Jaques v. Commissioner
| Citation | 58 TCM (CCH) 1026,1989 TC Memo 673 |
| Decision Date | 26 December 1989 |
| Docket Number | Docket No. 22869-88. |
| Parties | Leonard C. Jaques and Sybil J. Jaques v. Commissioner. |
| Court | United States Tax Court |
Edward J. Fletcher and Stephen A. FitzPatrick, 1862 Penobscot Bldg., Detroit, Mich., for the petitioners. Jacqueline M. Hotz, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Additions to Tax
Sec. Sec
Year Deficiency 6653(a)(1) 6653(a)(2) Sec. 6661
1983 ............................. $ 24,255 $ 1,212.75 * $ 6,063.75
1984 ............................. 120,377 6,018.85 * 30,094.25
1985 ............................. 301,970 15,098.50 * 75,492.50
* 50 percent of the interest due on the entire deficiency
Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the issues remaining for decision are (1) whether amounts withdrawn by petitioner from his wholly owned corporation are loans or taxable income, and (2) whether petitioners are liable for the additions to tax set forth above.
Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Leonard C. Jaques and Sybil J. Jaques (petitioners) resided in Grosse Pointe Shores, Michigan, when they filed the petition in this case.
Leonard C. Jaques, P.C. (the corporation) was incorporated in Michigan on November 11, 1971, as a professional corporation engaged in the practice of plaintiffs' class action law. During the years in issue, Leonard C. Jaques (petitioner) owned all of the outstanding stock of the corporation. Petitioner's basis in the stock of the corporation was $20,000. The corporation used the cash method of accounting and filed its, corporate tax returns on a fiscal year basis ending October 31.
Prior to the years in issue, the corporation established a defined benefit pension plan. Beginning in 1982 and continuing throughout the years in issue, the corporation withdrew the following amounts from the pension plan:
Year Ended
October 31 Amount
1983 .......................... $ 14,750.00
1984 .......................... 56,818.77
1985 .......................... 165,502.05
The withdrawals from the pension plan by the corporation were reflected in executed promissory notes carrying interest at the rate of 15 percent per annum. During the years in issue, the corporation made monthly interest payments to the pension plan.
In 1977, petitioner began making withdrawals from the corporation. Petitioner used the amounts withdrawn from the corporation during 1983, 1984, and 1985 to pay day-to-day personal living expenses. Petitioner withdrew the following amounts from the corporation:
Year Ended
December
31 Amount
1983 .......................... $140,687.00
1984 .......................... 275,682.00
1985 .......................... 803,398.00
These withdrawals were reflected as "Loans to Stockholders" by bookkeeping entries made on the books and records of the corporation. On its income tax returns, the corporation reflected the loans to stockholders as assets as follows:
Year Ended
October 31 Amount
1983 ........................... $ 764,166.72
1984 ........................... 1,007,119.02
1985 ........................... 1,820,837.25
Petitioner did not execute notes for these withdrawals, and there was no maturity date set for repayment. Petitioner did not pledge any collateral as security for the repayment of the amounts withdrawn. The corporation did not take any action to enforce the repayment of the amounts withdrawn by petitioner. During the years in issue, however, petitioner repaid amounts previously withdrawn as follows:
Year Ended
December 31 Amount
1983 .......................... $10,000.00
1984 .......................... 14,000.00
1985 .......................... 23,516.85
Petitioner also repaid $187,000 of amounts previously withdrawn by way of a deduction from his bonus compensation paid by the corporation on October 31, 1986.
Petitioner's personal financial statement prepared as of December 17, 1987, noted that "Leonard C. Jaques owes his law firm $2,645,000.00, but since the professional corporation stock is wholly owned by Leonard C. Jaques, the `loan' is a wash." Petitioner's personal financial statement prepared as of November 30, 1888, reflected loans payable to the corporation in the amount of $3,042,000. In a note to the financial statement, petitioner disclosed that "The $3,042,000.00 represents monies I have borrowed over the years from the P.C. to be repaid whenever convenience may focus."
During the years in issue, the corporation had taxable income or loss and retained earnings or deficits as follows:
Year Ended Taxable Retained Earnings
October 31 Income* (Loss) (Deficit)
1983 ............. $(976,264.19) $(925,875.47)
1984 ............. 301,419.16 (631,538.26)
1985 ............. 659,858.47 14,721.17
* Taxable income before net operating loss deduction
During each of the years in issue, the corporation paid petitioner a salary of $150,000.24. During 1984 and 1985, the corporation also reported on Forms W-2 $37,093 and $131,416, respectively, as other compensation paid to petitioner for imputed interest on the withdrawals. The corporation did not, however, pay any dividends during this period.
Petitioner believed that, under Michigan law, the corporation could not pay a dividend when it had a deficit balance in retained earnings. Petitioner believed that he had sufficient assets and future earnings that would enable him to repay the withdrawals. Petitioner, however, made no attempt to liquidate his assets to repay the withdrawals.
Vincent E. Scapini (Scapini), an accountant and "enrolled agent," prepared petitioners' income tax returns from 1969. Either Scapini or someone associated with his firm prepared the corporation's tax returns from the time it was formed. On his Federal income tax returns for 1983, 1984, and 1985, petitioner reported salary income of $150,000.24, $187,093.24, and $281,416.24, respectively.
On Forms W-2 attached to his tax return for 1984, petitioner disclosed wages of $150,000.24 and other compensation of $37,093.00 attributed to an interest-free loan. On Schedule A of his 1983 income tax return, petitioner deducted interest of $39,750.00 as paid to the "LCJ Pension Trust."
On Forms W-2 attached to his tax return for 1985, petitioner disclosed wages of $150,000.24 and other compensation of $131,416.00 attributed to an interest-free loan. On Schedule A of his 1984 income tax return, petitioner deducted other interest of $36,437.50 as paid to the "LCJ Pension Trust" and $37,093.00 attributed to an interest-free loan from the "L.C.J. P.C."
On Form 6251, Alternative Minimum Tax Computation, attached to his 1984 income tax return, petitioner reported $14,346.04 as "Qualified interest on property used as a residence." Subsequently, on Form 1040X, Amended U.S. Individual Income Tax Return, petitioner explained that the qualified interest reported on his 1984 income tax return "should have been increased by $36,437.50 which was the second mortgage interest on residence, borrowed from Leonard C. Jaques P.C. Pension Plan."
On Schedule A of his 1985 income tax return, petitioner deducted interest of $36,437.50 paid to the "LCJ Pension Trust" on line 11.a. as home mortgage interest paid to a financial institution. On Schedule A of his 1985 income tax return, petitioner also deducted other interest of $131,416.00 attributed to an interest-free loan from the "LCJ P.C."
Respondent determined that the withdrawals from the corporation were taxable distributions under section 301 includable in petitioner's taxable income. Of the $140,687 withdrawn in 1983, respondent determined that $20,000 should be applied against petitioner's basis in the corporation, and the remaining $120,687 should be taxed as a gain from the sale or exchange of property pursuant to sections 301 and 1001. Respondent also determined that the entire $275,682 withdrawn during 1984 was a taxable dividend pursuant to section 316. Finally, of the $803,398 withdrawn in 1985, respondent determined that $647,384, the amount of the corporation's earnings and profits, was a taxable dividend pursuant to section 316. Respondent determined that the remaining $156,014 withdrawn in 1985 should be taxed as a gain from the sale or exchange of property pursuant to sections 301 and 1001.
OpinionRespondent contends that the withdrawals from the corporation were taxable distributions that are includable in petitioner's taxable income. Petitioner asserts that the withdrawals were nontaxable loans that he intended to repay with future earnings. Petitioners bear the burden of proving that respondent's determinations are erroneous. Rule 142(a).
Whether advances from a corporation to its shareholder constitute bona fide loans is a factual question and depends upon the existence of an intent, at the time the advances occurred, on the shareholder's part to repay the advances and an intent on the corporation's part to enforce the obligations. Berthold v. Commissioner 68-2 USTC ¶ 9670, 404 F.2d 119, 122 (6th Cir. 1968), affg. a Memorandum Opinion of this Court Dec. 28,456(M). The issue thus turns upon all of the circumstances surrounding the transactions. Wiese v. Commissioner 38-1 USTC ¶ 9059, 93 F.2d 921 (8th Cir. 1938), affg. Dec. 9606, 35 B.T.A. 701 (1937). Where the shareholder receiving the advances controls the...
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