30 T.C.M. (CCH) 937
EDWARD GREENBERG and BESSE E. GREENBERG, Petitioners,
COMMISSIONER OF INTERNAL REVENUE, Respondent.
United States Tax Court
August 31, 1971
Alvin C. Martin, for petitioners.
Gerald Backer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION.
The respondent determined deficiencies in income tax for the taxable years 1960 and 1963 in the respective amounts of $13,165.64 and $4,057.11. Certain issues having been conceded, the issues remaining for decision are whether petitioners' stock in their wholly-owned corporation, as well as purported loans made by petitioners to such corporation, became worthless in 1963 entitling them to deductions with respect thereto and a net operating loss carryback to 1960.
FINDINGS OF FACT.
Some of the facts have been stipulated and are incorporated herein by this reference.
Petitioners, husband and wife, filed joint Federal income tax returns for the taxable years 1960 and 1963 with the district director of internal revenue, Newark, New Jersey. At the time their petition was filed herein they resided in East Orange, New Jersey. Edward Greenberg will hereinafter be referred to as the petitioner.
In 1923 the petitioner formed a business the principal activity of which was the manufacture of portable lamps. Thereafter, such business was successfully operated by petitioner and his brothers under the name ‘ The Carack Company’ . In 1954 the business was terminated and its assets liquidated.
From 1955 through June 1958 the petitioner was self-employed as a wholesale jobber and manufacturers' representative of lamps and shades. Such endeavors did not meet with much success and losses from such activities were reported on petitioner's returns for the taxable years 1955 through 1957.
In July 1958 the petitioner resumed the business of lamp manufacturing. A business loss was reported on petitioner's return for the taxable year 1958, but it was not shown what portion of such loss may have been attributable to the manufacture of lamps and what portion may have been attributable to petitioner's activities as a wholesale jobber and manufacturers' representative.
In January 1959 the petitioner's lamp manufacturing business was transferred to The Carack Company, Inc., a New York corporation owned equally be petitioner and his wife. On January 10, 1959, The Carack Company, Inc., hereinafter referred to as Carack No. 1, elected taxable status as a small business corporation pursuant to the provisions of Subchapter S of the Internal Revenue Code of 1954.
On its return for the taxable year 1959, Carack No. 1 reported gross receipts of $246,910.34, gross profit of $61,290.93 and, after the deduction of other expenses, a net loss in the amount of.$10,892.19. On its return for the taxable year 1960 it reported gross receipts in the amount of $429,492.13, gross profit of $120,435.99 and taxable income in the amount of $17,730.48.
The profits earned by Carack No. 1 in 1960 were attributable in part to its introduction of a blow-molded plastic ‘ bubble lamp’, which was unique in the industry. Within about 6 months following the introduction of such lamp, competitors were also producing it and Carack No. 1 had lost its initial advantage.
On May 2, 1961, The Carack Company, Inc., a New Jersey corporation, was formed. On August 15, 1961, 50 shares of stock of such corporation were issued to each of the petitioners in exchange for total capital contributed by them of $50,000 consisting of property valued at $31,928.30 and cash in the amount of $18,071.70. Such stock was issued as small business stock pursuant to, and in compliance with, the provisions of section 1244 of the Internal Revenue Code of 1954. Thereafter, the lamp manufacturing business was carried on by The Carack Company, Inc. of New Jersey, hereinafter referred to as Carack No. 2, and Carack No. 1 became inactive. On its final return for the period January 1, 1961 to August 15, 1961, Carack No. 1 reported gross receipts of $111,207.62, gross profit of $32,366.21 and a net loss in the amount of $15,672.22.
The business conducted by Carack No. 2 was the same as that previously carried on by Carack No. 1. Its product line consisted of lamps which were sold at a wholesale price of about $1.25 per lamp, largely to syndicated variety stores which, in turn, retailed them at prices ranging between $2.95 and $3.95 per lamp.
On its returns for the taxable years 1961 through 1963 Carack No. 2 reported the following:
|| Gross Receipts
|| Gross Profit
|| Total Deductions
|| Net Loss
|| $ 28,578.65
|| $ 8,428.04
From 1961 through 1963 the petitioners, their son Robert, and the petitioner's brothers made net advances to Carack No. 2 as follows:
|| $ 5,000.00
Such advances, treated as loans on the books of Carack No. 2, were made to enable it to pay its bills and continue in business. Sometime during 1963 the petitioner and his son decided that the business of Carack No. 2 would be improved if its marketing were directed to discount stores and its product line upgraded to higher priced lamps selling at wholesale prices of between $8.00 and.$9.00 per lamp. On December 30, 1963, the board of directors of Carack No. 2, comprised of the petitioners and their son, held a meeting. The minutes of such meeting recite that it was resolved that it was in the best interests of Carack No. 2 to dissolve and that the following plan of liquidation be adopted: (1) that an inventory of the corporation's assets and a list of its liabilities be prepared; (2) that petitioner be appointed trustee for the purposes of receiving the corporation's assets, paying its creditors, and distributing the remaining assets, if any, to its shareholders; (3) that the corporation's shareholders surrender their stock for redemption upon the receipt by them of such assets; and (4) that all necessary steps be taken to formally dissolve the corporation according to the laws of New Jersey. No actual liquidation of Carack No. 2 took place subsequent to the meeting of December 30, 1963. No assets were turned over to petitioner as trustee nor were any assets turned over to creditors. During 1964 the business was gradually changed over to the manufacture and sale of higher priced lamps as described hereinabove. In April 1964 Carack No. 2 was formally dissolved pursuant to the laws of New Jersey and The Carack Company, Inc., hereinafter referred to as Carack No. 3, was incorporated under the laws of New Jersey. On April 25, 1964, at the first meeting of the board of directors of Carack No. 3, comprised of petitioners and their son, it was resolved that Carack No. 3 issue 100 shares of stock (50 to petitioner, 25 to his wife, and 25 to their son) upon the transfer of assets of Carack No. 2; that such stock be issued pursuant to the provisions of section 1244 of the Internal Revenue Code of 1954; and that Carack No. 3 continue the business theretofore carried on by Carack No. 2. The balance sheets of Carack No. 2 and Carack No. 3 submitted with their returns filed for the taxable years 1963 and 1964, respectively, were as follows:
|| Carack No. 2
|| Carack No. 3
|| Dec. 31, 1963
|| Jan. 1, 1964
|| $ 19,653.21
|| $ 19,653.21
| Accounts Receivable-Net
| Depreciable Assets-Net
| Other Assets
| Total Assets
| Accounts Payable
|| $ 46,213.83
|| $ 46,213.83
| Other Current Liabilities
| Note Payable
| Loans from Stockholders
| Capital Stock
| Accumulated Deficit
| Total Liabilities & Capital
The opening balance sheet of Carack No. 3 in its 1964 return was identical to the closing balance sheet of Carack No. 2 in its 1963 return except that the account entitled ‘ Loans From Stockholders' had been reduced from $63,758.19 to $1,948.14. Such reduction was accomplished by charging the accumulated deficit of Carack No. 2 to its ‘ Loans From Stockholders' account. Such entry was accompanied by the notation ‘ Used For Loss on Liquidation’ . Such ‘ Loss on Liquidation’ in the amount of the accumulated deficit of Carack No. 2, namely, $61,810.05, was credited to petitioner upon the books of Carack No. 2. On its returns for the taxable years 1964 through 1968, Carack No. 3 reported the following:
|| Net Profit
|| or (Loss)