Lessinger v. Comm'r of Internal Revenue
| Decision Date | 20 November 1985 |
| Docket Number | Docket No. 24103-81. |
| Citation | 85 T.C. 824,85 T.C. No. 48 |
| Parties | SOL LESSINGER and EDITH LESSINGER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner husband transferred the assets and related business liabilities of his sole proprietorship to his pre- existing wholly owned corporation. No additional stock or securities were issued to petitioner. HELD, the exchange requirements of section 351 are met. To the extent that Abegg v. Commissioner, 50 T.C. 145 (1968), affd. on different grounds 429 F.2d 1209 (2d Cir. 1970), is inconsistent in this regard, it is overruled. HELD FURTHER, the liabilities assumed by the corporation are in excess of the adjusted basis of the transferred assets and, therefore, gain is recognized under section 357(c) to the extent of the excess. HELD FURTHER, the innocent spouse provisions under section 60l3(e) are inapplicable. BRUNO SCHACHNER, for the petitioners.
WILLIAM GROSS and ARNOLD GOULD, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax in the amounts of $114,147.30 and $1,427.50 for the taxable years 1977 and 1978, respectively.
After concessions, the issues remaining for decision are: (1) whether petitioner Sol Lessinger should recognize gain of $251,014, in the taxable year 1977 pursuant to section 357(c); 1 and (2) whether petitioner Edith Lessinger is entitled to relief from liability for the 1977 deficiency under the provisions of section 6013(e).
Some of the facts have been stipulated and are found accordingly.
Petitioners, Sol and Edth Lessinger, husband and wife, resided at Suffern, New York, on the date the petition in this case was filed. Petitioners filed joint Federal income tax returns for the taxable years 1977 and 1978, the years before the Court.
For over 25 years prior to December 31, 1976, petitioner Sol Lessinger (hereinafter petitioner in the singular) was engaged in business as a sole proprietor using the trade name Universal Screw and Bolt Co. (hereinafter proprietorship). The proprietorship acted as a wholesale distributor of a variety of metal fasteners. Universal Screw & Bolt Co., Inc., a New York corporation (hereinafter Universal), was organized on January 1, 1962. Petitioner has been the sole shareholder of Universal since it was incorporated. Universal was engaged in a similar business as the proprietorship, that is, the wholesale distribution of a variety of metal fasteners. Petitioner was the president and chief executive officer of Universal.
The business operations of Universal and the proprietorship were conducted from the same location on Ninth Avenue, New York, New York. Prior to January 1, 1977, Universal and the proprietorship carried on separate business operations and maintained separate books and records. Both maintained their books and records and filed their Federal income tax returns using the accrual basis of accounting and the calendar year accounting period.
The proprietorship's working capital was provided in part by a factor who made loans secured by a pledge of the proprietorship's accounts receivable. In the latter part of 1976, the factor refused to continue the existing arrangement. It notified petitioner, through S. Z. Swidler, petitioner's attorney and accountant, that it would continue the financing only for a corporation so that the factor could take advantage of the higher interest rate permitted on loans to corporations under the laws of the State of New York. Petitioner instructed Mr. Swidler to do whatever was necessary for the proprietorship to become a corporation so that he could continue operation. The details of the transfer were not explained to petitioner. Mr. Swidler instructed his associate, Nathan Kutner, a certified public accountant, and Max Fuchs, the bookkeeper of the proprietorship, as to the necessary arrangements for the transfer. It was determined that the businesses operated by the proprietorship and Universal should be consolidated as of January 1, 1977.
The unaudited balance sheet of the proprietorship as of December 31, 1976, disclosed the following:
On January 1, 1977, the proprietorship bank account was closed and all business activity formerly conducted by the proprietorship was carried on by Universal. On that date, the operating assets and related business liabilities of the proprietorship were transferred to the pre-existing corporation, Universal. The principal assets which were not transferred were mutual fund shares. The principal liability not transferred was the loan from Chemical Bank secured by the mutual fund shares.
No shares of stock or other securities were issued by Universal. No written agreements were prepared or executed between Universal and petitioner in connection with the consolidation.
Certain liabilities of the proprietorship were expressly assumed by Universal: (1) the indebtedness to the factor Trefoil, and (2) the trade notes payable in the amount of $802,075.09. These notes payable are of two types. First, the proprietorship had issued notes to creditors which were payable after January 1, 1977, at the bank of the proprietorship. After January 1, 1977, and prior to the due date, each payee was notified to change the name of the maker of the note to Universal and the place of payment to Universal's bank. The physical change was accomplished either by an employee of Universal or an employee of the payee. Second, in or about the month of December 1976, it had already been decided that the proprietorship would discontinue its business and bank account. Notes given for debts incurred by the proprietorship during that period, but which were not to become due until after January 1, 1977, designated Universal as payor, and were made payable at Universal's bank.
The trade accounts payable were not discussed with the creditors. The creditors of the proprietorship were the same as those of the corporation. It was intended that Universal would pay these accounts and in fact it did so within three to six months after the consolidation. The accounts payable ledger of the sole proprietorship was used as the corporate record. Five months after the consolidation on June 1, 1977, the following journal entries were made to reflect the consolidation:
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