Hawkins v. Commissioner

• Decision Date: 12 February 1987
• Docket Number: Docket No. 6256-70,6213-76.,1499-72,1486-72
• Citation: 53 TCM (CCH) 138,1987 TC Memo 91
• Parties: Earl G. Hawkins and Elva L. Hawkins v. Commissioner.
• Court: U.S. Tax Court

53 T.C.M. (CCH) 138 (1987)

T.C. Memo. 1987-91.

Earl G. Hawkins and Elva L. Hawkins v. Commissioner.

Docket Nos. 6256-70, 1486-72, 1499-72, 6213-76.

United States Tax Court.

Filed February 12, 1987.

Earl G. Hawkins, pro se. Robert L. Archambault, for the respondent.

Memorandum Findings of Fact and Opinion

CHABOT, Judge:

Respondent determined deficiencies in Federal individual income tax against petitioners as follows:

                Docket No. Year Deficiency
                6256-70 .................... 1965     $  1,004.20
                                             1966       13,806.00
                1486-72 .................... 1967        7,077.07
                1499-72 .................... 1968        2,195.00
                                             1969      102,753.00
                6213-76 .................... 1970        1,110.92
                                             1971       26,667.07
                                             1972        3,383.43
                                             1973          186.40
                                             1974        1,699.25
                

These cases have been consolidated for trial, briefs, and opinion.

After concessions by both sides, the issues for decision¹ are as follows:

(1) Whether, to what extent, and for what years petitioners are entitled to a deduction for worthless stock under section 165,² or to nonbusiness bad debt deductions under section 166, as a result of petitioners' dealings with Parsons Corporation;

(2) Whether petitioners are entitled to an interest expense deduction for 1971 under section 163;

(3) Whether petitioners are entitled to nonbusiness bad debt deductions for 1974 under section 166 with respect to various transfers made to their sons;

(4) Whether petitioners are entitled to a casualty loss deduction for 1968 under section 165;

(5) Whether petitioners are entitled to a sales tax deduction for 1970 under section 164 in excess of the amount allowed by respondent; and

(6) Whether petitioners are entitled to a net operating loss carryover deduction for 1974 under section 172.

Findings of Fact

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petitions were filed in the instant cases, petitioners Earl G. Hawkins (hereinafter sometimes referred to as "Earl") and Elva L. Hawkins (hereinafter sometimes referred to as "Elva"), husband and wife, resided in Douglas County, Nebraska.

Before August 1960, Parsons Construction Company, Inc. (hereinafter sometimes referred to as "Old Parsons"), was actively engaged in the construction business. Old Parsons was owned and operated by Earl, his sons, William C. Hawkins (hereinafter sometimes referred to as "William") and Earl G. Hawkins, Jr. (hereinafter sometimes referred to as "Earl, Jr."), Earl's brother, Kenneth J. Hawkins (hereinafter sometimes referred to as "Kenneth"), and Kenneth's son, Fred H. Hawkins (hereinafter sometimes referred to as "Fred"); they held Old Parsons' outstanding stock (all common stock) as shown in table 1.

                                                  Table 1
                      Owner Shares Basis
                      Earl .................................       113               $11,300
                      William ..............................        25                 2,500
                      Earl, Jr. ............................        25                 2,500
                      Kenneth ..............................       138                13,800
                      Fred .................................        25                 2,500
                

Over a period of time immediately before August 1960, personnel problems developed at the managerial level of Old Parsons which precipitated a decision by the two families operating Old Parsons to separate and operate their own construction businesses. A plan to reorganize Old Parsons was adopted at a meeting of Old Parsons' board of directors on August 24, 1960.

Pursuant to the reorganization plan, two corporations were formed on or about September 1, 1960, in order to operate separate construction businesses. Earl, William, and Earl, Jr., organized Parsons Corporation (hereinafter sometimes referred to as "New Parsons"). Kenneth and Fred organized Hawkins Construction Company. Each of these corporations was authorized to issue 4,000 shares of preferred stock at $100 par value each, and 1,000 shares of common stock at $100 par value each.

New Parsons issued 1,000 shares of its common stock to Earl on September 1, 1960, in exchange for which Earl transferred to New Parson $100,000 ($81,500 in cash and $18,500 in fair market value of equipment). New Parsons issued 4,000 shares of its preferred stock to Old Parsons on or about September 1, 1960, in exchange for which Old Parsons transferred to New Parsons $400,000 ($236,749.75 in cash and $163,250.25 in fair market value of equipment and a life insurance policy).

On August 24, 1960, Old Parsons' shareholders amended the Articles of Incorporation to authorize the issuance of 1,000 shares of Class A common stock and 1,000 shares of Class B common stock. On September 30, 1960, new Class A common stock of Old Parsons was issued to Earl, William, and Earl, Jr., in exchange for their Old Parsons common stock on a share-for-share basis. On the same day, new Class B common stock of Old Parsons was issued to Kenneth and Fred in exchange for their Old Parsons common stock on a share-for-share basis. Immediately after these exchanges, the Old Parsons outstanding stock was held as shown in table 2.

                                        Table 2
                  Owner Class Shares Basis
                Earl...................    A       113     $11,300
                William................    A        25       2,500
                Earl, Jr...............    A        25       2,500
                Kenneth ...............    B       138      13,800
                Fred ..................    B        25       2,500
                

On December 30, 1960, Earl disposed of his 1,000 shares of New Parsons common stock by transferring 500 shares to Earl, Jr., and 500 shares to William.

The stock certificate representing the 25 Class A Old Parsons shares owned by Earl, Jr., contains the following endorsement:

For Value Received, I hereby sell, assign, and transfer unto Earl G. Hawkins 25 (twenty-five) Shares of the Capital Stock represented by the within Certificate and do hereby irrevocably constitute and appoint the Secretary of Old Parsons to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises.

Dated 30th December 1960

A substantially similar endorsement with the same date appears on the stock certificate representing the 25 Class A Old Parsons shares owned by William. On or about December 4, 1963, a stock certificate representing the 50 Class A shares of Old Parsons stock owned by Earl, Jr., and William was issued to Earl. After this transfer³, Old Parsons outstanding stock was held as shown in table 3.

                                  Table 3
                   Owner Class Shares
                Earl .....................    A       163
                Kenneth ..................    B       138
                Fred .....................    B        25
                

On November 30, 1965, Old Parsons was voluntarily dissolved by written consent of all of its shareholders pursuant to Nebraska law. On November 30, 1965, in accordance with Old Parsons' Articles of Incorporation, the 4,000 shares of New Parsons preferred stock held by Old Parsons before dissolution were distributed to Earl, the holder of all the Old Parsons Class A common stock at the time of Old Parsons' dissolution. Immediately after the dissolution of Old Parsons, the New Parsons outstanding stock (all of it being voting stock) was held as shown in table 4.

                                      Table 4
                   Owner Class Shares
                Earl ..................... Preferred    4,000
                Earl, Jr. ................ Common         500
                William .................. Common         500
                

Holders of New Parsons preferred stock are entitled to dividends of $5 per share per year, payable in cash, property, or additional shares of preferred stock, at the discretion of the board of directors. During 1960 through at least 1974, no dividends were declared or paid with respect to the 4,000 shares of New Parsons preferred stock. As of November 30, 1965, arrearages in the payment of dividends to the preferred shareholders of New Parsons amounted to $100,000. On any dissolution, liquidation, merger, or consolidation of New Parsons in which there is a distribution of capital, the holders of New Parsons preferred stock are entitled to $100 per share plus unpaid dividends, before any amount is paid or property distributed to holders of New Parsons common stock.

During the years in issue, Earl was chairman of New Parsons' board of directors, William was president and treasurer, and Earl, Jr., was vice-president and secretary. Elva was never an employee, officer, director, or shareholder of New Parsons.

On or about January 28, 1963, petitioners, William, William's wife, Earl Jr., and Earl, Jr.'s wife executed an agreement entitled "GUARANTY" (hereinafter sometimes referred to as "the Guaranty") with the United States National Bank of Omaha (hereinafter sometimes referred to as "the Bank"), in which they jointly and severally guaranteed payment to the Bank of all existing and future debts from New Parsons to the Bank, up to a total of $300,000.

On or about April 1, 1969, New Parsons owed the Bank $280,000, plus interest, on various loans obtained by New Parsons in prior years. These loans were secured by the Guaranty. On April 1, 1969, Elva pledged various securities to the Bank to further secure these debts of New Parsons. On April 1, 1969, New Parsons borrowed an additional $100,000 from the Bank, secured by New Parsons' promissory note and various additional securities pledged to the Bank by Elva. After June 2, 1969, New Parsons was in default on its payments to the Bank on the $280,000 debt. On or about July 8, 1969, the Bank accelerated the maturity date of the $100,000 April 1, 1969, loan. On various dates in July, August, and September 1969, the Bank sold the securities that had been pledged by Elva, and applied the proceeds as payment on New Parsons' $394,366.61...