Magnon v. Comm'r of Internal Revenue
| Decision Date | 28 February 1980 |
| Docket Number | 4281-77.,Docket Nos. 4204-77 |
| Citation | 73 T.C. 980 |
| Parties | RAYMOND MAGNON and VERA E. MAGNON, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTMAGNON SERVICE ELECTRIC CORPORATION, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
Held:
1. Individual petitioners, who were the sole shareholders of the corporate petitioner herein, received constructive dividends due to their corporation's performance of electrical contracting services on their separate personal properties where such work was performed primarily for their own benefit and without any expectation of repayment;
2. Intercorporate transfers of funds between the corporate petitioner and its sister corporation did not result in a constructive dividend to the individual petitioners owning all the stock of both corporations where such transfers were made for substantial business reasons and did not directly benefit the individual shareholders.
3. Since individual petitioners' underpayment of taxes during 1970 and 1971 was due to negligence, they are liable for the penalty under sec. 6653(a) for those years;
4. Individual petitioners are liable for an addition to tax under sec. 6651(a) due to their failure to timely file their 1971 income tax return;
5. Corporate petitioner is not entitled to deduct expenditures incurred in completing jobs on properties belonging to the individual petitioners herein, since the costs of such services constituted constructive dividends to the individual petitioners;
6. Corporate petitioner is not entitled to a bad debt deduction for “uncollectible job cost advances” which it made to its sister corporation in the amount of.$337,300 for its taxable year ended Apr. 30, 1973, since the debt in question did not become worthless until 1974;
7. Since corporate petitioner did not pay any expenses on behalf of its sister corporation during its taxable year ended Apr. 30, 1974, it is not entitled to a deduction under sec. 162 for such costs for that year;
8. Since corporate petitioner had consistently used a cash method of accounting for its income and expenses from construction contracts it may properly follow that method of accounting for tax purposes;
9. Since corporate petitioner's underpayment of tax for the year ended Apr. 30, 1971, was due to negligence, it is liable for the penalty under sec. 6653(a) for that year. Paul M. Shimoff, for the petitioners.
John O. Kent, for the respondent.
The respondent determined the following deficiencies in income taxes and additions to the tax in these consolidated cases:
Raymond and Vera E. Magnon, petitioners in docket No. 4204-77, were the owners of all the outstanding shares of stock of both Magnon Service Electric Corp. (hereinafter referred to as Magnon Service) and Del Mar Service Electric Corp. (hereinafter referred to as Del Mar).
Due to concessions made by the parties, the issues remaining for our decision are:
Raymond Magnon and Vera E. Magnon—- Docket No. 4204-77
(1) Whether petitioners received constructive dividends from Magnon Service for work completed on their personal property during 1970 in the amount of $109,811.38 and during 1971 in the amount of $82,386.09;
(2) Whether petitioners received a constructive dividend from Magnon Service during 1973 in the amount of.$337,300 due to Magnon Service's forgiveness of Del Mar's indebtedness;
(3) Whether petitioners are liable for the negligence penalty under section 6653(a) due to their underpayment of taxes during the taxable years 1970 through 1973;
(4) Whether petitioners are liable for an addition to tax under section 6651(a) due to their failure to timely file their 1971 income tax return.
(1) Whether petitioner's expenditures incurred in completing jobs on property belonging to Raymond and Vera E. Magnon, in the total amount of $192,197.47, are deductible as ordinary and necessary business expenses;
(2) Whether petitioner is entitled to a bad debt deduction for “uncollectible job cost advances” which it made to Del Mar in the amount of.$337,300 for the year ended April 30, 1973;
(3) Whether petitioner is entitled to a deduction under section 162 for subcontractor expenses of Del Mar in the amount of $251,635.57 for the year ended April 30, 1974;
(4) Whether the petitioner could properly follow the cash method of accounting in reporting income and expenses from construction contracts; and
(5) Whether petitioner is liable for the negligence penalty under section 6653(a) due to its underpayment of taxes for the years ended April 30, 1971, and April 30, 1973.
Some of the facts have been stipulated by the parties. Such stipulation and the exhibits attached thereto are incorporated herein by this reference.
Petitioners in docket No. 4204-77 are Raymond Magnon (hereinafter referred to as Magnon) and his wife, Vera. They filed their joint Federal income tax returns for the taxable years ended December 31, 1970, through December 31, 1973, inclusive, with the District Director of Internal Revenue for the District of Los Angeles, Calif. All of the returns were timely filed except the return for 1971, which was filed late. Petitioners' legal residence at the time of the filing of the petition herein was Riverside, Calif.
Magnon Service, petitioner in docket No. 4281-77, is a corporation organized in 1968 under the laws of the State of California. It timely filed its corporate income tax returns for each of the taxable years ended April 30, 1970, April 30, 1971, and April 30, 1973, with the District Director of Internal Revenue for the District of Los Angeles, Calif. At the time of the filing of the petition herein, Magnon Service's principal office was located in Riverside, Calif., and its principal place of business was the southern California area.
After working as a journeyman electrician and an electrical contractor in the 1950's, Magnon established a sole proprietorship in 1961 to engage in electrical contracting. Magnon continued to do electrical contracting in the proprietorship form until August 12, 1968, when he transferred all of the assets of the business to Magnon Service, of which he was president and coowner with his wife, Vera, of all of the outstanding stock. Since that time, Magnon Service has been continuously engaged in electrical contracting work, and has primarily done subcontracting work on new commercial and industrial buildings located in southern California.
By 1970, Magnon Service did most of its subcontracting work for E. W. Hahn (hereinafter referred to as Hahn), a large general contractor and developer of commercial and industrial buildings which did contracting work in both southern and northern California. At that time, Magnon Service's work for Hahn accounted for 60 to 70 percent of its business. Hahn's subcontractor in northern California was Del Mar Electric, a corporation with which Magnon and Magnon Service had no prior affiliation.
Due to problems which Hahn was having in completing its jobs with its electrical contractors in northern California, Hahn wanted Magnon Service to do its subcontracting work in northern California. As a consequence, Hahn sent one of its officers to arrange a meeting between Magnon and the owner of Del Mar Electric so that they could discuss getting together and forming a company to provide Hahn with a reliable electrical contractor in northern California. This meeting resulted in the formation of Del Mar on September 25, 1970, with Magnon as its president and co-owner with his wife, Vera, of all its outstanding shares of stock and with the prior owner of Del Mar Electric as one of its employees. Del Mar was located in Fremont, Calif., and its principal business was electrical contracting on commercial and industrial buildings in central and northern California. Since Magnon and his wife were the sole shareholders of both Magnon Service and Del Mar, a brother-sister relationship existed between the two corporations.
The decision by Magnon to form Del Mar was based on his desire to maintain a good relationship with Hahn, Magnon Service's largest customer, and to prevent any potential adverse impact on Magnon Service if Hahn continued to have trouble completing its northern California jobs. Del Mar's formation also placed Magnon Service in a better bargaining position for obtaining jobs with Hahn since Hahn then allowed it to obtain jobs through informal negotiations rather than through the normal bidding process, which would have placed it in direct competition with other electrical contractors.
Del Mar's formation also helped Magnon Service improve its bargaining...
To continue reading
Request your trial
-
Waddell v. Comm'r of Internal Revenue
...due to reasonable cause and not due to willful neglect. United States v. Boyle, 465 U.S., 105 S. Ct. 687 (1985). See Magnon v. Commissioner, 73 T.C. 980, 1006- 1007 (1980); Inter-American Life Insurance Co. v. Commissioner, 56 T.C. 497, 511 (1971), affd. per curiam 469 F. 2d 697 (9th Cir. 1......
-
Keller v. Comm'r of Internal Revenue , Docket No. 2656-79.
...Coal Co. v. United States, 26 F.2d 805 (E.D. La. 1928). See Bay State Gas Co. v. Commissioner, 75 T.C. 410, 413 (1980); Magnon v. Commissioner, 73 T.C. 980, 1004 (1980); and Garth v. Commissioner, 56 T.C. 610 (1971), where we stated at page 618: It is well settled that the Commissioner has ......
-
Neonatology Assocs., P.A. v. Comm'r of Internal Revenue, 1201–97
...see also Loftin & Woodard, Inc. v. United States, supra at 1214–1215; Crosby v. United States, supra at 1388; Magnon v. Commissioner, 73 T.C. 980, 993–994, 1980 WL 4560 (1980). Petitioners argue that the excess contributions were paid to the employee/owners as compensation for their service......
-
Capital Video Corp. v. C.I.R.
...see Hadley v. Comm'r, 36 F.2d 543, 545 (D.C.Cir.1929); Hood v. Comm'r, 115 T.C. 172, 180, 2000 WL 1206813 (2000); Magnon v. Comm'r, 73 T.C. 980, 993-94, 1980 WL 4560 (1980). Guarino has not challenged this holding on appeal; he disputes the finding of a constructive dividend solely by argui......
-
Tax Court In Brief | Barrington v. Commissioner | Guilty Plea To Determine Tax Liability And Constructive Divident Versus Compensation
...occurs when "a corporation confers an economic benefit on a shareholder without the expectation of repayment." Magnon v. Commissioner, 73 T.C. 980, 993-94 (1980). payments for personal shareholder expenses that serve no corporate business purpose may be treated as constructive dividends to ......
-
Tax Court In Brief | Palmarini Inc. v. Commissioner, Palmarini v. Commissioner | Recordkeeping And Constructive Dividends
...the expectation of repayment, . . . even though neither the corporation nor the shareholder intended a dividend." Magnon v. Commissioner, 73 T.C. 980, 993-94 (1980); see C.F. Mueller Co. v. Commissioner, 479 F.2d 678, 683 (3d Cir. 1973) ("A taxpayer who is a shareholder has been held to hav......
-
Is the cash method dead?
...method of accounting has been widely used throughout the contracting industry and accepted by the [IRS] since time immemorial" (Magnon, 73 TC 980 (1980)), the IRS does, and has attacked this time-honored system in two Tax Court Ansley-Sheppard-Burgess Co., 104 TC No. 17 (1995), and J.P. She......