Kamborian v. Comm'r of Internal Revenue, Docket Nos. 5832-69— 5835-69.

• Citation: 56 T.C. 847
• Decision Date: 27 July 1971
• Docket Number: Docket Nos. 5832-69— 5835-69.
• Parties: JACOB S. KAMBORIAN AND ELIZABETH KAMBORIAN, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

56 T.C. 847

JACOB S. KAMBORIAN AND ELIZABETH KAMBORIAN, ET AL.,1 PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 5832-69— 5835-69.

United States Tax Court

Filed July 27, 1971.

[56 T.C. 847]

James D. St. Clair, for the petitioners.

Robert B. Dugan, for the respondent.

1. Four stockholders of International transferred their stock in Campex to International in return for International's common stock. At the same time a fifth International stockholder purchased additional shares of theretofore unissued International stock for cash. Held, in the circumstances of this case, that only the transferors of the Campex stock may be considered as transferors of property for purposes of sec. 351, I.R.C. 1954; that the fifth stockholder may not be so considered; that the control requirement imposed by secs. 351(a) and 368(c), I.R.C. 1954, as interpreted by regs. sec. 1.351-1(a) (1)(ii), has consequently not been satisfied; and that therefore all gain realized on the exchange must be recognized.

2. Held, petitioners Jacob and Elizabeth Kamborian have failed to establish that they are entitled to a deduction for a short-term capital loss in 1966. Secs. 166(d)(1)(B) and 165(f) and (g), I.R.C. 1954.

The Commissioner determined deficiencies in petitioners' income tax as follows:

+-----------------------------------------------------------------------------+
                ¦ ¦Calendar ¦ ¦
                +-----------------------------------------------------+----------+------------¦
                ¦Petitioner ¦year ¦Deficiency ¦
                +-----------------------------------------------------+----------+------------¦
                ¦ ¦ ¦ ¦
                +-----------------------------------------------------+----------+------------¦
                ¦Jacob S. and Elizabeth Kamborian, docket No. 5832-69 ¦{1965 ¦$79,174.28 ¦
                +-----------------------------------------------------+----------+------------¦
                ¦ ¦{1966 ¦20,031.79 ¦
                +-----------------------------------------------------+----------+------------¦
                ¦Jacob S., Jr. and Nancy M. Kamborian, docket No. ¦1965 ¦5,997.84 ¦
                ¦5833-69 ¦ ¦ ¦
                +-----------------------------------------------------+----------+------------¦
                ¦Gene E. and Lisbeth K. Godley, docket No. 5834-69 ¦1965 ¦5,540.54 ¦
                +-----------------------------------------------------+----------+------------¦
                ¦Michael M. Becka, docket No. 5835-69 ¦1965 ¦5,382.98 ¦
                +-----------------------------------------------------------------------------+
                

[56 T.C. 848]

The cases relate to petitioners' transfer of certain securities to International Shoe Machine Corp. in exchange for its common stock. Specifically in question is whether gain realized by petitioners as a result of that transaction qualifies for nonrecognition under section 351, I.R.C. 1954; if it does not so qualify further question is raised as to the amount of such gain, and the answer depends upon the fair market value of the International Shoe Machine Corp. stock received by petitioners in the exchange. Also in issue in docket No. 5832-69 is whether petitioners Jacob S. and Elizabeth Kamborian are entitled to a deduction for a short-term capital loss in the amount of $50,000 in 1966.

FINDINGS OF FACT

The parties have stipulated certain facts which are incorporated herein by this reference.

Petitioners Jacob S. and Elizabeth Kamborian were husband and wife at the time of the trial herein. They filed joint Federal income tax returns for the calendar years 1965 and 1966 with the district director of internal revenue at Boston, Mass., and resided in West Newton, Mass., at the time their petition herein was filed. Petitioners Jacob S., Jr., and Nancy M. Kamborian filed a joint Federal income tax return for the calendar year 1965 with the district director of internal revenue at Boston, Mass., and resided in Duxbury, Mass., at the time their petition herein was filed. Petitioners Gene E. and Lisbeth K. Godley filed a joint Federal income tax return for the calendar year 1965 with the district director of internal revenue at Baltimore, Md., and resided in Washington, D.C., at the time their petition herein was filed. Petitioner Michael M. Becka filed an individual Federal income tax return for the calendar year 1965 with the district director of internal revenue at Boston, Mass., and resided in Watertown, Mass., at the time his petition herein was filed.

1. International Shoe Machine Corp. (International) was incorporated in Massachusetts in 1938 and at the time of the trial herein was engaged in the business of manufacturing and leasing shoe machinery

[56 T.C. 849]

and the sale of related supplies. On April 1, 1964, International's articles of organization were amended to provide for a 20 for 1 split of its common stock into two classes of common stock: Class A, $1 par, voting stock, and class B, $1 par, nonvoting stock. Following an exchange of the preexisting stock for the newly created common stock. International's authorized and issued stock was as follows as of April 1, 1964:

+-------------------------------+
                ¦Shares ¦Class A ¦Class B ¦
                +-----------+---------+---------¦
                ¦ ¦ ¦ ¦
                +-----------+---------+---------¦
                ¦Authorized ¦100,000 ¦900,000 ¦
                +-----------+---------+---------¦
                ¦Issued ¦37,200 ¦334,800 ¦
                +-------------------------------+
                

At all times relevant herein, prior to July 10, 1969, International's stock was subject to the following restrictions:

No share of the common stock of the Company hereafter issued shall be sold or transferred by the registered holder thereof until such holder shall have first offered such shares for sale to the Company at the book value of such shares as shown by the Company's statement of assets and liabilities at the end of the Company's fiscal year next preceding the date of such offer. Such book value shall be adjusted to reflect any changes in the capital stock of the Company subsequent to the end of such preceding fiscal year but shall not be adjusted for any other reason. If within sixty days after the date of such offer the Board of Directors shall elect to purchase any or all of such shares, the holder thereof shall thereupon forthwith transfer and assign to the Company the shares so purchased and the Company shall at the same time make payment of the purchase price thereof. If the Board of Directors shall vote not to purchase any or all of such shares or shall fail to elect to make such purchase within said sixty days, the registered holder of such shares within ninety days after the date of such vote or after the expiration of said sixty days, as the case may be, may transfer such shares by sale or otherwise. Said shares shall again become subject to the above restriction after the transfer by the holder thereof as above permitted or after the expiration of said ninety days if not transferred prior thereto. These restrictions shall not be deemed to restrict the transfer of shares to the executor, administrator, legatees or heirs of a deceased shareholder (including as legatee a testamentary trustee and any person entitled to the distribution of assets of a testamentary trust) but except as above provided all shares so transferred shall be subject in the hands of the transferee to the restrictions on transfer herein provided. Notwithstanding the foregoing, any shares of common stock, $1 par value, as to which the holders of two-thirds of the shares outstanding and entitled to vote thereon have authorized or ratified the waiving of any or all of the foregoing restrictions on the transfer thereof, shall be transferable by the holder thereof from time to time free of the restrictions so waived. Such waiver and any transfer pursuant to any such waiver may be upon any terms and conditions specified by the shareholders in their authorization or ratification.

On September 1, 1965, prior to the transaction here in question, International's capital stock was held as follows:

+---------------------------------------------------------+
                ¦ ¦Shares of International ¦
                +-------------------------------+-------------------------¦
                ¦ ¦Class A ¦Class B ¦
                +-------------------------------+------------+------------¦
                ¦Name ¦common ¦common ¦
                +-------------------------------+------------+------------¦
                ¦ ¦ ¦ ¦
                +-------------------------------+------------+------------¦
                ¦Jacob Kamborian Revocable Trust¦20,324 ¦182,916 ¦
                +-------------------------------+------------+------------¦
                ¦Jacob Kamborian, Jr ¦4,220 ¦37,980 ¦
                +-------------------------------+------------+------------¦
                ¦Lisbeth (Kamborian) Godley ¦3,620 ¦32,580 ¦
                +-------------------------------+------------+------------¦
                ¦Michael Becka ¦60 ¦540 ¦
                +-------------------------------+------------+------------¦
                ¦Elizabeth Kamborian Trust ¦5,000 ¦45,000 ¦
                +-------------------------------+------------+------------¦
                ¦Others ¦3,916 ¦35,244 ¦
                +-------------------------------+------------+------------¦
                ¦ ¦37,140 ¦334,260 ¦
                +---------------------------------------------------------+
                

[56 T.C. 850]

Jacob S. Kamborian (Jacob) founded International and served as its president at all times relevant herein. Jacob S. Kamborian, Jr., and Lisbeth Kamborian Godley are the children of Jacob and his wife, Elizabeth. Michael Becka (Becka) is not related to the members of the Kamborian family. At the time of the trial herein he had been employed by International or an affiliate since at least 1943 and had served as International's executive vice president and general manager since approximately 1960. As such he was responsible for the operations of all of International's departments and reported directly to Jacob, the president of the corporation.

Jacob established the Jacob S. Kamborian Revocable Trust on April 13, 1965. Article I of the ‘Declaration of Trust’ (which identified Jacob as ‘SETTLOR’) set forth the trust's purposes:

ARTICLE I. The SETTLOR has executed this Trust to arrange for the continued management of his equity interests in INTERNATIONAL SHOE MACHINE CORPORATION and its affiliated companies and to create a family protective fund which will provide for the maintenance and comfort of the SETTLOR...