MJ Byorick, Inc. v. Commissioner
| Decision Date | 07 June 1988 |
| Docket Number | 33357-85.,Docket No. 33356-85 |
| Citation | 1988 TC Memo 252,55 TCM (CCH) 1037 |
| Parties | M.J. Byorick, Inc. v. Commissioner. Michael J. Byorick and Mary M. Gregg v. Commissioner. |
| Court | U.S. Tax Court |
Bruce E. Rosenblum, 1001 Pennsylvania Ave., Washington, D.C., Joseph D. Sullivan, and McGee Grigsby (specially recognized), for the petitioners. J. Darrel Knudtson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in income tax for petitioner M.J. Byorick, Inc. for the years ending and in the amounts as follows:
Year Ending* Deficiency
1-31-78 $15,299.38
1-31-79 $ 1,972.96
1-31-82 $ 5,723.42
* Respondent in the notice of deficiency made adjustments
to the corporate income for the fiscal years ending
January 31, 1981, which resulted in a decrease in the net
operating loss carryback to the year ending January 31
1978. For this reason the adjustments for the fiscal year
1981 are in issue
and for the individual petitioners Michael J. Byorick and Mary M. Gregg1 for the years ending and in the amounts as follows:
Year Ending Deficiency
12-31-77 $493,675.00
12-31-78 $372,468.94
12-31-79 $ 96,775.00
12-31-80 $ 10,383.00
12-31-81 $ 3,678.00
The parties disposed of all adjustments giving rise to the deficiencies determined in the statutory notice to the individual petitioners for the years 1980 and 1981 by agreement. However, by amendment to answer filed at the beginning of the trial, respondent alleged that petitioner Michael J. Byorick received either directly or indirectly in taxable years 1980 and 1981 amounts from M.J. Byorick, Inc. which are taxable to him as constructive dividends.
Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision the following:
(1) Whether respondent conducted a second inspection of the books of account of Michael J. Byorick for the year 1977 without notification as required by section 7605(b);2
(2) Whether funds advanced from M.J. Byorick, Inc. (the Company) to Michael J. Byorick (petitioner) during taxable years 1977, 1978, and 1979 should be characterized as loans or as constructive dividend income;
(3) Whether funds advanced during 1977, 1978, and 1978 by the Company to certain entities in which petitioner owned an interest constituted constructive dividend income to petitioner;
(4) If we conclude that the advances by the Company to petitioner were loans, whether the Company has additional income for its fiscal years ending January 31, 1981, and 1982 for accrued interest on the loans made to petitioner; and
(5) Whether the Company made advances to petitioner directly or indirectly in 1980 and 1981 which constituted constructive dividends to petitioner.
Some of the facts have been stipulated and are found accordingly.
M.J. Byorick, Inc., a District of Columbia corporation (the Company) is an accrual basis taxpayer with a fiscal year ending January 31. It filed its corporate Federal income tax returns for its fiscal years ending January 31, 1977 through 1982 with the Internal Revenue Service Center in Memphis, Tennessee. Michael J. Byorick, a resident of Fairfax, Virginia at the time of filing of the petition herein, and Mary M. Gregg, a resident of Centerville, Virginia at the time of filing of the petition herein, filed joint Federal income tax returns with the Internal Revenue Service Center in Memphis, Tennessee for the taxable years 1977, 1978, 1979, 1980 and 1981. Petitioner formed the Company in July 1965 with $10,000 which he borrowed from the Bank of Rosslyn. The business of the Company prior to and during the years in issue was the installation of reinforcing structural steel in buildings and other construction projects in the Washington, D.C. area.
The Company, a Union contractor, conducted a successful business into early and mid-1970. Several factors contributed to a decline in the Company's business in late 1970: (1) The percentage of work the Company did for the government decreased due to minority contracting requirements, (2) the Company's business decreased substantially when the percentage of non-union contracting increased, and (3) petitioner experienced health problems beginning in 1978 which continued into 1980. Between February and June 1980 petitioner was unable to work and when he returned he could only work several hours a day.
Petitioner was the President of the Company and its sole stockholder from its inception throughout the years here in issue.
For 1977, 1978 and 1979 petitioner received $84,250, $84,250, and $55,272 as salary from the Company.
The Company had a small office with space for only its three office employees, petitioner, Charles "Buck" Deacon, the Company bookkeeper, and Sally Bohn, petitioner's secretary. Petitioner had no accounting or financial training and did not personally maintain the Company's books and records.
Mr. Deacon actually maintained the Company's books and records while Ms. Bohn prepared the Company payroll, reconciled bank statements, wrote Company checks, maintained the Company's checkbook, and handled Company invoices, receipts and deposits. Mr. Deacon and petitioner would consult an accountant with respect to bookkeeping matters and petitioner consulted this accountant with respect to his personal financial matters.
After petitioner consulted his accountant, the Company advanced money to him beginning in 1973. The amounts advanced by the Company to petitioner were invested by him in income-producing ventures from which he expected to obtain proceeds for repayment of the advances. These advances were shown on the Company books as loans and were evidenced by promissory notes executed by petitioner.
As of February 1, 1976, petitioner's outstanding loan balance as shown on the Company books was $676,000,3 evidenced by eight promissory notes in the following amounts:
$400,000
37,500
40,000
30,000
5,000
5,000
150,000
9,500
These balances were after amounts shown on the Company books during the years 1973 through 1975 as loan repayments of $395,536.74.
Petitioner made regular payments to the Company designated as interest at 6 percent as follows:
With respect to the $400,000 note of November 5, 1975:
February 5, 1976 ...... $6,000 (check for $6,450)
May 5, 1976 ........... 6,000
August 4, 1976 ........ 6,000
November 3, 1976 ...... 6,000
_______
$24,000 (6% of $400,000)
With respect to the $37,500 note of November 24, 1975 and $40,000 note of November 25, 1975:
February 26, 1976 ..... $1,162.50
May 24, 1976 .......... 1,162.50
August 23, 1976 ....... 1,162.50
November 19, 1976 ..... 1,162.50
_________
$4,650.00 (6% of $77,500)
With respect to the $30,000 note of January 20, 1976 and $5,000 note of January 14, 1976:
April 20, 1976 $525.00
July 20, 1976 525.00
October 21, 1976 525.00
_________
$1,575.00
February 5, 1976 450.00 (of $6,450 check above)
January 12, 1976 87.48 (quarterly 7% interest
of $5,000 note)
_________
$2,112.48 (approx. 6% of $35,000)
With respect to the $5,000 note of December 30, 1975, $9,500 note of December 28, 1975, and $150,000 note of December 28, 1976:
June 28, 1976 $2,392.50
September 30, 1976 2,397.50
December 29, 1976 2,377.50
April 1, 1976 3,925.00
__________
$11,092.50 (representing interest
of 6% on
$155,000 and on the
declining 7 balance
of the $9,500 note)
On January 1, 1977 petitioner's loan balance to the Company was $751,000. On January 27, 1977, petitioner borrowed $715,000 at 7.27-percent interest from the Bank of Viginia on an unsecured basis. On January 27, 1977, petitioner paid $722,608.49 to the Company, representing $715,000 in principal and $7,608.49 in interest. On February 2, 1977, the Company advanced $715,000 to petitioner. That amount was recorded as a loan on the Company books and records and was evidenced by petitioner's promissory note payable to the Company in ninety days. Petitioner used that advance to pay off the Bank of Virginia loan on February 3, 1977.
During 1977 and 1978 petitioner received unsecured 90-day bank loans from the Bank of Virginia in the amounts of $20,000, $40,000, and $37,000. The $20,000 note was executed in November 1977, was renewed in February 1978, renewed again in June 1978 and paid off in July 1978. The $40,000 note was executed on August 1, 1977, renewed in December of 1977, further renewed in February and May of 1978, and paid off in July 1978. The $37,000 note was executed in November 1977, renewed in February and May of 1978 and paid off in July 1978.
Ms. Bohn worked for the Company from September 1972 until June 1980. She worked with petitioner on a daily basis and was aware that he borrowed money from the Company. Petitioner always referred to the advances as loans, always knew when interest was due and made arrangements to pay it and paid on the loan principal. Ms. Bohn was aware of petitioner's insistence upon executing promissory notes for the amounts advanced by the Company to him. Petitioner discussed with Ms. Bohn his intention to pay the notes with proceeds of his investments.
Financial statements during the years in issue filed by petitioner with various financial institutions showed assets, liabilities and net worth in the following amounts on the dates indicated:
Date Total Assets Total Liabilities Net Worth
1-31-78
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