Fink v. Commissioner

• Decision Date: 07 August 1984
• Docket Number: Docket No. 22865-80.
• Citation: 48 TCM (CCH) 786,1984 TC Memo 418
• Parties: Peter R. Fink and Karla S. Fink v. Commissioner.
• Court: U.S. Tax Court

48 TCM (CCH) 786

1984 TC Memo 418

T.C. Memo. 1984-418.

Peter R. Fink and Karla S. Fink v. Commissioner.

Docket No. 22865-80.

United States Tax Court.

Filed August 7, 1984.

Mark K. Wilson, 100 Renaissance Center, Detroit, Mich., for the petitioners. Richard A. Witkowski, for the respondent.

Memorandum Findings of Fact and Opinion

PARKER, Judge:

Respondent determined deficiencies in petitioners' 1976 and 1977 Federal income taxes in the respective amounts of $131,885 and $133,826. After a concession by petitioners, the issues remaining for decision are whether they are entitled to loss deductions for their non pro rata surrender of stock to the issuing corporation, and, if so, the measure of such losses.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioners, Peter R. Fink (Mr. Fink) and Karla S. Fink (Mrs. Fink), husband and wife, resided in Grosse Pointe Farms, Michigan, at the time they filed their petition herein. Petitioners filed joint returns, Forms 1040, for 1976 and 1977, using the cash receipts and disbursements method of accounting. The returns were filed with the Internal Revenue Service Center in Cincinnati, Ohio.

In 1964, petitioners and five other individuals purchased Frank Motor Homes, Inc., a Michigan corporation that manufactured motor homes. During 1976 and 1977, Frank Motor Homes, Inc., was renamed Travco Corporation (Travco or the corporation). Beginning in 1964 and throughout the years in issue, Mr. Fink was the corporation's president and chief executive officer. At no time was Mrs. Fink involved in the corporation's management.

In the early 1970's, Travco was a holding company conducting a variety of operations through subsidiaries. Travco manufactured motor homes through four operating subsidiaries. In addition, it operated a fiberglass parts and fiberglass bathtub-shower manufacturing business through a subsidiary (Richmond Products Company), and it manufactured seats, cushions, and fabrics for use in the interior of recreational vehicles through another subsidiary (Sanilac Company).

In July of 1971, Travco formed a wholly-owned subsidiary, Gemini Corporation (Gemini), to furnish on a contract basis the interiors for motor homes manufactured by the GMC Truck and Coach Division of General Motors Corporation (hereinafter GMC Truck and Coach). To perform its contract with GMC Truck and Coach, Gemini entered into a long-term lease for a plant of approximately 225,000 square feet. Gemini met its initial capital requirements by borrowing from the corporation and later, in October of 1973, by a $1,000,000 loan from GMC Truck and Coach, which was backed by Travco's credit.

Throughout the 1970's, the largest part of Travco's business involved the manufacture and sale of motor homes, recreational vehicles and their component parts. The energy crisis of 1973 and 1974 caused a change in consumer attitudes towards motor homes and recreational vehicles, resulting in a decline in earnings and a weakening of Travco's financial condition.

At the time of the energy crisis and following, Travco enjoyed a line of credit with Manufacturers National Bank of Detroit (Manufacturers National) of $3,000,000 to $3,400,000. Manufacturers National began to exert pressure on Travco for payment. Early in 1975, as a part of a new revolving credit agreement between Manufacturers National and Travco, Mr. and Mrs. Fink guaranteed payment of the corporation's borrowings against the line up to $200,000. Mr. and Mrs. Fink guaranteed the entire $200,000 because none of the other shareholders would guarantee any of it. For their guarantee, Travco issued petitioners stock warrants for up to 200,000 shares at $1.00 per share, the number of shares to be determined by the number of dollars they guaranteed to Manufacturers National.

From 1964 through 1976, Mr. Fink had invested approximately $835,000 in the stock of Travco and Mrs. Fink had invested approximately $1,060,000 in that stock. These stock investments were independent investment decisions. Mrs. Fink made her own decisions in all matters with regard to her own separate estate and did so regarding any investments she made in Travco. Each of petitioners' stock investments in Travco was made with an actual and honest objective of making an economic profit.

During 1975 and the early part of 1976, GMC Truck and Coach drastically cut the production of its recreational vehicles, requiring Gemini to lay off the vast majority of its employees. Later, in 1976, GMC Truck and Coach ceased production of its recreational vehicles for an indeterminate period of time, leaving Gemini with substantial financial obligations. Because its own viability was threatened, Travco was forced to liquidate Gemini. Gemini or Travco or both had repaid approximately $212,000 of the $1,000,000 loan from GMC Truck and Coach. On or about December 8, 1976, GMC Truck and Coach compromised the remaining principal balance, plus accrued unpaid interest of approximately $153,000, for payment by Travco of $225,000. Travco had borrowed this $225,000 from Mr. Fink, who himself had borrowed it from the City National Bank of Detroit (City National). Gemini had previously compromised the balance of its lease obligation on its plant.

Because of Travco's liquidation of Gemini, its weakened financial condition, and market conditions generally, Manufacturers National became greatly concerned about the corporation's ability to repay its borrowings. During 1976, Manufacturers National put heavy pressure for payment upon Travco leaving it three choices — liquidating, finding a new lending bank, or obtaining new capital. During 1975 and 1976, Mr. Fink, on behalf of Travco, unsuccessfully sought additional capital for the corporation from various sources. He sought additional capital from another manufacturer of motor homes, from a Florida investment group, from a Canadian company, and from his brother and brother-in-law, all without success.

Late in 1976, Travco was negotiating with City National to replace Manufacturers National as its lender. City National required $900,000 of new capital for the corporation, agreeing to $700,000 of equity and $200,000 of subordinated debt. City National also required the subordination of the corporation's $225,000 debt to Mr. Fink from the settlement with GMC Truck and Coach and of approximately $869,500 of additional shareholder-held debt, as well as personal guarantees from petitioners.

In an attempt to raise capital from sources other than its shareholders, Travco engaged an independent investment advisor, First of Michigan Corporation, to advise the corporation on how to attract outside investors and render an independent appraisal of the corporation's financial worth. In January of 1977, First of Michigan Corporation informed Travco that, without the infusion of new capital, its stock was worth about five cents a share.

Travco's capital structure, as of December 11, 1976, was as follows:

a. Common stock authorized — 2,100,000 shares ($.25 par value)

b. Common stock outstanding — 1,536,146 shares ($.25 par value)

c. Indebtedness in the amount of $350,000 to Mrs. Fink, subordinate only to bank indebtedness.

d. Indebtedness in the amount of $225,000 to Mr. Fink, subordinate only to bank indebtedness.

e. Indebtedness in the amount of $519,500 convertible for five years into Travco common stock at fifty cents ($.50) per share, with interest at the prime rate, payable quarterly, held as follows:

                  Mr. Fink ...........................    $207,100
                  Mrs. Fink ..........................     212,400
                  Elise F. Jones (Mr. Fink's sister)        50,000
                  Elise M. Fink (Mr. Fink's
                    Mother) ..........................      50,000
                

f. Guarantee to Manufacturers National Bank of Detroit in the amount of $200,000 by Mr. and Mrs. Fink, with petitioners holding warrants to purchase 200,000 shares of Travco's common stock at $1.00 per share.

On December 22, 1976, Mr. Fink surrendered without consideration 116,146 shares of Travco common stock to the corporation, shares having a total basis of $197,781.64. No other shareholder surrendered any shares. On January 6, 1977, Mrs. Fink surrendered without consideration 80,000 shares of Travco common stock to the corporation, shares having a total basis of $191,257.61. No other shareholder surrendered any shares. Travco held the shares surrendered by petitioners as treasury stock of zero value. At the time of the stock surrenders, the Travco stock was not worthless and had a value of at least five cents a share.

Petitioners surrendered a total of 196,146 shares to improve the corporation's financial position, to preserve its business, and to increase the attractiveness of the corporation to outside investors. Petitioners did not surrender stock as a part of any indirect transfer to a third party. The number of shares of stock that petitioners surrendered to the corporation was calculated to allow a new investor to acquire control of Travco by investing $700,000 in new equity to be issued in the form of $1.00 par value preferred stock convertible into common shares on a 2:1 ratio.¹ Petitioners' stock surrenders were made for the business reasons stated above and were not...