Levin v. Comm'r of Internal Revenue, Docket Nos. 3705-64
| Decision Date | 07 December 1966 |
| Docket Number | 6397-65.,Docket Nos. 3705-64 |
| Citation | 47 T.C. 258 |
| Parties | BEATRICE LEVIN, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Newton, D. Brenner and Allen H. Duffy, for the petitioner.
John K. Antholis and Robert D. Whoriskey, for the respondent.
Stock owned by the petitioner and her brother was redeemed so that the petitioner's son became the sole stockholder. The petitioner remained a salaried employee of the corporation. Held, the distributions in redemption of petitioner's stock were essentially equivalent to dividends within the meaning of sec. 302(b)(1), I.R.C. 1954.
In the notices of deficiency, respondent determined deficiencies in petitioner's income tax of $1,015.22 for 1960, $1,037.74 for 1961, $970.04 for 1962, and $5,976.60 for 1963. By an amended answer in this proceeding, respondent asserted an increased deficiency of $8,642.39 for 1960; thus, the total deficiency determined for such year is $9,657.61.
The issues for decision are whether distributions in redemption of petitioner's stock were essentially equivalent to dividends, and whether the respondent erroneously determined the amount of the corporate distributions to her in 1962 and in 1963.
Some of the facts were stipulated, and those facts are so found.
The petitioner, Beatrice Levin, resided in Middletown, Conn., and filed Federal income tax returns for 1960, 1961, 1962, and 1963 with the district director of internal revenue at Hartford, Conn. Such returns were filed on a calendar year basis, using the cash method of accounting. On Schedule D of those returns, she reported long-term capital gains, in part, as follows:
The respondent determined deficiencies in petitioner's income tax for 1960 and 1961, based upon his determination that the $7,000 sums received in those years were dividends. Notice of such determinations was mailed to petitioner on April 30, 1964. The respondent made a similar determination with respect to the $7,000 received in 1962 and the $8,000 reported for 1963. However, the respondent determined that the correct gross amount to be reported in 1963 was. $19,000, rather than $8,000, and these determinations resulted in determinations of income tax deficiencies for 1962 and 1963. Notice of such determinations for 1962 and 1963 was mailed to petitioner on August 5, 1965. By an amended answer in this proceeding, the respondent has asserted an increased deficiency of $8,642.39 for 1960, or a total deficiency of $9,657.61, based upon the alternative contention that, if there was a sale of the stock to the corporation, the sale occurred in 1960 and the entire gain is includable in income for that year.
The Connecticut Novelty Co., Inc., began in the early 1930's as a partnership between petitioner's husband and her brother, Joseph Levine. In 1940, petitioner's husband died, and she succeeded to his interest in the business. The business was incorporated in 1948, and its outstanding shares were held as follows:
+------------------------+
¦ ¦Shares ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Joseph Levine ¦650 ¦
+---------------+--------¦
¦Beatrice Levin ¦649 ¦
+---------------+--------¦
¦Jerome Levin ¦1 ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Total ¦1,300 ¦
+------------------------+
Jerome, the petitioner's son, paid no consideration for his share. From the date of incorporation until Joseph's death on April 18, 1962, petitioner, Joseph, and Jerome constituted the board of directors and the officers of the corporation. Thereafter, the bylaws were amended to permit nonshareholders to be directors, and Jerome's wife became a director. The petitioner held the positions of secretary and treasurer until 1959, when she limited her position to that of secretary of the corporation— a position she held throughout the taxable years in issue. Following her husband's death, Joseph lived with her and Jerome and became a second father to Jerome. Petitioner relied upon Joseph's advice in business matters.
Jerome has worked full time in the business since his graduation from high school in 1944. Initially, his activities were largely ‘leg-work,‘ shipping and receiving, and getting to know the customers. However, when his uncle suffered a heart attack in 1944, Jerome took on greater duties. In 1957, Jerome was 31 years old and was contemplating marriage. Therefore, he approached petitioner and his uncle demanding to know ‘where he stood’ so that he might attempt another career while young, if necessary. It was agreed that Jerome should have a greater share in the business and therefore, all certificates were canceled on August 1, 1957, and new shares were issued as follows:
+------------------------+
¦ ¦Shares ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Joseph Levine ¦485 ¦
+---------------+--------¦
¦Beatrice Levin ¦484 ¦
+---------------+--------¦
¦Jerome Levin ¦331 ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Total ¦1,300 ¦
+------------------------+
Jerome paid no money for the acquisition of the 330 additional shares of stock.
On January 19, 1960, at a special meeting of the shareholders, it was resolved that the stock of petitioner and Joseph would be redeemed at $200 per share. Identical agreements were executed by petitioner and Joseph on that date and were accepted by Jerome on behalf of the corporation. Petitioner agreed to an immediate transfer of her shares for $96,800, payable $7,000 annually without interest beginning April 1, 1960. The agreement provided that upon default the unpaid balance should become due upon the ‘seller's' election, and the corporation had an option to pay the whole or part of the purchase price at any time. The contract was made binding upon the parties, their heirs, successors, and assigns.
The agreements of January 19, 1960, were entered into at Jerome's suggestion. He wanted to own the business outright and retire his uncle and mother in such a way that they would be taken care of for the rest of their lives. Jerome did not want anyone else in the business with him but retained petitioner and Joseph as directors and officers out of respect and sentiment. Petitioner and Joseph became eligible for social security benefits in 1960, but they continued to perform actual services for the corporation and received salaries after the 1960 transaction. After the 1960 transaction, Jerome conducted the business with a greater freedom of action.
Following the 1960 redemption agreement, petitioner received two redemption payments of $7,000 cash, one in 1960 and one in 1961. In 1962 and 1963, the corporation paid petitioner by granting her credits towards the purchase price of a summer cottage in the amount of $7,000 in 1962 and $8,000 the following year, for a total purchase price of $15,000. No cash payments were made to petitioner pursuant to the redemption contract in 1962 or 1963.
The salaries and total amounts received by the shareholders from the corporation, rounded to the nearest dollar, are shown in the following table:
At the close of the fiscal year ending March 31, 1960, Connecticut Novelty Co., Inc., reported the receipt of dividend income in the amount of $1,810.74. At the close of the following fiscal year, the corporation reported dividend income of $1,776.20 $30,270.42 gross sales of securities, and an inventory of securities held for investment with a cost basis totaling $32,867.48. The corporation reported earned surplus on its tax returns as follows:
+----------------------------+
¦ ¦Earned ¦
+-----------------+----------¦
¦FYE Mar. 31— ¦surplus ¦
+-----------------+----------¦
¦1956 ¦$88,017.82¦
+-----------------+----------¦
¦1957 ¦95,159.89 ¦
+-----------------+----------¦
¦1958 ¦96,471.74 ¦
+-----------------+----------¦
¦1959 ¦98,983.78 ¦
+-----------------+----------¦
¦1960 ¦101,261.59¦
+-----------------+----------¦
¦1961 ¦113,234.46¦
+-----------------+----------¦
¦1962 ¦114,542.28¦
+-----------------+----------¦
¦1963 ¦122,934.00¦
+----------------------------+
The corporate record book shows that the directors approved a 4-percent dividend payable each year for 1952, 1953, and 1954. Respondent admits that the corporation has paid dividends, but the record does not disclose the amount paid.
On April 2, 1962, the corporation contracted to sell a summer cottage to petitioner. This agreement provided that the purchase price of $15,000 would be paid in two installments— one in the amount of $7,000 upon signing of the agreement and one in the amount of $8,000 on or before August 1, 1963, at which time a warranty deed would be delivered. The company acknowledged the receipt of the downpayment. It was agreed between buyer and seller that the price would be paid by agreement— crediting $7,000 in 1962 and $8,000 in 1963 toward the purchase of the cottage. The corporation reported and...
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