Lynch v. Commissioner, Docket No. 4556-78

CourtUnited States Tax Court
Writing for the CourtSIMPSON
Citation45 TCM (CCH) 1125,1983 TC Memo 173
PartiesClaud E. Lynch and Manita H. Lynch v. Commissioner.
Decision Date31 March 1983
Docket NumberDocket No. 4556-78,19138-80.

45 TCM (CCH) 1125
1983 TC Memo 173

T.C. Memo. 1983-173.

Claud E. Lynch and Manita H. Lynch

Docket Nos. 4556-78, 19138-80.

United States Tax Court.

Filed March 31, 1983.

45 TCM (CCH) 1126

Glenn A. Kirbo, Neal Weinberg, and William F. Hammond, for the petitioners. Albert L. Sandlin, Jr., for the respondent.

Memorandum Findings of Fact and Opinion


The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes:

                 Additions to Tax
                 Sec. 6651(a)(1) Sec. 6653(a)
                 Docket No. Year Deficiency I.R.C. 19541 I.R.C. 1954
                 4556-78 1971 $269,330.64 ........ $13,466.53
                 1972 19,893.04 ........ 994.65
                 1973 20,723.93 $1,856.04 1,425.24
                 19138-80 1975 4,308.00 ........ 215.00
                 1977 3,213.00 ........ 161.00

After concessions by both parties, the issues remaining for decision are: (1) Whether the petitioners are entitled to a deduction on the disposition of their shares in their closely held corporation; (2) whether the petitioners received a constructive

45 TCM (CCH) 1127
dividend by reason of the purchase of property from such corporation for a price alleged to be less than its fair market value; (3) whether the petitioners received dividend income from certain corporate payments made on their behalf; (4) whether a trip awarded to the petitioners resulted in income taxable to them; (5) whether the petitioners may deduct certain amounts as business expenses; (6) whether the petitioners are entitled to interest deductions in excess of the amount allowed by the Commissioner; (7) whether the petitioners intended to file a joint return for 1977; (8) whether Mrs. Lynch qualifies as an innocent spouse; (9) whether the petitioners may utilize the provisions for income averaging; (10) whether the petitioners are liable for the addition to tax under section 6651(a), relating to late filing; and (11) whether the petitioners are liable for the addition to tax under section 6653(a), relating to negligence

Findings of Fact

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Claud E. and Manita H. Lynch, husband and wife, were legal residents of Albany, Ga., at the time they filed their petitions in this case. They filed their joint Federal income tax returns for 1971, 1972, 1973, and 1975 with the Internal Revenue Service. A return was filed for 1977 containing the name of Mr. Lynch and labeled "Married filing separately."

In 1964, Mr. Lynch and Jack D. Barrett formed a corporation under the laws of the State of Georgia known as Gibson Products Co. of Albany, Inc. (Gibson). Mr. Lynch purchased 500 shares (49 percent) for $50,000, and Mr. Barrett purchased 520 shares (51 percent) for $52,000. Gibson operated a discount department store known as Gibson's Discount Center.2 Gibson was a franchisee of Gibson's Discount Centers, Inc. (Center). Gibson sold a complete line of hard and soft goods, major appliances, drugs, and sporting goods.

Mr. Lynch was the president of Gibson and managed its daily store operation. Mr. Barrett, who was retired, served as an advisor and handled the bookkeeping from his home in Texas. Mr. Barrett also owned the Barrett Grocery Company, Inc. (Grocery). Grocery owned the Gibson store building and the land upon which the building was located. This property will be referred to as the Gibson property. By oral arrangement, Grocery rented the Gibson property to Gibson for a rental equal to 2 percent of its annual gross sales. Mr. Barrett died in 1968. Thereafter, Gibson continued to pay rent to Grocery under the same arrangement that existed prior to his death.

In June 1969, Gibson borrowed $1 million from the Citizens and Southern National Bank of Albany (C & S). Such loan was secured by Gibson stock, by a guaranty by Mr. Lynch, and by a $250,000 term insurance policy on the life of Mr. Lynch. The proceeds of such loan were used in part to purchase Mr. Barrett's stock from his estate for $600,000.

The C & S loan carried an interest rate of 11 percent and provided for the repayment of principal as follows:

 Date Amount
                 12/29/69 ............. $100,000
                 12/29/70 ............. 200,000
                 12/29/71 ............. 200,000
                 12/29/72 ............. 200,000
                 12/29/73 ............. 200,000
                 7/ 1/74 ............. 100,000

In 1969, Gibson also purchased the Gibson property from Grocery for $600,000. Mr. Lynch personally borrowed $100,000 from his attorney, James Smith, to aid in the financing of such purchase. Grocery accepted a 1-year promissory note for $500,000 secured by the Gibson property. Successive secured notes were executed by Gibson with respect to such liability as follows:

 Date of Terms Principal
                July 1970 ....... 6 month, 11% $500,000
                Jan. 1971 ....... 6 month, 9½% 400,000
                June 1971 ....... 6 month, 9½% 400,000

In early 1970, John R. Donovan, Sr., the comptroller of Gibson, discovered that certain corporate liabilities had not been properly recorded on its books. Under his direction, a schedule of such unrecorded liabilities was prepared, and such liabilities totaled $296,813.41.

Later, in 1970, C & S learned about the unrecorded liabilities of Gibson and called or threatened to call its loan to Gibson. For a time, Gibson paid C & S between $5,000 and $10,000 per week on the loan. However, the required payments to C & S, the need to pay off the unrecorded liabilities, and the need to pay off the obligation to Grocery for the purchase of the Gibson property, all combined to create a cash-flow

45 TCM (CCH) 1128
problem. Mr. Lynch attempted to secure additional financing for the corporation, but his efforts were unsuccessful.

In time, Mr. Lynch learned that he could secure a loan on the Gibson property if he became the owner of it. Sometime before January 6, 1971, he retained Frank H. Hedrick to perform an appraisal of the Gibson property for the purpose of securing a mortgage. At such time, Mr. Hedrick valued the Gibson property at $1.2 million—allocating $315,000 to the land and $885,000 to the improvements. On November 23, 1971, Mr. Lynch executed an agreement appointing Investment Mortgage Company (IMC) as his exclusive agent to obtain a loan in the amount of $800,000 for the purpose of purchasing the Gibson property. At such time, Harold Woods III, an officer of IMC, valued the Gibson property at $1,140,000 and recommend that Cousins Mortgage and Equity Investments (Cousins)3 approve a loan in the amount of $800,000 for 16 years at an interest rate of 10 percent.

By warranty deed dated December 23, 1971, Gibson conveyed the Gibson property to Mr. Lynch, and such deed was recorded on that date. On January 6, 1972, there was a closing on the loan by Cousins. At such closing, Cousins loaned Mr. Lynch $800,000 for 16 years at an annual interest rate of 10 percent. Mr. Lynch executed a lease with Gibson wherein he (as landlord) leased the Gibson property to Gibson for a 16-year period at an annual rental of $120,000, and he assigned the proceeds of such lease to Cousins to be applied in discharge of the Cousins' loan to him. Additionally, Mr. Lynch executed a security deed on the Gibson property and assigned insurance policies on his life to Cousins. Gibson paid the premiums on such policies. Of the $800,000 borrowed by Mr. Lynch, $600,000 was applied to his purchase of the Gibson property and $200,000 was applied to reduce his personal debt to the corporation. The loan closing statement indicated that the corporation was to pay $400,000.00 to Grocery and $431,187.13 to C & S. The deficiency in financing, amounting to $41,610.52, was to be paid by Mr. Lynch.

The Gibson building was constructed in 1965 and 1966. Such building contained 75,600 square feet, consisted of concrete block with a brick front, and had a built-up roof supported by pipe columns and steel trusses. The floor was concrete and covered with asphalt tile. Partitions consisting of sheetrock panels were located throughout the building interior, and the ceiling consisted of acoustical tile. The entire structure had a sprinkler system. The building had air conditioning and heating systems. Other improvements on the Gibson property at the time of sale to Mr. Lynch included a loading platform, a storage area, an auxiliary building, a canopy, and fencing.

The Gibson property was located on the southeast corner of Gordon Avenue and South Slappey Drive in Albany, Ga. The 6.3-acre tract was irregular in shape and had approximately 293 feet of frontage on South Slappey Drive, which was a major north-south thoroughfare. The property had 715 feet of frontage on Gordon Avenue, which served as an artery into the southwest residential section of Albany. The property was generally level, contained 4 acres of parking, and had a gentle slope to allow for water drainage. Access to the property was provided by entrances on both Gordon Avenue and South Slappey Drive.

Gibson was located approximately 1 mile southwest of the Albany central business district, where Sears, Belks, and Rosenbergs department stores were located. J.C. Penneys, Woolworths, and Grants were located in the Mid-Town Shopping Center (Mid-Town), which was located about ½ mile north of Gibson, at the intersection of North Slappey Drive and Oglethorpe Avenue. Millers Discount Center was located immediately adjacent to Mid-Town. Two other stores, Kroger Family Center and Grant City, were located 1½ miles north of Gibson on North Slappey Drive. In 1971, Gibson had little, if any, competition in its type of merchandising from any stores south of Oglethorpe Avenue.

Albany is located in southwest Georgia and is the trade and distribution center for the area. Between 1950 and 1960, Albany experienced a 79.6-percent growth in its...

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