Smyers v. Comm'r of Internal Revenue , Docket Nos. 4557-69— 4559-69.
| Decision Date | 08 November 1971 |
| Docket Number | Docket Nos. 4557-69— 4559-69. |
| Citation | 57 T.C. 189 |
| Parties | J. PAUL SMYERS, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert S. Newkirk and Michael M. Gibson, for the petitioners.
John W. Dierker, for the respondent.
The petitioners' controlled corporation issued $55,000 of purported ‘sec. 1244 stock’ for cash. The corporation then used $20,000 of the issue price to repay the petitioners for advances they had previously made to the corporation. The corporation used the remaining $35,000 of the issue price to repay an outstanding bank loan which had been guaranteed by the petitioners.
2. Held, further, that the petitioners are entitled to an ordinary-loss deduction on the exchange of sec. 1244 stock that did qualify as such when issued to a partnership for cash, although such cash subsequently used by the issuing corporation to pay off a bank loan guaranteed by the partners.
3. Held, further, that stock issued pursuant to a plan adopted under sec. 1244 was not issued by the corporation while it was in the process of liquidation.
4. Held, further, that advances made to a corporation by a partnership were not expenses incurred by the partners in the ordinary course of a trade or business.
5. Held, further, that the petitioners are not allowed an investment credit arising from the acquisition of property by the petitioners from a corporation upon its liquidation.
The respondent determined deficiencies in the Federal income taxes of the petitioners as follows:
+--------------------------------+
¦Docket No. ¦Year ¦Deficiency ¦
+------------+------+------------¦
¦ ¦ ¦ ¦
+------------+------+------------¦
¦ ¦(1964 ¦$1,299.09 ¦
+------------+------+------------¦
¦4557-69 ¦(1965 ¦5,874.86 ¦
+------------+------+------------¦
¦ ¦(1964 ¦1,325.18 ¦
+------------+------+------------¦
¦4558-69 ¦(1965 ¦6,032.94 ¦
+------------+------+------------¦
¦ ¦(1964 ¦4,210.55 ¦
+------------+------+------------¦
¦4559-69 ¦(1965 ¦12,239.53 ¦
+--------------------------------+
After certain concessions by each party, the following questions remain for our consideration: (1) Whether advances in the form of loans made by the petitioners were capital contributions to a corporation; (2) whether bank loans made to a corporation and guaranteed by the petitioners were in fact capital contributions from the petitioners to that corporation; (3) whether the petitioners' corporation issued stock pursuant to a plan adopted under section 12442 while that corporation was in the process of liquidation; (4) whether the advances made by the petitioners were made in the ordinary course of the petitioners' trade or business; and (5) whether the petitioners are entitled to an investment credit arising from the acquisition of property by the petitioners from the corporation upon its liquidation.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
The petitioners L. E. and Marita J. Pietzker are husband and wife, and at the time of filing the petition herein they were residents of Dallas, Texas. Their joint Federal income tax returns for the calendar years 1964 and 1965 were filed with the district director of internal revenue at Dallas, Tex. L. E. Pietzker will sometimes hereinafter be referred to as Pietzker.
The petitioners J. Paul and Doris G. Smyers are husband and wife and at the time of filing the petitions herein they were residents of Dallas, Tex. Their individual Federal income tax returns for the calendar years 1964 and 1965 were filed with the district director of internal revenue at Dallas, Tex. J. Paul Smyers will sometimes hereinafter be referred to as Smyers. Any references hereinafter to the petitioners will be to Pietzker and Smyers.
Smyers and Pietzker were equal partners of the Southern Co. from its formation in August 1951 until its dissolution on July 31, 1969. Throughout this period the petitioners, through their partnership, were active in the conduct of various types of businesses. The petitioners at various times were factory representatives and distributors of equipment for oil companies, distributors of air-conditioning equipment, manufacturers of light poles, and real estate entrepreneurs.
In December 1963 Danny Krause (hereinafter referred to as Krause), a design engineer in Fort Worth, Tex., was aware of an anodizing business in Fort Worth which was in the process of ceasing operations. Krause met with the petitioners at the anodizing plant on December 19, 1963. The petitioners discussed the potential of the business with the plant manager and Tom Meek, a former purchasing agent for Bell Helicopter Co. Meek assured the petitioners that he could generate sufficient business to make the anodizing plant profitable. The petitioners then decided to acquire the business.
The petitioners began the anodizing business on December 19, 1963, when a lease agreement with an option to purchase the assets was executed with the former owners of the business. The lease called for a $500 monthly payment. The petitioners exercised the option to purchase in August 1964. They intended to run this anodizing business as a corporation. On December 27, 1963, Southern Anodizing, Inc. (hereinafter referred to as Southern Anodizing), was, under the laws of the State of Texas, granted a certificate of incorporation.
Pursuant to its articles of incorporation Southern Anodizing was authorized to issue up to 100,000 shares of common stock with a par value of $1 per share. No other class of stock was authorized to be issued by such corporation.
On January 7, 1964, a total of $1,000 cash was paid to Southern Anodizing by Smyers and Pietzker, and Southern Anodizing issued therefor 1,000 shares of its stock to five shareholders as follows:
+---------------------------------+
¦Name ¦Shares owned ¦
+------------------+--------------¦
¦ ¦ ¦
+------------------+--------------¦
¦J. Paul Smyers ¦425 ¦
+------------------+--------------¦
¦L. E. Pietzker ¦425 ¦
+------------------+--------------¦
¦D. F. Krause ¦50 ¦
+------------------+--------------¦
¦Gene Smyers ¦50 ¦
+------------------+--------------¦
¦Gordon D. Harriman¦50 ¦
+---------------------------------+
No cash contribution was made to Southern Anodizing by Krause, Gene Smyers, or Gordon D. Harriman for issuance to them of the stock.
Though the period beginning in March 1964 and ending with the dissolution of Southern Anodizing, various amounts were advanced on open account to, or paid on behalf of, Southern Anodizing by the petitioners' partnership, Southern Co. One repayment of $2,000 was made to Southern Co. on October 19, 1964. The net amount advanced by Southern Co. to Southern Anodizing was $46,366.19 and of this amount $16,700 had accumulated before any assets were purchased from the former owners of the business. These advances were made on open account and not evidenced by any certificates of debt. They were simply book entries by each entity involved. There were no maturity dates and no interest charges.
On the following dates the Republic National Bank of Dallas (hereinafter referred to as Republic National Bank), on three separate occasions, loaned money to Southern Anodizing in return for promissory notes duly executed by Southern Anodizing:
1. January 7, 1964, $10,000 was loaned at 5-percent interest with a maturity date of July 7, 1964.
2. August 31, 1964, $25,000 was loaned at 5 1/2-percent interest with a maturity date of March 2, 1965.
3. March 18, 1965, $10,000 was loaned at 5 1/2-percent interest with a maturity date of June 8, 1965.
The foregoing obligations were renewed and extended periodically as they matured. During 1964 Southern Anodizing made accrued interest payments to Republic National Bank in the sum of $329.17 on the January 7, 1964, bank loan of $10,000, and during 1965 Southern Anodizing made accrued interest payments to Republic National Bank in the sum of $978.54 on the January 7, 1964, and August 31, 1964, bank loans.
The total of the aforesaid notes of Southern Anodizing payable to Republic National Bank was $45,000. The said notes were unsecured; however, the bank did hold the guarantee of both Smyers and Pietzker on the entire amount of the loans.
During June 1965 the outstanding stock owned by Gene Smyers and Gordon D. Harriman was purchased at its par value by Smyers and Pietzker, increasing their stock ownership in Southern Anodizing to 475 shares each. At the same time an offer was made by the petitioners to purchase Krause's outstanding stock. This offer was refused by Krause.
From the inception of the anodizing business in December of 1963 through its sale in June 1970, Smyers spent approximately 95 percent of his time operating the anodizing business in Fort Worth. During the time the anodizing business was operated in the corporate form Smyers received no compensation from the corporation for services rendered. The first few years of operation did not prove profitable; however, both Smyers and Pietzker continued to be optimistic about the prospects for the anodizing concern.
In July of 1965 the petitioners determined that additional capital was required to put Southern Anodizing in better financial condition. On July 12, 1965, an annual meeting of the stockholders of Southern Anodizing was held. After discussing the corporation's future, the stockholders authorized the board of directors to issue new stock for the purpose of raising needed capital. Such...
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