TABERY v. Commissioner
| Decision Date | 13 July 1964 |
| Docket Number | Docket No. 4347-62. |
| Citation | 23 TCM (CCH) 1108,1964 TC Memo 189 |
| Parties | Fred J. Tabery and Leone M. Tabery v. Commissioner. |
| Court | U.S. Tax Court |
Earl C. Crouter, Glenn Roberts, and Ralph H. Moore, Rowan Bldg., Los Angeles, Calif., for the petitioners. Robert L. Gnaizda, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined a deficiency in petitioners' income tax for the year 1960 in the amount of $61,135.93. Petitioners, through an amended return and in their petition for the year 1960, claim an overpayment in the amount of $21,942.71. The principal issue for decision is whether the Tabery Corporation, a corporation whose stock in owned 100 percent by petitioner Fred J. Tabery, redeemed, as that term is defined in section 317(b)1 of the Internal Revenue Code of 1954, 80 shares of its stock from petitioner on July 31, 1960. If this issue is decided in the affirmative, then a secondary issue arises concerning whether the distribution is to be governed by section 302(a) or section 301.
Some of the facts have been stipulated and are so found.
Petitioners Fred J. Tabery (hereinafter referred to as petitioner) and Leone M. Tabery are husband and wife with their residence at 4443 Gould Avenue, Pasadena, California. They filed their original joint income tax return for the year 1960 with the district director of internal revenue at Los Angeles, California. They filed their amended joint income tax return for the year 1960 on March 9, 1962, with the district director of internal revenue at Los Angeles, California.
The Tabery Corporation (hereinafter referred to as Tabery) is a California corporation incorporated on May 24, 1933. Tabery's principal business is the decoration, operation, and promotion of trade association shows and the construction of street and building displays throughout the United States. Tabery's office is located at 3443 South Hill Street, Los Angeles, California.
Petitioner acquired 124 shares of stock in Menard Decorators, Inc., on July 31, 1933. The total authorized number of shares of stock of Menard Decorators, Inc., was 250. On January 26, 1944, petitioner acquired another 124 shares of stock in Menard Decorators, Inc., from Henry W. Menard. During the year 1944 petitioner acquired ownership of the remaining 2 shares of Mendard Decorators' authorized stock. Thereafter, petitioner had the name of Menard Decorators, Inc., changed to Tabery. The certificates held by petitioner were not exchanged and they still show the name of the corporation as Menard Decorators, Inc. Petitioner has been the sole stockholder and president of Tabery since 1944.
Petitioner is a cash basis taxpayer using the calendar year while Tabery is an accrual basis taxpayer using a fiscal year ended July 31.
Petitioner since 1946 and throughout 1960 individually owned a five-story commercial building known as the Plan Room Building, located at 1417 Georgia Street, Los Angeles, California. This building was physically located about 25 city blocks from the office of Tabery. Petitioner rented the office and loft space in the Plan Room Building to commercial tenants.
In 1957 petitioner decided to remodel, renovate, and air-condition the Plan Room Building. Inasmuch as Tabery was a licensed contractor and maintained a permanent work force of carpenters, designers, and painters, petitioner decided to have Tabery perform the major portion of the renovating work.
An account was carried on the books of Tabery entitled "Job Account Receivable," which reflected the charges and credits relating to the work on the Plan Room Building. Tabery charged petitioner $201,025.16 for the work on the building. The work was completed by March 1, 1960. By March 31, 1960, the "Job Account Receivable" charges had been reduced to $116,025.16 through credits to this account in the amount of $85,000.
Tabery also maintained a general ledger account entitled "F. J. Tabery Drawing Account No. 152." This account reflected withdrawals made by petitioner from Tabery and repayments thereto.
John W. Christopher (hereinafter referred to as John) was employed by Tabery from February 1951 to July 1961. Thoughout the calendar year 1960 John was secretary of Tabery. John's other duties included office manager, purchasing agent, and accountant. John was responsible for the bookkeeping of Tabery and also the preparation of its tax returns.
Louis M. Goodholme (hereinafter referred to as Louis) has been an employee of Tabery since 1933. Since about 1941 and throughout 1960 Louis was treasurer of Tabery. Louis and John worked together in maintaining the books and records of Tabery. Louis has been responsible for all tax matters of Tabery since 1933.
During 1960, the board of directors of Tabery consisted of petitioner, John, and Louis.
Tabery possessed a corporate minute book. However, no entries were made in this book since 1945. The board of directors of Tabery met at least once a year. The meetings were very informal and usually just consisted of a roundtable discussion in petitioner's office. There was no advance notice given of the meetings. Notes were rarely taken at any of the meetings.
Sometime after March 1, 1960, but before July 1, 1960, petitioner, John, and Louis discussed the ways in which petitioner could repay his indebtedness to Tabery. One suggestion was that petitioner borrow the money from an outside source. Another suggestion made by John and Louis was that petitioner transfer some of his shares of Tabery stock to Tabery. The number of shares would depend upon the value of the stock as of the time of transfer. Louis determined the book value of one share of Tabery stock to be worth $1,400. This value was arrived at by taking into account the cash in banks, accounts receivable, and inventories. This was accepted by the petitioner and John, and it was agreed that petitioner would transfer 80 shares of stock to Tabery in return for the cancellation of his indebtedness to the extent of $112,000. Petitioner wanted legal advice regarding this proposed sale. John and Louis contacted an attorney who had performed legal services for Tabery in the past, regarding the proposed sale. After contacting the attorney, John and Louis again discussed the matter with petitioner, who agreed to transfer his stock to Tabery. To record the transfer, the following journal entries on the books of Tabery were made on July 31, 1960, by John with the approval of the board of directors, including petitioner:
(1) Debit: Tabery Drawing Account ................... $116,025.16
Credit: (Job) Accounts Receivable .............................. $116,025.16
To transfer from Accounts Receivable to Tabery Drawing
Invoice No. 9191 at 3/1/60 in the amount of $73,025.16 and
balance at 7/31/58 of $43,000 — Plan Room Building
(2) Debit: Treasury stock ........................... $112,000.00
Credit: Tabery Drawing Account ................................. $112,000.00
To record the purchase from Tabery petitioner of 80 shares
at $1,400.00 stock Tabery Corporation, value $1,400.00 per
Board meeting dated 7/11/60
John prepared the income tax return of Tabery for the year ended July 31, 1960. One of the assets on the balance sheet of Tabery was treasury stock in the amount of $112,000. The return was prepared with the approval of Louis. John helped in the preparation of petitioner's income tax return for the calendar year 1960. The transaction regarding the 80 shares of Tabery's stock was reflected on petitioner's return as a long-term capital gain. Petitioner was aware of the fact that his return reflected the transfer of stock to Tabery. Both petitioner and Tabery were of the impression that a transfer of stock had taken place as of July 31, 1960, which impression was consistent with their intentions.
Petitioner left his shares of stock in Tabery in a vault located on the premises of Tabery. The 80 shares of stock transferred by petitioner to Tabery were not physically delivered to Tabery. Petitioner would have physically delivered the stock certificates to Tabery if he believed this was necessary to complete the transaction.
Sometime in February 1961 a revenue agent began an investigation of Tabery's return. Inquiries were made regarding petitioner's income tax return for the year 1960. In May 1961 after petitioner filed his 1960 return, he was informed by the examining agent that the transfer of stock to Tabery in return for the cancellation of his indebtedness would be considered a dividend taxable at ordinary income rates. Petitioner had hoped that the transfer of stock would result in a capital gain so that he could pay off his indebtedness to Tabery at the least cost to him. In view of the revenue agent's position regarding the transaction, Tabery, as of July 31, 1961, had two journal entries recorded on its books reversing the two entries made on July 31, 1960, with the following explanation: "To reverse July 31, 1960 journal entry 268 made in error."
After the receipt by petitioner of a 10-and a 30-day letter from the Commissioner, he filed an amended return for the year 1960. The amended return was identical in all respects with the original except that the transfer of stock to Tabery was omitted. Tabery also filed an amended return for its fiscal year ended July 31, 1960, to reflect the second set of journal entries. Both the petitioner's and Tabery's amended returns were filed March 9, 1962.
Sometime in June 1961 petitioner discussed with certain key employees the possibility of their purchasing stock in Tabery. These discussions took place eleven months after petitioner had transferred 80 shares of stock to Tabery. Nothing ever came of those discussions.
Tabery has declared and paid dividends to petitioner for the fiscal years ended July 31, 1955, through and...
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