Gada v. United States
| Decision Date | 12 September 1978 |
| Docket Number | Civ. No. H-220—H-222. |
| Citation | 460 F. Supp. 859 |
| Court | U.S. District Court — District of Connecticut |
| Parties | Richard B. GADA v. UNITED STATES of America. James P. WELLS and Barbara J. Wells v. UNITED STATES of America. Gaetano GADA and Mildred Gada v. UNITED STATES of America. |
COPYRIGHT MATERIAL OMITTED
Walter B. Kozloski, New Britain, Conn., for plaintiffs.
James Littlefield, Steven Z. Kaplan, Dept. of Justice Tax Division, Washington, D. C., Frank H. Santoro, Asst. U. S. Atty., New Haven, Conn., for defendant.
This case encompasses three consolidated actions for the recovery of income taxes claimed by the plaintiffs to have been erroneously assessed for the tax year 1969. The issue before the Court is whether the issuance of shares of stock of two newly formed corporations to the shareholders of Guy's Oil Service Station, Inc. ("Guy's Oil") constituted a tax free spin off pursuant to Internal Revenue Code ("I.R.C.") § 355 and therefore was not a taxable distribution of corporate property under I.R.C. §§ 301 and 316. After a trial to the Court, the Court finds that the transaction did not satisfy the requirements necessary to receive taxfree treatment. The respective actions of the plaintiff-taxpayers requesting refunds are therefore dismissed.
In 1939, Gaetano and Mildred Gada, husband and wife, commenced a business on borrowed funds of $350.00 in which they sold and delivered home fuel oil and kerosene. They expanded their business activities in 1946 to include the operation of a gasoline service station. The business enterprise was incorporated in 1953 as Guy's Oil Service Station, Inc., and all shares of the corporation were issued to Gaetano and Mildred Gada, with the exception of two shares, which were issued to their attorney to be held in trust for their son, Richard. The business was further expanded when the corporation began to acquire additional real estate and rent it to third parties. However, they kept separate business records for the various aspects of their businesses. The claimed impetus behind the land acquisition was the institution of a lawsuit against Guy's Oil following an explosion in 1955, which resulted from gasoline seeping through the soil onto adjacent property from the underground tanks owned by the corporation. In that lawsuit Guy's Oil was sued for $350,000, and the claims were finally settled in 1959, when the liability insurance carrier compromised the claims and settled the suit.
Subsequently, additional shares of stock in the original corporation were issued to Richard Gada and to the Gadas' daughter and son-in-law, Barbara J. and James P. Wells, so that at the beginning of 1969, the tax year in litigation, all of the stock of Guy's Oil was outstanding in the names of the following stockholders:
Gaetano Gada (father) ..................... 278 shares
Mildred Gada (wife) ....................... 278 shares
Richard Gada (son) ........................ 33 shares
Barbara Gada Wells and James
Wells (daughter & son-in-law) ........... 31 shares
The officers of Guy's Oil were Gaetano, president; Richard, vice-president; and Mildred, secretary-treasurer. The same three officers also served as directors of the corporation.
Prior to 1969, Gaetano Gada was the major motivating force behind the corporation, and he was in complete command of all aspects of the business. He drove fuel oil trucks, pumped gasoline, repaired automobiles, bought and sold used cars and determined which real estate was to be bought, sold and leased. Gaetano was assisted in these activities by his son, Richard, while the books and records of the business were maintained by his wife, Mildred, who worked in the business office. From 1956 on, Gaetano Gada suffered a series of heart attacks, after which he was forced to convalesce before returning to work. On February 2, 1969, Richard broke his kneecap and was hospitalized and at the same time his father was also hospitalized with another heart attack.
During this period, the Gadas received offers to purchase the fuel oil portion of their business from at least four companies. Because of Gaetano's declining health and Richard's temporary incapacitation, the Gadas actively considered selling all or part of Guy's Oil. At an April 24, 1969 meeting of the stockholders and directors of Guy's Oil, it was resolved that the assets of the fuel oil business should be separated from the remainder of the business. On the aforesaid date, the son-in-law, James P. Wells, agreed to join the company on July 1, 1969. The elder Gadas thought it would eliminate business conflict if the son and son-in-law were assigned to separate business responsibilities. A corporate separation had been first proposed in 1956 by the corporation's accountant, Harry McLaughlin, as a practical mechanism for shielding the total assets of the business from future liability claims, similar to those which had arisen at the time of the gasoline explosion case.
Pursuant to their vote to effect a division of the assets of Guy's Oil, the stockholders and directors incorporated two new entities on July 1, 1969, Gada Realty Corporation ("Gada Realty") and Guy's, Inc. Gada Realty was to operate the real estate business; Guy's, Inc., the retail fuel oil business; and Guy's Oil was to continue the operation of the service station, which by now had expanded into a garage repair service and a used car dealer business.
The shares of the two new corporations were issued directly to the shareholders of Guy's Oil, each shareholder receiving the same number of shares as he held in the original corporation. Therefore, Guy's, Inc. and Gada Realty each issued 278 shares to Gaetano Gada, 278 shares to Mildred Gada, 33 shares to Richard Gada, and 31 shares to Barbara and James Wells. Additionally, the directors and officers of the two new corporations were the same individuals who served in those capacities for Guy's Oil. At this point in its development, the business had grown from its original $350.00 of borrowed capital in 1939 to a gross annual income of $600,000.
Gada Realty and Guy's, Inc. were capitalized by the transfer of certain assets from Guy's Oil In particular, Guy's Oil transferred all its real estate holdings to Gada Realty, and issued a check payable to Gaetano and Mildred Gada in the amount of $40,000, which they endorsed and deposited to the account of Gada Realty. The $40,000 was then used by Gada Realty to purchase certain real estate, consisting of a fuel oil business and a garage for auto and truck repairs from the Estate of David Peterson. Subsequently, Guy's Oil issued a further check in the amount of $10,000 payable to Gada Realty, which was used for making repairs to the building on the Peterson property. Finally, Guy's Oil issued a check in the amount of $10,540 payable to Guy's, Inc. for the purpose of capitalizing the latter corporation.
For the first 6 months after its incorporation, Guy's, Inc. received various services from Guy's Oil. The trucks which were used to deliver the fuel oil were owned by Guy's Oil and leased to Guy's, Inc. Customers of Guy's, Inc. were billed by Guy's Oil, and the wages of the truck drivers were paid by Guy's Oil.
Following its incorporation, Gada Realty leased office space to both Guy's Oil and Guy's, Inc. It also leased to Guy's Oil the gasoline station and the used car lot, which was located on the Peterson property. Harry McLaughlin, the Gadas' accountant, conceded at trial that, apart from the rentals paid by its two sister corporations, Gada Realty received only a very small income from the leasing of five residential properties and an auto body repair shop. Gada Realty employed no individuals; Mildred Gada, serving as secretary of the corporation, collected the rents and kept the books.
All three corporations are still in existence at the present time. While Mildred Gada still collects rents for Gada Realty, her husband has retired and is no longer active in any part of the business enterprise. Richard Gada is now president of Guy's Oil and is responsible for the daily operation of that corporation, which includes car sales, auto repairs, and the gasoline station business. James Wells, the son-in-law, is president and in charge of Guy's, Inc., which has the responsibility for the fuel oil business. It should be noted that, although the Gadas had seriously entertained the idea of selling all or part of their business nine years ago, none of the assets of any of the three corporations, except for one parcel of residential real estate, has been sold to date.
In filing their individual income tax returns for 1969, the plaintiffs in these consolidated actions failed to report the receipt of the Gada Realty and Guy's, Inc. stock as dividend income. The I.R.S., determining that the issuance of the shares in the new corporations constituted a taxable distribution of corporate property, assessed deficiencies against the taxpayers in 1972 in the following amounts, including interest:
Gaetano & Mildred Gada .................... $74,436.23
Richard Gada .............................. $ 3,893.52
Barbara & James Wells ..................... $ 2,203.58
The taxpayers paid the deficiencies and filed timely claims for refunds, which were disallowed by the I.R.S. These actions seeking refunds of the amounts paid were subsequently commenced, the taxpayers arguing that the issuance of the shares of the two new corporations constituted tax-free distributions pursuant to I.R.C. § 355.
The jurisdiction of this Court is properly invoked pursuant to 28 U.S.C. § 1346(a)(1), which gives the district courts original jurisdiction over civil actions brought against the United States for the recovery of any internal revenue tax alleged to have been erroneously collected.
The creation of two new corporations out of the assets...
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