L.C. Bohart Plumbing & Heating Co. v. Comm'r of Internal Revenue

• Decision Date: 21 July 1975
• Docket Number: Docket No. 6871-73.
• Citation: 64 T.C. 602
• Parties: L. C. BOHART PLUMBING & HEATING CO., INC. PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 602

L. C. BOHART PLUMBING & HEATING CO., INC. PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 6871-73.

United States Tax Court

Filed July 21, 1975.

Clarence J. Ferrari, Jr., Edward M. Alvarez, and Kent E. Olsen, for the petitioner.

Eugene H. Ciranni, for the respondent

B Corp. adopted a plan of liquidation pursuant to which it distributed all of its assets to its sole shareholder within 24 months of adopting the plan. B Corp. did not designate any part of the distributions as a dividend. On its final Federal income tax return B Corp. did not identify itself as a personal holding company nor did it attach thereto Schedule PH which is required in the case of a personal holding company. In the following year an agent of the Internal Revenue Service tentatively determined that B Corp. was a personal holding company and had undistributed personal holding company income subject to tax. B Corp. thereupon filed an amended tax return accompanied by a Schedule PH, in which it claimed a dividends paid deduction in an amount equal to its tentatively determined undistributed personal holding company income. Held, B Corp. failed to designate such amount as a dividend within the time prescribed in the regulations pursuant to sec. 316(b)(2)(B)(ii), on account of which it is not entitled to a deduction for dividends paid but must include that amount in its undistributed personal holding company income.

OPINION

RAUM, Judge:

The Commissioner determined a deficiency of $19,611 in petitioner's Federal income tax for its taxable period ended February 28, 1969. Petitioner is a personal holding company, subject to the 70-percent tax imposed by section 541, I.R.C. 1954, with respect to its undistributed personal holding company income. Under section 545, a personal holding company may reduce its undistributed personal holding company income by an amount equal to its dividends paid deduction, as described in section 561. At issue is whether, under section 316(b)(2)(B)(ii), the controlling definition of ‘dividend’ for this purpose, a liquidated personal holding company may retroactively designate part of its liquidating distribution as a ‘dividend’ after the expiration of the period fixed by applicable Treasury regulations for such designation. The facts have been stipulated.

Petitioner L. C. Bohart Plumbing & Heating Co., Inc., is a California corporation which, at the time of filing its petition herein, had its principal office in Sunnyvale, Calif. Petitioner had been formed in 1955 for the purpose of engaging in the business of plumbing subcontracting which business was subsequently replaced by apartment house rentals. On September 11, 1968, petitioner's board of directors held a special meeting with petitioner's sole shareholder, Lewis C. Bohart (Bohart), at which time the directors adopted, with the approval of Bohart, resolutions authorizing the winding up and dissolution of petitioner. Among the various resolutions adopted in this regard were the following:

FURTHER RESOLVED that this corporation liquidate its assets in compliance with Internal Revenue Code Sec. 337;

FURTHER RESOLVED that each shareholder, upon distribution to him of his proportionate part of the assets, shall be required to surrender his share certificates for cancellation and that such a distribution shall be in complete satisfaction of his rights as a shareholder of this corporation, * * *

On October 3, 1968, petitioner filed with the District Director of Internal Revenue at San Francisco, Calif., a Form 966 (Return Of Information To Be Filed By Corporations Within 30 Days After Adoption Of Resolution Or Plan Of Dissolution, Or Complete Or Partial Liquidation). Petitioner did not indicate thereon in the space provided the existence of any amendment to its plan of dissolution.

Between December 1, 1968, and February 28, 1969, petitioner distributed all of its assets to Bohart, its sole shareholder, as provided in its plan of liquidation. At that time petitioner did not designate any part of the distribution to Bohart as a dividend, nor did it notify Bohart in writing that any part of the distribution was designated as a dividend. On its Federal income tax return, Form 1120, for the taxable period ended February 28, 1969, petitioner reported distributions of cash and property to Bohart in amounts of $62,543 and $83,250, respectively, of which it designated a portion¹ as a liquidating distribution in Form 1099L (Distributions In Liquidation During Calendar Year). It further indicated on the third page of its Form 1120 return (in response to question O) that it was not required to file either Form 1096 or 1099, relating to the payment of dividends to shareholders. Petitioner did not mark the appropriate box on its return stating that it was a personal holding company, nor did it attach a Schedule PH to its return. Schedule PH is the schedule required to be filed along with Form 1120 (the regular corporate income tax form) where the corporation is a personal holding company.

On his individual Federal income tax return for 1969, Bohart reported long-term capital gain of $83,166 received as a liquidating distribution in exchange for his stock in petitioner.

In the spring of 1969 petitioner filed a Certificate of Winding Up and Dissolution with the secretary of state of California, in which it certified that (a) the business of petitioner had been completely wound up, (b) the known debts and liabilities of petitioner had actually been paid, and (c) the known assets of petitioner had been distributed to its shareholder.

Sometime in 1970 a revenue agent commenced an audit of petitioner's final income tax return. In the course of the audit, he tentatively determined and made known to petitioner's representatives that petitioner was a personal holding company and that it was subject to personal holding company tax liability with respect to its final return. Petitioner thereupon filed an amended Federal income tax return on December 27, 1971, which differed from its earlier return in that it omitted Form 966 (Return Of Information To Be Filed By Corporations Within 30 Days After Adoption Of Resolution Or Plan Of Dissolution, Or Complete Or Partial Liquidation) and other information pertaining to its liquidation in place of which it attached a Schedule PH. On Schedule PH petitioner claimed a deduction of $25,469 for dividends paid on account of which it reported no undistributed personal holding company income and therefore no personal holding company tax liability. At the time of filing its amended income tax return, petitioner also filed Forms 1099L (Distributions In Liquidation During Calendar Year 1969), 1099 (information return relating to dividends paid), and 1096 (annual information return summarizing all distributions), all of which were labeled ‘Amended.’ On Form 1099 petitioner reported the payment of $25,469 to Bohart as a dividend in 1969, and on Form 1099L it reported a liquidating distribution of property valued at $57,697 to Bohart in . 1969. Petitioner supplied Bohart's name, address, and identifying number on both forms.

Despite the fact that petitioner identified Bohart in its amended income tax return as the distributee of a $25,469 dividend, there is no evidence that petitioner furnished Bohart with a statement of dividend distributions made to him during the year. Bohart never filed an amended 1969 income tax return to reflect additional tax due in respect of that part of the liquidating distribution which petitioner had recharacterized as a dividend. On April 11, 1973, the Commissioner issued a notice of deficiency to Bohart in which he determined that $25,469 of the distribution made by petitioner to Bohart was a dividend taxable at ordinary income rates. The amount of the deficiency was $7,358, which Bohart thereafter paid in full.

In his notice of deficiency to petitioner, which he issued some 2 months after the notice to Bohart, the Commissioner determined that petitioner was a personal holding company for the taxable period ended February 28, 1969. The Commissioner furthermore disallowed petitioner's deduction for dividends paid, on account of which he determined that petitioner was subject to the personal holding company tax on its undistributed personal holding company income of $25,469. This determination was inconsistent with the prior determination, made in respect of Bohart, that he had received a dividend of $25,469 from petitioner.

Section 541, I.R.C. 1954, imposes a 70-percent tax on the ‘undistributed personal holding company income’ (as defined in section 545) of every ‘personal holding company’ (as defined in section 542). Broadly stated, the personal holding company tax is the mechanism which Congress adopted to deter the use of certain closely held corporations which, by retaining their earnings, shield the controlling stockholders in the upper brackets from tax on dividends at the top applicable rates. The highly burdensome 70-percent tax was designed, at least in part, to remove any such tax advantage otherwise available through the accumulation of earnings. See H. Rept. No. 704, 73d Cong., 2d Sess. 11-12 (1934); S. Rept. No. 558, 73d Cong., 2d Sess. 13-16 (1934); O'Sullivan Rubber Co. v. Commissioner, 120 F.2d 845, 847-848 (2d Cir.); Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.20 (3d ed. 1971). But a personal holding company may mitigate the severity of the tax or, indeed, escape it altogether through relief provided by section 545(a). Because the purpose of the tax is achieved to the extent that a personal holding company distributes its earnings to its stockholders as taxable dividends, section 545(a) permits the corporation to subtract the so-called ‘dividends paid deduction’ in computing its undistributed personal holding company income, the amount upon which the tax is computed. As its name suggests, the dividends paid deduction,...