South Texas Rice Warehouse Co. v. Comm'r of Internal Revenue, Docket Nos. 1048-63
| Citation | 43 T.C. 540 |
| Decision Date | 29 January 1965 |
| Docket Number | Docket Nos. 1048-63,2460-63,5611-63.,1114-63— 1123-63 |
| Court | U.S. Tax Court |
| Parties | SOUTH TEXAS RICE WAREHOUSE COMPANY, PETITIONER,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTJ. E. DAVANT AND KATHRYN DAVANT, PETITIONERS,2 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
For a number of years prior to June 30, 1957, four families had owned in equal proportions two corporations, one engaged in the business of supplying water for irrigation of ricelands and leasing farmlands to a partnership consisting of the same persons as the corporate stockholders, and the other engaged in operating a warehouse for cleaning and storing rice. In June 1957 the corporation engaged in the warehousing business leased all its properties to a newly formed partnership for a rental of $48,000 a year. The new partnership was owned by the same four families in equal proportions but the fathers in two of the families who owned 12 1/2 percent each of the stock of the corporation were not partners in the new partnership, the children of each having a combined interest of 25 percent per family. On August 26, 1960, in a planned transaction, the stockholders of the warehousing corporation transferred their stock to the son of their attorney, who passed a resolution to dissolve the corporation and transfer all of its assets to the corporation supplying water, which issued its check for $700,000 to the warehousing corporation. The water-supplying corporation took the assets subject to the lease to the partnership which had several years remaining and the water-supplying corporation, at the expiration of such lease, itself leased the assets to the same partnership. Held:
(1) The new partnership was not a sham but a bona fide business entity and its entire income and deductions are not those of the warehousing corporation.
(2) Respondent properly attributed $78,000 a year rental to the warehousing corporation for the lease of its assets to the partnership under section 482, I.R.C. 1954.
(3) The transfer of the stock of the warehousing corporation to the son of the stockholders' attorney did not constitute a bona fide sale of such stock.
(4) The transaction whereby the warehousing corporation transferred its assets to the water-supplying corporation constituted a reorganization under the provisions of section 368(a)(1)(D), I.R.C. 1954. James Armour, Inc., 43 T.C. 295 (1964), followed.
(5) Although the basis of the assets transferred by the warehousing corporation to the water-supplying corporation was only $180,000, the fair market value of such assets was at least $700,000, so that no constructive dividend was paid by the water-supplying corporation to its stockholders by way of a distribution to them by paying an excessive price for assets.
(6) The stockholders of the warehousing corporation received
a dividend to the extent of the earnings and profits of that corporation from the transaction on August 26, 1960, and the distribution in excess of such earnings and profits was capital gain to the extent that it exceeded the basis of such stockholders in their stock. James Armour, Inc., supra, followed. SCOTT, Judge:
Respondent determined deficiencies in the income tax liability of petitioner South Texas Rice Warehouse Co. for the years and in the amounts as follows:
+-------------------------+
¦Year ended ¦ ¦
+------------+------------¦
¦June 30-- ¦Deficiency ¦
+------------+------------¦
¦1955 ¦$8,590.87 ¦
+------------+------------¦
¦1956 ¦17,956.96 ¦
+------------+------------¦
¦1957 ¦6,442.44 ¦
+------------+------------¦
¦1958 ¦32,903.25 ¦
+------------+------------¦
¦1959 ¦26,711.24 ¦
+------------+------------¦
¦1960 ¦34,455.51 ¦
+------------+------------¦
¦Total ¦127,060.27 ¦
+-------------------------+
The deficiencies determined for the taxable years ended June 30, 1955, 1956 and 1957, resulted from the disallowance of net operating losses, previously allowed as carrybacks from the taxable years ended June 30, 1958, 1959, and 1960.
Respondent determined deficiencies in the income taxes of the remaining petitioners for the calendar year 1960 and additional deficiencies in amendments to answer filed at the trial in the amounts as follows:
+-----------------------------------------------------------------------------+
¦ ¦ ¦Deficiency¦Additional¦
+-------+-----------------------------------------------+----------+----------¦
¦Docket ¦ ¦determined¦deficiency¦
+-------+-----------------------------------------------+----------+----------¦
¦No. ¦Petitioners ¦in ¦alleged in¦
¦ ¦ ¦statutory ¦ ¦
+-------+-----------------------------------------------+----------+----------¦
¦ ¦ ¦notice ¦amendments¦
+-------+-----------------------------------------------+----------+----------¦
¦ ¦ ¦ ¦to answer ¦
+-------+-----------------------------------------------+----------+----------¦
¦1114-63¦J. E. Davant and Kathryn Davant ¦$24,827.49¦$1,484.17 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1115-63¦Hortense E. Davant ¦10,969.99 ¦827.25 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1116-63¦T. E. Dunnam and Mary Anne D. Dunnam ¦22,287.97 ¦1,484.17 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1117-63¦Estate of L. D. Clements, Deceased, Ruth Neal ¦ ¦ ¦
¦ ¦Clements, ¦ ¦ ¦
+-------+-----------------------------------------------+----------+----------¦
¦ ¦Executrix, and Mrs. L. D. Clements, ¦103,017.35¦4,343.03 ¦
¦ ¦Individually ¦ ¦ ¦
+-------+-----------------------------------------------+----------+----------¦
¦1118-63¦William S. Fly and Betty Clements Fly ¦9,338.47 ¦987.84 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1119-63¦S. M. Clements and Mrs. S. M. Clements ¦68,063.14 ¦3,542.55 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1120-63¦Edward W. Clark and Marienne Clements Clark ¦47,354.85 ¦3,082.77 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1121-63¦Raye W. Pegram ¦39,358.12 ¦1,413.62 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1122-63¦R. Q. Pegram and Mrs. R. Q. (Denny) Pegram ¦34,193.31 ¦1,209.24 ¦
+-------+-----------------------------------------------+----------+----------¦
¦1123-63¦Scranton B. Jones and Joyce Pegram Jones ¦8,499.44 ¦936.74 ¦
+-------+-----------------------------------------------+----------+----------¦
¦2460-63¦Jack R. Dodson and Kathryn D. Dodson ¦24,667.39 ¦1,581.49 ¦
+-------+-----------------------------------------------+----------+----------¦
¦5611-63¦William G. Elliott and Peggy Pegram Elliott ¦9,099.36 ¦936.83 ¦
+-----------------------------------------------------------------------------+
The issues for decision in the case of petitioner South Texas Rice Warehouse Co. are:
(1) Whether the gross income and deductions reflected on the partnership records of South Texas Rice Enterprises for the period June 30 to December 31, 1957, and the years 1958 and 1959 were actually earned by or attributable to petitioner South Texas Rice Warehouse Co.
(2) In the alternative, if it is held that the income and deductions of South Texas Rice Enterprises were not actually earned by or attributable to South Texas Rice Warehouse Co., whether under the provisions of section 482 of the Internal Revenue Code of 1954, respondent properly allocated $30,000 of the income of South tExas Rice Enterprises to South Texas Rice Warehouse Co. as additional rent for each of its fiscal years ended June 30, 1958, 1959, and 1960.
The affirmative issue raised by the amendments to answer filed at the trial in the case of petitioners J. E. Davant and Kathryn Davant and the cases consolidated therewith has been settled by the parties, leaving for our decision in these consolidated cases the following:
(1) Whether the substance of the transaction between petitioners and a person who at the time of the transaction owned no stock in South Texas Rice Warehouse Co. constituted a sale by petitioners of their stock in South Texas Rice Warehouse Co.
(2) If the transaction whereby petitioners transferred their stock in South Texas Rice Warehouse Co. to an individual who immediately, as sole stockholder, passed a resolution to liquidate the corporation is not in substance a sale, (a) did the transfer by South Texas Rive Warehouse Co. of all of its assets to South Texas Water Co. constitute a sale of assets after adoption of a plan for liquidation with a distribution of all assets of the liquidated corporation within a period of 1 year to the stockholders of the liquidating corporation so that the distribution should be considered the equivalent of a sale of stock by the stockholders under the provisions of section 337 of the Internal Revenue Code of 1954;3 or (b) did the transaction constitute a reorganization within the provisions of either section 368(a)(1)(F) or 368(a)(1)(D)?
(3) If the transaction whereby South Texas Rice Co. transferred its assets to South Texas Water Co. constituted a reorganization within the provisions of either section 368(a)(1)(F) or 368(a)(1)(D), is the total amount received by the stockholders taxable to them as a dividend under ...
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