King v. Comm'r of Internal Revenue , Docket Nos. 4084-68— 4097-68.

• Citation: 55 T.C. 677
• Decision Date: 28 January 1971
• Docket Number: Docket Nos. 4084-68— 4097-68.
• Parties: E. WARD KING AND MYRTLE C. KING, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

55 T.C. 677

E. WARD KING AND MYRTLE C. KING, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 4084-68— 4097-68.

United States Tax Court

Filed January 28, 1971.

[55 T.C. 678]

John Y. Merrell and F. Allan Kelly, for the petitioners.

Vallie C. Brooks, for the respondent.

Mason & Dixon, a motor carrier of freight, was the sole shareholder of Interstate, Motorways, and Regal. For 5 years prior to Oct. 4, 1963, the only income of the subsidiaries was derived from the rental of motor freight terminals to their parent on a net lease basis. Held: The distribution of the stock of Interstate, Motorways, and Regal to its shareholders (the petitioners) by Mason & Dixon on Oct. 4, 1963, constitutes a taxable dividend. The subsidiaries were not engaged in the active conduct of a trade or business during the 5-year period prior to the date of distribution. Sec. 355(b), I.R.C. 1954.

STERRETT, Judge:

The respondent determined deficiencies in the Federal income taxes of petitioners in these consolidated case for the year 1963 as follows:

+-------------------------+
                ¦Docket No. ¦Deficiency ¦
                +------------+------------¦
                ¦ ¦ ¦
                +------------+------------¦
                ¦4084-68 ¦$130,945.51 ¦
                +------------+------------¦
                ¦4085-68 ¦168,462.24 ¦
                +------------+------------¦
                ¦4086-68 ¦17,455.78 ¦
                +------------+------------¦
                ¦4087-68 ¦17,455.78 ¦
                +------------+------------¦
                ¦4088-68 ¦8,350.46 ¦
                +------------+------------¦
                ¦4089-68 ¦171,652.81 ¦
                +------------+------------¦
                ¦4090-68 ¦17,455.84 ¦
                +------------+------------¦
                ¦4091-68 ¦17,455.84 ¦
                +------------+------------¦
                ¦4092-68 ¦159,859.98 ¦
                +------------+------------¦
                ¦4093-68 ¦17,189.59 ¦
                +------------+------------¦
                ¦4094-68 ¦8,350.46 ¦
                +------------+------------¦
                ¦4095-68 ¦2,096.59 ¦
                +------------+------------¦
                ¦4096-68 ¦24,818.26 ¦
                +------------+------------¦
                ¦4097-68 ¦593.30 ¦
                +-------------------------+
                

The sole issue presented for our determination is whether the distribution of all of the stock of three of its wholly owned subsidiaries by the Mason & Dixon Lines, Inc., to its shareholders qualified for nonrecognition of gain under section 355 of the Internal Revenue Code of 1954.²

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulations and the exhibits attached thereto are incorporated herein by this reference.

The following petitioners are husband and wife, respectively, all of whom resided in Kingsport, Tenn., at the time their petitions were filed herein, and filed joint income tax returns for the year 1963 with the district director of internal revenue at Nashville, Tenn.

+----------------------------------------------------------+
                ¦ ¦Docket No. ¦
                +---------------------------------------------+------------¦
                ¦ ¦ ¦
                +---------------------------------------------+------------¦
                ¦E. Ward King and Myrtle C. King ¦4084-68 ¦
                +---------------------------------------------+------------¦
                ¦E. William King and Mary P. King ¦4085-68 ¦
                +---------------------------------------------+------------¦
                ¦John R. King and Jane S. King ¦4089-68 ¦
                +---------------------------------------------+------------¦
                ¦Edwin O. Norris and Margaret K. Norris ¦4092-68 ¦
                +---------------------------------------------+------------¦
                ¦S. T. King and Ruth King ¦4096-68 ¦
                +---------------------------------------------+------------¦
                ¦Lloyd W. Pendleton and Elizabeth B. Pendleton¦4097-68 ¦
                +----------------------------------------------------------+
                

E. William King, John R. King, and Margaret K. Norris are the adult children of E. Ward King and Myrtle C. King. S. T. King is the brother of E. Ward King. Lloyd W. Pendleton and Elizabeth B. Pendleton are unrelated to any other petitioner.

[55 T.C. 679]

The following petitioners are Tennessee trusts created by E. Ward King, grantor, on the dates indicated. The address of each trust was in Kingsport, Tenn., at the time petitions were filed herein, and each trust filed a fiduciary income tax return for the year 1963 with the district director of internal revenue at Nashville, Tenn.:

+-----------------------------------------------------------------------------+
                ¦ ¦Date trust ¦Docket ¦
                +-------------------------------------------------------+------------+--------¦
                ¦ ¦created ¦No. ¦
                +-------------------------------------------------------+------------+--------¦
                ¦ ¦ ¦ ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Edward William King, Jr., Trust, E. William King, ¦2/15/55 ¦4086-6 ¦
                ¦trustee ¦ ¦ ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Elizabeth Madison King Trust, E. William King, trustee ¦2/15/55 ¦4087-6 ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Mary Armistead King Trust, E. William King, trustee ¦3/21/58 ¦4088-6 ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Jennifer Stewart King Trust, John R. King, trustee ¦1/14/55 ¦4090-6 ¦
                +-------------------------------------------------------+------------+--------¦
                ¦John Rutledge King, Jr., Trust, John R. King, trustee ¦2/28/55 ¦4091-6 ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Cheryl Ann Norris Trust, Margaret K. Norris, trustee ¦12/21/56 ¦4093-6 ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Laura Charlton Norris Trust, Margaret K. Norris, ¦6/18/58 ¦40948- ¦
                ¦trustee ¦ ¦ ¦
                +-------------------------------------------------------+------------+--------¦
                ¦Edwin Ward Norris Trust, Margaret K. Norris, trustee ¦12/22/61 ¦40958- ¦
                +-----------------------------------------------------------------------------+
                

The various trust beneficiaries are the minor children of the respective trustees and are the grandchildren of E. Ward King.

The Mason & Dixon Lines, Inc. (hereinafter referred to as Mason & Dixon), was incorporated under the laws of the State of Tennessee on January 5, 1934. Since its incorporation, Mason & Dixon has been engaged in business as a motor common carrier of property in interstate commerce. It has been under the regulatory jurisdiction of the Interstate Commerce Commission (hereinafter referred to as ICC) since the Federal Motor Carrier Act became effective in 1935. Since 1934 Mason & Dixon's principal office has been located in Kingsport, Tenn. For each of the taxable years 1950 through 1966, Mason & Dixon filed Federal income tax returns with the district director of internal revenue at Nashville, Tenn. For the years 1957 through 1961, Mason & Dixon filed consolidated income tax returns with its subsidiaries.

E. Ward King was a founder of Mason & Dixon and his family has controlled this corporation since 1939. M. & D. Investment Co., Inc. (hereinafter referred to as M. & D. Investment), was incorporated under the laws of Tennessee on October 20, 1941. The Crown Enterprises, Inc. (hereinafter referred to as Crown), was incorporated under the laws of Tennessee on May 29,1957. M. & D. Investment, since its incorporation, has been engaged in the business of acquiring, improving, and leasing real property to others. Crown was organized for the purpose of renting automotive equipment and prior to October 4, 1963, it engaged primarily in this activity.

Other than an issue of Mason & Dixon preferred stock, Crown, M. & D. Investment, and Mason & Dixon have only one class of

[55 T.C. 680]

capital stock outstanding which constitutes the voting stock of said corporations. The owners of the common (voting) stock of these corporations and their respective holdings on October 4, 1963, were as follows:

+-----------------------------------------------------------------------------+
                ¦ ¦Number of shares ¦
                +-----------------------------------------------+-----------------------------¦
                ¦Shareholder ¦ ¦
                +-----------------------------------------------+-----------------------------¦
                ¦ ¦Mason ¦Crown ¦M. & D. ¦
                ¦ ¦& ¦ ¦ ¦
                +-----------------------------------------------+------+-----------+----------¦
                ¦ ¦Dixon ¦Enterprises¦Investment¦
                +-----------------------------------------------+------+-----------+----------¦
                ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------------+------+-----------+----------¦
                ¦E. Ward King ¦1,847 ¦2,500 ¦614 1/2 ¦
                +-----------------------------------------------+------+-----------+----------¦
                ¦E. William King ¦2,384 ¦2,500 ¦6 1/2 ¦
                +-----------------------------------------------+------+----------------------¦
                ¦E. William King, trustee for Edward William ¦400 ¦ ¦
                ¦King, Jr ¦ ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Elizabeth Madison King ¦400 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Mary Armistead King ¦245 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦John R. King ¦2,384 ¦2,500 ¦6 1/2 ¦
                +-----------------------------------------------+------+----------------------¦
                ¦John R. King, trustee for Jennifer Stewart King¦400 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦John Rutledge King, Jr ¦400 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Margaret K. Norris ¦2,304 ¦2,500 ¦46 1/2 ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Margaret K. Norris, trustee for Cheryl Ann ¦400 ¦ ¦
                ¦Norris ¦ ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Laura Charlton Norris ¦245 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Edward Ward Norris ¦100 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Edwin O. Norris ¦ ¦ ¦41 ¦
                +-----------------------------------------------+------+----------------------¦
                ¦S. T. King ¦482 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦Lloyd W. Pendleton ¦30 ¦ ¦
                +-----------------------------------------------+------+----------------------¦
                ¦King Foundation ¦479 ¦ ¦

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