Heman v. Comm'r of Internal Revenue
| Decision Date | 29 May 1959 |
| Docket Number | Docket Nos. 63857,63899. |
| Citation | 32 T.C. 479 |
| Parties | GENEVRA HEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.SHELBY L. HEMAN TRUST U/W, GENEVRA HEMAN AND MERCANTILE TRUST COMPANY,TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Donald E. Fahey, Esq., for the petitioners.
Donald W. Wolf, Esq., for the respondent.
Decedent and his brother John owned all the common and preferred shares of Trinidad Asphalt Manufacturing Company, with the exception of 3 qualifying shares of common stock. Both were indebted to Trinidad on open account for differing amounts. Pursuant to agreements between Trinidad and decedent's estate and between Trinidad and John, and following the allowance by the Probate Court of Trinidad's claim against the estate, Trinidad canceled all of decedent's and a portion of John's indebtedness upon their surrender of 250 shares of preferred stock each. John and the estate each retained their proportionate holdings of Trinidad common stock. Under the decedent's will his estate was distributed one-third to his widow and two-thirds to the trustees of a testamentary trust, both being petitioners herein.
1. Held, Trinidad's cancellation of the decedent stockholder's indebtedness upon the redemption of his preferred stock was ‘essentially equivalent to the distribution of a taxable dividend’ within the purview of section 115(g)(1), I.R.C. 1939, and taxable under section 162(c) to decedent's widow and to the trustees of the testamentary trust.
2. Held, further, additions to tax under sections 294(d)(1)(A) and 294(d)(2) were properly imposed.
3. Held, further, addition to tax under section 291(a) was properly imposed.
These consolidated proceedings involve deficiencies in income tax and additions thereto in the amounts and for the years as set forth below:
The issues for decision are: (1) Whether the cancellation of decedent stockholder's debt upon the redemption of 150 shares of preferred stock of Trinidad Asphalt Manufacturing Company was essentially equivalent to a taxable dividend under section 115(g) of the 1939 Code and therefore taxable to the decedent's widow and to the trust created under the decedent's will; (2) whether decedent's widow is liable for an addition to tax under section 294(d) (2); and (3) whether the trust is liable for an addition to tax under section 291(a). The addition to the tax of decedent's widow under section 294(d)(1)(A) was conceded in the petitioner.
Some of the facts were stipulated, are so found, and are incorporated herein by this reference.
Genevra Heman (hereinafter referred to as decedent's widow) is the widow of Shelby L. Heman (hereinafter referred to as decedent). During 1950 she resided in Clayton, St. Louis County, Missouri, and filed her Federal individual income tax return with the collector of internal revenue for the first district of Missouri. She did not file a declaration of estimated tax for the year 1950.
Genevra Heman and the Mercantile Trust Co. are fiduciaries (duly appointed and acting executors and trustees of trust under decedent's will) with principal office in St. Louis, Missouri. For the year 1950 the Heman Trust did not file a fiduciary income tax return.
The decedent died on June 6, 1947. During his lifetime, decedent and his brother, John C. Heman (hereafter sometimes referred to as John), owned all of the outstanding preferred stock, 7 per cent noncumulative, equally and all except 3 qualifying shares of the outstanding common stock of Trinidad Asphalt Manufacturing Co. (hereinafter referred to as Trinidad).
Trinidad was duly organized under the laws of the State of Missouri on January 15, 1898.
Immediately before decedent's death, he and his brother John each owned 250 shares of Trinidad preferred stock and 474 shares of Trinidad common stock in their individual names and 49 shares of common stock were in their joint names, with right of survivorship. Upon decedent's death the 49 shares became the property of John.
Decedent's estate consisted primarily of his above-described holdings in Trinidad.
At the time of decedent's death, he and John were indebted to Trinidad on open account in the respective amounts of $26,395.21 and $43,301.26.
On June 21, 1948, Trinidad filed a claim against the Estate of Shelby L. Heman (hereinafter sometimes referred to as the estate) in the amount of $26,395.21. The claim was allowed on January 26, 1950, by the Probate Court of St. Louis County, Missouri, in the amount of $26,014.81.
On January 20, 1950, Trinidad had agreed with the executors of the estate that should the Probate Court allow Trinidad's claim in an amount in excess of $24,000, Trinidad would accept the 250 shares of preferred stock then in possession of the executors in full satisfaction and payment of Trinidad's claim against the estate.
The agreement between Trinidad and the executors included the following provisions:
WHEREAS, the estate of Shelby L. Heman does not have sufficient liquid assets or cash with which to pay the above-mentioned claim of the Company; and
WHEREAS, both the Company and the Executors are desirous of disposing of the claim of the Company now pending in the Probate Court of St. Louis County, Missouri, * * *
Of February 24, 1950, a petitioner by the estate for authority to transfer the preferred stock to Trinidad in payment of the claim was filed with the Probate Court and granted after a hearing, whereupon the stock was transferred to Trinidad.
Immediately before the redemption of the preferred stock of Trinidad held by the estate, the outstanding stock of Trinidad was held as follows:
Immediately after the redemption of the preferred stock of Trinidad, the outstanding stock of Trinidad was held as follows:
On January 20, 1950, the same date on which the agreement between Trinidad and the executors of the estate was made, John C. Heman entered into an agreement with Trinidad to transfer his 250 shares of preferred stock to Trinidad in three annual installments in partial satisfaction of his indebtedness to Trinidad. John agreed to deposit with Trinidad the 250 shares of preferred stock as security for his performance of the agreement. If he failed to perform his part of the agreement on the dates and in the amounts set forth in the agreement, Trinidad had the right and authority to transfer on its books to itself as treasury stock the number of shares due under the agreement. Furthermore, John waived and renounced all rights to receive dividends or other payments of any type due or to become due on the preferred stock of Trinidad.
The pertinent provisions of the agreement between John C. Heman and Trinidad are as follows:
WHEREAS, The Company and the First Party, as well as the other stockholders of the Company, are all desirous of having this indebtedness of the First Party reduced and finally satisfied as soon as possible; and
WHEREAS, by agreement dated January 20th 1950, the Company and the Executors of the estate of Shelby L. Heman, deceased, entered into an agreement whereby the Company agreed to accept shares of its Preferred stock in satisfaction of a claim of the Company against the Estate of Shelby L. Heman, deceased, which claim has been filed in the Probate Court, St. Louis County, Missouri.
NOW, THEREFORE, for the considerations hereinafter set forth the parties agree as follows:
1. The First Party agrees to surrender to the Company in three installments, due as hereinafter provided, the Preferred stock of the First Party, in partial satisfaction of the indebtedness of the First Party to the Company. The First Party agrees to so surrender to the Company on or before January 10,...
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