Penrod v. Comm'r of Internal Revenue
| Decision Date | 27 May 1987 |
| Docket Number | Docket Nos. 2484-84,2486-84.,2485-84 |
| Citation | 88 T.C. 1415,88 T.C. No. 79 |
| Parties | ROBERT A. PENROD, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps and J owned stock in corporations which operated fast food restaurants pursuant to franchise agreements with M Corp. J owned the majority of stock of such corporations and generally acted as the leader of the group in business matters. J and M Corp. negotiated an acquisition agreement under which M Corp. would issue unregistered common stock in exchange for the stock of corporations owned by J and Ps. Such agreement was executed on May 15, 1975.
In Nov. 1975, Ps and J took steps to register the M Corp. stock received in the acquisition. In Jan. 1976, Ps and J sold 90 percent of such stock.
HELD: (1) J did not intend to sell his M Corp. stock at the time of its acquisition. The acquisition and subsequent sale o f M Corp. stock were not part of a pre-arranged plan to ‘cash out‘ J's investment in M Corp. Ps under these circumstances maintained the continuity of interest necessary for the acquisition to qualify as a reorganization under sec. 368(a), I.R.C. 1954. (2) Ps failed to establish that they were partners in N, a partnership, and are not entitled to deduct distributive share s of losses of N. John Tyler, Lawrence E. Newlin, and Eric S. Chofnas, for the petitioners.
Rodney J. Bartlett and Brett J. Miller, for the respondent.
The Commissioner determined deficiencies in the ioners' Federal income taxes as follows:
+------------------------------------+
¦Petitioner ¦Year¦Deficiency¦
+--------------------+----+----------¦
¦Robert A. Penrod ¦1973¦$7,669.92 ¦
+--------------------+----+----------¦
¦ ¦1974¦11,133.58 ¦
+--------------------+----+----------¦
¦ ¦1975¦482,808.43¦
+--------------------+----+----------¦
¦ ¦1976¦149,896.00¦
+--------------------+----+----------¦
¦ ¦1977¦13,174.00 ¦
+--------------------+----+----------¦
¦Ronald L. Peeples ¦1975¦63,904.30 ¦
+--------------------+----+----------¦
¦and Carol A. Peeples¦1976¦42,892.02 ¦
+--------------------+----+----------¦
¦ ¦1977¦4.00 ¦
+--------------------+----+----------¦
¦Charles E. Penrod ¦1975¦208,949.79¦
+--------------------+----+----------¦
¦and Mary E. Penrod ¦1976¦99,417.33 ¦
+--------------------+----+----------¦
¦ ¦1977¦1,639.37 ¦
+------------------------------------+
The issues for our decision are: (1) Whether the exchange of stock of corporations owned by the petitioners for stock of McDonald's Corporation (McDonald's) qualifies as a tax-deferred reorganization under section 368, Internal Revenue Code of 1954 2; and (2) whether the petitioners are entitled to the distributive shares of partnership losses claimed by them for 1976 and 1977.
Some of the facts have been stipulated, and those facts are so found.
At the time the petitions in this case were filed, petitioner Robert A. Penrod resided in Atlanta, Georgia; petitioners Ronald L. Peeples and Carol A. Peeples, then husband and wife, resided in Birmingham, Alabama; and petitioners Charles E. Penrod and Mary E. Penrod, husband and wife, resided in Smyrna, Georgia. All of the petitioners filed Federal income tax returns for the years in issue with the Internal Revenue Service Center in Chamblee, Georgia, except that petitioners Ronald and Carol Peeples filed their Federal income tax return for 1976 and petitioners Charles and Mary Penrod filed their Federal income tax return for 1977 with the Internal Revenue Service Center in Ogden, Utah.
Prior to May 15, 1975, petitioners Robert A. Penrod (Bob), Charles E. Penrod (Chuck), and Ronald L. Peeples (Ron), together with Jack Penrod (Jack), 3 owned stock in a number of corporations which operated McDonald's fast food restaurants in South Florida. Jack Penrod and petitioners Bob and Chuck Penrod are brothers. Petitioner Ron Peeples was the brother-in-law of the Penrods during the years in issue. Jack, Bob, and Chuck Penrod and Ron Peeples will sometimes be referred to collectively as the Penrods.
Jack first became involved with McDonald's in 1961, when he began working as a ‘grill man‘ in a McDonald's restaurant in Tallahassee, Florida. Within 3 weeks, he was promoted to manager of such restaurant. Jack subsequently became the manager of another McDonald's restaurant in Ft. Lauderdale, Florida. When the owner of the Ft. Lauderdale franchise passed away, Jack and a partner acquired such franchise from the owner's estate. After that time, Jack enjoyed considerable success, and he began to acquire additional McDonald's franchises. After Jack opened five McDonald's restaurants, he formed Penrod Management, Inc. (Penrod Management), to provide management and support services to such restaurants.
Bob began working as a maintenance man in the Penrod restaurants in 1966. Bob eventually became vice president of Penrod Management, in charge of the overall operations of the restaurants owned by the Penrods. Chuck began with Penrod Management in 1972. He ultimately rose to supervise four McDonald's restaurants. Ron started with Penrod Management in 1973 as a maintenance man and worked his way through the ranks to become a supervisor of four restaurants.
By May 1975, the Penrods had acquired franchises for 16 McDonald's restaurants in South Florida. In all cases but one, a separate corporation was formed to hold each franchise and to operate each restaurant. In one case, a single corporation owned and operated two McDonald's restaurants. On May 15, 1975, the Penrods had interests in such corporations as follows:
+------------------------------------------------------------------------------+
¦ ¦ ¦Bob Penrod ¦Chuck Penrod ¦Ron Peeples ¦
+-------------------+-------+----------------+----------------+----------------¦
¦ ¦Jack ¦(acquisition ¦(acquisition ¦(acquisition ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Corporation ¦Penrod ¦date) ¦date) ¦date) ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Dania Foods, Inc. ¦900 ¦100 shares (01/ ¦0 ¦0 ¦
¦ ¦shares ¦01/75) ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Davie Foods, Inc. ¦600 ¦200 shares (01/ ¦200 shares (01/ ¦0 ¦
¦ ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Inverrary Foods, ¦800 ¦200 shares (01/ ¦200 shares (01/ ¦0 ¦
¦Inc. ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦441 Hollywood ¦600 ¦200 shares (01/ ¦200 shares (01/ ¦0 ¦
¦Foods, Inc. ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Davie I-95 Foods, ¦600 ¦200 shares (01/ ¦200 shares (01/ ¦0 ¦
¦Inc. ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Hallandale Foods ¦600 ¦200 shares (01/ ¦200 shares (01/ ¦0 ¦
¦Inc. ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Cutler Ridge Foods ¦600 ¦200 shares (01/ ¦0 ¦200 shares (01/ ¦
¦Inc. ¦shares ¦01/75) ¦ ¦01/75) ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Margate Foods Inc. ¦889 ¦111 shares 1 ¦0 ¦0 ¦
¦ ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Sunrise Foods Inc. ¦100 ¦0 ¦0 ¦0 ¦
¦ ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Coral Ridge Foods ¦800 ¦100 shares (01/ ¦100 shares (01/ ¦0 ¦
¦Inc. ¦shares ¦01/75) ¦01/75) ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Ft. Lauderdale ¦600 ¦100 shares 1 ¦0 ¦0 ¦
¦Foods, Inc. ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦No. 1167 Foods, ¦41 ¦17 shares 1 ¦0 ¦10 shares 1 ¦
¦Inc. ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Homestead Foods, ¦48 ¦16 shares 1 ¦0 ¦16 shares 1 ¦
¦Inc. ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦Dade Foods, Inc. ¦408 ¦(unknown) 1 ¦136 shares 1 ¦136 shares 1 ¦
¦ ¦shares ¦ ¦ ¦ ¦
+-------------------+-------+----------------+----------------+----------------¦
¦P.M.C., Inc. ¦56 ¦12 shares 1 ¦12 shares 1 ¦0 ¦
¦ ¦shares ¦ ¦ ¦ ¦
+------------------------------------------------------------------------------+
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