Priester v. Comm'r of Internal Revenue

Decision Date29 May 1962
Docket NumberDocket No. 88419.
Citation38 T.C. 316
PartiesMILTON F. PRIESTER AND ROBBIE PRIESTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

W. Stuart McCloy, Esq., for the petitioners.

Michael P. McLeod, Esq., for the respondent.

A corporation which had only two stockholders, and in which the petitioner held the minority stock interest, purchased or redeemed all the shares of its majority stockholder at a price of $113,000, then canceled such shares—whereupon the petitioner became the sole remaining stockholder. Held, that the corporation's payment of said sum of $113,000 to its majority stockholder in complete redemption of all his shares, did not cause petitioner to become chargeable with a constructive distribution of a taxable dividend to him of the same amount. Held, further, that the corporation's payment of $1,608.33 expenses for legal and accounting services and for interest on a bank loan, in connection with its redemption of its majority stockholder's shares, did not cause petitioner to become chargeable with constructive receipt of ‘compensation’ of said amount.

PIERCE, Judge:

The respondent determined a deficiency in the income tax of petitioners for the calendar year 1957, in the amount of $75,518.29.

The issues for decision are:

Where a corporation which had only two stockholders, and in which the petitioner held the minority stock interest, purchased or redeemed all the shares of its majority stockholder for a price of $113,000, and then canceled such shares, did this transaction—

(1) Cause petitioner to become chargeable with a constructive distribution of a ‘dividend’ to him of $113,000— being the same amount which the corporation paid to its majority stockholder in complete redemption of all the latter's chares?

(2) Cause petitioner to become chargeable with constructive receipt of ‘compensation’ of $1,608.33— being the amount which the corporation paid for certain legal, accounting, and interest expenses in connection with its redemption of the shares of its majority stockholder?

All other issues raised by the pleadings have been settled by stipulation of the parties. Effect will be given to such settlements in the computation to be made herein under Rule 50.

FINDINGS OF FACT.

Most of the facts have been stipulated. The written and oral stipulations of facts, and all exhibits identified therein, are incorporated herein by reference.

The petitioners, Milton F. Priester and Robbie Priester, are husband and wife, residing in Memphis, Tennessee. They filed a joint income tax return for the taxable year involved, with the district director of internal revenue at Nashville, Tennessee. Said return was filed in accordance with the cash receipts and disbursements method of accounting.

On about April 1, 1947, petitioner Milton F. Priester (herein called the petitioner) and his older brother, Clift L. Priester, organized a corporation named Priester Machinery Company, Inc., to take over the operation of a business which they had theretofore carried on as partners, of selling and servicing heavy roadbuilding machinery and equipment. The corporation issued in exchange for the assets of the prior partnership, 1,000 shares of common capital stock having no-par value, of which 666 shares were issued to Clift and 334 shares were issued to petitioner. No other or additional shares were thereafter issued. The original officers and directors of the corporation were: Clift, president and treasurer; petitioner, vice president; and James Wingard, secretary. These same three individuals, together with Clift's wife and petitioner's wife, comprised the board of directors. The business was successful.

In October 1948, Clift suffered a cerebral hemorrhage which disabled him; and the responsibility of the business then fell upon petitioner, as vice president. Clift died on February 2, 1950. Thereupon Clift's widow, Marjorie Priester (hereinafter called Marjorie), became the succeeding owner of the 666 shares of the corporation's stock which Clift had owned. She had no prior business experience, but nevertheless she attempted to control the affairs and policies of the business; and this created management and personnel problems within the corporation. In 1951, she caused a new board of directors to be installed, consisting of herself, her attorney, E. L. Williamson, and petitioner. Also at about this same time, the following new officers were elected: Petitioner, president; and Marjorie, vice president, treasurer, and secretary.

4 On July 1, 1952, petitioner bought from Marjorie, 165 of her shares of stock in the corporation; and these shares were then transferred of record on the corporation's books, and a new stock certificate therefor was issued to and in the name of petitioner. The price which petitioner paid Marjorie for those shares was $131.80 per share (a total of $21,748.65)— which price reflected the net worth of the stock per books, as of March 31, 1951. Immediately thereafter, the total issued and outstanding shares of the corporation were owned and held as follows: 501 shares by Marjorie; and 499 shares by petitioner.

About 7 months later, on February 28, 1953, petitioner and Marjorie executed three written agreements (hereinafter called the agreements of February 28, 1953), under which petitioner agreed to purchase from Marjorie all her remaining shares of stock of the corporation, consisting of the above-mentioned 501 shares.1 The purchase agreement provided in substance, that petitioner would buy all of Marjorie's said shares at the price of $200 per share (total purchase price of $100,200), payable as follows: $200 in cash, upon execution of the agreement; $30,000 in cash, on or before May 1, 1957; and $35,000 in cash, on or before May 1 of each of the years 1958 and 1959. Each of said installment payments (other than the first $200 downpayment) was evidenced by a promissory note executed by petitioner and made payable to Marjorie; and each installment was to bear interest at 6 percent per annum. Also, under the terms of the above-mentioned escrow agreement, all the promissory notes and all of petitioner's and Marjorie's shares of stock were placed in escrow with a local bank; and it was agreed that in the event petitioner defaulted in the payment of any installment, all remaining unpaid installments would become due immediately, and the escrow agent could then sell petitioner's deposited shares, either to Marjorie or to any third party.

During 1956, which was approximately 1 year prior to the due date of the first installment payment under said purchase agreement, petitioner realized that he would be financially unable to meet the same; and he realized also that, if he defaulted in meeting this installment, all the balance of the price would become due immediately, and that all his shares in the corporation would become subject to foreclosure and sale by the escrow agent. Petitioner thereupon contacted his bank in an attempt to borrow funds with which to pay the oncoming installment; but the bank refused to make him any loan, for the reason that he had practically no assets other than his investment in the corporation, and that all his stock therein had already been pledged under said escrow agreement. Petitioner and his attorney then contacted Marjorie and her attorney, with a view to having her modify the terms of the purchase agreement, or to have her make some arrangement with the corporation for it to redeem her stock; but both Marjorie and her attorney refused to comply with such suggestions. They insisted that the only way in which petitioner might obtain relief from his contractual obligations, would be for her to receive a cashier's check for $100,000, being the full unpaid balance of the purchase price. They said it would make no difference to them, whether such amount was paid by petitioner or by someone else.

In this situation, petitioner began a search for some investor who might be willing to purchase all of Marjorie's interest in the corporation, and thereby eliminate his contractual arrangement with her. In this search for such an investor, he procured the assistance of William Barclay, a certified public accountant who was a local official for one of the national accounting firms which had theretofore made certain audits for the Priester Machinery Company.

Early in February 1957, Barclay contacted a man named Max Pinkerton, who he thought might be interest in buying Marjorie's stock. Pinkerton was prominent in the lumber industry; and Barclay had performed some accounting services for him, but petitioner had never met him. Since about 1946, Pinkerton had been associated with the Pinkerton Lumber Corporation, the North Memphis Lumber Company, and the Gates Lumber Company— all of which carried on operations in the Memphis area. He had been engaged to represent the United States Government in matters relating to the lumber industry in Russia. Also, he had banking connections with two Memphis banks; and he had, on one occasion, obtained a loan of $400,000 from one of these banks.

Pinkerton had confidence in the judgment of Barclay, who acquainted him with the affairs of the Priester Machinery Company and suggested that he might find the purchase of Marjorie's shareholdings to be a good investment. Pinkerton at first demurred; but later, he told Barclay that he would be willing to purchase all of Marjorie's 501 shares for the amount of $100,000 which she was demanding, if he could be assured that after acquiring such stock the corporation would within a period of from 6 months to a year thereafter, purchase or redeem the stock from him at a price of $113,000— so as to enable him to derive a capital gain from the transaction. He further insisted that, since such a purchase would give him only a 51-percent interest in the corporation, he would have to receive the personal guarantee of petitioner who was the minority...

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27 cases
  • Read v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 4 février 2000
    ...purchasing shareholder is both primary and unconditional. Enoch v. Commissioner, 57 T.C. 781, 1972 WL 2421 (1972); Priester v. Commissioner, 38 T.C. 316, 1962 WL 1087 (1962). If, on the other hand, the corporation redeems stock which the remaining shareholder was not obligated to buy, no co......
  • Arnes v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 5 avril 1994
    ...the obligation of the remaining shareholder is both primary and unconditional. Enoch v. Commissioner, 57 T.C. 781 (1972); Priester v. Commissioner, 38 T.C. 316 (1962); Edenfield v. Commissioner, 19 T.C. 13 (1952); Edler v. Commissioner, supra. In Edler v. Commissioner, 727 F.2d 857 (9th Cir......
  • Esmark, Inc. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 2 février 1988
    ...remaining shareholders. See Yelencsics v. Commissioner, 74 T.C. 1513 (1980); Bennett v. Commissioner, 58 T.C. 381 (1972); Priester v. Commissioner, 38 T.C. 316 (1962). Another case involved a corporate middleman that in effect received a commission for its role in the purchase of one corpor......
  • Hayes v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 29 décembre 1993
    ...is a question of fact. Jacobs v. Commissioner, 698 F.2d 850, 852 (6th Cir.1983), affg. per curiam T.C.Memo. 1981–81; Priester v. Commissioner, 38 T.C. 316, 324–325 (1962). It is well settled that a shareholder receives a constructive dividend to the extent of available earnings and profits ......
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