Stinnett's Pontiac Service, Inc. v. Commissioner
| Citation | 1982 TC Memo 314,44 TCM (CCH) 55 |
| Decision Date | 07 June 1982 |
| Docket Number | 182-78.,117-78,Docket No. 112-78 |
| Parties | Stinnett's Pontiac Service, Inc., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Malcolm L. Kneale, 1341 S.W. First St., Miami, Fla., for the petitioners. Jan S. Neiman, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined the following deficiencies in petitioners' Federal income taxes:
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Docket No. Petitioner Taxable Year Amount
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112-78 Stinnett's Pontiac Service Inc. .......... Year ended $ 5,182.72
October 31
1972
117-78 Richard W. Stinnett ...................... 1973 8,359.89
182-78 Richard W. Stinnett and Gay P
Stinnett ................................ 1974 33,664.89
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By amended answers, respondent has determined an increased deficiency of $16,012.81 in docket No. 117-78 and an increased deficiency of $36,321.46 in docket No. 182-78.
After concessions three issues remain for resolution: (1) whether petitioner Stinnett's Pontiac Service, Inc. is entitled to a deduction for its taxable year ended October 31, 1972 for a $33,500 promissory note contributed on January 1, 1973 to an employees' profit-sharing plan, (2) whether petitioner Stinnett's Pontiac Service, Inc. was entitled to a partially worthless debt deduction for its taxable year ended October 31, 1974 and, if so, in what amount, and (3) whether certain transfers of cash and goods from Stinnett's Pontiac Service, Inc. to Cargo Construction Co., Ltd. were dividends to petitioners Richard W. Stinnett and Gay P. Stinnett.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference.
Petitioner Stinnett's Pontiac Service, Inc. filed its corporate income tax return for the year ended October 31, 1972 with the Internal Revenue Service Center in Chamblee, Georgia using the cash method of accounting. Petitioner Stinnett's Pontiac Service, Inc. is a corporation incorporated in the state of Florida with its principal place of business in Sarasota, Florida at the time the petition herein was filed.
Petitioner Richard W. Stinnett filed a 1973 individual income tax return, using the cash method of accounting and "married filing separately" status, with the Internal Revenue Service Center in Chamblee, Georgia. Petitioners Richard W. Stinnett and Gay P. Stinnett filed a joint 1974 individual income tax return using the cash method of accounting with the Internal Revenue Service Center at Chamblee, Georgia. Petitioners Richard W. Stinnett and Gay P. Stinnett were residents of Sarasota, Florida when their petitions were filed herein.
Petitioner Stinnett's Pontiac Service, Inc. (hereinafter Pontiac) is an automobile dealership. During the years in issue, petitioner Richard W. Stinnett (hereinafter Stinnett) was president of Pontiac and owned 74 percent of its stock. The remainder of Pontiac's stock was owned by Stinnett's brother and sister.2
In the early 1960's Pontiac established a qualified profit-sharing plan for its employees. Pontiac would calculate its year-end profit and, if such profit exceeded $25,000, transfer to the profit-sharing plan 15 percent of the compensation paid or accrued to each employee-member. These transfers were usually made by check within 75 days after the end of Pontiac's taxable year. For its taxable year ending October 31, 1972 Pontiac deducted $37,940 for pension and profit-sharing expenses. This amount consisted of $3,240 paid to Glenna C. Stinnett (a former shareholder and officer), $1,200 paid to Pontiac's former parts manager and $33,500 as a contribution to the employees' profit-sharing plan.3
On or about January 1, 1973 Pontiac issued a demand note in the amount of $33,500 and bearing 8 percent annual interest, made out to "Stinnett's Pontiac Employes' sic Profit Sharing Trust." Pontiac made an entry on its books under "notes payable" for $33,500 and the profit-sharing plan entered the note on its books as a "note receivable." Pontiac used the funds represented by the note for its operating needs. At the date of the note's issuance Pontiac was financially able to have contributed cash or a check to the profit-sharing plan.4
On or about July 2, 1973 Stinnett, Danford L. Sawyer, Jr. (hereafter referred to as Sawyer) and Albert L. Bundy (hereafter referred to as Bundy) purchased all the stock of Cargo Construction Company, Ltd. (hereafter referred to as Cargo), a Bahamian corporation. Cargo's principal business activity was commercial fishing and its sole asset was the R/V Victory, a lobster boat. Stinnett, Sawyer and Bundy owned 43 percent, 35 percent and 22 percent of Cargo's stock, respectively.5
After Stinnett, Sawyer and Bundy purchased Cargo's stock the corporation purchased the R/V Victory for approximately $55,000. Part of the R/V Victory's purchase price was obtained from a bank loan, which Stinnett, Sawyer and Bundy were required to co-sign.
Within 2 to 3 weeks of the boat's purchase, Stinnett, Sawyer and Bundy contributed some cash to Cargo in order to properly equip the boat for its operations. Because Cargo had not yet begun operations, the corporation also needed funds to make payments on the boat's mortgage. Although the three shareholders had not anticipated making cash contributions other than their initial investment, they agreed that they would contribute to Cargo to meet its needs.6 Such contributions were to be made in proportion to each shareholder's stock ownership in Cargo. After modifications the R/V Victory was equipped with, among other things, a 22 cubic ton refrigerated hold.
During the period 1973 through 1975 Sawyer and Bundy contributed amounts to Cargo. Pontiac also made several transfers to Cargo, consisting of both funds and parts for the R/V Victory.
During the period July 13, 1973 to December 31, 1973, Pontiac transferred funds to Cargo amounting to at least $12,969.86. Cargo issued interest bearing unsecured demand notes to Pontiac for $12,969.86. During this period, Pontiac also purchased marine parts for Cargo. Pontiac sold these parts to Cargo at Pontiac's cost plus 10 percent. Pontiac created an account receivable in the amount of $885.91 on its books for such sales. In addition to these transactions, Pontiac made payments to or on behalf of Cargo during 1973 of $12,100. There is no evidence of whether Cargo issued notes to Pontiac for all or any part of this latter amount.
During 1974 Pontiac transferred funds to Cargo in the amount of at least $34,275.267 and purchased parts for Cargo for which Pontiac created an amount receivable of $5,105.74 (representing Pontiac's cost plus 10 percent). During 1974 Pontiac made additional payments of $4,300 to or on behalf of Cargo. There is no evidence of whether Cargo issued notes to Pontiac for any or all of this last amount, see note 7, supra.
On March 30, 1974 Pontiac made a journal entry wherein account receivable from Cargo was credited and note receivable from Cargo was debited in the amounts of $4,159.16. No amount was paid on this account receivable. Cargo kept no corporate books. Cargo reflected all cash advances from Pontiac as deposits in its checkbook.
During the period January 1, 1975 to September 15, 1975 Pontiac transferred funds to Cargo aggregating at least $4,973.67.
During 1973 through 1975 Pontiac's net profit on all operations was around 2 percent. Pontiac's typical mark-up on automobile parts during this period was between 25 percent and 40 percent.
Pontiac rarely purchased parts for maritime customers and the parts transferred to Cargo were specially ordered by Pontiac. Pontiac's usual mark-up on marine parts during this time was about 100 percent.
Pontiac did not obtain any financial statements from Cargo prior to making the transfers, nor were the amounts of the transfers secured. Stinnett felt that there was no need to secure Pontiac's advancements to Cargo because he had primary control over both corporations. Pontiac did not normally make loans to nonshareholders apart from credit extended to purchasers of its goods or services.
Cargo's lobster venture was unsuccessful almost from its inception. Due to financial problems, Cargo's shareholders decided to sell the R/V Victory and recoup some of their investment. On or about February 23, 1976, Stinnett, as president of Cargo, entered into an agreement for the sale of the boat and all its gear and tackle for $80,000. Pontiac was to receive $20,000 from the sale of the boat. However, the agreement fell through and Pontiac never received any funds from Cargo.
On October 31, 1974 the dockside price of lobster in Miami, Florida was $3.50 per pound, delivered.
The R/V Victory was sold either in 1976 or 1977 for $42,000. The proceeds were used to pay the mortgage on the boat and other debts of Cargo. On July 7, 1977 Cargo issued check number 292 in the amount of $4,954.90 to Sawyer and Associates Advertising, Inc. Check number 293 was also issued by Cargo on that date to "R.W. Stinnett" in the amount of $6,000.
On its Federal income tax return for the taxable year ended October 31, 1974 Pontiac deducted $56,388.63 as a partially worthless debt for its advances to Cargo. This amount was computed by subtracting from total advances to Cargo of $76,388.63 the anticipated $20,000 from Cargo's sale of the boat. Pontiac's return for that year reflected a net operating loss of $160,016.48.
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