Glacier State Elec. Supply Co. v. Comm'r of Internal Revenue, Docket No. 4420-81.
| Decision Date | 23 May 1983 |
| Docket Number | Docket No. 4420-81. |
| Citation | 80 T.C. 1047 |
| Parties | GLACIER STATE ELECTRIC SUPPLY CO., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P is a corporation organized in 1946. P's shares were issued in effect one-half each to X and Y. Z, X, and Y organized a second corporation (GSB) in 1953. The stock of GSB was issued one-third to Z and two-thirds to P. These parties executed buy/sell agreements. After amendments in 1969, the agreements provided that one-half of the GSB shares held by P would be redeemed upon the death of X or Y and that all of Z's shares would be redeemed upon Z's death.
X died in 1976. Pursuant to the buy/sell agreements, two redemptions occurred. P received a check plus a 5-year note in return for one-half of the GSB stock held by P, and the shares of P held by X's estate were redeemed. The value of the P stock was determined by separately valuing the GSB shares owned by P from P's remaining assets. X's estate received 50 percent of the value of the GSB stock held by P (the entire amount redeemed from P by GSB), but a lesser value of P's other assets, corresponding to the estate's actual ownership interest in P. The checks issued by GSB in payment for its shares and retirement of its note were assigned directly to the estate. The P and GSB stock each had a value in excess of its basis. Held:
1. (a) The “step transaction” doctrine is ineffective to recategorize the redemption of P's stock in GSB as a nontaxable distribution to the X estate followed by GSB's redemption of those shares directly from the estate. (b) P was not a mere conduit for the estate. Held, further:
2. (a) The agreements' requirement that Z's shares also be redeemed upon Z's eventual death is insufficient to establish a “series of redemptions” under sec. 302(b)(2)(D), I.R.C. 1954. (b) The redemption of P's GSB shares is not essentially equivalent to a dividend. Robert J. Law and Ward E. Taleff, for the petitioner.
Thomas N. Thompson, for the respondent.
Respondent determined deficiencies in petitioner's Federal income taxes for the years 1976 and 1977 in the amounts of $7,350.71 and $38,943.17, respectively. Concessions have been made by the parties. The issues remaining for decision are:
(1) Whether the step transaction doctrine should be applied to treat a contemporaneous redemption of a portion of the stock of petitioner's subsidiary and a redemption of some of its own stock as a distribution of the subsidiary stock to the estate of a deceased shareholder of petitioner, followed by a redemption of that distributed stock directly from the estate.
(2) If the step transaction doctrine is inapplicable, whether the distribution to the petitioner from the subsidiary is to be treated as essentially equivalent to a dividend as determined under the provisions of section 302. 1
Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated herein by this reference.
Glacier State Electric Supply Co. (hereinafter referred to as Glacier State or petitioner) is a corporation which maintained its principal place of business in Great Falls, Mont., at the time of the filing of its petition herein. Petitioner's corporate income tax returns for the years involved were timely filed with the Internal Revenue Service Center at Ogden, Utah.
Petitioner was incorporated in 1946 by Donald P. Rearden (hereinafter Rearden) and J. Kenneth Parsons (hereinafter Parsons). One hundred ninety shares of common stock were issued by Glacier State at its incorporation: 94 each to Rearden and Parsons, and 1 each to their wives.2 Parsons was president of Glacier State and Rearden was vice president.
Business was good. Wishing to expand, Parsons and Rearden, through petitioner, joined with Arthur E. Pyle (hereinafter Pyle) to establish the Glacier State Electric Supply Co. of Billings (hereinafter GSB). GSB was organized and incorporated in 1953. Upon incorporation, GSB issued 339 shares of stock, 1 share each to Pyle, Parsons, and Rearden; with the remaining 336 shares held by petitioner. Parsons, Rearden, and Pyle were named as officers in GSB, with Pyle designated as that corporation's president. Pyle was allowed to buy into GSB (from Glacier State) as part of his business arrangement with Parsons and Rearden. In 1955, the stock of GSB was held as follows: Rearden and Parsons, 1 share; Pyle 113 shares; petitioner 224 shares.3
In September 1954, Rearden and Parsons entered into an agreement with Glacier State which provided that in the event of either of their deaths, the shares of Glacier State owned by the deceased would be redeemed by that corporation.
In November 1954, Pyle and petitioner entered into three agreements regarding the sale and purchase of the GSB stock. Though Parsons and Rearden were not parties to these agreements, they signed each of them to indicate their approval of the agreements' terms.4
The November 1954 agreements were amended by an addendum agreement on January 20, 1969 (the amendment). The amendment provided that upon the death of Pyle, his interest in GSB would be purchased by GSB. The amendment also stated that in the event of either Parsons' or Rearden's death, GSB would redeem the 1 share held in the name of the deceased along with one-half of the stock in GSB owned by petitioner. Worried that the obligations of the various buy/sell agreements might prove burdensome to the eventual obligors, life insurance was acquired on each of the officers of GSB with the proceeds payable to GSB. GSB was required to apply these proceeds to satisfy its various obligations under the amendment.5 Pyle never signed this amendment, however.6
Parsons died on April 10, 1976. As a result of Parsons' death, life insurance in the amount of $52,680.09 was paid to GSB. These proceeds were deposited in a specified account in a local bank. Parsons' widow was executrix for the estate and was a party to all subsequent negotiations. In order to satisfy the obligations of the 1954 agreements and the amendment, a memorandum of agreement was entered into between petitioner and the Parsons estate in July 1976 which provided a method for the required disposition of the stock in petitioner that was held by the estate. In addition, the small number of shares (see note 11 infra) owned by Parsons' widow would be redeemed. Under the terms of this agreement, the value of the Glacier State stock was to be determined by separately valuing: (1) The GSB stock held by petitioner, and (2) all of petitioner's remaining assets. The Parsons estate was to be paid 47.89 percent7 of the value of the remaining assets, but would receive 50 percent of the value of the GSB stock owned by petitioner.8
On August 30, 1977, petitioner, GSB, and the Parsons estate entered into an agreement for the disposition of 112 shares in GSB owned by petitioner, along with the one share owned by the Parsons estate. Petitioner was required under the terms of the agreement to assign to the Parsons estate the redemption payments it received from GSB. Thereafter, two redemptions took place: (1) The stock of petitioner owned by the Parsons estate and Parsons' widow was redeemed, and (2) one-half of the stock of GSB held by petitioner along with the 1 GSB share owned by the Parsons estate was redeemed.
In part payment for the value of the GSB stock, the Parsons estate was assigned a promissory note in the principal amount of $56,576.99 which had been issued by GSB to petitioner on August 30, 1977. Payments on the note were made by means of checks from GSB, made out to petitioner, which were then endorsed over to the Parsons estate.9 The balance due the estate for the value of the GSB shares was also paid by endorsing to the estate a $56,519.24 check issued to petitioner by GSB.10
In the interim period between incorporations and Parsons' death, the shareholder composition of each corporation had been slightly altered through the addition of one minority shareholder to GSB and two to petitioner. For our purposes, their holdings are relevant only in that control of each corporation was no longer solely in the hands of the other shareholders.
Immediately prior to the disposition agreement arranged between the Parsons estate, petitioner, and GSB on August 30, 1977, the stock ownership of GSB was as follows:
+------------------------+
¦ ¦Shares ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Glacier State ¦224 ¦
+---------------+--------¦
¦Rearden ¦1 ¦
+---------------+--------¦
¦Parsons estate ¦1 ¦
+---------------+--------¦
¦Pyle ¦113 ¦
+---------------+--------¦
¦William Hogan ¦35 ¦
+------------------------+
After that disposition, the ownership of GSB was as follows:
+-----------------------+
¦ ¦Shares ¦
+--------------+--------¦
¦ ¦ ¦
+--------------+--------¦
¦Glacier State ¦112 ¦
+--------------+--------¦
¦Rearden ¦1 ¦
+--------------+--------¦
¦Pyle ¦113 ¦
+--------------+--------¦
¦William Hogan ¦35 ¦
+-----------------------+
After the redemption of the stock of petitioner held by the Parsons estate and Betty Parsons individually,11 the stock ownership of petitioner was as follows:
+-----------------------+
¦ ¦Shares ¦
+--------------+--------¦
¦ ¦ ¦
+--------------+--------¦
¦Rearden ¦364 ¦
+--------------+--------¦
¦Betty Rearden ¦4 ¦
+--------------+--------¦
¦Vernon Moe ¦12 12 ¦
+--------------+--------¦
¦Art Gunderson ¦12 ¦
+-----------------------+
GSB had current or accumulated earnings and profits of at least $109,257.08 in 1977. The GSB shares held by P had substantially appreciated while held by petitioner.
OPINIONIssue 1. The Step Transaction Doctrine
As a result of the GSB redemption, respondent contends that petitioner...
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