Pierce v. Comm'r of Internal Revenue
| Decision Date | 03 January 1974 |
| Docket Number | Docket Nos. 1933-69,3460-69,5660-69. |
| Citation | 61 T.C. 424 |
| Parties | JAMES K. PIERCE AND MADELINE F. PIERCE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James K. Pierce, pro se.
Richard H. Gannon, for the respondent.
Petitioner husband, one of two 50-percent shareholders of a California corporation, received numerous advances from the corporation throughout the years 1962 through 1967. Held, on the facts, the advances were bona fide loans and not constructive dividends. Held, further, that petitioner husband's promise to repay the sums advanced constituted fair consideration under the Uniform Fraudulent Conveyance Act as adopted by California, so that petitioner husband was not responsible as a transferee for corporate tax obligations.
In these cases respondent determined (a) Deficiencies in petitioner's income taxes and (b) liabilities owed by petitioner James K. Pierce sas transferee of California Business Service & Audit Co., as follows:
+------------------------------------------------------------+
¦ ¦ ¦ ¦
+------------------------------------------------------------¦
¦JAMES K. MADELINE F. PIERCE, DOCKET NOS. 5660-69 AND 3460-69¦
+------------------------------------------------------------¦
¦ ¦ ¦ ¦
+----------+--------------------------+----------------------¦
¦Year ¦Deficiency ¦Overassessment ¦
+----------+--------------------------+----------------------¦
¦ ¦ ¦ ¦
+----------+--------------------------+----------------------¦
¦1962 ¦$84,665.53 ¦ ¦
+----------+--------------------------+----------------------¦
¦1963 ¦45,619.64 ¦ ¦
+----------+--------------------------+----------------------¦
¦1964 ¦98,928.28 ¦ ¦
+----------+--------------------------+----------------------¦
¦1965 ¦36,378.80 ¦ ¦
+----------+--------------------------+----------------------¦
¦1966 ¦-------------- ¦$18,255.42 ¦
+----------+--------------------------+----------------------¦
¦1967 ¦54,406.46 ¦ ¦
+----------+--------------------------+----------------------¦
¦Total ¦319,998.71 ¦18,255.42 ¦
+----------+--------------------------+----------------------¦
¦ ¦ ¦ ¦
+------------------------------------------------------------¦
¦JAMES K. PIERCE, TRANSFEREE, DOCKET NO. 1933-69 ¦
+------------------------------------------------------------¦
¦ ¦ ¦ ¦
+----------+--------------------------+----------------------¦
¦Year ¦Transferor's deficiency ¦Sec. 6653(a) penalty ¦
+----------+--------------------------+----------------------¦
¦ ¦ ¦ ¦
+----------+--------------------------+----------------------¦
¦1962 ¦$37,398.28 ¦$1,869.91 ¦
+----------+--------------------------+----------------------¦
¦1963 ¦2,340.08 ¦ ¦
+----------+--------------------------+----------------------¦
¦1964 ¦109,819.85 ¦5,490.99 ¦
+----------+--------------------------+----------------------¦
¦Total ¦1 149,558.21 ¦1 7,360.90 ¦
+----------+--------------------------+----------------------¦
¦__________¦ ¦ ¦
+------------------------------------------------------------+
The issue in docket Nos. 5660-69 and 3460-69 is whether certain withdrawals made by petitioner James K. Pierce from California Business Service & Audit Co. were bona fide lans for constructive dividends. The issue in docket No. 1933-69 is whether petitioner is liable as a transferee for the income tax deficiencies and penalties assessed against California Business Service & Audit Co., the transferor.
Petitioners, husband and wife, resided in Covina, calif., when they filed their their petitioners herein The filled joint Federal income tax returns for the years in docket Nos. 566-69 and 3460-69 with the district director of internal revenue at Los Angeles, Calif. Madeline F. Pierce is a party to this proceeding solely because she filed joint returns with her husband, and hereinafter ‘petitioner’ refers only to James K, Pierce.
The alleged transferor, California Business Service & Audit Co. (hereinafter ‘Company’), was incorporated in California on September 5, 1946. Its business consisted of performing bookkeeping services for its customers. When petitioners filed their petitions herein, Company's principal place of business was Pomona, Calif. Company maintained its books and records on a calendar year. It filed its corporation income tax returns for the years 1962, 1963, and 1964 with the district director of internal revenue of Los angeles.
Petitioner was one of the founders of Company and was its dominant figure. Petitioner and Wilton B. Kail each owned 50 percent of Comapany's issued and outstanding stock. Petitioner was Company's executive vice president and chairman of the board of directors, and Kail was its president and a director.
Between 1962 and 1967, Company paid petitioner the following salary, which was reasonable compensation for the services he performed:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1962 ¦$61,973.05 ¦
+------+-----------¦
¦1963 ¦39,500.00 ¦
+------+-----------¦
¦1964 ¦37,745.80 ¦
+------+-----------¦
¦1965 ¦92,469.00 ¦
+------+-----------¦
¦1966 ¦57,191.00 ¦
+------+-----------¦
¦1967 ¦48,000.00 ¦
+------+-----------¦
¦Total ¦336,878.85 ¦
+------------------+
Company made numerous advances directly to and on behalf of petitioner in addition to his salary. These loans were recorded on Company's books as ‘accounts receivable-officers J.K.P.’ In some years all loans were recorded in the one account, while in other years Company maintained two accounts in petitioner's name, one to record direct loans to petitioner and the other to record payments made on his behalf.
Direct loans to petitioner were made routinely by Company whenever petitioner instructed either his secretary or Company's vice president, Joseph P. Margala, to cause a check to be issued to him and deposited in his personal checking account. These direct loans were for petitioner's personal use.
Payments made on behalf of petitioner were made by Company whenever petitioner requested that Company issue its check directly to the person to whom petitioner owed money, in discharge of petitioner's personal obligations. Some such payments (as alimony paid petitioner's former wife) were made on a regular basis, while other such payments were made to pay for specific items purchased by petitioner.
Whenever advances were made to petitioner, he promised to repay the sums advanced.
The following schedule reflects the annual net increase in petitioner's loan account for the years listed:
+----------------------------------------------+
¦ ¦ ¦ ¦ ¦
+----------+------------+--------------+-------¦
¦Year ended¦Direct loans¦Indirect loans¦Total ¦
+----------+------------+--------------+-------¦
¦ ¦ ¦ ¦ ¦
+----------+------------+--------------+-------¦
¦1962 ¦$76,376 ¦0 ¦$76,376¦
+----------+------------+--------------+-------¦
¦1963 ¦45,977 ¦$32,349 ¦78,326 ¦
+----------+------------+--------------+-------¦
¦1964 ¦35,380 ¦30,678 ¦66,058 ¦
+----------+------------+--------------+-------¦
¦1965 ¦6,775 ¦48,381 ¦55,156 ¦
+----------+------------+--------------+-------¦
¦1966 ¦93,667 ¦0 ¦93,667 ¦
+----------+------------+--------------+-------¦
¦1967 ¦217,823 ¦0 ¦217,823¦
+----------+------------+--------------+-------¦
¦Total ¦475,998 ¦111,408 ¦587,406¦
+----------------------------------------------+
This schedule does not take into account three transfers petitioner made to Company in payment of debts. These three transfers, two stocks transfers and the transfer of a residence, are described below.
Sometime prior to 1962, Company expanded its bookkeeping services to many States other than California, forming non-California corporations under the name of Bookkeepers Business Service Co., Inc. Petitioner and Kail owned in equal proportion more than 80 percent of the stock of each such non-California corporation. Offices (or franchises) to carry on a bookkeeping service were established in various cities in the States where Bookkeepers Business Service Co., Inc., corporations had been incorporated. Some of these offices (or franchises) were owned and operated by investors; some were owned by investors and operated by the non-California corporations; some were both owned and operated by the non-California corporations. Petitioner owned the office in Elmhurst, I11. With the exception of the persons who manned such offices, the non-California corporations had no employees. Other than such offices, the non-California corporations maintained no offices of their own; in all cases, their headquarters were maintained at the main office of Company where the books and records of the non-California corporations were kept and maintained by Company's employees.
Petitioner owned stock in non-California corporations operating in Florida, Indiana, and Illinois, among other States.
On December 31, 1962, petitioner signed a non-interest-bearing note payable to Company within 2 years for $82,842.32. This sum...
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