Hitchins v. Comm'r of Internal Revenue, 23063–92.
| Citation | 103 T.C. 711,103 T.C. No. 40 |
| Decision Date | 22 December 1994 |
| Docket Number | No. 23063–92.,23063–92. |
| Parties | F. Howard HITCHINS and Esther E. Hitchins, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Tax Court |
103 T.C. 711
103 T.C. No. 40
F. Howard HITCHINS and Esther E. Hitchins, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 23063–92.
United States Tax Court.
Dec. 22, 1994.
[103 T.C. 712]
S. Byron Balbach, Jr., Urbana, IL, for petitioners.
Anthony S. Gasaway, St. Louis, MO, for respondent.
[103 T.C. 711]
P-husband loaned money to CCC, a subchapter C corporation, and received a note of CCC evidencing the loan. It was anticipated that CCC would develop a chemical database for a corporation subsequently to be formed. CMB was later formed with P-husband as a shareholder. CMB gave a note to CCC for the amount the latter had expended in developing the database. Subsequently, CMB paid that note by way of cash and assuming CCC's indebtedness to P-husband. CCC's note was not canceled nor did CMB give its note to P-husband. CMB elected subchapter S status. Held, the amount loaned by P-husband to CCC could not be included in his basis in the stock and indebtedness of CMB for the purposes of determining the amount of CMB losses Ps could deduct under sec. 1366(d)(1), I.R.C. Held further, Ps are liable for the additions to tax for negligence, except the addition to tax under sec. 6653(a)(1)(B) attributable to their inclusion of the amount of the loan to CCC in P-husband's basis.
Respondent determined the following deficiencies in and additions to petitioners' Federal income tax:
+----------------------------------------------------------+
¦ ¦ ¦Additions to Tax ¦
+----+----------+------------------------------------------¦
¦ ¦ ¦Sec. ¦Sec. ¦Sec. ¦
+----+----------+-------------+-------------+--------------¦
¦Year¦Deficiency¦6653(a)(1)(A)¦6653(a)(1)(B)¦6653(a)(1) 1 ¦
+----+----------+-------------+-------------+--------------¦
¦1986¦$12,840 ¦$642 ¦2 ¦— ¦
+----+----------+-------------+-------------+--------------¦
¦1987¦3,050 ¦153 ¦2 ¦— ¦
+----+----------+-------------+-------------+--------------¦
¦1988¦2,137 ¦— ¦— ¦107 ¦
+----------------------------------------------------------+
After certain concessions, the issues remaining for decision are: (1) Whether petitioner F. Howard Hitchins' basis in a subchapter S corporation, under section 1366(d) 1, should reflect a debt owed to him by a subchapter C corporation and assumed by the S corporation in partial payment of its debt to the C corporation, and (2) whether petitioners are liable for additions to tax for negligence.All of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners are husband and wife (hereinafter references to petitioner in the singular are to F. Howard Hitchins). They were residents of Rogers, Arkansas, at the time their petition was filed.
Petitioner was the founder and president of Champaign Computer Company (CCC), and his wife was the secretary/treasurer of CCC. During the relevant years, CCC was engaged in the business of computer hardware and software sales, service and development, and as a dealer and distributor of Alpha Micro computer equipment and related software. During that
[103 T.C. 713]
same period, CCC's issued and outstanding stock was owned as follows: 2
+----------------------------------------------+
¦Shareholder ¦Shares ¦Value ¦
+--------------------------+--------+----------¦
¦ ¦ ¦ ¦
+--------------------------+--------+----------¦
¦F. Howard Hitchins ¦48 ¦$22,052.40¦
+--------------------------+--------+----------¦
¦Esther Hitchins ¦48 ¦22,052.40 ¦
+--------------------------+--------+----------¦
¦Randa Davis ¦12 ¦5,514.80 ¦
+--------------------------+--------+----------¦
¦Sharon Allen ¦12 ¦5,514.80 ¦
+--------------------------+--------+----------¦
¦James & Charlotte Hitchins¦8 ¦3,678.80 ¦
+--------------------------+--------+----------¦
¦Richard Weinbrenner ¦20 ¦9,186.80 ¦
+----------------------------------------------+
On August 24, 1985, petitioner and Scot Miller and his wife, Barbara, (the Millers) entered into an agreement to develop and market a chemical database relating to the environmental impact of various chemicals. The agreement provided that development of the database structure and software would be undertaken by CCC and that the ownership of the database would be transferred to a company to be formed upon obtaining venture capital or the occurrence of sales. The agreement also provided that CCC would be reimbursed for its expenses in developing the database system. Pursuant to the agreement, ChemMultiBase Company, Inc. (CMB), a subchapter S corporation, was incorporated on September 30, 1986. Petitioners, collectively, were 50–percent shareholders in CMB. The remaining 50–percent interest was owned, collectively, by the Millers. Mr. Miller was the president of CMB, and petitioner was a director. Petitioners' basis in their CMB stock was $10,158.46.
In 1985 and 1986, CCC undertook development of the chemical database. In 1986, petitioner personally loaned a total of $34,000 to CCC, to pay the operating expenses of CCC relating to the database project. The...
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