Plantation Patterns, Incorporated v. CIR, 31126.
| Decision Date | 06 July 1972 |
| Docket Number | No. 31126.,31126. |
| Citation | 462 F.2d 712 |
| Parties | PLANTATION PATTERNS, INCORPORATED, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. John S. JEMISON, Jr. and Marie S. Jemison, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Wm. Bew White, Jr., Birmingham, Ala., Ivins, Phillips & Barker, Washington, D. C., Griffith F. Pitcher, Karl R. Price, Birmingham, Ala., Bradley, Arant, Rose & White, Birmingham, Ala., of counsel, for petitioners-appellants.
Meyer Rothwacks, Atty., Tax Div., Dept. of Justice, Washington, D. C., K. Martin Worthy, Chief Counsel, Eugene F. Collella, Atty., Int. Revenue Serv., Washington, D. C., Ernest J. Brown, Carolyn R. Just, Attys., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.
Before JONES, COLEMAN and SIMPSON, Circuit Judges.
This is an appeal from a determination by the Tax Court of tax deficiencies against the corporate taxpayer, Plantation Patterns, Incorporated (New Plantation hereinafter, to distinguish it from an earlier corporation with the same name) for the fiscal years ending September 30, 1963-65, for the respective amounts of $2,947.12, $51,719.69, and $23,732.28, and against the individual taxpayers, John S. Jemison, Jr. (Mr. Jemison) and his wife, Marie S. Jemison (Mrs. Jemison) of $28,403.91 for their taxable year 1963.1 The cases were consolidated for trial in the Tax Court as they are for purposes of this appeal.
Most of the relevant facts are stipulated. The New Plantation, an Alabama corporation, filed income tax returns, on the accrual basis, for its taxable years ended September 30, 1963 through September 30, 1965, with the office of the District Director of Internal Revenue, Birmingham, Alabama. The individual taxpayers also filed their joint income tax return for their taxable year ended December 31, 1963, with the Birmingham District Director at Birmingham.
New Plantation's corporate predecessor, which was also called Plantation Patterns, Inc. (Old Plantation) was engaged in the business of manufacturing wrought iron furniture in Birmingham, Alabama, from the time of its incorporation in 1956 until September 23, 1962.
Prior to September 28, 1962, the stockholders of Old Plantation and the outstanding shares therein were owned as follows:
Number of Shares
Thomas E. Jernigan 162,483
William C. Jernigan 80,718
John M. Goodwin 8,812
H. Ferrell Jernigan 353
James C. Stone 17,624
Total 270,000
Before that date Mr. Thomas E. Jernigan was president and Mr. William C. Jernigan was vice president and secretary of Old Plantation.
During the spring of 1962, Old Plantation made plans for a public offering of 100,000 shares of its common stock in order to raise funds to develop the United Chair Division and to permit Old Plantation to operate both the wrought iron furniture business and the United Chair Division's metal office chair business. This public offering was not consummated. Messrs. Thomas E. and William C. Jernigan then decided that it would be in their best interests to sell the wrought iron furniture business of Old Plantation and to develop the United Chair Division's metal office chair business.
During the summer of 1962, the shareholders of Old Plantation decided that they would attempt to sell their interests in both the wrought iron furniture and metal office chair businesses by sale of their Old Plantation stock. In July of 1962, Mr. Jack Parish, a member of the accounting firm that had worked on the prospectus for the proposed public offering of Old Plantation stock, contacted Mr. John S. Jemison, Jr., the president and controlling shareholder of Jemison Investment Co., Inc., and inquired if he would be interested in purchasing or finding a purchaser for the stock of Old Plantation.
At that time Mr. Jemison was an experienced investment banker, having been in that business for at least twenty years. As an investment banker, he had arranged for the acquisition of businesses, both for Jemison Investment Co., Inc. clients and for its own account— both as purchases of assets and as purchases of stock. Mr. Jemison had become a member of the board of directors of a number of corporations.
Jemison Investment Co., Inc. had acted as agent or broker for purchasers and sellers of businesses since its organization by Mr. Jemison in 1949. During 1962, Jemison Investment Co., Inc. had assets of eleven million dollars, including a number of wholly owned subsidiaries, such as a transit company that operated the city bus system in Birmingham, Alabama, a company that manufactured window frames in Chicago, Illinois and operated a textile mill in North Carolina, and corporations that operated department stores in St. Petersburg, Florida, and Tuscaloosa, Alabama.
The accountant Parish arranged for negotiations in July and August, 1962, between Messrs. Jemison and Thomas E. Jernigan concerning the sale of Old Plantation. These negotiations led to a general understanding between Messrs. Jemison and Thomas E. Jernigan that a corporation would be formed to purchase all the stock of Old Plantation and that Old Plantation would sell its United Chair Division's metal office chair business to Messrs. Thomas E. and William C. Jernigan.
A letter addressed to Mr. Thomas E. Jernigan dated August 24, 1962, on the letterhead of Jemison Investment Co., Inc. and signed by Mr. Jemison, set forth a conditional offer to purchase the "assets of the Plantation Patterns Division". This letter stated:
"We would organize a new corporation to be known as Plantation Patterns Corporation (it is understood that you would agree to change the name of the existing corporation) and we would pay in a total of $155,000. in cash—$150,000. in 6 1/2% subordinated notes—which notes would be subordinated to your notes—and $5,000. in common stock."
On September 25, 1962, Mr. Jemison caused New Plantation to be organized under the laws of the State of Alabama. Upon its incorporation, New Plantation issued ten shares of common stock with a par value of $100 per share to its incorporators. On the same date that it was incorporated, the incorporators transferred those ten shares of stock to Mrs. Marie S. Jemison.
On September 26, 1962, New Plantation issued an additional 40 shares of common stock to Mrs. Jemison for a price of $4,000 cash. Mrs. Jemison paid for this additional 40 shares and her initial ten shares of stock by her check for $5,000 dated September 26, 1962. The record does not indicate whether or not the funds for the purchase of the stock came from the separate estate of Mrs. Jemison. The total capital stock of New Plantation, consisting of the 50 shares of common stock held by Mrs. Jemison, remained at $5,000 through September 30, 1966.
Mrs. Jemison took no active part in the preliminary negotiations leading up to the incorporation of New Plantation on September 25, 1962, in any of the events that took place thereafter, or in the management of New Plantation from the time it was incorporated to September 30, 1966, inclusive. Mrs. Jemison, her husband and Mr. Thomas Bradford were the directors of New Plantation. A meeting of the directors and a joint meeting of the directors and stockholders of New Plantation took place on September 28, 1962. Although Mrs. Jemison was the sole shareholder of record and a director, she attended neither meeting. Mr. Jemison was active in the management of New Plantation. Mr. Jemison testified that he had contacts with large department stores that sold wrought iron furniture.
On September 27, 1962, New Plantation obtained $150,000 from Bradford and Company, Inc., an unrelated finance and investment company, for which it issued 61/2% serial debentures aggregating $150,000 maturing in $50,000 units on September 1, 1974, 1975, and 1976. The debentures were subordinated to all other indebtedness of New Plantation and were not guaranteed as to payment of either principal or interest. Mr. Thomas Bradford controlled Bradford and Company. The loan by Bradford and Company was made as an inducement to Mr. Jemison to place Mr. Bradford's son with New Plantation. Although this advance was made with little security and no priority as to repayment, the Tax Court found that it was a bona fide loan.
The sellers accepted, with modifications, the proposal made in the Jemison letter of August 24, 1962, and the terms of sale were embodied in an agreement dated September 28, 1962 between New Plantation and the stockholders of Old Plantation. Pursuant to that agreement, the stockholders agreed to sell and New Plantation agreed to buy the stock of Old Plantation for a stated consideration equal to the net worth of Old Plantation plus $644,909.53. The total purchase price was to be paid as follows:
(1) A cash payment of $100,000 at the time of closing;
(2) An amount equal to the book value of the United Chair Division ($183,435.84), without interest, in installments on January 10, 1963, March 15, 1963 and June 15, 1963;2 and
(3) The balance ($609,878.33) in equal installments of $50,000 beginning October 1, 1963, and each year thereafter, with a final installment of $109,878.33 due on October 1, 1973. The notes representing such installments were to be guaranteed by the Jemison Investment Company and by Mr. Jemison, personally.
Pursuant to the agreement of September 28, 1962 Mr. Thomas E. Jernigan agreed to serve as president and chief executive officer of New Plantation for two years beginning October 1, 1962.
Further pursuant to the agreement of September 28, 1962, the stockholders of Old Plantation transferred their stock to New Plantation for a stated consideration of $893,314.17, of which $100,000 was paid in cash at the time of the sale, and...
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