. The stipulation of facts and related exhibits are incorporated herein by this reference.
Petitioner is a Tennessee chartered life insurance company, filing its Federal income tax returns for the years at issue with the Internal Revenue Service Center in Memphis, Tennessee. At the time the petitions in this case were filed, petitioner's principal place of business was in Dallas, Texas.
Immediately prior to December 31, 1977, Financial Assurance, Inc. (Financial) owned 100 percent of the stock of petitioner, 56.32 percent of the stock of Continental Bankers Life Insurance Company of the North (CBN), and 100 percent of the stock of Capitol Bankers Life Insurance Company (Capitol). Capitol owned 20 percent of the stock of CBN.
On October 18, 1977, a letter agreement was signed providing for the sale of all of Financial's stock in Capitol to Mr. Everett J. Garner, Jr., effective September 30, 1977 (Purchase Agreement). The purchase price was based upon a formula set forth in the Purchase Agreement, and Mr. Garner tendered a $150,000 refundable deposit. The Purchase Agreement expressly provided that, prior to closing, all of Capitol's stock in CBN (100,000 shares) be sold to Financial for $1.60 per share in cash or securities. The closing of Financial's sale of its Capitol stock was first scheduled to occur on October 30, 1977, but was later delayed to December 30, 1977.
On December 30, 1977, a Closing Agreement was signed providing for the sale of all of Financial's stock in Capitol to Mr. Garner and ten other individuals. On December 31, 1977, an Amendment to the Closing Agreement was signed increasing the purchase price by $10,000 and modifying the terms of payment.
The Closing Agreement provided that it was entered into ‘Pursuant to an as a part of the Purchase Agreement.‘ The Closing Agreement also provided that it ‘shall in no way be construed as superceding [sic] or altering any of the terms or conditions of the * * * Purchase Agreement, unless specifically so stated. ‘ Finally, Article V of the Closing Agreement provided:
In lieu of the repurchase of the 100,000 shares of * * * [CBN] by * * * [Financial], the PURCHASERS acknowledge receipt from * * * [petitioner] of mortgages in the amount of $150,905 assigned to Capitol * * *, with a 1% servicing agreement on such mortgages, and a receipt of a note from * * * [petitioner], payable to Capitol * * * in the amount of $9,095, in exchange for 100,000 shares of stock of * * * [CBN] held as an asset by Capitol * * *. It is agreed by the parties that this note will be paid off simultaneously with the payment of the note specified in Article III * * *.
Capitol transferred all of its stock in CBN to petitioner at the closing of the sale by Financial of all of its stock in Capitol. The purchasers later defaulted on a promissory note given to Financial as part payment for the Capitol stock, and Financial reacquired the stock through foreclosure in 1978. The Capitol stock was ultimately resold to an unrelated party.
On December 31, 1977, petitioner acquired all of Financial's stock in CBN (281,164 shares) in exchange for real estate valued at $473,111.
Respondent determined that petitioner's acquisitions of CBN stock from Capitol and Financial were distributions in redemption of petitioner's stock under section 304(a)(1). Further, to the extent that such distributions exceeded the balance in petitioner's stockholders' surplus account, such distributions were from petitioner's policyholders' surplus account, resulting in phase III taxable income to petitioner under section 802(b)(3).
Petitioner sold life insurance policies through the use of sales agents working on a commission basis. Commissions were not earned by sales agents until premiums were paid by purchasers to petitioner. However, petitioner advanced commissions to sales agents upon the sale of policies but before premiums were actually paid. In some cases, petitioner would advance funds to group sales agents even before any sale took place. Petitioner recorded an advance by charging an account receivable from the sales agent receiving the advance. As premiums were paid by purchasers, the commission earned would be credited against the advance, thereby reducing the account receivable balance. Where petitioner returned premiums to a purchaser on a terminated sale, a charge back would be made to a sales agent's account in the amount of the commission previously credited.
Mr. Michael Houser was employed by petitioner from May, 1973 through June, 1977. He was Director of Marketing until May 1, 1974, when he became Vice President of petitioner. In May or June of 1974, Mr. Houser was given the responsibility of attempting to collect outstanding sales agent accounts receivable balances shown on petitioner's books. His attempt to collect consisted of sending letters demanding payment to those agents for which he had an address and documentation in the company files to support such a demand. At trial, Mr. Houser could not identify the accounts for which he sent letters or why certain accounts were considered uncollectible. No legal action was taken, or collection agency consulted, in order to collect the debts; no collections were made.
Petitioner claimed a $126,049.26 bad debt deduction on its 1973 Federal income tax return for worthless receivables from sales agents, which respondent disallowed upon examination of such return. A list presented by petitioner shows that this amount is made up of $76,465.22 in ‘ordinary agents balances,‘ $11,762.71 in ‘group agents balances,‘ and $37,821.33 in ‘agents deficiencies.‘ No documentation was presented in support of the individual receivable balances. As best as we can tell, ‘ordinary agents‘ sold policies to individuals, while ‘group agents‘ sold to groups. The ‘agents deficiencies‘ list contains a large number of small balances purportedly due from agents selling small life policies in petitioner's former ‘industrial business,‘ which was sold by petitioner in 1972 or 1973. The industrial business was essentially made up of door-to-door sales and collections of small life policies and premiums, respectively.
The ordinary agents balances includes $19,600.00 due from the ‘Teamsters Union‘ and $10,247.10 from the ‘Union Trust Agency.‘ These balances purportedly represent amounts due from the Teamsters Local 327 in Nashville, Tennessee. Many of petitioner's witnesses were asked (by deposition or at trial) about such balances, including Mr. Houser, Mr. Jerry Wayne Fickes, a consultant to petitioner, Mr. Robert B. Smith III, petitioner's former President, Mr. Curtis F. Mansfield, petitioner's former Treasurer, and Mr. Billy Jack Goodrich, petitioner's former General Counsel. None of these witnesses could explain why these funds were advanced to the Teamsters, whether any attempt was made to collect the balances due, or why the amounts were considered uncollectible. As to other accounts, petitioner's witnesses could identify the names of only a few of the debtors.
OPINIONThe first issue for decision is whether petitioner's acquisitions from Financial and Capitol of 56.32 percent and 20...
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