Thatcher v. Comm'r of Internal Revenue
| Decision Date | 04 October 1973 |
| Docket Number | Docket Nos. 5391-69— 5393-69. |
| Citation | 61 T.C. 28 |
| Parties | WILFORD E. THATCHER AND ESTELLA M. THATCHER, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Leo S. Meysing, for the petitioners.
Gary R. DeFrang, for the respondent.
A partnership, using the cash receipts and disbursements method of accounting, transferred all of its assets and liabilities, including accounts receivable and accounts payable, to a newly formed corporation in exchange for all of the authorized stock of the corporation. Held: Under sec. 357(c), I.R.C. 1954, the excess of the liabilities assumed, including the accounts payable, by the corporation over the basis of the assets transferred is taxable. The basis of the stock acquired in the exchange is determined. Held, further, respondent's determination of reasonable compensation approved.
In these consolidated cases, the respondent determined the following deficiencies in the petitioners' Federal income taxes:
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¦ ¦ ¦ ¦ ¦
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¦Petitioners ¦Docket ¦Taxable¦Deficiency¦
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¦ ¦No. ¦year ¦ ¦
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¦ ¦ ¦ ¦ ¦
+-----------------------------------+-------+-------+----------¦
¦ ¦ ¦ ¦ ¦
+-----------------------------------+-------+-------+----------¦
¦Wilford E. and Estella M. Thatcher ¦5391-69¦1963 ¦$31,344.82¦
+-----------------------------------+-------+-------+----------¦
¦ ¦ ¦1964 ¦648.36 ¦
+-----------------------------------+-------+-------+----------¦
¦Teeples & Thatcher Contractors, Inc¦5392-69¦1963 ¦42,051.45 ¦
+-----------------------------------+-------+-------+----------¦
¦ ¦ ¦1964 ¦2,486.20 ¦
+-----------------------------------+-------+-------+----------¦
¦Karl D. and Iva A. Teeples ¦5393-69¦1963 ¦46,716.96 ¦
+-----------------------------------+-------+-------+----------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------------------------------------+
Concessions having been made by the parties, the issues remaining for decision are: (1) Whether the liabilities transferred to a corporation as a part of an exchange under section 351 of the Internal Revenue Code of 1954 2 exceeded the basis of the assets acquired by such corporation in such exchange so that section 357(c) is applicable; (2) what is the basis of the stock acquired by the transferor in such exchange; and (3) whether the respondent properly disallowed deductions to the corporation for salary payments made to Karl D. Teeples.
Wilford E. and Estella M. Thatcher are husband and wife who, at the time of filing the petitioner herein, resided in Portland, Oreg. They filed joint United States individual income tax returns for the taxable years 1963 and 1964, on the cash receipts and disbursements method of accounting, with the district director of internal revenue, Portland, Oreg.
Karl D. and Iva A. Teeples are husband and wife who, at the time of filing the petitioner herein, resided in Portland, Oreg. They filed a joint United States individual income tax return for the taxable year 1963, on the cash receipts and disbursements method of accounting, with the district director of internal revenue at Portland, Oreg.
Teeples & Thatcher Contractors, Inc., is.an Oregon corporation having its principal place of business at the time of filing its petition herein at 8850 S.E. Otty Road, Portland, Oreg. Its United States corporation income tax returns for the period February 1, 1963, to December 31, 1963, and the taxable year 1964, prepared on the cash receipts and disbursements method of accounting, were filed with the district director of internal revenue at Portland, Oreg.
On March 31, 1956, Wilford E. Thatcher and Karl D. Teeples (hereinafter sometimes referred to as Thatcher and Teeples, respectively), formed a general partnership to engage in business as general contractors under the name of Teeples & Thatcher Co. (hereinafter sometimes referred to as the partnership). On August 1, 1960, the partnership purchased farm and cattle ranching properties.
From August 1, 1960, until February 1, 1963, the partnership owned and operated the contracting business and the farm and cattle ranching business. From February 1, 1963, until June 30, 1963, the partnership operated the farm and cattle ranching enterprise as its sole business activity. The partnership maintained its books and filed its partnership returns on the cash receipts and disbursements method of accounting.
In January 1963, Teeples & Thatcher Contractors, Inc. (hereinafter referred to as the corporation), was organized. On February 1, 1963, the partnership transferred to the corporation all of the assets and liabilities of the general contracting business in exchange for all 500 shares of the authorized stock of the corporation and the assumption by the corporation of the liabilities of the partnership.
The assets transferred to the corporation as of February 1, 1963, included the following:
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¦Current assets ¦
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¦ ¦ ¦ ¦ ¦
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¦Cash: ¦ ¦ ¦ ¦
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¦First National Bank ¦ ¦ ¦$16,191.28¦
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¦Cash advances—employees ¦ ¦ ¦250.00 ¦
+-------------------------------+----------+----------+----------¦
¦Loan receivable ¦ ¦ ¦100,000.00¦
+-------------------------------+----------+----------+----------¦
¦Prepaid items: ¦ ¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Insurance ¦ ¦$1,957.23 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Interest ¦ ¦375.00 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Plan deposits ¦ ¦146.00 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Reserve for taxes and insurance¦ ¦1,795.13 ¦4,273.36 ¦
+-------------------------------+----------+----------+----------¦
¦Total current assets ¦ ¦ ¦120,714.64¦
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¦Fixed assets ¦
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¦Land ¦ ¦ ¦2,819.00 ¦
+-------------------------------+----------+----------+----------¦
¦Building ¦$47,105.99¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦7,325.49 ¦39,780.50 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Office equipment ¦4,895.55 ¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦3,215.38 ¦1,680.17 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Machinery and equipment ¦221,879.18¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦110,931.40¦110,947.78¦ ¦
+-------------------------------+----------+----------+----------¦
¦Neon sign ¦391.29 ¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦382.15 ¦9.14 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Automotive vehicles ¦67,297.70 ¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦35,184.56 ¦32,113.14 ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Cessna #310 Skyline ¦43,379.78 ¦ ¦ ¦
+-------------------------------+----------+----------+----------¦
¦Less: Depreciation ¦27,871.82 ¦15,507.96 ¦200,038.69¦
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¦ ¦ ¦ ¦ ¦
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¦Deferred expense ¦
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¦Prepaid rent ¦ ¦ ¦2,320.00 ¦
+-------------------------------+----------+----------+----------¦
¦Properties ¦ ¦ ¦325,892.33¦
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The amounts of the liabilities assumed by the corporation as of February 1, 1963, included the following:
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¦Notes and mortgages payable ¦
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¦ ¦ ¦
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