Scott v. Comm'r of Internal Revenue
| Decision Date | 27 April 1978 |
| Docket Number | Docket No. 11233-76. |
| Citation | 70 T.C. 71 |
| Parties | JOY HARPER (OWENS) SCOTT, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. In 1970, P's husband sold an undivided life interest in real property and arranged to have the proceeds transferred to P. Held, P is liable as a transferee for her husband's income taxes for 1964 through 1966 to the extent of the proceeds transferred to her.
2. In 1973, P's husband, who owned 49.8 percent of the stock of Scott Roofing, arranged for Scott Roofing to redeem his stock. As part of the redemption agreement, Scott Roofing agreed to subcontract two roofing jobs to Quality, a corporation to be formed. Later, Quality was incorporated. P made a capital contribution of $500 and received all of the capital stock of Quality. Quality elected under subch. S, sec. 1371 et seq., I.R.C. 1954, to be treated as an electing small business corporation. P's husband, who had 30 years of experience in the roofing business, managed the corporation but received only a minimal salary. P, who had no prior experience in the roofing business, performed only clerical work for Quality. From 1973 through 1976, P received distributions in the total amount of $67,758.30 from Quality. Held, P is liable as a transferee for her husband's taxes to the extent of Quality's distributions to her. N. A. Townsend, Jr., and John M. Geil, for the petitioner.
Gary F. Walker, for the respondent.
The Commissioner determined that the petitioner was liable as a transferee of E. L. Scott for deficiencies in income tax, additions to tax, and interest in the total amount of $146,530.60. There is no dispute over the liability of E. L. Scott for such deficiencies, additions to tax, or interest. The principal issues remaining for decision are: (1) Whether the petitioner's husband transferred to her the proceeds from the sale of a life interest in certain real property; and (2) whether the petitioner is liable as a transferee for the profits received by her from a business which was conducted by her husband and to which she made only a nominal contribution of capital and services.
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Joy Harper (Owens) Scott, resided in New Bern, N. C., at the time she filed her petition in this case.
Joy Harper (Owens) Scott and E. L. Scott were married on March 7, 1970. From 1965 to the time of her marriage to Mr. Scott, Mrs. Scott's gross earnings were about $4,000 each year. She also received $175 per month in support payments from her former husband. Mrs. Scott's net worth at the time of her marriage to Mr. Scott was about $10,000, consisting of cash, securities, an automobile, furniture, and household goods. She owned no real estate at the time of the marriage.
Mr. Scott was insolvent at the time of the marriage, and he has remained insolvent since that time.
On March 7, 1970, Mr. Scott was, and had been since 1963, the president of E. L. Scott Roofing Co., Inc. (Scott Roofing), a North Carolina corporation engaged in the roofing business in and about the town of Kinston, N. C. On October 12, 1970, Mr. Scott was indicted under section 7201 of the Internal Revenue Code of 1954,1 on charges of willfully attempting to evade part of the income taxes of Scott Roofing for the years 1964 through 1966, and of attempting to evade the income taxes of E. L. Scott and Bernice Scott (his former wife)2 for the years 1964 through 1966. On November 29, 1971, Mr. Scott pled guilty to Count 3 of the indictment, which charged him with filing false and fraudulent income tax returns on behalf of Scott Roofing for 1966; he pled not guilty to all other charges. His guilty plea was accepted on November 29, 1971, and all other charges were dismissed.
On December 30, 1972, pursuant to an agreement reached between Mr. Scott and the Commissioner, the following deficiencies in income taxes and additions to the tax were assessed against Mr. Scott: 3
+----------------------------------+
¦ ¦ ¦Sec. 6653(b) ¦
+------+------------+--------------¦
¦Year ¦Income tax ¦addition ¦
+------+------------+--------------¦
¦ ¦ ¦ ¦
+------+------------+--------------¦
¦1963 ¦$6,243.84 ¦$3,121.92 ¦
+------+------------+--------------¦
¦1964 ¦11,194.19 ¦5,597.10 ¦
+------+------------+--------------¦
¦1965 ¦33,992.41 ¦16,996.21 ¦
+------+------------+--------------¦
¦1966 ¦14,205.12 ¦7,102.56 ¦
+----------------------------------+
As of November 24, 1976, the date of the notice of transferee liability issued to Mrs. Scott, Mr. Scott's unpaid tax liabilities for the years 1963 through 1966 were as follows:
+--------------------------------------------------+
¦Year ¦Tax ¦Addition ¦Interest ¦Liability ¦
+------+---------+----------+----------+-----------¦
¦ ¦ ¦ ¦ ¦ ¦
+------+---------+----------+----------+-----------¦
¦1963 ¦$3,583.04¦$3,121.92 ¦$5,037.32 ¦$11,742.28 ¦
+------+---------+----------+----------+-----------¦
¦1964 ¦11,194.19¦5,597.10 ¦9,372.76 ¦26,164.05 ¦
+------+---------+----------+----------+-----------¦
¦1965 ¦33,791.75¦16,996.21 ¦26,412.36 ¦77,200.32 ¦
+------+---------+----------+----------+-----------¦
¦1966 ¦14,205.12¦7,102.56 ¦10,116.27 ¦31,423.95 ¦
+------+---------+----------+----------+-----------¦
¦Totals¦62,774.10¦32,817.79 ¦50,938.71 ¦146,530.60 ¦
+--------------------------------------------------+
As of March 7, 1970, Mr. Scott and his nephew Rufus Scott held title to an undivided life interest in certain real estate located on the Trent River, Jones County, N. C. (the Trent River property). Such interest had been acquired on February 16, 1956, from James Edward Mallard. Mr. Mallard had asked Mr. Scott to loan him the funds necessary to purchase the Trent River property; in consideration for such loan, Mr. Mallard agreed to convey a life interest in the Trent River property to Mr. Scott. At the request of Mr. Scott, his nephew also was named as a grantee of the life interest in the Trent River property.
Mr. Scott's nephew paid no consideration for his life interest in the Trent River property and did not participate in any manner in the negotiations leading to the acquisition of such interest. The nephew was named as a grantee, at Mr. Scott's request, to prolong the period before the use of the property would revert to Mr. Mallard. Mr. Scott's nephew did not use the property, other than for occasional visits with his uncle, nor did he contribute financially toward the construction of improvements on the property. On the other hand, Mr. Scott used and enjoyed the property and constructed improvements on it.
On November 5, 1971, Mr. Mallard's daughter purchased the life interest in the Trent River property and had such interest conveyed to her father. Although Mr. Scott's nephew joined as a grantor in the deed conveying the life interest to Mr. Mallard, he took no part in the negotiations with Mr. Mallard's daughter, which were conducted solely by Mr. Scott. Mr. Scott's nephew was not even aware of the amount Mr. Mallard's daughter paid for the life interest. Mr. Scott's nephew always considered his uncle to be the owner of the life interest in the Trent River property and considered himself to have “no interest in it whatsoever.”
Mr. Mallard's daughter paid a total of $17,500 for the conveyance of the life interest in the Trent River property to her father; of such amount, $2,500 was paid for furniture which was left in the house on the property. Some of such furniture belonged to Mrs. Scott and had been acquired by her prior to her marriage to Mr. Scott. The sales proceeds of $17,500 were received by Mrs. Scott and were expended on a residence purchased by her in New Bern, N. C., where she and her husband continued to reside at the time of the trial in this case. Mrs. Scott held sole title to the residence and owned all of the personal property and fixtures in the residence. Mr. Scott's nephew reported no income from the sale on his Federal income tax return and did not file a gift tax return reporting a gift to Mrs. Scott of the property or the proceeds from its sale because he had no interest in the property.
On February 15, 1973, Mr. Scott owned 284 of the 570 issued and outstanding shares of stock of Scott Roofing, a 49.8-percent interest. On February 16, 1973, he resigned his position as president of Scott Roofing and entered into an agreement with such corporation whereby his stock was to be redeemed by the corporation. On the same date, he and the corporation also entered into an amendment to the redemption agreement. Under the terms of the agreements, the corporation agreed to: cancel Mr. Scott's indebtedness to the corporation, not to exceed $71,000; assume a debt, not to exceed $41,000, that he owed to First Citizens Bank & Trust Co., Kinston, N. C.; transfer to him all the shares that the corporation held in the Kinston Motel Co.;4 allow him to purchase corporate insurance policies on his life at cash surrender value; 5 and employ Mr. Scott at his then present salary through April 30, 1973.
In addition, the redemption agreement contained the following covenant:
6. Covenant Not to Compete. In consideration of the Corporation redeeming the Two Hundred and Eighty-Four (284) shares owned by the Selling Shareholder, the Selling Shareholder and his spouse, Joy Harper Scott, * * * covenant with the Corporation that neither of them * * * will establish, engage in, or become interested in, directly or indirectly * * * any business engaged in roofing or reroofing structures other than personal residences * * *. It is stipulated and agreed that the Selling Shareholder has notified the Corporation that his spouse, Joy Harper Scott, intends to form a corporation, to be known as Quality Roofing Company, and that said corporation plans to engage...
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