Kerry Inv. Co. v. Comm'r of Internal Revenue , Docket No. 2568-70.

CourtUnited States Tax Court
Writing for the CourtSIMPSON
Citation58 T.C. 479
Decision Date20 June 1972
Docket NumberDocket No. 2568-70.
PartiesKERRY INVESTMENT COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

58 T.C. 479

KERRY INVESTMENT COMPANY, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2568-70.

United States Tax Court

Filed June 20, 1972.


[58 T.C. 479]

James Wm. Johnston and William R. Smith, for the petitioner.

Eugene H. Flood, for the respondent.

The petitioner made interest-free loans to its subsidiary. Some of these loans were outstanding in 1966 and 1967. Acting under sec. 482, I.R.C. 1954, the respondent increased the petitioner's income by 5 percent of such loans and indicated that correlative adjustments would be made in the tax returns of the subsidiary. Held: (1) The respondent has the power under sec. 482, I.R.C. 1954, to allocate gross income to the parent with respect to loans, the proceeds of which produced gross income in the years in issue; (2) since the respondent determined to make an allocation of income under sec. 482, I.R.C. 1954, the petitioner has the burden of proving that the proceeds of the interest-free loans did not produce gross income; accordingly, the respondent's determination is sustained with respect to the loans the proceeds of which were not traced during the years in issue; and (3) the respondent lacked legal authority to make an allocation under sec. 482, I.R.C. 1954, with respect to the loans the proceeds of which were shown not to have produced gross income during the years in issue.

[58 T.C. 480]

SIMPSON, Judge:

The respondent determined a deficiency of $10,058.38 in the petitioner's Federal income tax for 1966 and a deficiency of $11,826.61 in the petitioner's Federal income tax for 1967. The only issue for decision is whether, in the circumstances of this case, the respondent was authorized under section 482 of the Internal Revenue Code of 19541 to increase the petitioner's income inasmuch as it made interest-free loans to its subsidiary.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioner, Kerry Investment Co., is a Washington corporation having its office in Seattle, Washington, at the time of the filing of its petition in this case. For the calendar years 1966 and 1967, it timely filed its Federal income tax returns, using the accrual method of accounting, with the Internal Revenue Service office at Ogden, Utah.

Since its organization in 1929, the petitioner has been owned and controlled by Albert S. Kerry, Sr., his wife, his children, and their families. At all times material to this case, the petitioner has been a personal holding company with its assets consisting primarily of stocks, bonds, debentures, and notes and contracts receivable. At least since April 30, 1942, the Kerry family has also, directly or indirectly, controlled Kerry Timber Co. (Timber), and until its liquidation in 1948 the Seattle Medical Arts Building Co. (Medical Arts). From October 28, 1943, to December 29, 1948, the petitioner owned all the outstanding capital stock of Medical Arts, and since December 29, 1950, it has owned all the outstanding capital stock of Timber.

Timber is a Washington corporation which is engaged in the business of owning, leasing, and operating various commercial office buildings, apartment houses, and other real estate. Prior to its liquidation, Medical Arts operated the Medical Arts Building in downtown Seattle as lessee and owned and leased the Southcourt Apartments in Bremerton, Wash.

On December 23, 1948, the Medical Arts sold the Southcourt Apartments and the Medical Arts Building leasehold and equipment to Timber for $127,609.54. The contract of sale provided for a downpayment of $7,609.54 and for the balance to be paid in 12 equal annual installments. It also provided that the balance was not to bear interest. The downpayment was made on December 24, 1948, and on December 29, 1948, when Medical Arts was liquidated, the contract of sale was transferred to the petitioner. The petitioner has held the contract since that time and has received no payments upon the deferred balance of the purchase price. Similarly, no interest has ever been paid on this indebtedness.

[58 T.C. 481]

On July 15, 1956, Timber purchased the First and Seneca Building for a purchase price of $169,000. In order to finance this purchase, Timber borrowed $18,000 from the petitioner and $150,000 from the Washington Mutual Savings Bank. The loan from the petitioner was evidenced by a non-interest bearing demand note and the bank loan was evidenced by a 5-percent note which was payable in quarterly installments of $7,500 and secured by a real and chattel mortgage covering the Medical Arts Building, the Southcourt Apartments, and the First and Seneca Building. The loan by the bank has been repaid in full, but no payment of interest or principal has been made on the note payable to the petitioner.

On May 22, 1957, the petitioner sold to Timber certain common stock, preferred stock, and promissory notes of the Wilkeson Cut Stone Co. (Wilkeson). The total purchase price of $24,500 was allocated as follows: $8,250 for the common stock, $3,750 for the preferred stock, and $12,500 for the promissory notes. The purchase price was evidenced by a non-interest-bearing demand note payable to the petitioner. In 1958, Wilkeson paid in full the promissory notes and redeemed the preferred stock. No payments of interest or principal have even been made on the demand note payable to the petitioner.

On September 18, 1957, the petitioner sold debentures of General American Industries (General debentures), which had a face value of $45,000, to Timber for $24,617.50. The purchase price was evidenced by a non-interest-bearing promissory note payable to the petitioner on demand. Prior to June 30, 1966, Timber sold or disposed of the debentures. No payments of interest or principal have been made on the note payable to the petitioner.

On October 13, 1959, Timber borrowed $20,000 from the petitioner for the purpose of making a loan to Wilkeson. The loan from the petitioner to Timber bore no interest, and the loan from Timber to Wilkeson bore 6-percent interest. Sometime before June 30, 1968, Wilkeson repaid the loan from Timber. No payments of interest or principal have been made on the loan from the petitioner.

On or about January 24, 1961, Timber purchased a parking lot situated adjacent to the Southcourt Apartments for a cash purchase price of $38,887.60. In order to finance the purchase, Timber borrowed $30,000 from the petitioner. The loan was evidenced by a non-interest-bearing demand note payable to the petitioner. No payments of principal or interest have been made on the note.

In 1966, Timber purchased the Colonial Building and the Grand Pacific Building for a total purchase price of $208,901 payable in cash. To finance this purchase, Timber borrowed $100,000 from the petitioner on June 7, 1966, and $110,000 from the Washington Mutual Savings Bank on August 29, 1966. The loan from the bank was at 6 1/2 percent interest and was secured by a real and chattel mortgage

[58 T.C. 482]

covering the Medical Arts Building and the First and Seneca Building. The loan from the petitioner was evidenced by a non-interest-bearing demand note. Timber has made regular payments of principal and interest to the bank, but has not made any payments of interest or principal to the petitioner.

During the period from February 13, 1951, to April 3, 1958, Timber borrowed $57,500 from the petitioner for the purpose of making improvements to the Medical Arts Building and $36,000 for the purpose of making improvements to the First and Seneca Building. An additional $16,000 was borrowed from the petitioner for the purpose of making improvements to both buildings. Each such loan was evidenced by a non-interest-bearing demand note payable to the petitioner, and the proceeds of each loan were used by Timber for the intended purposes. No interest or principal payments have been made on any of the notes.

From September 23, 1948, to July 31, 1966, the petitioner made open account advances of $255,888.32 to Timber for the purposes of providing Timber with funds for current operations, advances to tenants, and investments. Timber has repaid all but $59,000 of these advances. None of the open account advances bore interest.

During the period from December 23, 1948, to December 10, 1957, the petitioner also made interest-free loans of $88,021.98 to Timber for current operations, for improvements to real estate, and for other purposes. These loans had been repaid in full prior to January 1, 1966.

During 1966 and 1967, the following non-interest-bearing debts were owed by Timber to the petitioner:

Transaction . . . . . Amount of indebtedness

Medical Arts contract . . . $120,000.00

Demand note for loan to purchase First and Seneca Building . . . $18,000.

Demand note for purchase of Wilkeson stock and notes . . . $24,500.00

Demand note for purchase of General debentures . . . $24,671.50

Demand note for funds to loan to Wilkeson . . . $20,000.00

Demand note for loan to purchase Bremerton parking lot . . . $30,000.00

Demand note for loan to purchase Colonial and Grand Pacific Buildings (only outstanding since June 7, 1966) . . . $100,000.00

Demand notes for loans for miscellaneous improvements to real estate . . . $109,500.00

Miscellaneous open account advances . . . $59,000.00

Total . . . $505,617.50

[58 T.C. 483]

Timber has not claimed any deductions for interest as the result of the loans to it by the petitioner, and the petitioner has not received or accrued any interest income from these loans. However, Timber, which computes its income on the basis of a fiscal year ending June 30, claimed deductions for interest paid on the loan by the Washington Mutual Savings Bank in the amounts of $479.57, $5,921.58, and $6,909.35, for its fiscal years ending in 1966, 1967, and 1968, respectively. Timber received interest income of $4,441.13, $4,223.32, and $3,682.83, for its fiscal years 1966, 1967, and 1968, respectively. During these fiscal years, Timber has had the...

To continue reading

Request your trial
19 practice notes
  • Ross Glove Co. v. Comm'r of Internal Revenue , Docket Nos. 7486-70
    • United States
    • United States Tax Court
    • July 23, 1973
    ...Philipp Brothers Chemicals, Inc. (N.Y.) v. Commissioner, 435 F.2d 53 (C.A. 2, 1970), affirming 52 T.C. 240 (1969); Kerry Investment Co., 58 T.C. 479 (1972),on appeal (C.A. 9, Oct. 27, 1972); Huber Homes, Inc., 55 T.C. 598 (1971). However, in this case, there is a dispute as to who has the b......
  • Latham Park Manor, Inc. v. Comm'r of Internal Revenue, Docket Nos. 2339-76
    • United States
    • United States Tax Court
    • November 9, 1977
    ...& Co. v. Commissioner, 16 T.C. 287 (1951); PPG Industries, Inc. v. Commissioner, 55 T.C. 928 (1970); Kerry Investment Co. v. Commissioner, 58 T.C. 479 (1972), affd. in part and revd. in part500 F.2d 108 (9th Cir. 1974); and Kahler Corp. v. Commissioner, 58 T.C. 496 (1972), revd. 486 F.2d 1 ......
  •  R.T. French Co. v. Comm'r of Internal Revenue, Docket Nos. 5026-70— 5028-70.
    • United States
    • U.S. Tax Court
    • September 6, 1973
    ...of section 162 into the case, has framed a principal argument in its original brief in terms of that section. Cf. Kerry Investment Co., 58 T.C. 479, 493; Richard Rubin, 56 T.C. 1155, 1163-1164, affirmed per curiam 460 F.2d 1216 (C.A. 2).5 It is therefore unnecessary for us to express any op......
  • Brittingham v. Comm'r of Internal Revenue , Docket Nos. 6626-71
    • United States
    • U.S. Tax Court
    • June 3, 1976
    ...Inc., 55 T.C. 598, 605 (1971); see Baldwin-Lima-Hamilton Corp. v. United States, 435 F.2d 182, 185 (7th Cir. 1970); Kerry Investment Co., 58 T.C. 479, 484 (1972), affd. on this issue 500 F.2d 108 (9th Cir. 1974); Asiatic Petroleum Co. (Delaware) Ltd., 31 B.T.A. 1152 (1935), affd. 79 F.2d 23......
  • Request a trial to view additional results
19 cases
  • Ross Glove Co. v. Comm'r of Internal Revenue , Docket Nos. 7486-70
    • United States
    • United States Tax Court
    • July 23, 1973
    ...Philipp Brothers Chemicals, Inc. (N.Y.) v. Commissioner, 435 F.2d 53 (C.A. 2, 1970), affirming 52 T.C. 240 (1969); Kerry Investment Co., 58 T.C. 479 (1972),on appeal (C.A. 9, Oct. 27, 1972); Huber Homes, Inc., 55 T.C. 598 (1971). However, in this case, there is a dispute as to who has the b......
  • Latham Park Manor, Inc. v. Comm'r of Internal Revenue, Docket Nos. 2339-76
    • United States
    • United States Tax Court
    • November 9, 1977
    ...& Co. v. Commissioner, 16 T.C. 287 (1951); PPG Industries, Inc. v. Commissioner, 55 T.C. 928 (1970); Kerry Investment Co. v. Commissioner, 58 T.C. 479 (1972), affd. in part and revd. in part500 F.2d 108 (9th Cir. 1974); and Kahler Corp. v. Commissioner, 58 T.C. 496 (1972), revd. 486 F.2d 1 ......
  •  R.T. French Co. v. Comm'r of Internal Revenue, Docket Nos. 5026-70— 5028-70.
    • United States
    • U.S. Tax Court
    • September 6, 1973
    ...of section 162 into the case, has framed a principal argument in its original brief in terms of that section. Cf. Kerry Investment Co., 58 T.C. 479, 493; Richard Rubin, 56 T.C. 1155, 1163-1164, affirmed per curiam 460 F.2d 1216 (C.A. 2).5 It is therefore unnecessary for us to express any op......
  • Brittingham v. Comm'r of Internal Revenue , Docket Nos. 6626-71
    • United States
    • U.S. Tax Court
    • June 3, 1976
    ...Inc., 55 T.C. 598, 605 (1971); see Baldwin-Lima-Hamilton Corp. v. United States, 435 F.2d 182, 185 (7th Cir. 1970); Kerry Investment Co., 58 T.C. 479, 484 (1972), affd. on this issue 500 F.2d 108 (9th Cir. 1974); Asiatic Petroleum Co. (Delaware) Ltd., 31 B.T.A. 1152 (1935), affd. 79 F.2d 23......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT