Gooding Amusement Co. v. Commissioner of Int. Rev.

• Decision Date: 01 August 1956
• Docket Number: No. 12574-12577.,12574-12577.
• Citation: 236 F.2d 159
• Parties: GOODING AMUSEMENT COMPANY, Incorporated, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. F. E. GOODING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Anna Elizabeth GOODING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. F. E. GOODING and Elizabeth Gooding, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

236 F.2d 159 (1956)

GOODING AMUSEMENT COMPANY, Incorporated, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

F. E. GOODING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Anna Elizabeth GOODING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

F. E. GOODING and Elizabeth Gooding, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12574-12577.

United States Court of Appeals Sixth Circuit.

August 1, 1956.

Roger K. Powell, Columbus, Ohio, for petitioners.

Grant W. Wiprud, Washington, D. C., H. Brian Holland, Ellis N. Slack, Washington, D. C., on briefs, for respondent.

Before SIMONS, Chief Judge, and MARTIN and McALLISTER, Circuit Judges.

MARTIN, Circuit Judge.

These four tax reviews, involving transactions among F. E. Gooding, his wife Anna Elizabeth Gooding, and his controlled corporation, Gooding Amusement Company, were consolidated for hearing and resulted in decisions by the Tax Court of the United States that there are deficiencies in income tax, varying in amounts as to the respective parties, relating to the years 1947, 1948 and 1949, in the aggregate amount of $65,663.88.

The findings of fact and opinion of the tax judge were reviewed by the tax court. Many facts were stipulated and embraced in the findings. The tax court received in evidence the testimony of the taxpayer, F. E. Gooding, and that of a certified public accountant, Edmund C. Redman. A review of the findings of fact deemed pertinent to decision will be undertaken; but we shall not incorporate the several mathematical tabulations contained therein, or otherwise indulge in unnecessary detail.

In late December of 1932, F. E. Gooding organized a corporation to lease and operate merry-go-rounds, ferris wheels, and like amusement devices, which were owned by him individually. This corporation was dissolved on December 31, 1942. During 1942, petitioner employed as tax consultant a certified public accountant who has been associated with his business since that time.

On January 1, 1943, F. E. Gooding formed a partnership with his wife and their one-year-old daughter under the name and style of "F. E. Gooding Amusement Company." Gooding gave his wife two-sevenths' interest and his baby daughter a one-seventh interest in the partnership, retaining for himself the remaining four-sevenths' interest therein. The petitioners accepted the determination of the Bureau of Internal Revenue that the infant daughter was not a bona fide partner for income tax purposes. Accordingly, her one-seventh interest in the partnership was taxed to her father for the years 1943 to 1946, inclusive. Gooding sold the amusement devices and portable rides to the partnership, which operated them rent free. The partnership carried public liability insurance to the extent of $50,000, which Gooding considered as going "a long way" toward covering any liability which might arise from accidents in the operation of the property of the partnership. The largest accident claim ever paid amounted to $18,000. The net taxable yearly income of the partnership from January 1, 1943, to August 24, 1946, ranged from $151,000 to $257,000, approximately.

On August 24, 1946, a corporation known as "Gooding Amusement Company, Incorporated," was organized, the officers being F. E. Gooding, President and Treasurer; Elizabeth Gooding (his wife), Vice-President; and Kathleen Holleran, Secretary. At the close of business on that date, the Gooding partnership distributed to its three partners — as tenants in common in respective moieties of four-sevenths to F. E. Gooding, two-sevenths to his wife, and one-seventh to his infant daughter — assets of the partnership consisting of accounts and notes receivable, land, buildings, cables, canvas, electrical, trucking, and office equipment, electrical towers, mechanical rides, unexpired insurance, advance payments on equipment, and advances to employees. The book value of the assets so distributed was $177,037.29; and the book value of the undistributed cash investments, land and accrued interest of the partnership was $285,745.84. Each partner, in proportion to his or her respective undivided interest in the distributed assets, assumed a joint and several obligation to pay certain notes executed by the partnership in the total amount of $13,969.25. The capital account of each partner was proportionately reduced on the books, with the effect that the net total distribution was $163,068.04, which was equivalent to the book value of the assets distributed, less the notes payable assumed.

The partnership remained in existence throughout the entire period involved in this litigation. Included in the assets distributed to the partners were depreciable assets, whereof nearly $130,000 consisted of trucking equipment and mechanical "rides."

Concurrently with the distribution of the partnership assets of the book value of $177,037.29, the partners made an offer to the newly formed corporation, Gooding Amusement Company, to exchange the aforementioned distributed assets at a valuation of $294,970.39. The difference between the depreciated book value of the distributed assets and the amount offered came to $117,933.10. This represented the difference between the book value of the trucking equipment and mechanical rides and the fair market value of such assets as appraised by Gooding with the help of Kathleen Holleran, secretary of the corporation. In arriving at the new valuations, Gooding surveyed the equipment and rides in use on the various locations, checked inventory records, and consulted with his foremen concerning the condition of the equipment and rides. The new corporation assumed the partnership notes, amounting to $13,969.25, the payment of which had previously been assumed by the three partners.

In return for the foregoing assets amounting by net balance to $281,001.14, transferred and conveyed to the corporation, the three partners received in proportion to their respective partnership interests corporate shares of no-par value and corporate notes of the Gooding Amusement Company. F. E. Gooding received 140 shares having a stated value of $28,000 and five notes due in five succeeding years (beginning in 1947) of $26,514.42 each, totalling $132,572.08; Elizabeth Gooding received 70 shares having a stated value of $14,000 and five notes due in five succeeding years (beginning in 1947) of $13,257.20, for a total of $66,286.04; and the infant daughter, Joyce Ann Gooding, received 35 shares having a stated value of $7,000 and five notes due in five succeeding years (beginning in 1947) of $6,628.60 each, totalling $33,143.02. The portion of the assets contributed for the shares and that contributed for the notes was not identified. The corporate notes were ordinary negotiable instruments, each containing an unconditional promise to pay at a fixed maturity date the principal promised, together with interest at five per cent per annum. The notes to the infant daughter were made payable to "F. E. Gooding as natural guardian of Joyce Ann Gooding." Though the name "Gooding" was of established value in the outdoor amusement filed, no goodwill value was ascribed to it on the books of either the partnership or the corporation. The sum of $184,444.23 in cash was left in the partnership among its non-operating assets totalling $285,745.84. The corporation received no cash whatever from the partnership.

Each partner reported for the taxable year 1946, as a long-term capital gain, his or her proportionate share of the difference between the depreciated cost of the transferred assets and the amount at which such assets were offered to and accepted by the corporation. The individual petitioners paid a total tax of $28,683.27 on these long-term capital gains, which the Commissioner of Internal Revenue accepted.

The corporation used as the unadjusted basis of the trucking equipment and mechanical rides acquired from the partnership on August 24, 1946, the increased valuation assigned to them by Gooding. Between August 24, 1946, and December 31, 1952, the corporation sold about fifteen per cent of its trucking equipment and fifty-seven per cent of its mechanical rides acquired from the partnership on August 24, 1946. The corporation acquired new equipment and rides at a total cost of $306,894.27 during 1947. For the acquisition of additional equipment in 1947 and in later years, and in connection with its operation, the corporation obtained funds and credits evidenced by notes from banks, merchants, the partnership, the petitioner, and the Gooding infant. These notes payable amount in 1947 to $138,572.08; in 1948 to $186,018.92; and in 1949 to $246,149.40. During 1947, the partnership and Gooding's infant daughter advanced to the corporation the additional sum of $23,000, whereof $17,000 was outstanding at the close of both years 1947 and 1948; and $14,000 was outstanding at the close of 1949.

By agreement of date December 20, 1946, certain key employees of the corporation, in consideration of corporate shares issued to them, gave the corporation an option to repurchase the shares at any time at progressively increasing prices, beginning with $220 per share in 1947 and ending with $400 per share in 1956, at the close of which latter year the option would expire unless extended by mutual consent. At the end of 1947, the employees had acquired approximately twenty-five per cent of the corporation's outstanding stock. As of December 1953, the corporation had paid Mrs. Gooding only $5,000 on the series of five notes of $13,257.21 each issued to her by the corporation; and had made no payments on the series of five notes of $6,628.60 each payable to the infant daughter. The corporation still owed F. E. Gooding two notes of $26,514.41 each. All the unpaid notes payable to the Goodings were long past due. F. E. Gooding had been paid by the corporation three notes of $26,514.42 each for the reason, stated by him,...