Owens v. Comm'r of Internal Revenue
| Decision Date | 02 April 1975 |
| Docket Number | Docket Nos. 1947-70,1988-70. |
| Parties | E. KEITH OWENS, TRANSFEREE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE,RESPONDENT E. KEITH OWENS AND SHARON E. OWENS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frank G. Pollock and William L. Powers, for the petitioners.
James C. Lynch, for the respondent.
Held, petitioner's sale in 1965 of all of his stock in his wholly owned subch. S corporation was not a bona fide arm's-length transaction and petitioner is taxable on the undistributed subch. S income of the corporation in the taxable year of sale; held, further, petitioner has not overcome respondent's prima facie case that he is a transferee within the meaning of sec. 6901, I.R.C. 1954, and thus is liable for any deficiency in income tax of the corporation for its 1964 taxable year, when it was not a subch. S corporation; held, further, the major portion of payments made by the corporation in the 1964 taxable year for cattle feed were deposits and therefore not deductible as ordinary and necessary expenses in the year of payment.
In these consolidated proceedings, respondent determined the following deficiencies in income tax:
+-------------------------------------------------------------------+
¦Petitioners ¦Docket No. ¦Year ¦Deficiency ¦
+----------------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------+------------+------+------------¦
¦E. Keith Owens (transferee) ¦1947-70 ¦1964 ¦$103,601.41 ¦
+----------------------------------+------------+------+------------¦
¦E. Keith Owens and Sharon E. Owens¦1988-70 ¦1965 ¦78,443.00 ¦
+-------------------------------------------------------------------+
In docket No. 1947-70, the issues are (1) whether petitioner E. Keith Owens is a transferee of Mid-Western Investment Corp. under section 69011 so as to be liable for any deficiency determined in such corporation's 1964 corporate income tax and (2) whether the corporation is entitled to a deduction of $200,068.18 for feed purportedly purchased in 1964 but not used until 1965. 2 Respondent has conceded that to the extent that it is determined that the corporation's feed expense deduction was properly disallowed in 1964, a corresponding deduction should be allowed in 1965.
In docket No. 1988-70, the issue is whether the disposition by petitioner E. Keith Owens of all of his stock in Mid-Western Investment Corp. constituted a sale so as to entitle petitioners to long-term capital gain treatment on the $246,925 gain realized. This issue is interrelated with the transferee liability issue in docket No. 1947-70.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by reference.
Petitioners E. Keith Owens and Sharon E. Owens, husband and wife, resided in the Detroit, Mich., area at the time of the filing of the petitions herein. For the taxable year 1965, they filed their joint Federal income tax return with the District Director of Internal Revenue, Detroit, Mich. Sharon E. Owens is a petitioner in docket No. 1988-70 only because a joint return was filed. E. Keith Owens will hereinafter be referred to as petitioner.
Mid-Western Investment Corp. (hereinafter referred to as Mid-Western) was a Michigan corporation incorporated on December 17, 1962. Petitioner was one of its incorporators. During the years in issue, until August 20, 1965, petitioner was an executive of Mid-Western and the owner of all of its stock (4,000 common shares). For the taxable years 1963, 1964, and 1965, Mid-Western reported taxable income of $24,288.16, $26,719.29, and $245,650.31, respectively.
Beginning in November 1963, Mid-Western undertook the underwriting of the sale of the common stock of Alexander Hamilton Life Insurance Co. of America (hereinafter referred to as Alexander Hamilton), a Michigan corporation. Alexander Hamilton has been granted a preliminary charter by the State of Michigan in the latter part of October 1963 which permitted the funding of the corporation and, if successfully funded, would entitle the corporation to a final charter. Petitioner was an incorporator and chief executive officer of Alexander Hamilton.
During 1963 and 1964, Mid-Western sold Alexander Hamilton stock having a gross sale price of $693,000 and $8,728,000, respectively. Sales commissions totaling $103,950 and $1,205,250 for the respective years were credited by the National Bank of Detroit to Mid-Western's bank account and were reported by Mid-Western on its tax returns for the respective years.
Mid-Western concluded its underwriting activities in April 1964 and Alexander Hamilton received its permanent charter in May of the same year.
During early 1964, petitioner withdrew from Mid-Western most of the income earned from this underwriting and invested the majority of these funds in Alexander Hamilton stock.
Upon receipt of its permanent charter, Alexander Hamilton was authorized to sell life insurance and during its first year placed in force approximately $118 million of insurance. Petitioner, as chief executive officer, had the overall responsibility for directing the company's activities. These activities included matters pertaining to the issuance of stock, obtaining approval for insurance policies, hiring employees (including agents), supervising investments, and the general organization of the home office. As a result, petitioner was extremely busy managing Alexander hamilton during its first year of existence.
During the fall of 1964, petitioner, upon the recommendation of one of Alexander Hamilton's general agents, went to the Detroit office of Lybrand, Ross Bros. & Montgomery (now Coopers & Lybrand and hereinafter referred to as Lybrand), an accounting firm, for the purpose of obtaining accounting, business investment, and tax-planning advice. This advice included matters relating to Mid-Western as well as to petitioner's personal financial situation. Petitioner met with Ralph J. Paonessa (hereinafter referred to as Paonessa), an attorney and certified public accountant then assigned to Lybrand's tax department, and they discussed various investments, including apartment houses, oil wells, and cattle. Petitioner expressed a particular interest in cattle investment.
Lybrand's New York and Detroit offices had clients who had dealt previously in cattle investments, including cattle feeding programs. A majority of these investments had been negotiated through Oppenheimer Industries, Inc., of Kansas City, Mo. (hereinafter referred to as Oppenheimer).
Oppenheimer managed breeding herds for absentee owners and represented absentee owners of feeding cattle (generically referred to as feeder cattle). Acting as a feeder cattle agent, Oppenheimer would enter into arrangements for acquiring cattle, develop the contractual arrangements for the operation of feeder cattle, prepare the contracts, analyze and project financial and tax aspects of the transactions, and arrange for the financing.
Jerome Halperin (hereinafter referred to as Halperin), a Lybrand tax partner, who was personally acquainted with a number of people involved in Oppenheimer's operations and who had previously recommended the company to other clients, was consulted by Paonessa and gave advice on Mid-Western's proposed cattle feeding operations.
Mid-Western engaged Oppenheimer to act as its agent for the purpose of entering into contracts for the purchase and maintenance of feeder cattle. Since petitioner had withdrawn Mid-Western's funds to invest in Alexander Hamilton stock, Mid-Western borrowed the money, collateralized by petitioner's Mid-Western stock, to invest in the cattle feeding business. On December 16, 18, 19, and 24 of 1964, Oppenheimer entered into four separate contracts on behalf of Mid-Western for the purchase and maintenance of cattle.
The feeder cattle contracts reflected the purchase of cattle through the use of a 5-percent deposit on the purchase price and a note for the remaining balance. Each note bore interest at 6 1/2 percent per annum. Three of the notes were payable by June 1965, the fourth was to be due December 16, 1965, and each provided for a prepayment of interest at the time of signing the contract. Except for certain differences in amounts and relevant time periods, all four contracts contained identical language and provisions. Each contract contained the following provisions relevant to the feeding operations:
This contract is between (the named feeder), whose address is . .. , hereinafter called the ‘FEEDER,‘ and Mid-Western Investment Corporation, whose address is 1808 Main Street, Kansas City, Missouri, hereinafter called the ‘OWNER.’ The OWNER shall be represented by OPPENHEIMER INDUSTRIES, INCORPORATED, of 1808 Main Street, Kansas City, Missouri, as AGENT, for the purpose of entering into this contract with the FEEDER on his behalf, and for the purpose of supervising performance under the terms of this agreement and seeing it through to execution and final settlement.
THE FEEDER AND THE OWNER HEREBY DECLARE AND ACKNOWLEDGE THAT THE ONLY AGREEMENTS AND UNDERSTANDINGS EXISTING BETWEEN THEM, AS CONTRACTING PARTIES, ARE THOSE WHICH ARE SPECIFICALLY SET FORTH HEREINAFTER, THE SAME BEING THE FOLLOWING:
1. PURCHASE OF CATTLE. The FEEDER hereby agrees to sell to the OWNER, and the OWNER hereby agrees to purchase from the FEEDER, (the number of cattle purchased) head of (the type of cattle) now owned by, and in the possession of, the FEEDER. These cattle shall be delivered to the feed lot of (the named feeder) located at . . . , at the expense of the FEEDER. These cattle shall be of . . . grade or better quality, shall be merchantable at the time of the purchase contracted for herein, and they...
To continue reading
Request your trial
-
Van Raden v. Comm'r of Internal Revenue, Docket Nos. 1336–76
...a true prepayment or merely a deposit. See Owens v. Commissioner, 568 F.2d 1233, 1243–1246 (6th Cir. 1977), revg. as to this issue 64 T.C. 1, 16–19 (1975); Lillie v. Commissioner, 45 T.C. 54 (1965), affd. per curiam 370 F.2d 562 (9th Cir. 1966). In this focus, he met with varying degrees of......
-
Dunn v. United States, 77 Civil 2664.
...note 3 supra). 7 Rev.Rul. 75-152, 1975-1 C.B. 144. 8 See Owens v. Commissioner of Internal Revenue, 568 F.2d 1233 (6th Cir. 1977), rev'g 64 T.C. 1 (1975) (both opinions relying on "deposit" test); Mann v. Commissioner of Internal Revenue, 483 F.2d 673 (8th Cir. 1973); Cravens v. Commissione......
-
Owens v. C. I. R.
...and the judges split six to four, one not participating, in upholding respondent-appellee Commissioner's determination. Owens v. Commissioner, 64 T.C. 1 (1975). We affirm the Tax Court's decision as to the year 1965, but reverse as to the year A detailed statement of facts in the present ca......
-
Packard v. Comm'r of Internal Revenue
...in which those arrangements were implemented in our assessment of the economic substance of the transactions in issue. Owens v. Commissioner, 64 T.C. 1, 16-17 (1975), affd. in part and revd. in part 568 F.2d 1233 (6th Cir. 1977). Artifices that are engaged in solely for favorable tax conseq......