Daggitt v. Comm'r of Internal Revenue
| Decision Date | 13 October 1954 |
| Docket Number | Docket Nos. 38570,38571. |
| Parties | DELOSS E. DAGGITT AND DUANA C. DAGGITT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOSEPH REID AND MAE REID, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William H. Quealy, Esq., for the petitioners.
Robert R. Veach, Esq., for the respondent.
Stock distributed to two stockholders substantially in proportion to their prior stock ownership, purportedly in payment of salary, held, not to constitute taxable income.
The commissioner of Internal Revenue determined deficiencies in income tax for 1948 in the amount of $17,193.40 against Deloss E. and Duana C. Daggitt, and in the amount of $910.92 against Joseph and Mae Reid. The petitioners in each case are husband and wife, residing in Michigan, and the joint returns in question for 1948 were filed with the then collector of internal revenue at Detroit, Michigan. Substantially all of the facts have been established by admissions in the pleadings and by a stipulation of facts with accompanying joint exhibits. All such facts are incorporated herein by reference as our findings. The principal question presented is whether petitioners Deloss E. Daggitt and Joseph Reid (referred to hereinafter as Daggitt and Reid) are chargeable with taxable income upon the receipt of certain stock in Producers Transport, Inc., on February 11, 1948. If this question is answered in the affirmative, a second question is presented as to the fair market value of that stock.
Producers Transport, Inc., incorporated in 1942, is a carrier of gasoline and other petroleum products by tank truck. Only one class of stock, having a par value of $10 per share, has been outstanding during the entire period involved. Daggitt has been the principal stockholder since the date of incorporation. Of the original stock of 100 shares, 98 shares were issued to Daggitt; the 2 remaining shares were apparently merely qualifying shares and were issued to others. At all times material, Daggitt has been president of the corporation. Reid was the active terminal manager.
As of December 31, 1945, the corporation owed Daggitt.$24,219.68. In order to reduce this indebtedness, $23,219.68 was ‘transferred to capital,‘ and by an amendment to the articles of incorporation filed May 27, 1946, the authorized capital stock was increased to 2,500 shares. However, no additional stock was issued at that time.
On or before August 15, 1946, Daggitt decided that Reid should be given an opportunity to acquire a proprietary interest in the business. Reid paid in $2,500 to be applied toward the purchase of stock. As of February 11, 1947, there were 2,400 shares of stock authorized and unissued. This stock was thereupon issued on that day as follows: 2,173 shares to Daggitt for the $23,219.68 which had theretofore been transferred to capital, as noted above; and 227 shares to Reid for $7,491, $2,500 of which he had already paid, the balance being represented by an interest-bearing note secured by a pledge of the stock, with the understanding that such balance would be paid out of earnings.
During 1947, Reid had received a salary from the corporation, but no salary was paid to Daggitt. The corporate net income for that year from operations was $34,071.39 (before deducting salary voted for Daggitt and additional compensation for Reid, as hereinafter described); in addition, it had other income in the amount of $19,226.56. At a meeting of the board of directors on December 15, 1947, it was resolved that Daggitt be paid a salary of $9,000 for 1947, but since the corporation's cash position was such that it could not make payment to Daggitt in cash, it was agreed that Daggitt would accept additional stock (to be authorized and issued subsequently) in lieu of payment of the amount due. Meanwhile, Reid had acquired an interest in the corporation, as already noted, and it was recognized that it would be improper to issue additional stock to Daggitt without issuing a proportionate amount to Reid. Accordingly, in order to maintain their approximate proportionate interest, there was accrued additional compensation of $1,000 for Reid with the understanding that he would likewise accept stock in payment. As of December 31, 1947, there was accrued as wages payable on the corporate books a liability for salaries in the amount of $9,000 to Daggitt and $1,000 to Reid, or a total of $10,000 which the corporation claimed as a deduction on its returns for 1947.
The articles of incorporation were amended on January...
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...also W. A. Krueger Co., T.C. Memo. 1967-192. 29. The result sought by respondent is clearly contrary to the result reached in Deloss E. Daggitt, 23 T.C. 31 (1954), albeit based on a new theory. But even aside from the endless litigation, there is danger in continually spinning new theories ......
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