Dees v. C.I.R., 062662 FEDTAX, 81908

Docket Nº:81908, 81909, 81910, 82404.
Opinion Judge:SCOTT, Judge:
Party Name:ELSIE L. DEES, et al.,[1] Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Donald L. Wilson, Esq., Robert Mueller, Esq., A. E. Brooks, Esq., and K. G. Tarlton, Esq., for the petitioners. E. John Eagleton, Esq., Roy E. Graham, Esq., and Allen T. Akin, Esq., for the respondent.
Case Date:June 26, 1962
Court:United States Tax Court
 
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21 T.C.M. (CCH) 833 (1962)

T.C. Memo. 1962-153

ELSIE L. DEES, et al.,[1] Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 81908, 81909, 81910, 82404.

United States Tax Court.

June 26, 1962

Donald L. Wilson, Esq., Robert Mueller, Esq., A. E. Brooks, Esq., and K. G. Tarlton, Esq., for the petitioners.

E. John Eagleton, Esq., Roy E. Graham, Esq., and Allen T. Akin, Esq., for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SCOTT, Judge:

Respondent determined deficiencies in the income tax of W. W. Dees and Elsie L. Dees in the amounts of $36,972.62 and.$88,692.63 for the years 1953 and 1954, respectively, and additions to the tax for 1953 under sections 294(d)(1) (A) and 294(d)(2) of the Internal Revenue Code of 1939 in the respective amounts of $3,646.80 and $2,431.18. For 1955 respondent determined a deficiency in income tax of W. W. Dees in the amount of $7,359.37 and a deficiency of the same amount in the income tax of Elsie L. Dees. Respondent determined a deficiency in the income tax of William Angus Wages and Mildred Wilma Wages for 1954 of $11,368.88. W. W. Dees and Elsie L. Dees each claim an overpayment of income tax for the year 1955 in the amount of $463.10, and for the year 1954 W. W. Dees and Elsie L. Dees claim an overpayment of income tax in the amount of $360.

Some of the issues raised by the pleadings have been settled by the parties, leaving for decision herein the following:

(1) Whether W. W. Dees and Elsie L. Dees realized income in the years 1953 and 1954 from the purchase of Western Republic Life Insurance Company stock at less than the fair market value thereof.

(2) What was the fair market value of Western Republic Life Insurance Company stock on December 21, 1953, and April 21, 1954?

(3) Whether W. W. Dees and Elsie L. Dees realized income of $1,350 in 1955 through the purchase of land from Western Republic Trust Company at less than its fair market value.

(4) Whether W. W. Dees received, in 1955, as compensation for services rendered to Western Republic Life Insurance Company one block of 600 shares of that company's stock.

(5) Whether W. W. Dees and Elsie L. Dees realized income of $16,812.50 by transferring 1,000 shares of Western Republic Life Insurance Company stock to Horace E. White in part payment of the purchase price of land.

(6) Whether W. W. Dees and Elsie L. Dees sold 200 shares of Western Republic Life Insurance Company stock to Frank Griffin in 1955.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found accordingly.

Petitioners W. W. Dees and Elsie L. Dees, husband and wife residing in Brownwood, Texas, filed joint income tax returns for the taxable years 1953 and 1954 and separate income tax returns for the taxable year 1955 with the district director of internal revenue at Dallas, Texas.

Petitioners William Angus Wages and Mildred Wilma Wages, husband and wife residing in Austin, Texas filed a joint income tax return for the year 1954 with the district director of internal revenue at Austin, Texas.

W. W. Dees (hereinafter referred to as petitioner) during the years here involved, was president of the Citizens National Bank in Brownwood, Texas.

Sometime in 1952 or prior thereto, Banks L. Miller (hereinafter referred to as Miller) contacted petitioner and William Angus Wages (hereinafter referred to as Wages) to discuss the formation of an insurance company. Miller had formulated a plan for organizing a life insurance company and believed petitioner possessed the experience and reputation in the banking business and Wages the experience in the insurance business, necessary to the successful formation of such a company. Miller, Wages, and petitioner discussed the different plans and problems attendant upon forming an insurance company, and it was decided that they would proceed with the establishment of such a company. In furtherance of this plan three corporations were organized.

Western Republic Life Underwriters (hereinafter referred to as Underwriters) was organized on November 6, 1952, Western Republic Life Insurance Company (hereinafter referred to as insurance company) in March 1953, and thereafter, Western Republic Trust Company (hereinafter referred to as trust company). The function of Underwriters was to raise funds with which the insurance company would be capitalized, enabling the latter to start insurance operations. Underwriters was to raise the funds with which to purchase insurance company stock through the public sale of both its own stock and the stock of insurance company. Insurance company was formed and operated as a stock insurance company engaged in the business of selling insurance. Trust company was set up to stabilize the market for insurance company stock during the time of the public offering thereof by Underwriters. Trust company would purchase shares of insurance company stock at the public offering price from brokers and stock purchasers desiring to sell to prevent the stock being sold by newspaper advertisement or otherwise at less than its public offering price. Miller was president of all three corporations. Petitioner was chairman of the board of directors of insurance company. Wages was vice president and on the board of directors of insurance company.

Underwriters, organized under article 1303(b) of Vernon's Annotated Statutes of the State of Texas, was a licensed securities dealer and as such could license agents or other security dealers to sell any security it was handling. It had capital stock of 100,000 shares, divided into 50,000 shares of no par common stock and 50,000 shares of no par class A common stock. Twenty-five thousand shares of its common stock were issued for $25,000, which constituted its initial paid-in capital. By December 31, 1953, 49,400 shares of Underwriters common stock were outstanding for which $52,150 or an average per share amount of $1.06 had been paid.

On December 31, 1953, Miller, his wife, Zella Miller, and his son, Banks Miller, Jr., together held 44,700 shares; Wages held 2,500 shares; and petitioner held 500 shares of Underwriters common stock.

About the first of March 1953, Underwriters began the public promotion of its class A common stock. On cash sales the price was set at $16 per share. On subscription contract sales, payable over 3 years, the price was set at $20 per share. These prices were arrived at by the Securities Commissioner in consultation with Underwriters' officers. The net to Underwriters from such sales was $12.80 per share whether from cash or installment sales.

Underwriters employed 18 agents in 1953 for the sale to the public of its class A common stock and later employed 18 additional agents to sell insurance company stock. Underwriters sold and issued to the public 24,900 shares of its class A common stock in 1953, 2,217 shares in 1954, and 59 shares in 1955 for a total of 27,176 shares. In addition, Underwriters sold to the public on 3-year subscription contracts 24,825 shares of its stock in 1953, 605 shares in 1954, and none in 1955, a total of 25,430 shares. The class A common stock sold on these subscription contracts was not to be issued until paid in full.

Individuals who were either agents or employees of Underwriters or members of Underwriters' board of directors purchased Underwriters class A common stock on the dates, in the amounts, and for the prices set forth:

Price

Date of No. of per

purchase Purchaser shares share

5/18/53 W.B. Hahn 100 $16.00

6/30/53 George L. Herber 10 16.00

7/8/53 A. E. Fulton 400 12.80

8/25/53 W. B. Hahn 50

9/28/53 John Howard Wilkinson 50 12.80

10/1/53 Kenneth H. Riley 25 12.80

10/7/53 Thelma G. Westbrook 500 12.80

10/13/53 W. T. Mayfield, Jr. 25 16.00

10/13/53 W. B. Hahn 100 12.80

1/8/54 Edward S. Gardner 25 12.80

2/10/54 George A. Herber 100 12.80

3/25/54 George L. Herber 25 16.00

5/21/54 William T. Mayfield 75 16.00

6/2/54 W. L. Muston 5 12.80

7/9/54 W. T. Mayfield 25 16.00

On March 4, 1953, when insurance company commenced business, it had capital stock of 2,500 shares of $10 par value, with paid-in capital of $25,000 and paid-in surplus of $12,500. On August 15, 1953, the capital stock of insurance company was increased from 2,500 shares of $10 par value to 10,000 shares of $10 par value, making a total of issued and outstanding capital stock of 10,000 shares, with a paid-in capital of $100,000 and a paid-in surplus of $17,500. Underwriters owned 9,995 shares of the outstanding 10,000 shares. On October 14, 1953, insurance company increased its authorized capital stock from 10,000 shares of $10 par value to 300,000 shares of no par value stock. The outstanding 10,000 shares of $10 par value stock were exchanged for 100,000 shares of no par value stock, and Underwriters at the same time acquired an additional 100,000 shares of no par value stock of insurance company at $1.50 per share, giving insurance company at that time a total of 200,000 shares of capital stock issued and outstanding with a paid-in capital of $250,000 and a surplus of $18,187.61. Underwriters owned 199,950 shares of the outstanding 200,000 shares. On October 14, 1953, there were 100,000 shares of no par value stock of insurance company authorized and not issued. Underwriters, by agreement, undertook to sell 50,000 shares thereof to the public. The promotion by Underwriters of insurance company stock was similar in procedure to the promotion of...

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