Parker Oil Co. v. Comm'r of Internal Revenue
| Decision Date | 21 September 1972 |
| Docket Number | Docket No. 4907-69. |
| Citation | 58 T.C. 985 |
| Parties | PARKER OIL COMPANY, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Henry B. Steagall II, for the petitioner.
Henry C. Stockell, Jr., and J. Leon Fetezer, for the respondent.
Stockholders of petitioners settled a lawsuit involving ownership of 5 shares of stock of petitioner by providing for the transfer back to the former owner of the disputed shares, by granting an irrevocable proxy to unrelated parties to vote such shares, by providing for the voting power in the election of directors by the stockholders and proxy holders until dissolution of the corporation, and by providing for the voting power of the directors until dissolution of the corporation. Respondent determined that the net effect of such agreements and execution of the proxy created a second class of stock under sec. 1371(a)(4), I.R.C. 1954, which terminated petitioner's election to be taxed as a small business corporation under the provisions of subch. S of the Internal Revenue Code. Held, the stockholder agreement and proxy do not create a second class of stock. Held, further, under such circumstances sec. 1.1371-1(g), Income Tax Regs., and Rev. Rul. 63-226, 1963-2 C.B. 341, are invalid to the extent that they hold a second class of stock is created unless all of the shares outstanding are identical as to all voting rights.
Respondent determined a deficiency in petitioner's Federal income tax for the taxable year ending June 30, 1967, in the amount of $56,985.10.
The sole issue for decision is whether the election of Parker Oil Co. to be taxed as a small business corporation under the provisions of section 1372(e) (3)1 terminated in 1966 for failure to comply with the requirement of section 1371(a)(4) that the corporation have only one class of stock.
This will require us to decide whether 5 shares of stock of the petitioner covered by an agreement among the stockholders and the corporation which provided for an irrevocable proxy, for disproportionate voting for the election of directors, and for disproportionate voting by the directors, constitutes a second class of stock thereby terminating petitioner's election to be taxed under the provisions of subchapter S.
All of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein and adopted as our findings.
Parker Oil Co., Inc. (sometimes hereinafter referred to as Parker Oil), is a corporation organized under the laws of Alabama. For all times material herein the joint venture of Fuel Services, Inc., and Parker Oil engaged in the business of refueling aircraft under a contract with the U.S. Government. At the time of filing its petition herein, the principal place of business of Parker Oil was Ozark, Ala. In reporting its income Parker Oil utilized a fiscal year which ended on June 30 and for the taxable year ended June 30, 1967, it filed a U.S. small business corporation return with the district director of internal revenue, Birmingham, Ala. A valid election to be taxed as a small business corporation pursuant to section 1372 had been filed by Parker Oil on June 1, 1959.
At the time of incorporation 100 shares of stock were issued as follows:
+---------------------------------------------------+
¦ ¦Shares ¦
+------------------------------------------+--------¦
¦Wilmer Parker ¦40 ¦
+------------------------------------------+--------¦
¦Annie Laura Parker (wife of Wilmer Parker)¦10 ¦
+------------------------------------------+--------¦
¦Don W. Parker ¦50 ¦
+---------------------------------------------------+
The total number of shares issued represented a single class of voting common stock.
On May 24, 1961, Don W. Parker signed an instrument which purported to ‘sell, assign and transfer’ to Annie Laura Parker 5 shares of the 50 shares owned by him. The instrument appointed Wilmer Parker, president of Parker Oil, as agent to transfer the 5 shares of stock on the books of the corporation to Annie Laura Parker. The transfer of the 5 shares adjusted the stock ownership of the outstanding shares as follows:
+----------------------------+
¦ ¦Shares ¦
+-------------------+--------¦
¦Wilmer Parker ¦40 ¦
+-------------------+--------¦
¦Annie Laura Parker ¦15 ¦
+-------------------+--------¦
¦Don W. Parker ¦45 ¦
+----------------------------+
On October 4, 1966, Don W. Parker sued Wilmer Parker, Annie Laura Parker, Henry B. Steagall II (an officer of the corporation but not a shareholder), and Parker Oil in the Circuit Court of Coffee County, Ala., Enterprise Division in Equity, seeking, among other relief, to have the 5 shares of stock previously transferred to Annie Laura Parker transferred back to him.
Such litigation was settled by the parties and embodied in a written agreement dated December 30, 1966, which provided (insofar as material herein) as follows:
1. Conveyance of 5 shares of the stock of Parker Oil from Annie Laura Parker to Don W. Parker;
2. Execution by Don W. Parker of an irrevocable proxy covering 5 shares of stock naming M. N. Brown and Ben B. Henderson, jointly or the survivor of them, as the holders of the proxy. It granted to Brown and Henderson the power to vote the 5 shares at any meeting of the stockholders of Parker Oil from the date of the settlement agreement until final dissolution of Parker Oil. The right to vote granted by the proxy was as complete as the power would be in Don W. Parker if present to vote but could be exercised only upon the joint concurrence of Brown and Henderson. By a later agreement of the parties, Henderson was dropped from the proxy and M.N. Brown became the sole holder of the proxy. The stock certificate for the 5 shares transferred from Annie Laura Parker to Don W. Parker was to bear a legend that such shares were subject to the irrevocable proxy to Henderson and Brown. This legend was for the purpose of making the proxy apply to anyone who might own the 5 shares after Don W. Parker.
3. The directors elected were Wilmer Parker, Annie Laura Parker, Don W.Parker, Ben B. Henderson, and M. N. Brown. Henderson and Brown were given collectively one vote as a director if concurred in by both, and the remaining three votes or directors were given one each to directors selected by Wilmer Parker, Annie Laura Parker, and Don W. Parker, four votes being the maximum permitted so long as Parker Oil remained in corporate existence. Three votes were to constitute a quorum and a majority of those voting was required for corporate action. The voting power of Wilmer Parker, Annie Laura Parker, and Don W. Parker in the selection of directors was binding upon their successors in interest.
4. No officers' salaries were to be paid by Parker Oil after the date of the settlement agreement and only routine daily activities of the business of the corporation were to be conducted thereafter; matters such as execution of contracts and loans were to require approval of the board of directors. All parties agreed to use their best efforts to continue in effect the contract of the U.S. Government with petitioner and Fuel Services, Inc., as joint venturers. Upon termination of the contract, Parker Oil was to be dissolved and liquidated unless the board of directors unanimously voted to extend the corporate existence for 1 year following termination of the contract.
The settlement agreement was carried out by the parties, i.e., Annie Laura Parker conveyed 5 shares to Don W. Parker; Don W. Parker executed the irrevocable proxy covering the 5 shares in favor of M. N. Brown and Ben B. Henderson and the stock certificate for the 5 shares covered by the proxy bore the legend that the shares were subject to the settlement agreement.
The settlement agreement did not provide for amendment to the articles of incorporation to reflect any portions of the settlement agreement. The articles of incorporation provide that there shall be only one class of stock.
The voting power as stockholders of the corporation, after giving effect to the agreement (as amended to delete Ben. B. Henderson as a party), was as follows:
+---------------------------+
¦ ¦Votes ¦
+-------------------+-------¦
¦ ¦ ¦
+-------------------+-------¦
¦Wilma Parker ¦40 ¦
+-------------------+-------¦
¦Annie Laura Parker ¦10 ¦
+-------------------+-------¦
¦Don W. Parker ¦45 ¦
+-------------------+-------¦
¦M. N. Brown ¦5 ¦
+---------------------------+
The voting power of the directors, giving effect to their method of selection as provided in the agreement, was as follows:
+----------------------------------------------------------+
¦ ¦Votes ¦
+--------------------------------------------------+-------¦
¦ ¦ ¦
+--------------------------------------------------+-------¦
¦Wilmer Parker's and Annie Laura Parker's directors¦2 ¦
+--------------------------------------------------+-------¦
¦Don W. Parker's director ¦1 ¦
+--------------------------------------------------+-------¦
¦M. N. Brown's director ¦1 ¦...To continue reading
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