Schwartz v. Comm'r of Internal Revenue , Docket Nos. 7087-73—-7089-73.

Citation69 T.C. 877
Decision Date06 March 1978
Docket NumberDocket Nos. 7087-73—-7089-73.
PartiesARTHUR P. SCHWARTZ, TRANSFEREE, THOR PUBLICATIONS, INC., et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Six corporations controlled by S filed separate petitions for an arrangement under ch. XI of the Bankruptcy Act, and shortly thereafter the proceedings were consolidated. The debtor corporations sold the bulk of their assets to an unrelated party. According to their books and records, some of the corporations had assets in excess of their liabilities. Pursuant to the arrangement under ch. XI, the assets of the corporations (including the proceeds from the sale) were distributed to satisfy the creditors' claims, including those claims personally guaranteed by S. Held, the intercorporate transfers made incidental to the consolidated bankruptcy proceedings were motivated by business objectives and were not constructive dividends to S. Held, further, educational expenses not shown to be ordinary and necessary business expenses. Harvey Paul Stein, for the petitioners.

Stanley J. Goldberg and Ronald E. Friedman, for the respondent.

TANNENWALD, Judge:

In these consolidated cases, respondent determined the following deficiencies in Federal income tax and additions to tax:

+-------------------------------------------------------------------------+
                ¦            ¦                       ¦       ¦            ¦Addition       ¦
                +------------+-----------------------+-------+------------+---------------¦
                ¦            ¦                       ¦       ¦            ¦to tax         ¦
                +------------+-----------------------+-------+------------+---------------¦
                ¦            ¦                       ¦       ¦            ¦(sec. 6651(a)  ¦
                +------------+-----------------------+-------+------------+---------------¦
                ¦Docket No.  ¦                       ¦TYE    ¦Income tax  ¦2              ¦
                +------------+-----------------------+-------+------------+---------------¦
                ¦            ¦                       ¦       ¦            ¦               ¦
                +------------+-----------------------+-------+------------+---------------¦
                ¦7087-73     ¦Thor Publications, Inc.¦9/30/65¦$16,455.93  ¦-              ¦
                +-------------------------------------------------------------------------+
                
                               9/30/66  38,180.47  -
                                               9/30/68  484,924.85 -
                7088-73 Alpha Study Aids, Inc. 10/31/65 1,967.94   -
                
                           10/31/68 49,142.75 -
                7089-73 Arthur P. Schwartz 12/31/66 1,149.22  -
                
  12/31/67 111.54     -
                  12/31/68 313,454.35 $15,572.72
                

Concessions having been made by the parties, the issues for decision are:

(1) Whether Arthur P. Schwartz received constructive dividends in 1968 from Alpha Study Aids, Inc., Thor Publications, Inc., and Barrister Publishing Co., Inc.;

(2) Whether Arthur P. Schwartz is liable as a transferee for the income tax deficiencies, if any, of Thor Publications, Inc., and Alpha Study Aids, Inc.; and

(3) Whether certain amounts claimed as educational expenses by Arthur P. Schwartz are deductible as ordinary and necessary business expenses.

FINDINGS OF FACT

Some of the facts are stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Arthur P. Schwartz (Schwartz or petitioner) resided in New York, N. Y., at the time the petitions herein were filed. His individual income tax returns for the taxable years 1966, 1967, and 1968 were filed with the District Director of Internal Revenue, Manhattan District, N. Y.

Alpha Study Aids, Inc. (Alpha), was a corporation organized under the laws of the State of New York, formerly having its principal place of business in New York, N. Y. It has been liquidated and dissolved. Its United States corporation tax returns for the taxable years ending October 31, 1965, 1966, 1967, and 1968 were filed with the District Director of Internal Revenue, Manhattan District, N. Y.

Thor Publications, Inc. (Thor), was a corporation organized under the laws of the State of New York, formerly having its principal place of business in New York, N. Y. It has been liquidated and dissolved. Its United States corporation income tax returns for the taxable years ending September 30, 1965, 1966, 1967, and 1968 were filed with the District Director of Internal Revenue, Manhattan District, N. Y.

In 1960, while a college student, petitioner founded a business to prepare and market study guides for subjects taught at colleges in the New York City area. During the following years, the business grew substantially, and various corporations were organized to produce study guides in related areas. In particular, Thor was established in April 1963 to publish study guides in the area of literature and philosophy, Alpha was organized in July 1964 to publish study guides for high school students in subjects such as trigonometry and American history, and Barrister Publishing Co., Inc. (Barrister), was organized in November 1965 to publish legal study guides. Petitioner was the controlling shareholder and chief executive officer of each of the corporations.

During April 1967, Thor, Alpha, Barrister, Monarch Press Publishing, Inc. (Monarch Press), Monarch Enterprises, Inc., and Monarch Overseas, Ltd., filed separate petitions for an arrangement under chapter XI, Bankruptcy Act. 3

In their petitions for arrangement, Thor, Alpha, and Barrister each alleged that it was “unable to pay its debts as they mature” and listed total assets and liabilities as follows:

+---------------------------------------+
                ¦Corporation  ¦Assets     ¦Liabilities  ¦
                +-------------+-----------+-------------¦
                ¦             ¦           ¦             ¦
                +-------------+-----------+-------------¦
                ¦Thor         ¦$437,287.31¦$235,044.74  ¦
                +-------------+-----------+-------------¦
                ¦Alpha        ¦45,717.00  ¦6,662.09     ¦
                +-------------+-----------+-------------¦
                ¦Barrister    ¦517,597.54 ¦4  590,635.82¦
                +---------------------------------------+
                

Included in Thor's assets were inventory valued at $246,555.28 and debts owing from Monarch Press and Monarch Enterprises in the sum of $190,632.03. Excluded from its listed assets were unamortized book plates, listed as having a net value of $159,745.37, and various copyrights, the value of which was not determined. Alpha's listed assets consisted solely of inventory. Included in Barrister's assets were inventory valued at $175,788.08 and book plates valued at $148,238.93.

On the recommendation of their attorneys, the six corporations petitioned the bankruptcy court on May 22, 1967, to consolidate the proceedings in which they were involved. The attorneys suggested this procedure because they believed that it would be easier to administer one consolidated proceeding and that it was more likely that an arrangement could be confirmed if only a single creditors' committee was involved.

The petition for consolidation alleged, inter alia, as follows:

5. Although not the parent of the other debtors, Monarch Press Publishing, Inc. had acted as such in connection with the other debtors in the use of its name and good will, making the capital investment for each, retaining their earnings, lending money to and from them, and guaranteeing their obligations.

6. There is in actuality only one management, Arthur P. Schwartz, who determines the management of Monarch Press Publishing, Inc., and through it operates the others as a division.

7. All overhead is paid by Monarch Press Publishing, Inc. and bookkeeping adjustments indicating the obligations are entered on Monarch's books for these charges.

8. To administer the estates separately would create confusion and difficulties inimical to the interest of the creditor body as a whole and would allow the presentation of intercompany claims.

9. In order that there may be equality of treatment among creditors, it is necessary that the above proceedings be consolidated and intercompany claims eliminated.

Due notice of the petition was given to all creditors but none appeared in opposition thereto.

On June 28, 1967, the referee in bankruptcy issued an order consolidating the separate proceedings. The referee made findings of facts identical with the factual allegations contained in the above-mentioned petition. Although the assets and liabilities of the debtor corporations were ordered consolidated, the referee's order provided—-“that consolidation shall apply only to these proceedings and shall not be deemed to alter, amend or destroy the separate corporate charters of the corporate debtors.”

Petitioner and Simon & Schuster, Inc. (Simon & Schuster), entered into negotiations concerning the sale of the assets of the corporations at or about the time that the petitions for arrangement were filed.5 The purpose of such a sale was to generate sufficient cash to fund a proposed arrangement with the creditors of the corporations, including an arrangement with petitioner in respect of certain loans which he had guaranteed. The creditors' committee was informed of the possible sale to Simon & Schuster on May 10, 1967. On July 13, 1967, a contract, subject to court approval, was entered into by petitioner and the corporations controlled by him to sell certain assets to Simon & Schuster.

The agreement provided in part:

(1) That the sellers assign the trademark “Monarch” (used alone or in conjunction with any other words) to the purchaser;

(2) That the sellers cause any corporate name which included the term “Monarch” to be changed to a name which did not include such term;

(3) That certain books retained by the sellers pursuant to the agreement of sale involved herein be sold under a name or mark not including the name “Monarch.”

The agreement included the following allocation of the purchase price:

(1) Publishing rights, plant costs, copyrights, plates (if any), negatives, and related property interests in 34 high school study guides and 319 literature...

To continue reading

Request your trial
42 cases
  • Kean v. Comm'r of Internal Revenue, Docket Nos. 19346-81
    • United States
    • United States Tax Court
    • September 8, 1988
    ......607] transferred to them. Petitioners rely on Schwartz v. Commissioner, 69 T.C. 877 (1978). However, in Schwartz, we indicated that there may be ......
  • Love Box Co., Inc. v. C.I.R.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • March 28, 1988
    ......v. COMMISSIONER OF INTERNAL REVENUE, Appellee. No. 85-1804. United States ... Schwartz v. Commissioner, 69 ......
  • Wagner v. Commissioner, Docket No. 4519-80.
    • United States
    • United States Tax Court
    • May 7, 1984
    ...... criminal investigation division of the Internal Revenue Service in Utica, New York, first met ...145, 153 (1928); Schwartz v. Commissioner Dec. 35,020, 69 T.C. 877, 889 ......
  • LDS, INC. v. Commissioner, Docket No. 16839-84.
    • United States
    • United States Tax Court
    • July 15, 1986
    ...... Federal income tax returns with the Internal Revenue Service. .         In the early ...36,888, 74 T.C. 60, 64 (1980); Schwartz......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT