Stinnett v. Comm'r of Internal Revenue

Decision Date11 February 1970
Docket Number3515-67,3418-67,5094-67.,Docket Nos. 3414-67— 3416-67
PartiesJAMES L. STINNETT, JR., ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Charles E. McClung, for the petitioners.

Brice Tondre, for the respondent.

1. Held, non-interest-bearing notes issued to the stockholders of an electing small business corporation in exchange for their capital in the predecessor partnership, whether regarded as ‘debt’ or as ‘equity,‘ did not give rise to more than one class of stock within the meaning of sec; 1371(a), I.R.C. 1954. Regs. sec. 1.137101(g) invalidated.

2. Held, the leasehold term was for an indefinite period and leasehold improvements thereon must be depreciated over their useful life.

QUEALY, Judge:

Respondent determined deficiencies as follows:

+-----------------------------------------------------------------------------+
                ¦Docket No.¦Petitioner(s)                                ¦ ¦Taxable¦Deficiency¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦ ¦year   ¦          ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦ ¦       ¦          ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦ ¦       ¦          ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦3414-67   ¦James L. Stinnett, Jr                        ¦ ¦1962   ¦$225.30   ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦3415-67   ¦James L. Stinnett, Jr., and Bonnie H.        ¦(¦1963   ¦446.40    ¦
                ¦          ¦Stinnett                                     ¦ ¦       ¦          ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1964   ¦1,322.90  ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦3416-67   ¦James E. Thomas and Cathern Thomas           ¦(¦1963   ¦565.82    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1964   ¦429.63    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1962   ¦211.26    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦3418-67   ¦Robert E. Brown and Grace H. Brown           ¦(¦1963   ¦530.61    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1964   ¦807.06    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1962   ¦636.95    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦3515-67   ¦Louis H. Heath and Mary S. Heath             ¦(¦1963   ¦1,605.05  ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1964   ¦1,083.03  ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1962   ¦169.63    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦5094-67   ¦Harold L. Roberts and Lois Roberts           ¦(¦1963   ¦4,413.60  ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦(¦1964   ¦356.00    ¦
                +----------+---------------------------------------------+-+-------+----------¦
                ¦          ¦                                             ¦ ¦       ¦          ¦
                +-----------------------------------------------------------------------------+
                

The issues for decision are: (1) Whether International Meadows, Inc., had more than one class of stock within the meaning of section 1371(a) of the Internal Revenue Code of 1954 thereby rendering its election to be taxed as a small business corporation invalid; and (2) whether a lease pursuant to which the lessee made certain household improvements was a lease for a term certain for purposes of amortizing the cost of such improvements. A decision on these questions will dispose of the issues in dockets Nos. 3414-67, 3415-67, 3416-67, 3418-67, 3515-67, and 5094-67.

FINDINGS OF FACT

Issue 1. Qualification Under Section 1371(a)

Some of the facts were stipulated and they are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioner James L. Stinnett, Jr., at the time of filing his petition in this case resided in El Segundo, Calif. Petitioner Bonnie H. Stinnett were resided in Seattle, Wash. James L. Stinnett, Jr., and Bonnie H. Stinnett were husband and wife during 1962, 1963, and 1964 and filed joint Federal income tax returns for said years with the district director of internal revenue at Los Angeles, Calif.

Petitioners James E. Thomas and Cathern Thomas resided in El Segundo, Calif., at the time they filed their petition herein. They were husband and wife during 1963 and 1964 and filed joint Federal income tax returns with the district director of internal revenue at Los Angeles, Calif. Petitioners Robert E. Brown and Grace H. Brown resided in Anaheim, Calif., at the time they filed their petition herein. They were husband and wife during 1962, 1963, and 1964 and filed joint Federal income tax returns with the district director of internal revenue at Los Angeles, Calif.

Petitioners Louis H. Heath and Mary S. Heath resided in El Segundo, Calif., at the time they filed their petition herein. They were husband and wife during 1962, 1963, and 1964 and filed joint Federal income tax returns with the district director of internal revenue at Los Angeles, Calif.

Petitioners Harold L. Roberts and Lois Roberts resided in Reno, Nev., at the time they filed their petition herein. They were husband and wife during 1962, 1963, and 1964 and filed joint Federal income tax returns with the district director of internal revenue at Reno, Nev.

In early 1962 petitioners James L. Stinnett, Jr., Robert E. Brown, Louis H. Heath, and Harold L. Roberts formed a partnership known as J. b. J. Co. for the purpose of operating a golf driving range in El Segundo, Calif. Prior to this time on October 6, 1961, J. B. J. Co., which at that time was composed of Stinnett, Brown, and Heath, executed a lease with the Standard Oil Co. of California (hereinafter referred to as Standard Oil). Under this lease J. B. J. Co. leased a certain tract in El Segundo, Calif., for 3 years for use as a golf driving range.

Petitioners Brown and Stinnett had spent 2 years and 9 months in attempts to obtain this lease from Standard Oil. During this period Brown and Stinnett engaged in surveys and projections in order to evaluate the possibilities of success for a driving range in the El Segundo area. In undertaking these surveys Brown and Stinnett incurred expenses which were unreimbursed.

When Brown and Stinnett realized that the lease from Standard Oil was forthcoming, they determined that they would need additional capital. They then contacted a mutual friend, petitioner Heath, who consented to join the venture.

Brown and Stinnett each contributed $10,000 and Heath contributed $20,000. Brown and Stinnett were each to have a 35-percent interest in the partnership and Heath was to have 30 percent. In addition Heath was to manage the business and receive a salary. The reason for the discrepancy in the partnership percentage division was the aforenoted time and funds that Brown and Stinnett had expended in promoting the venture.

In the early part of 1962 petitioner Harold L. Roberts, another friend, joined the partnership. Roberts contributed about $53,000. As of May 31, 1962, the partners' percentages for sharing profits and losses were:

+--------------------------+
                ¦                  ¦Percent¦
                +------------------+-------¦
                ¦Robert E. Brown   ¦27     ¦
                +------------------+-------¦
                ¦James L. Stinnett ¦27     ¦
                +------------------+-------¦
                ¦Louis H. Heath    ¦23     ¦
                +------------------+-------¦
                ¦Harold L. Roberts ¦23     ¦
                +--------------------------+
                

The partners' capital accounts were:

+----------------------------+
                ¦Robert E. Brown   ¦$8,504.35¦
                +------------------+---------¦
                ¦James L. Stinnett ¦8,504.35 ¦
                +------------------+---------¦
                ¦Louis H. Heath    ¦18,753.62¦
                +------------------+---------¦
                ¦Harold L. Roberts ¦52,252.17¦
                +----------------------------+
                

On April 6, 1962, International Meadows, Inc. (hereinafter referred to as the corporation), was formed under the laws of the State of California for the purpose of operating the golf driving range that had been operated by J.B.J. Co. Article four of the articles of incorporation provided:

This corporation is authorized to issue only one class of shares of stock; the total number of said shares shall be One Hundred (100) of a par value of One (1.00) Dollar per share; and the aggregate par value of all shares having a par value is One Hundred (100.00) Dollars.

On May 25, 1962, the corporation obtained from the commissioner of corporations of the State of California a permit to sell and issue 100 shares of its common stock for $1 per share. The stock was issued and held of record as follows:

+-------------------------+
                ¦                  ¦Shares¦
                +------------------+------¦
                ¦Robert E. Brown   ¦27    ¦
                +------------------+------¦
                ¦James L. Stinnett ¦27    ¦
                +------------------+------¦
                ¦Louis H. Heath    ¦23    ¦
                +------------------+------¦
                ¦Harold L. Roberts ¦23    ¦
                +-------------------------+
                

On May 31, 1962, J.B.J. transferred all of its assets and liabilities to the...

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