Spheeris v. CIR, 13093.
| Decision Date | 25 January 1961 |
| Docket Number | No. 13093.,13093. |
| Parties | Andrew M. SPHEERIS and Ismene A. Spheeris, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Maurice Weinstein, Milwaukee, Wis., for petitioners.
Joseph W. Townsend, Chicago, Ill., John Potts Barnes, MacLeish, Spray, Price & Underwood, Chicago, Ill., for amicus curiae.
Charles K. Rice, Asst. Atty. Gen., Charles B. E. Freeman, Lee A. Jackson, A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., for respondent.
Before HASTINGS, Chief Judge, and SCHNACKENBERG and CASTLE, Circuit Judges.
This petition to review a decision of the Tax Court of the United States raises one central issue — the legal characterization for income tax purposes of certain payments made by Milwaukee Towne Corporation (Towne) to taxpayer Andrew M. Spheeris. Spheeris and his wife Ismene, joint taxpayers and petitioners, here contend that such payments were loans by the corporation to them and as such were not reportable income. The Commissioner argues that the payments were dividends and therefore constituted taxable income. The Tax Court held that the payments in question were dividends within the relevant statutes1 and assessed deficiencies in petitioners' income tax for the calendar years 1953, 1954 and 1955 in the respective amounts of $18,908.66, $5,592.76, and $8,486.00.
The pertinent factual background of this case, as revealed in unchallenged findings of the Tax Court, may be summarized as follows.
In 1946, the Miller Theater Corporation was organized in Wisconsin by Andrew Spheeris and two brothers-in-law, C. J. Papas and S. J. Papas. The three divided the capital stock equally. Shortly thereafter, pursuant to an agreement with United Artists Corporation, the Miller Theater Corporation was reorganized to form the Milwaukee Towne Corporation. United Artists agreed to furnish Towne with motion pictures; in turn, it was permitted to purchase 200 shares of Towne's Class B stock. It further agreed to make loans to Towne. The 400 shares of Class A stock in Towne were to be purchased by the former owners of the Miller Theater Company.
The authorized capital stock of Towne has been held since November, 1946 as follows:
Name Class No. of Shares
----------------------------------------------------------
A. M. Spheeris A 117 34/100
Mary J. Papas A 77 22/100
C. J. Papas A 78 22/100
S. J. Papas A 78 22/100
John Papas A 1
B. C. Dolar, Trustee A 48
United Artists B 198
Edward Raftery B 1
Rud. Lohrenz B 1
Paul Lazarus, Jr. B 1
Ralph Cramblett B 1
Since 1946, the ownership of all 400 shares of Class A stock, except for 48 shares held in trust for United Artists, has been in the hands of Spheeris and his family who have operated Towne as a close family unit.
During the years 1946-1949, Towne received substantial loans from various sources, including Spheeris, his father-in-law John Papas, United Artists, and other corporations. All these loans, which were repaid by Towne by mid-1952, were evidenced by promissory notes and bore interest of four per cent.
Beginning in 1953, Spheeris and other stockholder-members of his family withdrew funds from Towne for their personal use. No withdrawals were made on behalf of United Artists. Corporations which Spheeris and members of his family controlled also received funds from Towne during this period. It is indicated that such withdrawals were not made in proportion to the recipient's equity ownership of Class A stock.
These various withdrawals were entered in Towne's books as "Accounts Receivable — Miscellaneous." The entries on Spheeris' account were as follows:
Debit
Date Debit Credit Balance
-------------------------------------------------------------
May 27, 1953 $ 5,000.00 $ 5,000.00
Sept. 30, 1953 15,000.00 20,000.00
Oct. 28, 1953 16,500.00 36,500.00
Mar. 31, 1954 5,000.00 41,500.00
Apr. 28, 1954 $23,547.27 17,952.73
Apr. 28, 1954 25,000.00 42,952.73
Mar. 30, 1955 9,000.00 51,952.73
Apr. 27, 1955 5,000.00 56,952.73
May 24, 1955 3,000.00 59,952.73
Oct. 31, 1955 2,500.00 62,452.73
May 23, 1956 5,000.00 57,452.73
Nov. 30, 1957 1,500.00 58,952.73
The sole cash credit reducing Spheeris' account in the amount of $5,000 was in 1956, after he was apprised that the present proceedings had begun. The 1954 credit of $23,547.27 was merely a bookkeeping transaction and did not represent a cash repayment by Spheeris.
None of the withdrawals was evidenced by promissory notes by Spheeris to Towne nor were they secured by any collateral. There was no provision for payment of interest to Towne; and, in fact, no interest was ever paid. No date of repayment was specified.
During the period in question, on advice of counsel, no formal dividends were declared by Towne. The Tax Court found that during such time there was doubt as to the tax effect on the corporation of a million dollar treble damage award it had received in an antitrust action. See, Milwaukee Towne Corp. v. Loew's Inc., 7 Cir., 1951, 190 F.2d 561. Further, the status of United Artists as a stockholder was in doubt, following notice given in 1954 by Towne demanding that United Artists return its Class B stock because of the latter's alleged breach of contract.
After notice by Towne to United Artists to return the Class B stock, the latter filed suit in 1954 against Towne charging that Spheeris and other officers had mismanaged the company and complaining of loans and advances made by Towne to Spheeris and other family stockholders. In answer to that complaint, filed prior to the instant proceedings, Spheeris and others admitted receiving loans from Towne. In addition there was testimony before the Tax Court by Spheeris and S. J. Papas that the payments in question were at all times considered by them as loans which were intended to be repaid.
From 1952 to 1956, Towne had substantial earned surplus, and the withdrawals in question were taken from earnings and profits.
After considering all the above facts and weighing the...
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