Gamble v. Commissioner
| Citation | 37 TCM (CCH) 1675,1978 TC Memo 404 |
| Decision Date | 10 October 1978 |
| Docket Number | 2023-74.,Docket No. 2022-74 |
| Parties | Gamble Construction Co., Inc. v. Commissioner. Investment Holdings, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Lawrence Brody, Dave L. Cornfeld, Carroll J. Donahue, and Bruce Springer, The Boatmen's Tower, 100 North Broadway, St. Louis, Mo., for the petitioners. David J. Duez, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined deficiencies and additions to tax in the petitioners' Federal corporate income taxes, and Gamble Construction Co., Inc., claimed overpayments, in the following amounts:
________________________________________________________________________________________________________
Addition
Year Sec. 6651(a)
Petitioner Ended Deficiency I.R.C. 19541 Overpayment
________________________________________________________________________________________________________
Gamble Construction Co., Inc. ... 12/31/67 $ 4,067.86 ........... $ 7,586.37
12/31/68 63,191.90 $ 8,497.74 10,804.39
12/31/69 50,745.10 ........... 218.98
12/31/70 118,099.02 ...........
Investment Holdings, Inc. ....... 1/31/69 494,052.86 123,513.22
1/31/70 121,453.59 ...........
1/31/71 55,898.73 ...........
________________________________________________________________________________________________________
The parties have settled certain issues. The issues remaining for decision are: (1) Whether certain transfers of funds between the petitioners constituted bona fide loans or dividends; (2) whether payments between the petitioners pursuant to a management contract, and whether a payment of $28,483.30 to an officer of one of the petitioners, were intended as compensation for services and constituted reasonable compensation for services actually rendered; (3) whether one of the petitioners is entitled to an interest deduction of $3,885.07; and (4) whether the petitioners are liable for late filing additions under section 6651(a).
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Gamble Construction Co., Inc. (Gamble), is a Missouri corporation which had its principal office in St. Louis, Mo., at the time it filed its petition in this case. Gamble timely filed its Federal corporate income tax return for the calendar year 1967 with the District Director of Internal Revenue, St. Louis, Mo. Gamble filed its Federal corporate income tax return for 1968 on January 14, 1970, with the Internal Revenue Service Center, Kansas City, Mo. Gamble timely filed such returns for 1969 and 1970 with the Internal Revenue Service Center, Kansas City, Mo. Gamble kept its books and records and reported its income for the years in issue using the completed contract method of accounting.
The petitioner, Investment Holdings, Inc. (Investment), is a Missouri corporation which had its principal offices in Maryland Heights, Mo., at the time it filed its petition in this case. It filed its Federal corporate income tax returns on the basis of a taxable year ending January 31, and we shall identify each taxable year by the calendar year in which it ended. Investment filed its Federal corporate tax return for 1969 with the Internal Revenue Service Center, Kansas City, Mo., on June 9, 1970. Investment timely filed such returns for its taxable years 1970 and 1971 with the Internal Revenue Service Center, Kansas City, Mo.
Prior to 1956, Gamble was incorporated. In 1956, several long-time employees of Gamble acquired all of its issued and outstanding stock from its previous shareholders. Subsequently, two other persons became shareholders. From 1956 through 1965, four of these shareholders were directors, officers, and full-time key employees of Gamble. However, within a period of several months during 1965, two of them resigned. In connection with their resignations, Gamble agreed to redeem their stock over the next several years.
Following such resignations, Pringle T. George, the president and principal shareholder of Gamble, reported to its board of directors that he was apprehensive about the disruptive effect such resignations might have on Gamble's various construction projects and that he anticipated "serious additional losses" to occur in the short run. He informed the board that Gamble's commitment to repurchase their stock would drain Gamble's capital surplus to such an extent that Gamble would have to re-evaluate its policy of periodically replacing old equipment and purchasing new equipment and that its growth potential might be seriously impeded. In addition, Mr. George questioned whether Gamble would be able to find adequate replacements for the retiring employees.
On August 13, 1968, Gamble had 2,000 shares of stock outstanding. Mr. George held 1,500 of such shares, Sherwood R. Hughes held 300, and L.A. Bannes held 200. Mr. Bannes' stock was subject to a repurchase agreement pursuant to which such stock was redeemed by Gamble prior to August 31, 1975.
Investment was originally organized as Friedman Textile Co. in 1946 by Harvey A. Friedman and his father. It acquired its present corporate name prior to December 31, 1968, and we will refer to it for all periods as Investment. In the late 1950's, Burnett Schwartz, an attorney who had represented both Investment and the Friedman family, acquired stock in Investment. By August 14, 1968, and during all of the years in issue, Mr. Friedman, Mr. Schwartz, and their families owned all Investment's issued and outstanding stock.
Originally, Investment was primarily engaged as a wholesaler in the domestic textile business. By the early 1960's, Investment had expanded its operation to include the wholesale, retail and leased department store domestic textile business on a national basis. However, these activities were largely terminated by the beginning of 1967. Thereafter, Investment's major asset was its ownership of 31,102 shares of stock of International Super Stores (ISS), which represented approximately 10 percent of ISS's outstanding stock. Approximately 30 percent of such stock was publicly owned and the remaining 60 percent was held by Mr. Friedman, Mr. Schwartz, and their families.
ISS was originally organized by Mr. Friedman in 1960 as Linco. Initially, it was involved in the linen leased department store business but gradually expanded its operation to include hard goods such as toys, housewares, and major appliances. By 1966, ISS owned and operated eight discount department stores. At its peak, ISS had gross annual revenue of approximately $60 million, and it employed more than 500 persons. During 1967, ISS sold all of its discount stores. However, it retained leases on four of the stores with terms ranging from 20 to 25 years. These stores were subsequently subleased by ISS at an aggregate yearly rental of approximately $100,000.
By August 14, 1968, ISS also owned 91 percent of the outstanding stock of Bernard Nursing Home, Inc. (Bernard), a company engaged in the nursing home business in St. Louis. In 1969, ISS sought to have Bernard's stock publicly marketed. To facilitate a public offering, Bernard was merged into a newly formed subsidiary of ISS, Medigroup, Inc. (Medigroup), on August 14, 1969. A preliminary prospectus was prepared in which it was contemplated that 210,000 shares of Medigroup stock, representing approximately 40 percent of the total outstanding shares of the corporation, would be sold to the general public for approximately $3.15 million. Of the total shares sold, ISS expected to sell 90,000 shares for its own account and to receive approximately $1.35 million, of which approximately $240,000 was to be used to retire indebtedness from ISS to Medigroup.
The public offering was never consummated. Subsequently, ISS engaged in extensive negotiations during 1969 and 1970 to effect a private sale of Medigroup to two different corporations. With the one corporation, a draft letter of understanding was executed under which the prospective purchaser agreed to acquire substantially all of the assets of Medigroup, subject to substantially all of Medigroup's liabilities, in exchange for its subordinated notes in the face amount of $3 million, 5-year warrants to purchase 100,000 shares of its common stock at $12 per share, and additional shares of common stock based upon the earnings of Medigroup over a 5-year period. With the other corporation, the tentative agreement called for the prospective purchaser to purchase all of the outstanding shares of Medigroup stock for $912,000 in cash, subject to adjustments based on the after-tax earnings of Medigroup. In addition, the purchaser's subsidiary also agreed to pay additional consideration, either in cash or stock, equal to the amount by which the after-tax earnings of Medigroup for its first 5 taxable years after the purchase exceeded $760,000. Neither prospective sale was completed.
Harvey A. Friedman was born, reared, educated, and has resided all of his life in St. Louis, Mo. After graduating from a local high school, he attended Washington University Business School in St. Louis from 1938 through 1941. In later years, he took postgraduate courses at Washington University, Stanford University, and the University of Massachusetts. Mr. Friedman enlisted in the Air Corps in 1942 where he served as an administrative...
To continue reading
Request your trial