Estate of Mixon v. United States, Civ. A. No. 1036-S.

Decision Date26 March 1971
Docket NumberCiv. A. No. 1036-S.
Citation324 F. Supp. 977
PartiesESTATE of Travis MIXON, Jr., Plaintiff, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — Middle District of Alabama

Griffith F. Pitcher and James W. Gewin, Bradley, Arant, Rose & White, Birmingham, Ala., for plaintiff.

Ira DeMent, U. S. Atty., M. D. Ala., Montgomery, Ala., for defendant.

DECREE

PITTMAN, District Judge.

This tax refund case has been submitted on a stipulation, depositions, and briefs for decision by the court without jury. The suit involves $126,964.54 in allegedly overpaid taxes, penalties, and interest, this being the amount assessed by the Commissioner against a $140,000 payment from the Bank of Graceville (Florida) to the now deceased taxpayer Travis Mixon, Jr. The taxpayer paid the assessment, filed a timely claim for refund, and brought this action when his claim was not acted on within six months.

This case involves a debt vs. equity question; that is, was the $140,000 payment to the taxpayer repayment of a bona fide debt or was it a return on his invested capital. The following facts appear from the record:

On June 25, 1960, the taxpayer owned 142 (or 14.2%) of the authorized and outstanding 1000 shares of the Bank of Graceville (Bank); he, by attribution under § 318 of the Internal Revenue Code of 1954, owned 153 shares or 15.3% of the stock.

On June 27, 1960, examiners from the FDIC began an examination of the financial position of the bank. They discovered a shortage of nearly $908,000 which was later traced to defalcation by an officer of the bank. Because of the large loss, the FDIC examiner called in a state banking official. The joint examination by the federal and state agents resulted in a determination that through faulty bank practices, the bank had made many improperly secured loans. The examiners ordered some $118,000 of these loans written off. Writing a loan off as uncollectable in no way affects the bank's right to seek collection; it is, rather, an entry on the bank's books which reduces the value of its assets.

The bank and the state bank examiner attempted to get early, partial payment from the bonding company to cover the losses caused by the embezzlement; they were unsuccessful and the bank found itself short of cash. In order to meet an expected run on the bank, caused by public disclosure of the embezzlement, the Board of Directors voted to borrow $200,000 from other banks. A few days later another $100,000 was borrowed from yet a third bank.

Throughout the month of July, the bank attempted to enlarge its endangered assets without incurring short term liabilities: in an effort to attract new depositors the bank began paying interest on time deposits; directors and large depositors were requested to convert savings accounts into certificates of deposit; and, bank officers pushed final settlement with the bonding company. Despite these efforts the position of the bank continued to be tenuous.

On July 21, 1960, Mr. Chapman, the State Deputy Commissioner of Banking, told the directors that $200,000 would have to be injected into the bank to justify his allowing the bank to stay open. The minutes of the board meeting on that date read in part:

"The F.D.I.C. and Mr. Chapman requested that the stock holders add $200,000.00 to the stock of the Bank to strengthen the Bank. The Directors agreed to comply with the request."

At this point it seems clear that the directors envisioned the sale of stock to produce the needed capital. According to the surviving participants at the meeting, the idea of selling stock was rejected because the small stockholders of the corporation had preemptive rights and the difficulties inherent in a new issue of stock made it an impractical method of raising money quickly.

The method of providing the needed additional funds was arrived at during the directors meeting of July 26, 1960. Because of its importance to the resolution to the present dispute, the formal resolution adopting the funding procedure is reprinted in full in the margin.1

Under the terms of the agreement three directors, Travis Mixon, Jr., R. L. Miller, and John R. Mixon would contribute $200,000 to a special account being set up called "Reserve for Contingencies." The bank issued no formal writing indicating that this was a debt. The amount contributed by each director along with his percentage ownership of the bank is as follows:

                                      No. of       % of        Amount
                                      Shares       Shares      Contributed
                                      Owned        Owned
                Travis Mixon, Jr.     153*         15.3       $160,000
                R. L. Miller           20           2.0          20,000
                John R. Mixon          27           2.7          20,000
                                      ___          ____        ________
                        Total         200          20.0        $200,000
                

The money deposited by taxpayer in the newly created account was raised by cashing in some certificates of deposit at the bank and by borrowing from a Tallahassee bank; his note at the Tallahassee bank was secured by the pledge of other Graceville Bank certificates of deposit. Subsequently, the pledged certificates were cashed in and the proceeds used to pay the note at the Tallahassee bank.

Over the next few months, the bonding company began paying for the bank's losses; also, many of the loans charged off by the examiners were collected. Despite requests from the bank, however, the examiners refused to authorize any withdrawals from the reserve for contingency fund. The state agent also denied the bank's request to pay interest on the $200,000.

Finally, on April 20, 1961, the state and federal authorities authorized the withdrawal of $50,000 from the reserve for contingencies. By resolution of the Bank's board, the $50,000 was withdrawn on April 26 and distributed as follows:

                                           Amount             Amount paid on
                                           Contributed        April 26, 1961
                Travis Mixon, Jr.          $160,000.00          $20,000.00
                R. L. Miller                 20,000.00           10,000.00
                John R. Mixon                20,000.00           20,000.00
                

It is noted that the payments bore no relationship to the amount originally paid in. Taxpayer got one-eighth of his money, Dr. Miller got half, and John Mixon was paid all of his. At this time the bank was not authorized to pay dividends.

During the following months the bank directors requested release of the remainder of the contingency fund. Finally, on October 26, 1962, the state and federal authorities allowed the remaining $150,000 to be withdrawn. At the same time the bank was authorized to pay up to $10,000 aggregated, in dividends. The $150,000 was distributed to the two remaining contributors. Thereafter the Commissioner of Internal Revenue decided taxpayer's $140,000 was a taxable dividend and the present controversy began.

As noted earlier, this is a debt vs. equity question. Sections 301 and 316 of the Internal Revenue Code of 1954 provide for the taxation of dividends paid by corporations. The money is taxable to the corporation as profits and, after distribution, to shareholders as ordinary income. There is no tax to the individual if the money is merely repayment of a debt; additionally, the interest paid by the corporation is deductible by it as a business expense. There is usually a great tax advantage to the shareholder (and a corresponding disadvantage to the tax collector) when payments to the shareholder can be treated as repayment of a debt. This, of course, is why the debt-equity question is so often litigated.

In deciding whether the money advanced to the corporation is a debt or equity-capital no one test can be used. United States v. Henderson, 375 F.2d 36 (5th Cir. 1967).

Among the factors which may be considered are: (1) whether the money...

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2 cases
  • Estate of Mixon v. United States
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • July 5, 1972
    ...On December 18, 1969, taxpayer instituted this suit in the district court; and on March 31, 1971, judgment was entered in his favor, 324 F.Supp. 977. This appeal by the government followed.2 Finding no error in the district court's judgment, we As in most cases of this type, the facts here ......
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