Martin v. Commissioner
| Decision Date | 26 November 1979 |
| Docket Number | Docket No. 6854-77. |
| Citation | 39 TCM (CCH) 531,1979 TC Memo 469 |
| Parties | William G. and Martha C. Martin v. Commissioner. |
| Court | U.S. Tax Court |
Kirk R. Manning, 1800 First Nat'l Bank Bldg., Fort Worth, Tex., for the petitioners. Charles L. McReynolds, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined the following deficiencies in income tax for the following years:
1973 .................. $ 3,982.20
1974 .................. 15,759.98
After concessions, the only issue remaining for our resolution is:
Whether petitioners are in receipt of income during the tax years in issue by virtue of receiving certain interest-free loans, directly and indirectly through petitioners' sole proprietorship,1 from a corporation of which he was the principal officer.
Some of the facts have been stipulated and are so found. The stipulation of facts together with the exhibits attached thereto are incorporated herein by reference.
Petitioners William G. Martin (Bill Martin) and Martha C. Martin are husband and wife and were residents of Johnson County, Tex., at the time the petition was filed. Petitioners timely filed their joint income tax return for 1973 with the Internal Revenue Service Center at Austin, Tex. Their joint return for 1974 was filed with the Fort Worth office of the District Director of Internal Revenue, Dallas District, on June 16, 1975. Martha is a party to this action by virtue of having filed a joint return with her husband. When we hereinafter refer to petitioner or to Martin, we will be referring only to William.
In 1957 Bill Martin founded the original Zuider Zee Restaurant. He eventually expanded his business into a chain of seafood restaurants known as Zuider Zee Restaurants, which restaurants were owned and operated by Zuider Zee Oyster Bar, Inc., a corporation owned by Bill Martin.
On December 1, 1961, in order to provide for their children's education and also to minimize their own income tax liability, petitioners established an inter vivos irrevocable trust. The trust assets were to be divided into three separate, equal shares with one trust share to be for the use and benefit of each of petitioners' three children, being Priscilla Kay Martin, Cylinda Sue Martin, and Shauna Dawn Martin. Each trust share was named for the child for whom the trust share was to benefit. The corpus of each trust share consisted of two shares of common stock of Zuider Zee Oyster Bar, Inc., that was transferred by petitioners. Under the terms of the trust agreement, the trust properties, together with the income therefrom of each trust share, could be expended for the benefit of the beneficiary to such extent and in such manner as the trustee in his discretion should determine. To the extent that the trust properties and income therefrom were not expended for the benefit of the beneficiary, such trust properties and any accumulated income therefrom was to be distributed to the beneficiary when she reached 21 years of age, unless the beneficiary extended the terms of the trust. The trustee was authorized to invest and reinvest the trust properties in any kind or character of property including notes.
In 1968, Martin and the trust shares exchanged the stock owned in Zuider Zee Oyster Bar, Inc., for letter stock of Ward Foods, a corporation listed on the New York Stock Exchange. The value of the Ward Foods' stock received by the parties was approximately $5 million. In addition to the Ward Foods stock and as partial consideration for the sale, Martin entered into an employment contract to manage the Zuider Zee Restaurants for Ward Foods. The contract provided that he would receive a salary of $40,000 per year for the years 1968 through 1973. The contract contained a covenant not to compete and prohibited Martin from entering the seafood restaurant business in competition with Ward Foods for 5 years.
In 1970 the Zuider Zee Restaurant chain sold by Martin collapsed. At that time Martin's employment contract with Ward Foods was canceled and the trustee sold all of the trust's Ward Foods' stock. Martin later sued Ward Foods for breach of this contract. A jury, in determining the amount of Martin's damages, found as a fact that the value of his services for the calendar year 1972 was $24,000.
On April 8, 1971, Phillip C. Muller (Muller) was appointed third successor trustee of the trust for petitioners' children. Muller is Martin's brother-in-law and is also a close personal friend. Prior to that time Muller had never had business dealings with Martin. At the time of Muller's appointment the fair market value of the assets in each trust share was approximately $26,700.
In October 1971 MAR-G Corp. (MAR-G), a Texas corporation, was formed. To capitalize the corporation each trust share contributed $1,900 to the capital of MAR-G, and Muller, as trustee, was issued 100 percent of its outstanding stock.
MAR-G was formed to engage in the seafood restaurant business and has from its inception engaged in the seafood restaurant business under the name of Bill Martin's Second Edition Oyster Bar and Seafood Restaurant.
In addition to the contribution to capital, the trust shares made loans to MAR-G in the aggregate amount of $53,200. These loans were made between October 10, 1971, and November 23, 1971, and were evidenced by demand notes with interest payable at 9 percent per annum. On March 29, 1972, the trust shares made additional loans in the aggregate amount of $38,582.77. These loans were also payable on demand with 9-percent interest per annum. After the making of these loans, the MAR-G stock and the notes received for the loan were the only assets held by the trust shares. As of the date of trial, MAR-G has paid all principal and accrued interest on the loan made by the Priscilla Kay Martin Trust; as of this same date interest is still accruing on the principal that is owing to the other two trusts.
Martin, Martha, and Muller have respectively served as MAR-G's president, vice-president, and secretary, since its inception through 1974. The three of them also constituted the board of directors during this same period.
Martin actively managed on a daily basis all of the affairs of MAR-G's restaurant business and was primarily responsible for the major corporate decisions and policies. For his service to MAR-G Martin received a salary of $25,000 and $23,000 for 1973 and 1974, respectively. MAR-G could have found someone of equal experience and educational background to run its restaurant for the same or less salary.
Muller, although an officer and director of MAR-G Corp., did not participate in the management of the affairs of the corporation; he was in essence a passive trustee insofar as the affairs of MAR-G were concerned. It was his belief that Martin would not act as an officer and director of MAR-G in any way which would jeopardize the interests of his children.
During the years in issue, Martin also ran at least two other seafood restaurants, Bill Martin's 3d Edition (3d Edition) and Bill Martin's 4th Edition (4th Edition). The 3d Edition was operated as a proprietorship by Martin and the 4th Edition was operated by the Zuider Zee Development Corp. which was wholly owned by Martin.
Martin received advances or loans from MAR-G during 1973 and 1974 either in his individual capacity or indirectly through his proprietorship (3d Edition) and through the Zuider Zee Development Corp. (4th Edition). The cumulative balances of such loans or advances outstanding at the beginning of each calendar month during the years 1973 and 19742 are as follows:
_________________________________________________________________________________________
Outstanding Loans To
_________________________________________
Month Bill Martin 3rd Edition 4th Edition Total
_________________________________________________________________________________________
1/1/73 .......... $17,340.00 ........... ........ $ 17,340.00
2/1/73 .......... 17,340.00 $ 100.00 ........ 17,440.00
3/1/73 .......... 34,625.00 100.00 ........ 34,725.00
4/1/73 .......... 34,625.00 2,550.36 ........ 37,175.36
5/1/73 .......... 37,416.93 63,671.69 ........ 101,088.62
6/1/73 .......... 2,416.93 114,172.00 ........ 116,588.93
7/1/73 .......... 2,858.53 130,859.52 ........ 133,718.05
8/1/73 .......... 3,300.13 125,751.21 ........ 129,051.34
9/1/73 .......... 3,300.13 125,751.21 ........ 129,051.34
10/1/73 .......... 5,520.93 158,810.86 ........ 164,331.79
11/1/73 .......... 5,741.73 179,027.25 ........ 184,768.98
12/1/73 .......... 11,785.59 202,365.83 ........ 214,151.42
1/1/74 .......... 12,106.39 193,444.25 ........ 205,550.64
2/1/74 .......... 12,106.39 193,444.25 ........ 205,550.64
3/1/74 .......... 12,327.19 206,495.87 $ 2,057.97 220,881.03
4/1/74 .......... 12,547.99 236,799.94 (667.01) 248,680.92
5/1/74 .......... 18,808.79 243,123.00 (9,266.68) 252,665.11
6/1/74 .......... 19,208.79 228,654.61 669.95 248,533.35
7/1/74 .......... 19,772.89 235,731.63 18,870.36 274,374.88
8/1/74 .......... 20,214.49 232,447.12 28,547.25 281,208.86
9/1/74 .......... 20,214.49 232,447.12 28,547.25 281,208.86
10/1/74 .......... 25,953.31 243,521.49 35,472.51 304,947.31
11/1/74 .......... 26,303.31 229,160.57
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