Mabry v. Comm'r of Internal Revenue (In re Estate of McWhorter)
| Decision Date | 02 February 1978 |
| Docket Number | Docket Nos. 6653-74—-6655-74. |
| Citation | 69 T.C. 650 |
| Parties | ESTATE of WARD T. MCWHORTER, DECEASED, LYNN MABRY and CLAYTON W. MCWHORTER, CO- EXECUTORS, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
On Aug. 28, 1970, Ozark declared dividends to shareholders of record on Sept. 30, 1970, payable Oct. 1, 1970. On Oct. 1, 1970, promissory notes with a face value equal to the declared dividends were issued to the shareholders. On Apr. 12, 1971, Ozark acquired 100 percent ownership in a previously unrelated corporation, Benton. On Apr. 30, 1971, Benton was merged into Ozark. Held, the property distributions occurred on Oct. 1, 1970; there were no earlier constructive distributions. Held, further: The purchase and liquidation of Benton did not qualify as one of the transactions described in sec. 381(a), I.R.C. 1954. Ozark may not deduct Benton's pre-merger net operating loss. E. J. Ball, for the petitioners.
Thomas J. Miller, for the respondent.
Respondent determined the following deficiencies in petitioners' income taxes:
There are two issues remaining for our resolution. First, we must decide whether notes distributed by Ozark Supply Co. (hereinafter Ozark) to its shareholders on the first day following the termination of its subchapter S status, pursuant to a declaration of dividend adopted prior to the termination of Ozark's subchapter S status, constituted a return of capital or whether it constituted distributions of current and accumulated earnings and profits. If we conclude, as petitioners argue, that the distributions were a return of capital, petitioners in docket Nos. 6653-74 and 6655-74 will not be required to include dividend income from Ozark in their 1970 income.
Second, we must decide if the purchase of Benton County Enterprises, Inc. (hereinafter referred to as Benton), stock by Ozark, followed by a merger of Benton into Ozark constituted an F reorganization as contended by petitioners or whether it constituted a liquidation under section 332,3 to which section 334(b)(2) applies as contended by respondent. Should we hold for petitioners on this issue, Ozark will be entitled, under sections 381(a) and 381(c)(1), to use Benton's net operating loss carryover to offset post-merger income. Further, under section 362(b), Ozark will have a carryover basis in the assets acquired from Benton.
All of the facts were stipulated and are found accordingly.
Ozark, an Arkansas corporation, had its principal place of business in Rogers, Ark., when it filed its petition herein. For its tax years ended September 30, 1971, and September 30, 1972, Ozark filed its Federal income tax returns with the Internal Revenue Service Center, Austin, Tex.
W. T. McWhorter and his wife Gladys, both of whom are now deceased, were residents of Rogers, Ark., when they timely filed their 1970 and 1971 Federal income tax returns with the District Director of Internal Revenue at Little Rock, Ark. W. T. McWhorter resided in Rogers, Ark., when he filed his petition herein.4
Clayton W. McWhorter and Michael S. McWhorter, husband and wife, timely filed their 1970 and 1971 joint Federal income tax returns with the District Director at Little Rock, Ark. Clayton and Michael McWhorter resided in Rogers, Ark., when they filed their petition herein.
Ozark was organized in 1965 and since that time has engaged in the distribution of veterinary supplies in Arkansas. From the time of its organization through its tax year ended September 30, 1970, Ozark had 800 shares of common stock issued and outstanding. During this period, Gladys McWhorter owned 120 shares, W. T. McWhorter owned 230 shares, and their son, Clayton McWhorter, owned 450 shares. From its inception through September 30, 1970, Ozark was operated as an electing small business corporation, or subchapter S corporation, under the provisions of sections 1371 through 1379.
At the close of each tax year Ozark, by journal entry, credited each shareholder with his respective share of the corporation's income. For the 3 years ending September 30, 1968, 1969, and 1970, Ozark credited the shareholders with the following total amounts of income: W. T., $38,159.14; Gladys, $19,909.13; and Clayton, $74,659.21. During the same period Ozark paid cash dividends of $24,483.15 to W. T.; $6,200.83 to Gladys; and $18,085.96 to Clayton. At the close of each tax year Ozark calculated each shareholder's undistributed taxable income (hereinafter referred to as UTI) and by journal entry credited it to the shareholder's UTI account. On September 30, 1970, the corporation had $130,856.54 of UTI allocated to the shareholders as follows: W. T., $35,449.58; Gladys, $24,113.04; and Clayton, $71,293.92. On October 1, 1970, Ozark had $26,712.14 cash on hand.
On August 28, 1970, Ozark held a regular directors meeting at which the directors noted their desire to pay dividends to shareholders as of September 30, 1970, from the shareholders' UTI accounts. Because the company did not have adequate cash available from which to pay dividends, however, the following resolution was adopted:
RESOLVED, to issue unsecured promissory notes to the shareholders dated October 1, 1970, due on October 1973 and bearing interest at the rate of six (6) percent per annum in amounts equal to the shareholders undistributed taxable income as determined on the Company's books and records as of September 30, 1970 in consideration for and for payment of dividends declared this date by this board of directors, and be it further
RESOLVED, that this Board hereby declares a dividend equal to all shareholders' undistributed taxable income as determined on the books and records of the Company as of September 30, 1970, payable October 1, 1970 to stockholders of record on September 30, 1970.
Pursuant to this resolution, promissory notes were issued to the three shareholders on October 1, 1970. The face amount of these promissory notes, representing an amount equal to the undistributed taxable income credited to each shareholder's account was as follows: $35,449.58 payable to W. T. McWhorter; $71,293.92 payable to Clayton W. McWhorter; and $24,113.04 payable to Gladys McWhorter. Ozark's shareholders did not have a regular practice of loaning the corporation amounts equal to the shareholders' UTI.
During its tax years ending September 30, 1971, and September 30, 1972, Ozark made the following payments on the notes issued October 1, 1970:
+-------------------------------------------------------------------------+
¦ ¦ ¦ ¦Amount of principal ¦
+-----------------+----------------+----------------+---------------------¦
¦Shareholders ¦Sept. 30, 1971 ¦Sept. 30, 1972 ¦unpaid on 9/30/72 ¦
+-----------------+----------------+----------------+---------------------¦
¦ ¦ ¦ ¦ ¦
+-----------------+----------------+----------------+---------------------¦
¦W. T. McWhorter ¦$1,000 ¦$449.58 ¦$34,000 ¦
+-----------------+----------------+----------------+---------------------¦
¦Gladys McWhorter ¦0 ¦113.04 ¦24,000 ¦
+-----------------+----------------+----------------+---------------------¦
¦Clayton McWhorter¦0 ¦7,293.92 ¦64,000 ¦
+-------------------------------------------------------------------------+
Also, on October 1, 1970, Ozark voluntarily revoked its subchapter S election. On October 28, 1970, as part of the process of ending its subchapter S election, Clayton W. McWhorter, Ozark's president, wrote to the Internal Revenue Service stating that Ozark revoked its election under section 1372(a) and the revocation was effective for the tax year beginning October 1, 1970. All shareholders consented to this revocation. On December 31, 1970, Ozark received a response from the Internal Revenue Service stating that Ozark's revocation of its election to be treated as a small business corporation was effective October 1, 1970.
On October 2, 1970, Gladys and W. T. McWhorter sold their entire interest in Ozark to Clayton and Michael McWhorter. Since October 2, 1970, Clayton McWhorter has owned 450 shares of the total 800 outstanding shares of Ozark stock, and Clayton and Michael have jointly owned the remaining 350 outstanding shares of Ozark stock.
On April 12, 1971, Clayton McWhorter, in his capacity as Ozark's president, entered into an agreement with the shareholders of Benton County Enterprises, Inc., to purchase all of Benton's issued and outstanding stock. The purchase price of the Benton stock totaled $75,000, plus the assumption of certain liabilities. Pursuant to the purchase agreement Ozark became Benton's sole shareholder as of April 12, 1971. Prior to that time Ozark owned no stock in Benton. The parties have stipulated that the transaction between Ozark and Benton's shareholders constituted a purchase within the meaning of section 334(b)(3).
Benton, an Arkansas corporation, was engaged in the production of hogs for market in northwest Arkansas. On April 30, 1971, the book value of all...
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...Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938). The facts of the present case are very similar to those of Estate of McWhorter v. Commissioner, 69 T.C. 650 (1978), affd. in an unpublished opinion 590 F.2d 340 (8th Cir. 1978). In McWhorter, a corporation (Ozark) entered into an agr......
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