R. Shisler Farms, Inc. v. C. I. R., 060474 FEDTAX, 829-70

Docket Nº:829-70, 830-70.
Opinion Judge:GOFFE, Judge:
Party Name:R. SHISLER FARMS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ROBERT A. SHISLER and DORIS SHISLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Thomas N. Bantivoglio, Mitchell J. Rabil and Bert W. Hunt, for the petitioners. Alan E. Cobb, for the respondent.
Case Date:June 04, 1974
Court:United States Tax Court

33 T.C.M. (CCH) 635

R. SHISLER FARMS, INC., Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ROBERT A. SHISLER and DORIS SHISLER, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 829-70, 830-70.

United States Tax Court

June 4, 1974

Thomas N. Bantivoglio, Mitchell J. Rabil and Bert W. Hunt, for the petitioners.

Alan E. Cobb, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOFFE, Judge:

The Commissioner determined deficiencies in the Federal income taxes of petitioners as follows:

Docket
Petitioner Number Year Deficiency
R. Shisler Farms, Inc. 829-70 1965 $43,183.66
Robert A. Shisler and
Doris Shisler 830-70 1965 8,867.40
Upon motion by respondent, unopposed by petitioners, these cases were consolidated for trial, briefs and opinion. The issues for decision are: (1) whether Petitioners Robert A. Shisler and Doris Shisler must recognize gain under section 351(b) of the Internal Revenue Code of 1954[1] upon the transfer of assets to a corporation, R. Shisler Farms, Inc. (hereinafter Shisler Farms); and (2) whether Petitioner Shisler Farms filed its initial income tax return for the taxable year 1965 on the cash or accrual method of accounting. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts and exhibits are incorporated by reference. Robert A. Shisler and Doris Shisler are husband and wife and reside in Sewell, New Jersey. They filed their joint Federal income tax return for the taxable year s965 with the district director of internal revenue at Newark, New Jersey. R. Shisler Farms, Inc., was incorporated in 1965 under the laws of the State of New Jersey. It is engaged in the business of collecting garbage from the City of Philadelphia and raising and selling swine. Its principal place of business during 1965 was Sewell, New Jersey and it filed its Federal income tax return with the district director of internal revenue at Newark, New Jersey. From 1947 to 1964 Mr. and Mrs. Shisler operated a hog farm as a proprietorship. The books and records of the proprietorship consisted of bank statements, canceled checks, deposit slips and several spiral notebooks into which Mrs. Shisler recorded the checks received and the bills paid. The accounting system of the proprietorship was maintained on the cash receipts and disbursements method. Upon advice of counsel, Mr. Shisler incorporated the proprietorship as of January 1, 1965. The incorporation was accomplished by the transfer of certain assets of the proprietorship to the corporation in exchange for 100 shares of no-per value common voting stock of the corporation. The adjusted bases for tax purposes and the fair market values of the assets transferred by Mr. Shisler were as follows:
Adjusted Fair Market
Assets Basis Value
Cash $1,000.00 $1,000.00
Inventory (Swine) -0- 117,500.00
Automotive Equipment 392.00 392.00
Farm Equipment 2,922.00 2,922.00
$4,314.00 $121,814.00
The respective fair market values of the assets are undisputed. The first meeting of the board of directors of Shisler Farms was held on January 2, 1965, in the offices of the Shislers' attorney. At that meeting Robert A. Shisler was elected president and Doris M. Shisler was elected secretary-treasurer by the board of directors consisting of Robert A. Shisler, Doris M. Shisler, Robert A. Shisler, Jr. and William A. Shisler-the latter two individuals being the older sons of Robert and Doris Shisler. Among the resolutions unanimously adopted at the January 2, 1965, meeting of the board of directors were the following: WHEREAS, The following offer has been made to the corporation in consideration of the issuance of full paid and non-assessable shares of the corporation: A transfer to the corporation by Robert A. Shisler of all of the inventory of pigs, together with equipment, feed and other like items of personal property used in the business new conducted by Robert A. Shisler under the name of R. Shisler Farms, an individual proprietorship in exchange for transfer to him of 100 shares of capital stock of the corporation. Such stock to include the stock subscribed by the incorporators, assignments of which are represented by the transfer of subscription annexed to the minutes of the meeting of the incorporators as well as a transfer of subscriptions annexed thereto. WHEREAS, In the judgment of this Board of Directors of this corporation said offer is good and sufficient consideration for the shares demanded therefor and necessary for the business of this corporation. Now, therefore, be it RESOLVED, That the aforesaid offer be and it is hereby accepted and that the President and Secretary of this corporation be and they hereby are authorized and directed to execute in the name and on behalf of this corporation and under its corporate seal any agreement or agreements that may be necessary in accordance with said offer FURTHER RESOLVED, That the President and Secretary be and they are hereby authorized and directed to issue and deliver in accordance with said offer certificates of full paid and non-assessable shares of this corporation to the said Robert A. Shisler, excepting the qualifying shares held by Doris M. Shisler and Robert A. Shisler. Immediately thereafter, Robert A. Shisler presented to the Board transfers of 33 shares of the said capital stock (including the two qualifying shares held by Doris M. Shisler and Robert A. Shisler, Jr.) reflecting the transfer of 18 shares to Doris M. Shisler, his wife, 5 shares to Robert A. Shisler, Jr., his son, 5 shares to William A. Shisler, his son and 5 shares to Robert A. Shisler ‘ as custodian for Jean A. Shisler under the New Jersey Uniform Gifts to Minors Act’ . Thereupon motion duly made, seconded and unanimously carried, it was FURTHER RESOLVED, That the President and Secretary be and they are hereby authorized and directed to issue and deliver in accordance with the said transfer certificates reflecting the names of the donees-transferees. Prior to the year 1965 when Petitioner Robert Shisler incorporated the proprietorship, he employed a local accountant to prepare his annual Federal income tax returns. The 1964 Federal income tax return was prepared and filed on the cash method of accounting. After the incorporation of the proprietorship in January 1965, petitioners employed a firm of certified public accountants to prepare the 1965 Federal income tax return of Shisler Farms and the 1965 return for Mr. and Mrs. Shisler. The Shislers have little, if any, knowledge of accounting and rely completely upon their accountant for the manner of preparation of the income tax returns. Between January and March of 1966 the accountant obtained the checkbook stubs, canceled checks, deposit books and deposit slips from the Shislers in order to begin preparation of the 1965 corporation income tax return. He was also instructed to prepare a financial statement of the corporation to be used for securing a bond to do business with the City of Philadelphia and to be used for applying for a bank loan. The accountant examined the January 2, 1965, minutes of the corporation in order to determine the consequences of the transfer of assets from Robert Shisler to the corporation. He reconstructed an opening balance sheet for 1965 because Shisler Farms maintained no books of account from which a statement could be prepared. Based upon the information available to him at the time, the accountant prepared a work sheet which included the following opening entries:
Assets Amount
Cash $1,000.00
Inventory 117,500.00
Automotive Equipment $13,674.00
Less: Reserve 13,282.00 392.00
Farm Equipment 4,475.00
Less: Reserve 1,553.00 2,922.00
$121,814.00
The opening entry on the ‘ Capital’ side of the balance sheet was:
Capital Stock $121,814.00
The capital stock account was then reduced by adjusting journal entry number 7 as follows:
Capital Stock $21,814.00
Due from R. Shisler, Personal $21,814.00
To write down value of
stock to $100,000
It was the practice of the accounting firm to use the term ‘ due from’ when, after combining the credit and debit entries on work papers, the resulting figure was a debit amount and to use the term ‘ due to’ when the resulting figure was a credit amount; therefore, use of the term ‘ due from R. Shisler, Personal’ indicated that the amount was owed by Shisler Farms to Robert A. Shisler. Shisler Farms reported on its 1965 income tax return a gross profit of $42,079.13 computed as follows:
Gross receipts or gross sales: $93,505.74
Less: Cost of Goods Sold (Schedule A) 51,426.61
Gross profit $42,079.132
The cost of goods sold was computed on the 1965 return as follows:
Schedule A - Cost of Goods Sold
(1) Inventory at beginning of year -0-
(2) Merchandise bought for manufacture or sale $15,077.61
(3) Salaries and wages 36,349.00
(4) Other costs per books -0-
(5) Total of lines 1 thru 4 51,426.61
(6) Less: Inventory at end of year -0-
(7) Cost of Goods Sold (enter here
and on line 2, p.1) $51,426.61
The 1965 return did not show a beginning or closing inventory in its cost of goods sold section (Schedule A) nor on its balance sheets (Schedule L). The value of the opening and closing inventories for the 1965 corporate tax year was the same-$117,500. The 1965 return of Shisler Farms did not contain any entries on its balance sheet for the beginning of the taxable year and it...

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