Livernois Trust v. CIR

• Decision Date: 12 October 1970
• Docket Number: No. 20141-20143.,20141-20143.
• Citation: 433 F.2d 879
• Parties: Theodore B. LIVERNOIS TRUST of May 2, 1958, Theodore B. Livernois, Jr., and Albert L. Grigsby, Jr., Trustees, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Alma G. LIVERNOIS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Alma G. LIVERNOIS, Petitioner-Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

433 F.2d 879 (1970)

Theodore B. LIVERNOIS TRUST of May 2, 1958, Theodore B. Livernois, Jr., and Albert L. Grigsby, Jr., Trustees, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Alma G. LIVERNOIS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Alma G. LIVERNOIS, Petitioner-Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Cross-Appellant.

Nos. 20141-20143.

United States Court of Appeals, Sixth Circuit.

October 12, 1970.

Michael J. Mehr, Detroit, Mich., for appellants and cross-appellee; Jerry D. Luptak, Evans, Boyer, Luptak & Briggs, Detroit, Mich., on brief.

Issie L. Jenkins, Atty., Dept. of Justice, Washington, D. C., for appellee and cross-appellant; Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Attys., Dept. of Justice, Washington, D. C., on brief.

Before EDWARDS and McCREE, Circuit Judges, and KALBFLEISCH,^* District Judge.

EDWARDS, Circuit Judge.

These cases present a complicated set of facts and at least one appellate issue of some importance in federal tax law. They were heard by the Tax Court which found for the Commissioner in an opinion containing a detailed statement of the cases and findings of fact and conclusions of law. (T.C. Memo 1969-111). We shall rely upon the Tax Court opinion for the details of the case and recite only those facts (most of which were stipulated) which are directly relevant to our decision.

The basic issue presented by this appeal is whether this record supports the conclusion of the Tax Court that approximately $294,000 of payments made by five corporations owned or controlled by appellant, Theodore B. Livernois Trust, were loans to the Trust, as claimed by the taxpayers, or dividends, as claimed by the Commissioner and as found by the Tax Court.

The Theodore B. Livernois Trust was created May 2, 1958, by Theodore B. Livernois, Sr., — one month before he died from an accidental gunshot wound. Livernois, Sr., conveyed to the Trust substantially all of his assets, including his stock in five corporations in which he was the sole or principal shareholder.¹ The Trust instrument provided that Livernois, Sr., would receive the income of the Trust for his lifetime and that on his death, his wife Alma would receive the income, with rights to invade the corpus. On her death the Trust was to terminate with distributions to children and grandchildren. The Trust instrument required the Trust to pay all debts and tax obligations of the settlor's estate.

The Trust instrument provided for four Trustees — Livernois, Sr., Theodore Livernois, Jr., Albert Grigsby, and Ed Degree. During all relevant times Trustees Livernois, Jr., and Albert Grigsby were not only the dominant Trustees, but were also members of the Boards of Directors of all five of the corporations which made payments to the Trust.

After Livernois, Sr.'s, death, his estate filed its tax return. On I.R.S. audit an additional assessment of $61,000 was made. In addition, the I.R.S. made a joint assessment against Theodore Livernois, deceased, and Alma Livernois for $123,000 tax deficiencies (including fraud penalties) for the prior years 1950-1955. Neither Livernois, Sr.'s estate nor the Trust had money to pay these tax liabilities and the I.R.S. threatened to file liens upon the five corporations owned by the Trust. Livernois, Jr., and Grigsby, Trustees of the Trust, then caused the five corporations, of which they were also officers and directors, to make certain payments to meet the Trust obligations just referred to. These payments are summarized in this record as follows:

                   Name
                    of
                Corporation   1958       1959        1960        1961        1962        1963        Totals
                Supply    $22,000.00  $ 9,500.00  $ 2,000.00                                      $ 33,500.00
                Ohio Lumber            20,333.41   70,000.00  $12,000.00              $46,000.00   148,333.41
                Greenfield              1,000.00   14,000.00   23,500.00  $26,501.00   11,000.00    76,001.00
                Blue Water              9,000.00    9,000.00    9,000.00    3,000.00    1,000.00    31,000.00
                Style King                                      6,000.00                             6,000.00
                _______   __________  __________  __________  __________  __________   __________ ___________
                TOTALS    $22,000.00  $39,833.41  $95,000.00  $50,500.00  $29,501.00  $58,000.00  $294,834.41
                =======   ==========  ==========  ==========  ==========  ==========  ==========  ===========
                A2806
                

During the years in question, aside from these payments, the Trust had only about $30,000 of income. The earned surplus of the corporations during the years concerned is shown as follows:

                Name of
                Corporation    1959         1960         1961        1962          1963
                Supply     $ 59,011.39  $ 52,766.95  $ 52,142.37  $ 63,423.15  $ 51,890.74
                Ohio
                Lumber      477,122.42   391,764.54   369,436.24   352,438.80   332,156.21
                Greenfield  111,181.08    97,929.67   100,141.39   103,279.82   109,490.78
                Blue Water   86,857.56   105,871.37   119,598.82   128,247.84   139,238.23
                Style King    3,495.55     5,150.09     7,398.70   (11,336.16)  (25,446.67)
                A2805
                

Every payment by the corporations to the Trust was recorded as a loan and an unsecured "demand" note bearing 6% interest was given in exchange. Generally, the notes were entered on the books of the corporations as receivables, but the interest was not. No interest was ever paid. No demand for payment was ever made. In one year $4,000 was repaid, but in that same year $95,000 was transferred from the corporations to the Trust.

Appellants assert that the payments were bona fide loans and that there was a plan for repayment of them through liquidation of some of the Trust assets. As to Trust contentions the Tax Court found:

"After consideration of all the evidence, we conclude that at the time of the payments there was no intention or expectation that they would be repaid and that they are properly taxable as dividends.

"We are not persuaded that at the time of the payments the Trust intended to repay the Corporations. The Trust was the sole shareholder of Supply, Ohio Lumber, and Style King. It was the 70 percent majority shareholder of Blue Water and the 75 percent majority shareholder of Greenfield. The balance of the stock of the latter two corporations was owned by Theodore Sr.\'s three children. This stock represented substantially all of the Trust\'s assets. By 1960, due to the disposition of certain other property held by the Trust, the stock was the Trust\'s sole asset with the exception of a house and lots which had been mortgaged for $20,000. We think it is clear from the record that the Trust had but one source from which it could acquire funds. That source was the Corporations which it controlled. In a factual situation such as this, transactions are subject to the closest scrutiny. See Elliott J. Roschuni, 29 T.C. 1193 (1958), affd. per curiam 271 F.2d 267 (C.A.5, 1959), certiorari denied 362 U.S. 988, 80 S.Ct. 1074, 4 L.Ed.2d 1021 (1960).

"From the date of Theodore Sr.\'s death, the Trust has looked to the Corporations whenever and for whatever purpose it required money. The Corporations paid money to the Trust without collateral and without any express limitation as to the ceiling amount of such payments. Though the notes accompanying these payments called for the payment of interest at the rate of 6 percent per annum, no interest was in fact paid to, or accrued by, the Corporations. Nor have there been any significant payments of principal by the Trust to the Corporations. In essence, the trustees have withdrawn from the Corporations whatever money they needed to administer the terms of the Trust Agreement. We hold that the petitioners have not met their burden of demonstrating that there was any real intention or expectation that the monies advanced to the Trust by the Corporations would ever be repaid.

"The testimony about liquidating Ohio Lumber and Blue Water as part of a repayment plan is vague and unconvincing. Initially there is no evidence that such a plan was conceived when the withdrawal of money from the Corporations began. Nor are we convinced that such a plan was in any way a realistic consideration in the decision to pay the money to the Trust.

"For the first time on brief petitioners argue that the loans from Ohio Lumber and Blue Water were in reality in furtherance of informal plans of complete liquidation and should be treated under section 331(a) (1). They further argue that to the extent the money advanced by the Corporations was used to pay Federal estate taxes, Michigan inheritance taxes, and funeral and administration expenses of the Estate, they are distributions in redemption of stock under section 303. Aside from the procedural point that these arguments were not raised until briefs were filed, the short answer is that neither of them is supported by the facts. Petitioners have not shown the presence of an informal plan of complete liquidation for the purposes of section 331. Nor have they shown facts to support the existence of a redemption, that is, the acquisition of its shares by a corporation, for the purposes of section 303.

"In light of the foregoing analyses and because we have found that the earnings and profits of each Corporation exceeded the respective payments, we hold that the corporate payments are taxable as dividends."

Essentially the problem here is one of self-dealing between the Trustees of a trust and five corporations which those same Trustees controlled. In order to liquidate tax liabilities of the deceased Theodore B. Livernois, Sr., who is settlor of the Trust, the Trustees occasioned the five corporations to make payments of approximately $294,000. The Trust was completely devoid of funds to meet its liabilities or to contemplate repayment. No schedule of repayments was ever tendered or demanded. No interest was ever paid and the one repayment of $4,000 was offset by...