Friendly Finance, Inc. v. Commissioner
| Decision Date | 05 November 1991 |
| Docket Number | Docket No. 3940-87. |
| Parties | Friendly Finance, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Linda S. Paine and Robert I. White, 1200 Smith St., Houston, Tex., for the petitioner. Melanie R. Urban, for the respondent.
Memorandum Findings of Fact and Opinion
In his notice of deficiency, respondent determined the following deficiencies in, and additions to, petitioner's Federal income taxes:
Additions to Tax, Sections
Fiscal Year 6653 6653
Ended Deficiency (a)(1)1 (a)(2) 6661(a)
June 30, 1983 ............................ $315,592.84 $15,779.64 * $31,559.28
June 30, 1984 ............................ 73,504.34 3,675.22 * 7,350.43
* 50 percent of the interest due on the portion of the underpayment attributable to negligence
The above tax deficiencies include respondent's determination that petitioner is liable for personal holding company tax for each of the years in issue in the amount of $172,439.97 and $51,625, respectively.
In his answer to the petition, respondent claims additions to tax under section 6661(a) in the amount of $78,898.21 for fiscal year 1983, and $18,376.09 for fiscal year 1984, rather than the lower amounts determined in the notice of deficiency, set forth above. He claims the higher amounts under section 8002 of the Omnibus Budget Reconciliation Act of 1986, Pub.L. 99-509, 100 Stat. 1874, 1951, which increased the percentage rate for additions under section 6661(a) from 10 to 25 percent of the underpayment in the case of returns due after December 31, 1982. This increase is effective for additions assessed after October 21, 1986.
The issues presented for decision are: (1) Whether certain payments constitute compensation for services rendered or dividends; (2) whether petitioner or one of its shareholders owned certain partnership units in the San Antonio Spurs Basketball Club at the time the partnership made a distribution of $200,000 to its partners, or at the time the partnership units were sold; (3) whether petitioner qualifies as a "lending or finance company" within the meaning of section 542(c)(6) for both of the years at issue, and, accordingly, is not a personal holding company subject to personal holding company tax; (4) whether petitioner is liable for additions to tax for negligence under section 6653(a)(1) and (2); and (5) whether petitioner is liable for additions to tax under section 6661 for substantial understatement of income tax. We note that petitioner concedes the bad debt adjustments in the amount of $78,033.61 for fiscal year 1983, and $15,000 for fiscal year 1984, which were also determined by respondent in his notice of deficiency.
Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated by this reference.
Petitioner is a corporation organized in 1969 under the laws of the State of Texas. At the time the petition in this case was filed on its behalf, its principal place of business was Corpus Christi, Texas.
In 1969, Mr. Charles F. Thomas, Mr. B.J. McCombs, and Mr. Jack Sulephen owned an automobile dealership, Charlie Thomas Courtesy Ford (Courtesy Ford), located in Corpus Christi, Texas. Customers of Courtesy Ford with good credit histories were able to obtain car loans from the Ford Motor Credit Company or banks, but customers with poor credit histories and customers who wished to purchase older cars had difficulty obtaining financing. Mr. Thomas and Mr. McCombs organized petitioner to provide financing for car purchases by customers of Courtesy Ford who were unable to obtain conventional financing.
After petitioner was organized, its operations grew and it later began financing the purchase of new cars, leasing cars, and selling credit insurance on the lives of its borrowers. Throughout the period in issue, most of petitioner's assets took the form of accounts receivable which were to be collected over the lives of the car loans it made. Petitioner required bank loans to conduct its operations and at its peak, its bank loans amounted to approximately $4.5 million.
For the years in issue, petitioner accounted for and reported Federal income tax on the basis of a fiscal year ending June 30. Petitioner reported the following retained earnings on the balance sheets, Schedules L, filed as part of its Federal income tax returns for the fiscal years shown below:
Fiscal Year Retained Earnings
1980 .......................... $305,631.19
1981 .......................... 321,053.43
1982 .......................... 407,934.13
1983 .......................... 429,198.36
1984 .......................... 479,252.42
Initially, after petitioner was organized by Mr. Thomas and Mr. McCombs, one half of its stock was issued to Mr. Thomas and the other half was issued to Mr. Sidney A. Sparks, who held the stock as "custodian" for Mr. McCombs' three daughters, Linda, Marsha, and Connie. Approximately 11 years later, in August of 1981, Mr. Gary V. Woods replaced Mr. Sparks as custodian for Mr. McCombs' daughters. Three days later, on August 15, 1981, their stock interest was transferred to a Texas general partnership, LYMARCO, in which each of the three daughters owned a one-third interest.
As of June 30, 1982, 1983, and 1984, the shares of petitioner's stock were owned as follows:
As of As of As of
Shareholder June 30, 1982 June 30, 1983 June 30, 1984
Mr. Thomas .................................... 27,500 27,500 **47,500
Mr. Daniell ................................... 25,000 25,000 25,000
Mr. Sulephen .................................. 20,000 20,000 **--
LYMARCO ....................................... 27,500 *-- --
_________ __________ __________
Total Shares .................................. 100,000 72,500 72,500
* On or about August 31, 1982, LYMARCO's shares in petitioner were redeemed
** On October 1, 1983, Mr. Sulephen transferred his shares in petitioner to Mr. Thomas
During both of the years at issue, petitioner's board of directors consisted of Mr. Thomas, Mr. McCombs, and Mr. Daniell.
Mr. Thomas was petitioner's principal manager from the time he cofounded it until June 30, 1984. He held the position of chairman of the board during the years in issue. During that time, he played a significant role in all major decisions affecting petitioner's growth and the types of business in which it engaged.
Mr. McCombs was petitioner's other cofounder and was a member of petitioner's board of directors during the years at issue. In addition to his investment in petitioner, he was involved in other business ventures with Mr. Thomas, including Courtesy Ford and Courtesy Insurance Agency. He was also involved in business ventures unrelated to Mr. Thomas. All of Mr. McCombs' businesses and holdings were managed by McCombs Enterprises.
During the years in issue, Mr. Gary V. Woods was president of McCombs Enterprises. He was also managing agent of LYMARCO. The record does not reveal when Mr. Woods became associated with McCombs Enterprises or LYMARCO. In the course of representing the McCombs family, Mr. Woods assisted petitioner and consulted with its employees. He was not an officer or director of petitioner nor was he employed by it.
Mr. Sulephen was a co-owner and manager of Courtesy Ford. He was neither an officer or director of petitioner nor was he employed by it. Nevertheless, the bulk of petitioner's business was derived from his referrals of Courtesy Ford's customers to petitioner and, under his management, Courtesy Ford agreed to repurchase any automobile which petitioner repossessed, if the customer was delinquent by 90 days or less. He also made sure that, when possible, petitioner's sales force sold credit life insurance to customers.
Mr. Taylor Daniell became petitioner's general manager in 1973. He was a full-time salaried employee of petitioner until November 1978, when he moved to Houston to work for another business owned by Mr. Thomas and Mr. McCombs, Courtesy Insurance Agency. Mr. Daniell continued to work for petitioner without compensation on a part-time basis. During the years in issue, he served as petitioner's president and as a member of its board of directors.
Prior to August of 1982, Mr. Thomas, Mr. McCombs, Mr. Sulephen, and Mr. Woods had received no dividends or compensation from petitioner. Mr. Daniell had received compensation during the years 1973 to 1978 as a salaried employee of petitioner, but he had not received any dividends.
In 1982, petitioner's directors and officers decided that petitioner's operations should be reduced in size with a view to the company's possible future liquidation. As steps were taken to carry out that decision and to contract petitioner's operations, cash became available to the business. In August of 1982, Mr. Thomas asked Mr. Daniell to determine if petitioner had enough cash on hand to distribute to certain individuals. Mr. Daniell determined that $100,000 was available.
In deciding how much of the $100,000 to pay and to whom it should be paid, Mr. Thomas did not take into account the time and effort which any person had expended on behalf of petitioner. He allocated the payment to each of petitioner's four shareholders in accordance with the pro rata share which each of them held in petitioner's stock. Thus, at Mr. Thomas' direction, petitioner made the following payments on August 31, 1982:
Amount of
Recipient Payment
Mr. Thomas .......................... $...To continue reading
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