PASCHKES v. Commissioner, Docket No. 4808-65.
| Decision Date | 02 December 1969 |
| Docket Number | Docket No. 4808-65. |
| Parties | Pauline F. Paschkes v. Commissioner. |
| Court | U.S. Tax Court |
David J. Feigert, 22 W. 1st St., Mt. Vernon, N. Y., for the petitioner. Agatha L. Vorsanger, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined deficiencies in income tax for 1956, 1957, and 1958 in the respective amounts of $9,086.16, $6,460.91, and $1,615.76. The issue is whether the amount received in each year from the corporation which employed petitioner's deceased husband is a nontaxable gift excludable from gross income under section 102(a) of the Code, or is taxable income under section 61(a) (1), as respondent determined.
The oral and written stipulated facts are so found and are incorporated herein by reference.
Petitioner is a resident of Mount Vernon, N. Y., where she resided when the petition was filed. She filed individual income tax returns for the taxable years with the district director of internal revenue for the Manhattan District of New York City.
Petitioner is the widow of Otto Paschkes who died on October 25, 1955, a resident of Mount Vernon, N. Y., at the age of 70 years. He was the president of Astron Corporation. After her husband's death, Astron made periodic payments to petitioner during the years 1955-1958. The payments made in 1956-1958 are in dispute here. The year 1955 is not before us.
Astron Corporation was a New Jersey corporation, organized in September 1949, which had its offices and plant in Newark, N. J. It became merged into Renwell Industries, Inc., in 1962. It was engaged in the business of manufacturing and selling fixed capacitors and noise suppression filters. A capacitor, or condenser, controls electric circuit performance, stabilizes electronic circuits, and is an essential component in electronic products. Noise suppression filters suppress undesirable noises in electronic devices and various types of electrical equipment. Astron's products were used in many kinds of electronic, electrical, and communication devices and equipment. Astron sold some of its products to the United States Government for use in military equipment. Astron maintained an engineering and research department. Technological skills were required in developing and producing Astron's products. Its business was in the highly competitive electronics industry.
Otto Paschkes joined the Astron organization early in 1950, and became its president and a director in May 1950. He held those offices continuously up to the time of his death. Astron owed much of its success to Otto. Before working for Astron, Otto was employed by corporations engaged in similar businesses, including Solar Manufacturing Company, but he was retired from business occupations during the years 1947-1950.
The officers of Astron from May 1950 until July 26, 1955, were Otto Paschkes, president; Joseph Frank, vice president, secretary, and treasurer; and Irving Black and John Fisher, vice presidents. They constituted the management group and also were directors. Each of those officers received salaries in the same equal amount. In 1954, each officer's salary was $41,181.80. They agreed to a reduction in salary to $35,000 a year, plus expenses, under new employment contracts on April 1, 1955. Those employment contracts were for a period ending on December 31, 1956. When Otto died his salary was $2,916.66 a month, or $35,000 a year.
In July 1955, Herman Rose and Richard H. Robinson became directors replacing Pauline and William Paschkes. Robinson was a partner in the securities firm of Van Alstyne, Noel & Company, New York City, which handled a public offering in 1955 of part of the common stock of Astron.
At the meeting of the directors on July 26, 1955, Joseph Frank, a vice president, resigned from the additional offices of secretary and treasurer, and the following became officers: Irving Ser, secretary; George Sexton, assistant secretary; S. Newman, treasurer; and H. Mutz, assistant treasurer. The officers of Astron at the time of Otto's death were the same as on July 26, 1955, and included the above-named officers. After Otto's death, Joseph Frank became president, and on October 28, 1955, Astron's lawyer, William C. Davidson, became a director succeeding Otto.
Astron was a closely held, private corporation. As of April 1, 1955, the outstanding stocks of Astron consisted of 3,900 shares of preferred and 445,000 shares of common stock. The stockholders were:
Preferred
Shares Common Shares
--------------------------------------------
O. Paschkes .... 2,450 194,000
I. Black ....... 250 58,000
J. Frank ....... 250 58,000
J. Fisher ...... 250 58,000
Others ......... 700 77,000
_____ _______
3,900 445,000
On April 28, 1955, there was a public offering, through Van Alstyne, Noel & Co., New York City, of 250,000 share of Astron's common stock, of which 200,000 shares were offered for sale on behalf of Astron Corporation, and 50,000 shares were offered on behalf of four selling stockholders, Otto Paschkes, Fisher, Frank, and Black. The public offering involved increasing the issued common stock from 445,000 to 645,000 shares. Van Alstyne received selling commissions of $120,000 from Astron, and $30,000 from the selling stockholders. The offering price per share to the public was $4 per share, the underwriting commission was 60 cents per share, and the net proceeds to the corporation and to the selling stockholders was $3.40 per share. In this offering, the shares offered for sale by the four selling stockholders were: Otto, 26,396 shares, and Fisher, Frank, and Black, 23,604 shares, or 7,868 shares each. In October 1956, 45,000 additional shares were offered for sale, by the estate of Otto Paschkes, 40,000 shares, and Fisher, 5,000 shares.
After the public offering of the common stock in April 1955, the shares of common stock were held as follows:
Otto Paschkes ......................... 167,604
I. Black .............................. 50,132
J. Frank .............................. 50,132
J. Fisher ............................. 50,132
Directors & officers as a group ....... 323,500
Others ................................ 3,500
_______
645,000
At the time of his death, Otto owned 2,450 preferred shares and 167,604 common shares of the stock of Astron.
On March 14, 1955, Astron borrowed $150,000, at 4½ percent interest, from the Bank of Manhattan, now Chase Manhattan, payable in six semi-annual installments of $25,000, with the right to repay the loan after one year. Under the terms of the underwriting agreement with Van Alstyne, Noel & Co., Astron agreed that it would not declare or pay, and the selling stockholders, Paschkes, Black, Frank, and Fisher, agreed to waive, cash dividends on the 318,000 shares of common stock held by them, until the loan had been paid in full, or until April 30, 1956, whichever occurred later. A stockholder's waiver of cash dividends would end upon his death, and when Otto died his waiver ended. The agreement was made "to assist in the sale of the stock" to the public.
Pauline Paschkes, through her husband, loaned $25,000 to Astron on August 4, 1950, and an additional $10,000 on October 2, 1950. These loans were evidenced by promissory notes payable on demand bearing 5 percent interest. These loans were made 5 years before Otto's death on October 25, 1955. They were repaid.
Otto became ill of cancer soon after joining Astron Corporation in 1950, and he was in and out of hospitals thereafter. The cause of his death was cancer. Otto was at home a great deal of the time during the year before his death and came to Astron's place of business only rarely. Meetings of the directors were held at the hospital where Otto was, on occasions, and at Otto's home. A directors' meeting on July 26, 1955, was held at Otto's home. He did not attend the meeting held on April 25, 1955. In spite of his illness Otto continued to participate in the management of Astron's business up to a few months before his death in October 1955.
Upon the death of Otto, his employment contract and salary ended, and Astron was not obligated under any agreement or contract to continue to make payments of what had been his salary. Astron did not owe any back salary to Otto at the time of his death, and had paid him all of his salary during and prior to October 1955. Astron paid Otto's salary for the entire month of October 1955, the month in which he died.
Astron did not have for its officers any pension plan; and at the time of Otto's death, it did not have any bonus plan. Therefore, when Otto died, Astron was not obligated to pay any bonus with respect to his services, and there was not any pension plan under which his widow and dependents would receive any survivors' pension payments. Pauline did not receive any pension payments from Astron. However, Astron took out a small group insurance policy prior to the time of Otto's death under which about $10,000 was the amount of insurance receivable on Otto's life, which was received by petitioner. Otto was the first officer of Astron to die in office. Astron did not have any precedent or business policy for making any provision for or payments to a deceased officer's widow and dependents.
Otto and Pauline were married in 1919. They had two daughters. Otto was survived by his wife and two daughters. In 1955, Pauline was about 61 years old. After her marriage, Pauline was never employed in any business pursuits. She was at all times a housewife and remained in her home. She does not have any social security. She was not college trained, and she did not have any business training. She was not...
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