Henry C. Beck Co. v. Comm'r of Internal Revenue , Docket No. 1686-66.
| Decision Date | 03 April 1969 |
| Docket Number | Docket No. 1686-66. |
| Citation | 52 T.C. 1 |
| Parties | HENRY C. BECK COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Sam G. Winstead and William D. Jordan, for the petitioners.
D. Ronald Morello and Ralph V. Bradbury, Jr., for the respondent.
In 1955, Management, a corporation wholly owned by petitioner and its joint venturer, Utah, distributed $250,000 to petitioner. The distribution was made by Management from a profit ‘realized’ in 1954 from its two wholly owned corporations, but which it did not ‘recognize’ for income tax purposes because of filing a consolidated return. Petitioner treated the distribution as an ordinary dividend, deducting 85 percent of the distribution under sec. 243, I.R.C. 1954, and reporting the remaining 15 percent as a taxable dividend. Respondent determined that the distribution was not a dividend paid from earnings and profits, but represents income received from a collapsible corporation under sec. 341 which, to the extent it exceeds petitioner's basis in the stock of Management, is taxable as ordinary income. Held, that the distribution was a dividend paid from the earnings and profits of Management within the meaning of secs. 301 and 316, I.R.C. 1954.
Respondent determined a deficiency in the income tax of petitioner for the year 1955 in the amount of $110,240.
The principal question for our consideration is whether an intercompany profit of $1,065,313.09 obtained in 1954 by Ridgeview Management Co., and eliminated from a consolidated return for that year, constituted earnings and profits of Ridgeview Management Co. when received, so that a distribution by Ridgeview Management Co. to petitioner of $250,000 out of such profit in 1955 was a dividend within the meaning of sections 301 and 316, I.R.C. 1954. If the answer to the principal question is that the distribution was not a dividend, we must then decide whether Ridgeview Management Co. was a collapsible corporation under section 341.
Many of the facts have been stipulated by the parties. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Henry C. Beck Co. (petitioner) is a corporation organized under the laws of the State of Delaware on April 4, 1946. Its principal place of business has always been in Dallas, Tex. Petitioner's Federal corporation income tax return for the calendar year 1955 was filed with the district director of internal revenue at Dallas.
Petitioner is a general building contractor. During 1955 all of petitioner's issued and outstanding stock was owned as follows:
+-----------------------------------------------------------------------------+
¦ ¦Common stock ¦Preferred stock ¦
+--------------------------------------------+--------------+-----------------¦
¦Shareholder ¦Percent ¦Percent ¦
+--------------------------------------------+--------------+-----------------¦
¦ ¦ ¦ ¦
+--------------------------------------------+--------------+-----------------¦
¦Henry C. Beck, Jr., Dallas, Tex ¦60 ¦33 ¦
+--------------------------------------------+--------------+-----------------¦
¦Joe B. Hutchinson, Atlanta, Ga ¦35 ¦67 ¦
+--------------------------------------------+--------------+-----------------¦
¦Henry C. Beck, Jr., trustee for Margaret ¦ ¦ ¦
¦Beck ¦ ¦ ¦
+--------------------------------------------+--------------+-----------------¦
¦Grinnan Trust No. One, Dallas, Tex ¦5 ¦0 ¦
+--------------------------------------------+--------------+-----------------¦
¦ ¦ ¦ ¦
+--------------------------------------------+--------------+-----------------¦
¦ ¦ ¦ ¦
+--------------------------------------------+--------------+-----------------¦
¦ ¦100 ¦100 ¦
+-----------------------------------------------------------------------------+
Ridgeview Management Co. (Management) was incorporated under the laws of the State of Delaware on March 30, 1953, as were Ridgeview Homes, Inc. (Homes), and Ridgeview Development Co., Inc. (Development). At all times material hereto, the outstanding stock of Management consisted of 200 shares of voting common, of which 100 shares were owned by Utah Construction & Mining Co., San Francisco, Calif. (Utah), and the remaining 100 shares were owned by petitioner. All of the stock of Homes and Development was owned by Management.
Ridgeview Service Co. (Service) was incorporated under the laws of the State of Delaware on June 1, 1953, and from that date through the taxable year in question, all its stock was owned by Homes and Development.
Utah, the owner with petitioner of the stock of Management, is a large California-based company engaged in building construction, mining, overseas operations, and real estate operations.
Management was organized to construct an FHA-insured housing project in Davenport, Iowa, for Homes and Development and to manage the project after its completion. Homes and Development were organized to own the housing units and to borrow the money to construct them. Service was formed to own and operate the utilities and establish a trustee relationship for the assurance of their continued operation.
On April 14, 1953, Management contracted with Homes to construct 196 housing units for Homes, and with Development, to construct 458 housing units for Development, both projects being under section 903 of title IX of the National Housing Act. Homes had obtained a commitment from the Commissioner of National Housing to insure the 196 units upon completion of construction, and Development had obtained a commitment from the Commissioner of National Housing to insure 458 housing units upon completion of construction. Management completed construction of the houses in January 1954.
For the fiscal years ended February 28, 1954, February 28, 1955, and February 28, 1956, inclusive, Management, as the parent corporation, and Homes and Development, filed consolidated Federal income tax returns on the accrual basis of accounting with the district director of internal revenue at Des Moines, Iowa. On the consolidated income tax returns, all intercompany transactions were eliminated in accordance with the applicable consolidated income regulations as promulgated by respondent.
The following schedule reflects the taxable income or loss per the books and records of Management, Homes, Development, and Service, after elimination of all intercompany transactions and after giving effect to respondent's adjustments agreed to in connection with his audit of the consolidated income tax returns, for each of the fiscal years ended February 28, 1954, to February 28, 1956, inclusive:
+-----------------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦Year ending ¦Management ¦Development ¦Homes ¦Service ¦Consolidated¦
¦Feb. 28— ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦1954 ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦Net income ¦$1,059,448.64¦($36,017.90)¦($28,063.70)¦($7,526.07)¦$987,840.97 ¦
¦per books ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+-------------------------------------+------------¦
¦Less ¦ ¦ ¦ ¦
¦intercompany¦1,065,313.09 ¦ ¦1,065,313.09¦
¦profit ¦ ¦ ¦ ¦
+------------+-------------+-------------------------------------+------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦ ¦ ¦ ¦ ¦ ¦(77,472.12) ¦
+------------+-------------+------------+------------+-----------+------------¦
¦Interest ¦ ¦ ¦ ¦ ¦1 ¦
¦capitalized ¦ ¦177,210.90 ¦64,734.48 ¦ ¦241,945.38 ¦
¦on books ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦Net loss per¦(5,864.45) ¦(213,228.80)¦(92,798.18) ¦(7,526.07) ¦(319,417.50)¦
¦return ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+------------+------------+-----------+------------¦
¦Adjustment ¦ ¦ ¦ ¦ ¦ ¦
¦per RAR ¦ ¦ ¦ ¦ ¦ ¦
¦dated ¦ ¦...To continue reading
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