Moffatt v. Comm'r of Internal Revenue, Docket Nos. 1086-62—1092-62.
| Citation | 42 T.C. 558 |
| Decision Date | 16 June 1964 |
| Docket Number | Docket Nos. 1086-62—1092-62. |
| Parties | JOHN G. MOFFATT, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Joseph D. Peeler, Brian J. Kennedy, and Richard A. Gadbois, Jr., for the petitioners.
Lawrence S. Kartiganer, for the respondent.
Held, distributions to shareholders were incident to a plan of reorganization, secs. 368(a)(1)(D) and 354(b)(1)(A), I.R.C. 1954, taxable as dividends to the extent provided in section 356(a)(2), rather than as capital gains pursuant to sections 331 and 346 dealing with corporate liquidations.
The Commissioner determined deficiencies in income tax as follows:
+------------------------------------------------------------+
¦Docket ¦Petitioner ¦Year¦Deficiency¦
+-------+------------------------------------+----+----------¦
¦No. ¦ ¦ ¦ ¦
+-------+------------------------------------+----+----------¦
¦1086-62¦John G. Moffatt ¦1958¦$14,659.15¦
+-------+------------------------------------+----+----------¦
¦1087-62¦Mary E. Moffatt ¦1958¦14,511.99 ¦
+-------+------------------------------------+----+----------¦
¦1088-62¦John G. Moffatt and Mary E. Moffatt ¦1959¦41,193.90 ¦
+-------+------------------------------------+----+----------¦
¦1089-62¦Frank E. Nichol ¦1958¦14,491.36 ¦
+-------+------------------------------------+----+----------¦
¦1090-62¦Ruth H. Nichol ¦1958¦14,491.36 ¦
+-------+------------------------------------+----+----------¦
¦1091-62¦Frank E. Nichol and Ruth H. Nichol ¦1959¦41,138.10 ¦
+-------+------------------------------------+----+----------¦
¦1092-62¦George G. Murray and Anna Mae Murray¦1958¦2,990.82 ¦
+-------+------------------------------------+----+----------¦
¦ ¦ ¦1959¦4,500.37 ¦
+------------------------------------------------------------+
Various issues have been settled by the parties. The sole remaining issue is whether distributions by Moffatt & Nichol, Inc., to its shareholders were liquidating distributions under sections 331 and 346, I.R.C. 1954, taxable as capital gains, or were distributions incident to a plan of reorganization under sections 354 and 368 and taxable as dividends under section 356.
Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.
The petitioner, John G. and Mary E. Moffatt, Frank E. and Ruth H. Nichol, George G. and Anna Mae Murray, are husbands and wives, respectively, all residing in California. The Moffatts and the Nichols timely filed their respective 1958 separate income tax returns and 1959 joint income tax returns and the Murrays timely filed their 1958 and 1959 joint income tax returns, all with district director of internal revenue at Los Angeles, Calif.
Moffatt & Nichol, Inc., was a corporation incorporated under the laws of California on September 29, 1947; its principal place of business was in Long Beach, Calif.
Prior to 1947, petitioners John G. Moffatt and Frank E. Nichol and a man named Harrison Roberts were partners in a consulting engineering business. Upon the incorporation of Moffatt & Nichol, Inc., Moffat and Nichol conducted their former partnership activities in behalf of the corporation; Roberts did not become a shareholder or an employee of the corporation.
The authorized capital stock of Moffatt & Nichol, Inc., consisted of 750 shares of $100 par value common stock, of which only 100 shares were ever issued. On January 21, 1948, 50 shares were issued to Moffatt and 50 shares to Nichol. On September 4, 1952, Moffatt and Nichol each sold five shares of stock to petitioner George G. Murray, an employee of the corporation, for $500. During the years in question the outstanding stock was held as follows:
+-----------------------------+
¦Stockholder ¦Number of¦Cost ¦
+------------+---------+------¦
¦ ¦shares ¦ ¦
+------------+---------+------¦
¦Moffatt ¦45 ¦$4,500¦
+------------+---------+------¦
¦Nichol ¦45 ¦4,500 ¦
+------------+---------+------¦
¦Murray ¦10 ¦1,000 ¦
+-----------------------------+
From the time of its organization until approximately October 7, 1957, the principal business activity of Moffatt & Nichol, Inc., was the practice of consulting engineering. Among the corporation's activities were: The preparation of studies and reports; the making of plans, specifications, and designs; and the supervision of construction. It was also licensed as a building contractor and had participated in various joint ventures; however, the record does not disclose that it engaged in any actual building activities. Moffatt, Nichol, and Murray were employed by the corporation as licensed engineers and were its ‘key‘ employees. During the period of January-September 1957, the corporation had an average of 67 employees. About one-third of its employees were professional people; there was also an office manager and about four ‘clerical people‘; and the remaining employees were ‘subprofessional‘ or draftsmen.
Between September 29, 1947, and October 1, 1957, Moffatt & Nichol, Inc., entered into a substantial number of consulting engineering contracts which called for architect-engineer services. The acquisition of these contracts depended almost entirely on the personal efforts of petitioners Moffatt and Nichol. Approximately one-half to two-thirds of these contracts were with Government agencies.
In the spring of 1954, Glen Miller, a mechanical engineer, became associated with Moffatt & Nichol, Inc. Petitioners Moffatt and Nichol had an understanding with Miller that the latter could purchase from them 10 percent of the corporation's stock at book value. However, the parties did not reach a firm agreement concerning this purchase because Miller thought book value of the stock to be an excessive purchase price.
William J. Bobisch, a structural engineer, became an employee of Moffatt & Nichol, Inc., in August 1955. Prior to Bobisch's employment by the corporation, Moffatt and Nichol offered to sell to him 10 percent of the corporation's stock at book value; payment for this stock was to be made from Bobisch's share of the company's earnings Subsequent to his becoming an employee, Bobisch accumulated approximately $10,000 from sales and bonuses with which to pay for the stock. However, Bobisch thought the stock was overpriced at book value and was concerned that any investment he might make would be subject to contingent liabilities which the corporation had incurred in ventures entered into prior to his employment. Bobisch proposed that he pay $8,000 for 10 percent of the stock which then had a book value in excess of $16,000.
Negotiations between petitioners Moffatt and Nichol and Miller were suspended in October 1956, and Miller left the employ of the corporation in February 1957. Negotiations with Bobisch continued through 1956 and the early part of 1957, when, in April or May of that year, an impasse was reached.
The taxable income of Moffatt & Nichol, Inc., increased from $24,048.31 in 1953 to $128,122.75 in 1956 and $97,401.38 in 1957, and its accumulation of earned surplus increased from $49,761.34 at the end of 1952 to $197,487.18 at the end of 1957.
From the time of its inception on September 29, 1957, until its formal resolution to liquidate in December 1958, Moffatt and Nichol, Inc., formally declared and paid only one dividend to its shareholders. This dividend was in the amount of $30,000; it was declared on December 31, 1954, and paid on March 31, 1955.
The balance sheets of Moffatt & Nichol, Inc., as of December 31, 1957, 1958, and 1959 reflected in part the following:
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