Osrow v. Comm'r of Internal Revenue, Dockets Nos. 160-66
| Decision Date | 11 January 1968 |
| Docket Number | Dockets Nos. 160-66,185-66. |
| Citation | 49 T.C. 333 |
| Parties | LEONARD OSROW AND GLADYS OSROW, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTHAROLD OSROW AND FRANCES OSROW, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Carl F. Bauersfeld, for the petitioners.
John B. Murray, Jr., for the respondent.
Petitioners exchanged 20 shares of common stock, having a basis of $10,000, for 171,800 new shares of common stock in the same corporation. On the same day, petitioners also exchanged a $50,000 debt owed them by the corporation for 11,500 shares of new common stock. The corporation later paid $5,625 of underwriting expenses attributable to the sale of some of petitioner's stock in a public offering of stock. Held:
1. Under the circumstances, petitioners have a basis in the 171,800 shares of new common stock of $10,000 and in the 11,500 shares of new common stock of $50,000.
2. The corporation's payment of expenses attributable to petitioners constituted a dividend to them.
The respondent determined deficiencies in the income tax of Leonard Osrow and Gladys Osrow of $7,388.47 for the year 1961 and in the income tax of Harold Osrow and Frances Osrow of $7,199 for the year 1961. There are two issues for decision. The first issue involves a determination of the petitioners' basis in stock that they sold in 1961. The second issue is whether the petitioners realized dividend income as a result of the payment by their wholly owned corporation of expenses attributable to them.
Some of the facts were stipulated, and those facts are so found.
The petitioners Harold Osrow (Harold) and Frances Osrow are husband and wife, and the petitioners Leonard Osrow (Leonard) and Gladys Osrow are husband and wife. The legal residence of all the petitioners was Glen Cove, N.Y., at the time their petitions were filed in this case. They filed their joint Federal income tax returns, using the cash receipts and disbursements method of accounting, for the calendar year 1961 with the district director of internal revenue, Brooklyn District, New York.
Harold and Leonard were both stockholders and officers of Osrow Products Co., Inc. (Osrow Products). Harold was present of the company, and Leonard was vice president. Osrow Products was incorporated on December 5, 1952, in the State of New York for the manufacture of automobile- and window-washing equipment and household products.
Harold and Leonard were the sole stockholders of Osrow Products from the date of its incorporation to July 17, 1961. Each had initially made a $5,000 capital contribution to Osrow Products in return for which received 10 shares of its common stock. As of the close of Osrow Products' fiscal year ending March 31, 1961, it was indebted to Harold and Leonard in the amounts of $25,000 each for loans that they had made to it.
During the year 1960, Osrow Products considered offering some of its stock to the public. It was first thought that some of the proceeds of the public offering could be used to pay the loan obligations to Harold and Leonard.
In November of 1960 or January of 1961, General Securities, Inc. (General), an underwriter, agreed to sell stock of Osrow Products to the public. As a condition of the public offering, General required Harold and Leonard to accept Osrow Products stock in payment of the loan obligations to them. It was contemplated that Harold and Leonard could then offer part of their holdings of Osrow Products stock to the public as a part of the public offering by the company.
On June 15, 1961, the articles of incorporation of Osrow Products were amended to authorize the company to issue 500,000 shares of $0.10 par value common stock in place of the then authorized 200 shares of no-par value common stock. On June 23, 1961, Harold and Leonard received, respectively, stock certificates number 1 and 2 from Osrow Products, representing the issuance to each of them of 85,900 shares of the new common stock in exchange for their 10 shares each of the old common stock. On the same date, Harold and Leonard also received, respectively, stock certificates numbered 3 and 4 from Osrow Products, representing the issuance to each of them of 5,750 shares of the new common stock in payment of the indebtedness due them by the company.
On July 17, 1961, Harold and Leonard each sold, at a price of 1 cent per share, 5,400 shares from their personally held Osrow Products stock to three of the persons assisting in various capacities in the underwriting.
Before the Osrow Products stock could be sold to the public, the company had to obtain the authorization of the Securities and Exchange Commission. An offering circular was approved by the Securities and Exchange Commission on November 21, 1961. Under the terms of the public offering, 60,000 shares of Osrow Products common stock were offered for sale to the general public at $5 per share. Of the 60,000 shares, 37,500 were to be sold on behalf of Osrow Products, 11,250 shares were to be sold on behalf of Harold, and 11,250 shares were to be sold on behalf of Leonard.
During the calendar year 1961, 37,500 shares of Osrow Products stock were sold on behalf of the company, and 11,675 shares were sold on behalf of both Harold and Leonard, all at $5 per share. Osrow Products paid the entire underwriting expense for the sale of the stock to the public, including the expense for the sale of the 22,500 shares sold in 1961 and 1962 on behalf of Harold and Leonard. The parties agree that the total expense attributable to the sales in 1961 on behalf of Harold and Leonard was $5,625.
On November 2, 1961, Harold and Leonard wrote identical letters to General instructing it to sell their respective shares offered in the prospectus in the following order:
First, you are to dispose of 5,750 shares of Osrow Products Company, Inc. stock that I have acquired on June 19, 1961. Then, and only if they are entirely disposed of, you are to sell from my account 5,500 shares of Osrow Products Company, Inc. that I acquired on April 1, 1953.
On January 8, 1962, Osrow Products stock certificates numbered 3 and 4 were sent to the transfer agent of the company for reissue to purchasers in the public offering. On January 9, 1962, other stock certificates of Osrow Products that had been issued to Harold and Leonard were sent to the transfer agent of the company for reissuance to purchasers in the public offering.
On their respective 1961 Federal income tax returns, Harold and Leonard each reported the following sales of Osrow Products stock:
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¦Number of¦Date ¦Date ¦Sales ¦Cost ¦Gain (or ¦
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¦shares ¦acquired ¦sold...To continue reading
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