Hume v. C.I.R., 89-70195

• Decision Date: 10 April 1990
• Docket Number: No. 89-70195,89-70195
• Citation: 899 F.2d 1225
• Parties: Unpublished Disposition NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. Tirey L. HUME; Margaret K. Hume, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1225

899 F.2d 1225

Unpublished Disposition

NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.

Tirey L. HUME; Margaret K. Hume, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 89-70195.

United States Court of Appeals, Ninth Circuit.

Submitted April 10, 1990. ^*

Decided April 13, 1990.

Appeal from a Decision of the Tax Court of the United States.

U.S.T.C.

AFFIRMED.

Before WALLACE, CYNTHIA HOLCOMB HALL and WIGGINS, Circuit Judges.

MEMORANDUM ^**

Tirey L. Hume ("Hume") appeals pro se the decision of the United States Tax Court finding deficiencies in his income tax payments for the years 1974 and 1975. Hume contends that the Tax Court erred in determining that Columbia Forge and Machine Works, Inc. ("Columbia") was a Subchapter S corporation and that Hume, as a shareholder, was required to report his share of the undistributed taxable income of Columbia on his personal income tax returns.

The Tax Court had jurisdiction pursuant to 26 U.S.C. Secs. 6213(a) and 7442. We have jurisdiction pursuant to 26 U.S.C. Sec. 7482 and affirm.

I

The Commissioner of the Internal Revenue Service issued a notice of deficiency to Tirey L. Hume and Margaret K. Hume for the years 1974 and 1975. The deficiency resulted from the Humes' failure to include on their personal income tax return the undistributed taxable income and dividends reported by Columbia Forge and Machine Works, Inc. at the close of its fiscal years on January 31, 1974 and January 31, 1975. Columbia is a welding and forging business which had three shareholders at the time of its incorporation, namely, Louis McMullin ("McMullin"), Jack E. Orr ("Orr") and Hume. Each owned 100 shares (one third) of the stock of the corporation. Columbia elected to be taxed as a qualified small business corporation under Subchapter S of the Internal Revenue Code, 26 U.S.C. Secs. 1371-1379 (1972).

On August 12, 1971, McMullin and Orr entered into a Stock Sale Agreement ("Agreement") with The Skookum Company, Inc. ("Skookum") which provided that Skookum would lease certain properties to Columbia in exchange for an option to purchase Columbia stock either upon the death of Orr or McMullin, or upon the initiative of either one of them.

McMullin died on December 14, 1973. On January 10, 1974, his estate and Orr executed a Supplemental Agreement with Skookum extending the option period until February 1, 1975. The actual transfer of the McMullin shares to Skookum occurred on May 30, 1975.

Columbia filed its income tax returns for fiscal years ending January 31, 1974 and January 31, 1975 as a Subchapter S corporation. It also issued K-1 forms to all three shareholders. The K-1 forms issued to Hume reported his share of the undistributed taxable earnings of Columbia to be $31,305.58 for 1974 and $521.83 for 1975 as well as a dividend distribution of $53,666.69 for 1975. Hume's income tax returns for 1974 and 1975 did not report any undistributed taxable income or dividend income from Columbia.

II

Item 15 in the Supplemental Stipulation of Facts, filed herein on September 22, 1986 and signed by both parties, states that "the only issue for resolution in this case is whether the status of Columbia Forge and Machine Works, Inc. as a qualifying Subchapter S Corporation was terminated for the fiscal years ended January 31, 1974 and January 31, 1975 based upon an alleged transfer of stock to the Skookum Company, an Oregon Corporation."

Hume contends that when the Agreement was executed on August 12, 1971, Skookum became the owner of two-thirds of the stock of Columbia and since Skookum was not an individual, the Subchapter S status of Columbia terminated at that time, see 26 U.S.C. Sec. 1371(a)(2) (for the purposes of Subchapter S status a corporation may not "have as a shareholder a person (other than an estate) who is not an individual").

Hume relies on section 318(a)(4) of the Internal Revenue Code to support his argument that the option agreement transferred stock ownership to Skookum. ¹ His reliance is misplaced. Section 318 is limited to provisions of Subchapter C which expressly make section 318 applicable. Hume has failed to indicate any provision specifically making this section applicable to his case. ²

An option to purchase stock does not transfer ownership until such time as the option is exercised. See Walker v. C.I.R., 544 F.2d 419, 422 (9th Cir.1976) (...