Teller v. Commissioner
| Decision Date | 15 July 1992 |
| Docket Number | Docket No. 20317-88. |
| Citation | 64 T.C.M. 166 |
| Parties | Howard S. Teller and Mei-Li Teller v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined a $616,498 income tax deficiency for petitioners' 1983 taxable year. Respondent also determined additions to tax of $30,825 under section 6653(a)(1)1 and $154,125 under section 6661. If section 6653(a)(1) is applicable, then section 6653(a)(2) would also be applicable requiring, pursuant to respondent's determination, liability for 50 percent of the interest due on any deficiency in income tax that may be finally redetermined. By an amendment to her answer, respondent asserts that section 6621(c) regarding increased interest for tax-motivated transactions is applicable and is seeking increases in the deficiencies, as follows: Income tax—increase of $318,756.10 to a total of $935,254.10, the section 6653(a)(1) addition to tax—increase of $15,937.70 to a total of $46,762.70, and the section 6661 addition to tax—increase of $79,688.53 to a total of $233,813.53.
The issues for our consideration are: (1) Whether either of two domestic corporations was availed of principally for holding stock of foreign subsidiaries under section 1248 so that petitioners' gains from sale of either domestic corporation's stock should be recognized as dividends, (2) what portion of the consideration received by petitioners is allocable to the stock of the domestic corporations, (3) whether the $137,478 reported by petitioners as ordinary income attributable to imputed or unstated interest should have been reported as capital gain, and (4) whether petitioners are liable for additions to tax and increased interest under sections 6653(a)(1) and (2), 6621(c), and 6661.
The parties entered into stipulations of fact and documents, all of which are incorporated by this reference. Petitioners were at all pertinent times husband and wife, who at the time their petition was filed had their legal residence at Waimanalo, Hawaii.
Petitioner Howard Teller (petitioner or Teller) graduated from the University of South Carolina in 1962 with a degree in electrical engineering and thereafter was employed by the General Electric Co. performing advanced product research, where he worked with Antal Csicatka, the inventor of FM stereo radio. He became a manager in the radio engineering department, where he worked as an engineer and supervised 21 engineers.
Petitioner went on to work in managerial positions for two other large manufacturers of radios. His experience and expertise included involvement in the renegotiation of contracts for imported electronic audio equipment. After leaving the employ of electronics manufacturers, petitioner worked for Chicago Display Co. (CDC), a direct mail marketing business. One of CDC's activities was to provide radios to American Oil Co. for sale to its credit card customers by means of an advertisement in customers' monthly statements. Petitioner, in addition to advanced technical knowledge of electronics, especially radios, was proficient as a promoter and vendor of radio and electronic products.
From 1979 through September 1983, petitioner resided in Taiwan, Formosa, and thereafter resided in Hawaii through the time that the petition was filed in this case.
Modular Radio Corp.
Modular Radio Corp. (MRC) was incorporated by petitioner on January 13, 1971, for multiple purposes, including designing, fabricating, promoting, marketing, and selling electronic components. From inception until July 1, 1976, Teller owned 100 percent of MRC's stock. MRC did not have separate offices and used the office of Teller's attorney, Robert Zeitner (Zeitner), to maintain its records. MRC was not formed principally for the holding, directly or indirectly, of stock of one or more foreign corporations. Teller's expertise and efforts provided the basis for any success enjoyed by MRC.
In addition to Teller, MRC's only employee was John Edwards (Edwards). As of July 1, 1976, Edwards was hired as vice president of MRC and he served as a member of MRC's board of directors. Edwards held 49 percent of MRC's shares and Teller the remaining 51 percent from July 1, 1976, until some time early in 1979 when MRC redeemed Edward's shares and his relationship with MRC was terminated. At the time of his termination, Edwards sued MRC claiming $800,000 in damages. Teller and Edwards settled this litigation.
Initially, MRC was engaged primarily in the design of electronic radio products that were assembled in southern Illinois and marketed though CDC to American Oil Co. credit card customers. Petitioner, while performing the contract services for CDC, conceived of an idea to use the National Weather Service Radio broadcasts in an advertising banner or sign at gas stations. While providing promotional advertising for the gas station, the device would provide motorists with up-to-date weather conditions in the vicinity of their travel. In addition, petitioner designed a wall barometer with a built-in weather radio system which could be activated by the push of a button to provide local weather conditions.
While working on this project, petitioner decided that the radio circuits sold by Radio Shack (which had been used in petitioner's prototype "talking weather station") did not have the quality of reception he thought necessary for the success of his product. After unsuccessfully working with a Hong Kong company to make a better radio circuit, petitioner designed his own circuit. Petitioner's circuit was incorporated in the talking weather stations which were successfully marketed through American Oil Co., Shell Oil Co., and Sears, Roebuck & Co.
During the mid-1970's MRC was awarded a contract to design five radio products to be manufactured by untrained local labor in Algeria. MRC received in excess of $250,000 in income for its part in this venture. From mid-1976 through early 1979, Edwards was hired to provide a presence in the Far East so as to permit Teller to concentrate on expanding the domestic radio business of Teller's corporations.
Teller, with respect to contracts of MRC, was instrumental in the design (electronic and cabinetry), quality, quality control, and marketing of its products. For the fiscal years ended 1971 through 1983, MRC's gross receipts, other income, income or loss, and salary paid to Teller were as follows:
Fiscal Gross Other Income Teller's
Year Receipts Income (Loss) Salary
1971 .................................... $ 504 0 $ 38 0
1972 .................................... 5,008 0 3 0
1973 .................................... 45,886 0 1,016 0
1974 .................................... 40,164 0 ( 1,062) 0
1975 .................................... 195,161 0 (75,810) $ 44,000
1976 .................................... 264,978 $ 1,576 58,966 55,350
1977 .................................... 168,589 7,689 (15,021) 36,225
1978 .................................... 169,118 10,682 (44,424) 48,833
1979 .................................... 186,997 11,337 (84,235) 103,483
1980 .................................... 259,114 1,147 27,884 113,500
1981 .................................... 0 3,624 ( 6,908) 7,500
1982 .................................... 0 0 ( 4,186) 0
1983 .................................... 0 284 ( 220) 0
On the last day of its fiscal year 1971 through 1983, MRC's balances of cash, total assets, and retained earnings were as follows:
Year Cash Total Assets Retained Earnings
1971 ..................................... $ 940 $ 2,470 0
1972 ..................................... 541 2,746 0
1973 ..................................... 1,867 4,073 0
1974 ..................................... 835 3,116 0
1975 ..................................... 40,779 62,276 ($ 75,810)
1976 ..................................... 172,366 243,810 50,256
1977 ..................................... 117,142 347,413 21,738
1978 ..................................... 73,271 177,238 ( 22,665)
1979 ..................................... 8,486 24,233 (108,350)
1980 ..................................... 6,889 15,719 ( 579)
1981 ..................................... 179 8,539 5,374
1982 ..................................... 5,035 8,689 1,189
1983 ..................................... 7,257 10,441 2,941
As of the end of its 1983 fiscal year, MRC's balance sheet reflected the following entries:
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