Nasser v. United States

• Decision Date: 26 January 1966
• Docket Number: No. 42544.,42544.
• Parties: Richard J. NASSER and Argent Nasser, his wife, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of California

257 F. Supp. 443

Richard J. NASSER and Argent Nasser, his wife, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 42544.

United States District Court N. D. California, S. D.

January 26, 1966.

COPYRIGHT MATERIAL OMITTED

Henry C. Clausen, San Francisco, Cal., for plaintiffs.

John M. Youngquist, Asst. U. S. Atty., for the United States.

MEMORANDUM OPINION

WOLLENBERG, District Judge.

This is an action for the recovery of Federal income taxes paid under protest by the plaintiffs Richard J. Nasser (hereinafter, "taxpayer") and his wife for the years 1960 and 1961. This court's jurisdiction derives from 28 U.S.C. § 1346(a) et seq. This opinion embodies the Court's findings of fact and conclusions of law as required by F.R.Civ.P. 52(a).

Plaintiffs are husband and wife and reside in San Francisco, California. The District Director audited plaintiffs' 1960 and 1961 joint returns and gave plaintiffs notice by letter dated October 14, 1963, of proposed assessments against them of deficiencies in taxes in the amount of $30,341.30 for the year 1960 and in the amount of $8,427.42 for the year 1961. Plaintiffs under protest paid the proposed deficiencies on December 18, 1963, and paid the accrued interest on the deficiencies on March 10, 1964. Plaintiffs filed claims for refund with respect to their deficiency payments for both years with the District Director on December 18, 1963, claiming a refund of $29,223.41 for the year 1960 and a refund of $8,113.90 for the year 1961. Plaintiffs' claims for refund were disallowed by the District Director and the present action was commenced. Following the withdrawal of an additional deficiency notice, the court granted defendant leave to file a counter-claim in this action demanding judgment against plaintiffs for an additional deficiency in tax for the year 1961 in the amount of $36,233.98.

At the times of all transactions involved in this case, the plaintiff Richard J. Nasser (hereafter referred to as "Mr. Nasser") was the sole shareholder, president and one of the directors of a California corporation known as "Bay Properties, Inc." (hereafter referred to as "Bay").

Bay Properties prior to 1960 owned non-income producing property, the San Pablo lot, in conjunction with income property, the Shattuck properties which had depreciated down taxwise. Nasser was advised to sell the property and invest the proceeds in depreciable income.

On October 7, 1960, about the time that negotiations for the Continental Market began, the sum of $60,000 was withdrawn by check from the checking account of Bay and deposited in the personal savings account of Mr. Nasser at the Bank of America. The $60,000 payment to Mr. Nasser was entered by the bookkeeper, Garibaldi, on or about October 7, 1960, as the first entry in an account in Bay's books entitled "R. J. Nasser Loan for Refund." On March 2, 1961, the sum of $60,000 was returned from the personal savings account of Mr. Nasser to the checking account of Bay, because of the inability of Nasser to effect the intended purchase of the Continental Market.

On April 18, 1961, the sum of $30,000 was withdrawn by check from the checking account of Bay and deposited in the personal checking account of Mr. Nasser at the Bank of America. The $30,000 withdrawn from Bay's account and deposited in Mr. Nasser's personal checking account was used by Mr. Nasser partially to cover personal checks outstanding on April 18, 1961, and partially to make purchases of shares of stock on the market in plaintiffs' names as their own personal investments. Between April 18, 1961, and December 21, 1961, said sum of $30,000 was consumed in such personal transactions; the balance in Mr. Nasser's personal checking account as of December 20, 1961, was $1,424.05. However, at all times during this period Mr. Nasser had over $200,000 in his savings account at the same bank.

On December 21, 1961, the sum of $40,000 was withdrawn by check from the checking account of Bay and deposited in the personal checking account of Mr. Nasser at the Bank of America. On December 1, 1961, a check was drawn on Bay's checking account in the amount of $10,000 payable to one Roy W. Stovall. This check represented a deposit toward the purchase price of $485,000 under a contract between Stovall as seller and Mr. Nasser as buyer for the purchase of a parcel of real property located in Millbrae, California, on which a supermarket was situated. This property is hereafter referred to as the "Continental Market".

On January 3, 1962, Mr. Nasser withdrew the sum of $181,000 from his personal savings account and deposited it in his personal checking account, and on January 4, 1962, he wrote a check for the sum of $226,332.60 payable to the California Pacific Title Company as escrow agent in the closing of the transaction for the purchase of the Continental Market. On January 5, 1962, two grant deeds conveying the Continental Market to Mr. Nasser alone were recorded with the Recorder of San Mateo County. The first of these deeds conveyed "an undivided interest of 89 1/3 %" to "Richard J. Nasser, a married man as his separate property" from "Roy W. Stovall" and is dated December 1, 1961. The second deed conveyed "an undivided interest of 10 2/3 % in the same property to "Richard J. Nasser, a married man as his separate property" from the "Garden Investment Company, a Limited Partnership" and is dated December 20, 1961.

After the acquisition of title to the Continental Market, Mr. Nasser in January of 1962 caused a separate set of books to be opened under the name of "Millbrae Continental", and the entries in those books reflect monthly receipts of rent from the lessee of the Continental Market and monthly mortgage payments on the $250,000 Nasser note having been made out of such rent receipts from January, 1962 through December, 1962.

On November 8 and November 15, 1962, an Internal Revenue Service agent called on Mr. Nasser at his office for the purpose of examining books and records reflecting the 1960 and 1961 withdrawal transactions in connection with the audit of the plaintiffs' tax returns for 1960 and 1961. On November 29, 1962, a meeting of the directors of Bay was held and minutes of that meeting set forth the fact of the purchase of the Continental Market in January of 1962, and stated that Mr. Nasser had taken title to the property in his own name for convenience, that it was understood at the time of the purchase that Bay should participate in the purchase to the extent that its available funds would permit, that Mr. Nasser had utilized $80,000 of Bay's funds in the purchase and had borrowed funds and put up his own funds for the balance of the purchase price, that the respective investments of Bay and Mr. Nasser in the property would be adjusted to two-fifths for Bay and three-fifths for Mr. Nasser, and that a two-fifths ownership interest in the property would be conveyed by deed to Bay from plaintiffs.

On December 19, 1962, a grant deed dated November 29, 1962, conveying "an undivided two-fifths interest" in the Continental Market from "Richard J. Nasser and Argent Nasser, his wife" to "Bay Properties, Inc., a California corporation" was recorded with the Recorder of San Mateo County.

On December 31, 1962, new accounts were opened in the books of Mr. Nasser and of Bay designated respectively as "Continental Market Investment" and "Investment Millbrae Continental Market", and opening entries were made in those accounts to show Mr. Nasser's investment as $141,000 and Bay's investment as $94,000. The net income from the rental of the Continental Market for the year 1962 was on or after December 31, 1962, divided and credited on the Millbrae Continental Books on a two-fifths, three-fifths basis between Bay and Mr. Nasser. A "U. S. Partnership Return of Income—Form 1065" was filed with the Internal Revenue Service in 1963 in the name of "Continental Market" and signed by Mr. Nasser, showing the division of the rental income for the year 1962 between Bay and Mr. Nasser.

In this case the ultimate issue is whether certain transfers of corporate money to plaintiff taxpayer constituted dividend income to him under the Internal Revenue Code. The legal characterization of these transfers under standards defined by federal law is the ultimate issue for decision. Chism's Estate v. Commissioner of Internal Revenue, 322 F. 2d 956, 960 (9th Cir. 1963), United States v. Loo, 248 F.2d 765 (C.A.9th 1957). Specifically at issue is the question of whether the "transfers" or "withdrawals" in 1960 and 1961 were "distributions" within the meaning of Section 61 and Section 316(a) of the Internal Revenue Code (26 U.S.C.1964 ed.) and therefore taxable as dividend income,¹ or whether the funds were transferred to plaintiff to be used by him as an investment agent on behalf of the corporation for its purposes and therefore not a dividend. Mertens Law of Fed.Inc.Tax. § 9.23.² It is settled that the burden is on the taxpayer to prove by a preponderance of the evidence that the specific transfer of funds determined by the Government to be dividend income was in fact a bona fide payment for a corporate business purpose. Adams v. Glenn, (W.D.Ky 1950) 42 AFTR 1356; Gurtman v. United States, 237 F.Supp. 533, 535 (N.J. 1965); Welch v. Helvering, 1933, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212. In other words, the Commissioner's finding is presumptively correct and the taxpayer has the burden of proving the Commissioner's finding was erroneous. Gurtman v. United States, supra.

The primary factual determination is recognized to be the intention of the sole-shareholder of the corporation at the time the transfer is made— Wiese v. Commissioner of Internal Revenue, 93 F.2d 921 (C.A.8th 1938), C.I.R. v. Makransky, 321 F.2d 598, 600 (3 Cir. 1963). To carry the burden imposed upon him the taxpayer must prove by a preponderance that he had a state of mind at the time of withdrawal which included a specific plan to use...