Frantz v. Comm'r of Internal Revenue, Docket No. 16188–79.

CourtUnited States Tax Court
Writing for the CourtSTERRETT
PartiesLEROY FRANTZ, JR. AND SHEILA FRANTZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Decision Date07 August 1984
Docket NumberDocket No. 16188–79.

83 T.C. 162
83 T.C. No. 11

LEROY FRANTZ, JR. AND SHEILA FRANTZ, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16188–79.

United States Tax Court

Filed August 7, 1984.


Petitioner owned 65 percent of the common stock and 13 percent of the preferred stock of a corporation. He surrendered to the corporation his preferred stock and certain advances owing to him from the corporation. The surrender was non-pro rata with respect to other shareholders. Petitioner subsequently sold his common stock. Held, petitioner did not sustain a loss on his surrender to the corporation of his preferred stock and advances. His surrender constituted a contribution to the capital of the corporation. To the extent that our prior cases hold that a non-pro rata surrender of stock to the issuing corporation results in an ordinary loss, they are expressly overruled. Held further, petitioner's common stock did not qualify as “section 1244 stock,” since the corporation was not a “small business corporation” as defined in sec. 1244(c)(2)(A), I.R.C. 1954. Accordingly, petitioner is not entitled to a $50,000 ordinary loss on the sale of the stock.

[83 T.C. 163]

Patrick J. Carr, for the petitioners.

Leslie J. Spiegel, for the respondent.

STERRETT, Judge.

In his notice of deficiency dated August 28, 1979, respondent determined a $78,440.97 deficiency in petitioners' Federal income tax for the year 1973. In an amendment to his answer, respondent asserted an additional deficiency in the amount of $13,249.03. After concessions by the parties, the primary issues remaining for decision are:

(1) Whether petitioner, Leroy Frantz, Jr., sustained a loss during 1973 from surrender to a corporation, of which he was a principal common shareholder, of his preferred stock in the corporation as well as certain advances previously made by him to that corporation.

(2) Whether petitioner's shares of common stock in the corporation qualified as “section 1244 stock,” thereby entitling petitioners to an ordinary loss on the sale of the stock during 1973 to the extent of $50,000.

FINDINGS OF FACT

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

At the time they filed their petition in this case, Leroy Frantz, Jr. and Sheila Frantz, husband and wife, resided at 89 Butternut Hollow Road, Greenwich, Connecticut. Petitioners filed a joint Federal income tax return for the taxable year 1973 with the Internal Revenue Service Center, Holtsville, New York, which was received by the Internal Revenue Service on October 8,

[83 T.C. 164]

1974. The amounts here in dispute relate to the activities of Leroy Frantz, Jr., and Sheila Frantz is a party to this litigation only because she filed a joint return with her husband. When used hereinafter in the singular, “petitioner” will refer to Leroy Frantz, Jr.

During 1969 through 1973, petitioner invested a substantial amount of money in eight or nine business entities.1 Andree Biallot, Ltd. (hereinafter referred to as ABL), a corporation engaged in the business of selling perfumeries and toilet articles, was one such entity. During this same period, petitioner was not a salaried employee of any business entity, but rather devoted his time to the supervision of his investments.

ABL was organized under the laws of the State of New York and filed its certificate of incorporation on July 1, 1966. The certificate of incorporation authorized ABL to issue 4,000 shares of common stock without par value. Prior to June 30, 1971, ABL had issued 1,677 shares of common stock without par value to an aggregate of 13 shareholders. The aggregate amount received by ABL as consideration for the issuance of the 1,677 shares of common stock was at least $219,250.

From September 25, 1970 through February 1, 1971, petitioner, who was not at that time a shareholder of ABL, made advances to the corporation in the total amount of $80,000.

As of May 1971, ABL was experiencing financial difficulties and offered to its shareholders and creditors a proposed plan of reorganization and composition with creditors. Under the plan of reorganization, negotiated with old stockholders and old creditors, adopted by the board of directors at a special meeting held on June 10, 1971, and approved by the shareholders at a meeting begun on June 21, 1971 and concluded on June 30, 1971,2 ABL authorized 500,000 shares of a new class of common stock with a par value of $.01 per share (“new common stock”) and 120,000 shares of new 6-percent convertible preferred stock with a par value of $2 per share (“new preferred stock”) in place of the old authorized common stock (“old common stock”). The new preferred stock was convertible

[83 T.C. 165]

into ABL's new common stock. The plan provided for each share of old common stock to be exchanged for 25 shares of new preferred stock. Thus, the 1,677 shares of previously issued and outstanding common stock were exchanged for 41,925 shares of new 6-percent convertible preferred stock.

Ancillary to the plan of reorganization was a composition with creditors. Under the composition, which was negotiated with old creditors and old stockholders, each creditor classified as a Class C creditor received shares of the new 6-percent convertible preferred stock aggregating $40 in par value for each $100 of approved claims held against ABL. Pursuant to the final composition, certain creditors' claims aggregating $383,840 in face amount were exchanged for 76,768 shares of new 6-percent convertible preferred stock.

Petitioner was a member of the group of Class C creditors. On June 21, 1971, he exchanged his $80,000 in claims against ABL for 16,000 shares of the new 6-percent convertible preferred stock.3 On his Federal income tax return filed for the taxable year 1971, petitioner claimed a $48,000 loss as a result of the exchange of the $80,000 advances made to ABL for the 16,000 shares of the new 6-percent preferred stock. Said loss was allowed by respondent after audit of petitioners' 1971 income tax return.4

There were 21 shareholders of new preferred stock in total, 8 as a result of conversion of old debt only, 9 as a result of conversion of old common stock only, and 4 as a result of conversion of old debt and old common stock combined. Petitioner did not own any of the old common stock and, accordingly, received the new preferred stock as a result of conversion of old debt only.

At the special meeting of the board of directors of ABL held on June 30, 1971, the board of directors adopted a plan to offer stock under section 1244, I.R.C. 1954. Under this plan, ABL was authorized to offer and issue 500,000 shares of common stock with par value of $.01 per share. The shares were to be issued from June 30, 1971, the date the plan was adopted, to June 29, 1973 or to the date when ABL might make a subsequent offering of any stock, whichever should occur

[83 T.C. 166]

sooner. The plan specifically provided that “[t]he maximum amount to be received by the Corporation in consideration of the stock to be issued pursuant to this plan or as a contribution to capital shall be $500,000.00.”

In accordance with the terms of the reorganization and composition with creditors, petitioner agreed to invest approximately $200,000 of which no less than $150,000 could be allocated to capital and surplus and no more than $50,000 could be classified as senior indebtedness. On June 30, 1971, after adoption of the section 1244 plan, petitioner was issued 276,250 shares of new ABL common stock in exchange for a $150,000 check issued on that date, which check included payment for the stock at par value ($2,762.50) and petitioner's contribution to capital and surplus. On June 30, 1971 ABL also issued shares of common stock at $.01 par to the following individuals, who comprised, with petitioner, all of the common shareholders of ABL:

+---------------------------+
                ¦ ¦Shares ¦
                +------------------+--------¦
                ¦ ¦ ¦
                +------------------+--------¦
                ¦Thomas M. Biallo ¦85,000 ¦
                +------------------+--------¦
                ¦Patrick J. Carr ¦42,500 ¦
                +------------------+--------¦
                ¦Francis X. Weston ¦21,250 ¦
                +---------------------------+
                
Accordingly, 75,000 shares of authorized new common stock remained unissued as of the close of June 30, 1971.

At the June 30, 1971 meeting of the board, the following persons were elected to the positions set forth opposite their respective names:

+--------------------------------------------------------+
                ¦Leroy Frantz, Jr ¦Chairman of the board ¦
                +-----------------+--------------------------------------¦
                ¦Thomas M. Biallo ¦President and chief executive officer ¦
                +-----------------+--------------------------------------¦
                ¦Patrick J. Carr ¦Executive vice president and secretary¦
                +-----------------+--------------------------------------¦
                ¦Marion Biallo ¦Vice president—public relations ¦
                +-----------------+--------------------------------------¦
                ¦Francis X. Weston¦Treasurer and assistant secretary ¦
                +--------------------------------------------------------+
                
Mr. Carr was ABL's attorney from at least June 30, 1971 to December 27, 1973. Mr. Weston was ABL's accountant and, as such, prepared ABL's financial statements and corporate income tax returns.

Petitioner advanced funds to ABL as follows:

+----------------------------------------------+
                ¦ ¦ ¦Amount ¦
                +--------------+----------------------+--------¦
                ¦ ¦ ¦ ¦
                +--------------+----------------------+--------¦
                ¦Check No. 500 ¦and note dated 6/17/71¦$6,000 ¦
                +--------------+----------------------+--------¦
                ¦Check No. 508 ¦dated 7/ 7/71 ¦35,000 ¦
                +--------------+----------------------+--------¦
                ¦Check No. 5736¦dated 2/10/72 ¦10,000 ¦
                +--------------+----------------------+--------¦
                ¦Check No. 568 ¦dated 3/15/72 ¦6,000 ¦
                +--------------+----------------------+--------¦
                ¦Check No. 569 ¦dated 3/16/72 ¦9,000 ¦
                +--------------+----------------------+--------¦
                ¦Check No. 5765¦dated 4/14/72
...

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8 practice notes
  • Fox v. Comm'r of Internal Revenue (In re Estate of Leavitt ), Docket Nos. 32041-84
    • United States
    • United States Tax Court
    • February 10, 1988
    ...becomes an S corporation. Would the ‘interest‘ payments now be deductible under the majority opinion's analysis? 8 Frantz v. Commissioner, 83 T.C. 162, 172 (1984), affd. 784 F.2d 119 (2d Cir. 1986). 9 Citation to subchapter S cases relying on subchapter C precedent would serve no purpose. S......
  • Commissioner of Internal Revenue v. Fink, No. 86-511
    • United States
    • United States Supreme Court
    • June 22, 1987
    ...In an unpublished opinion, the Tax Court sustained the Commissioner's determination for the reasons stated in Frantz v. Commissioner, 83 T.C. 162, 174-182 (1984), aff'd, 784 F.2d 119 (CA2 1986), cert. pending, No. 86-11. In Frantz the Tax Court held that a stockholder's non pro rata surrend......
  • Frantz v. C.I.R., No. 154
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • February 19, 1986
    ...the relevant transactions) appeal from a decision of the United States Tax Court, Sterrett, C.J., entered on January 29, 1985 (reported at 83 T.C. 162), holding that their non-pro-rata surrender of their preferred stock in a closely-held corporation controlled by them, Andree Biallot, Ltd. ......
  • Halliburton Co. v. Comm'r of Internal Revenue, Nos. 26290–90R
    • United States
    • United States Tax Court
    • March 24, 1993
    ...could cause a partial termination under the [100 T.C. 247] facts and circumstances test. Tipton & Kalmbach, Inc. v. Commissioner, 83 T.C. at 162 n. 9. After due consideration, we agree with Halliburton that the terminated participants who were rehired should not be considered in deciding wh......
  • Request a trial to view additional results
8 cases
  • Commissioner of Internal Revenue v. Fink, No. 86-511
    • United States
    • United States Supreme Court
    • June 22, 1987
    ...In an unpublished opinion, the Tax Court sustained the Commissioner's determination for the reasons stated in Frantz v. Commissioner, 83 T.C. 162, 174-182 (1984), aff'd, 784 F.2d 119 (CA2 1986), cert. pending, No. 86-11. In Frantz the Tax Court held that a stockholder's non pro rata surrend......
  • Fox v. Comm'r of Internal Revenue (In re Estate of Leavitt ), Docket Nos. 32041-84
    • United States
    • United States Tax Court
    • February 10, 1988
    ...becomes an S corporation. Would the ‘interest‘ payments now be deductible under the majority opinion's analysis? 8 Frantz v. Commissioner, 83 T.C. 162, 172 (1984), affd. 784 F.2d 119 (2d Cir. 1986). 9 Citation to subchapter S cases relying on subchapter C precedent would serve no purpose. S......
  • Frantz v. C.I.R., No. 154
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • February 19, 1986
    ...the relevant transactions) appeal from a decision of the United States Tax Court, Sterrett, C.J., entered on January 29, 1985 (reported at 83 T.C. 162), holding that their non-pro-rata surrender of their preferred stock in a closely-held corporation controlled by them, Andree Biallot, Ltd. ......
  • Halliburton Co. v. Comm'r of Internal Revenue, Nos. 26290–90R
    • United States
    • United States Tax Court
    • March 24, 1993
    ...could cause a partial termination under the [100 T.C. 247] facts and circumstances test. Tipton & Kalmbach, Inc. v. Commissioner, 83 T.C. at 162 n. 9. After due consideration, we agree with Halliburton that the terminated participants who were rehired should not be considered in deciding wh......
  • Request a trial to view additional results

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