Tollefsen v. Comm'r of Internal Revenue
| Decision Date | 24 July 1969 |
| Docket Number | Docket no. 1743-67. |
| Citation | 52 T.C. 671 |
| Parties | GEORGE R. TOLLEFSEN AND MARGARET A. TOLLEFSEN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Murray Kurman, for the petitioners.
Richard J. Mandell, for the respondent.
T owned all the stock in A corporation. A corporation was in turn the sole shareholder of B corporation. B corporation sold for cash all its assets and manufacturing rights within the continental United States to a party unrelated to T and became inactive. Thereafter, T immediately began making cash withdrawals from B corporation which were evidenced by non-interest-bearing ‘notes.’ Held, the net withdrawals from B corporation during the year in issue were not bona fide loans to T but, as a result of T's control over A and B corporations, were constructive dividends to T from A corporation.
The Commissioner determined a deficiency in petitioners' 1961 income tax in the amount of $13,029.91. The only issue is whether $24,665.40 received by petitioner George R. Tollefsen during 1961 from Tollefsen Manufacturing Corp., a corporation controlled by him, is taxable to petitioners as a dividend under sections 301 and 316, I.R.C. 1954.
Some of the facts are stipulated and are incorporated herein by reference.
The petitioners, George R. Tollefsen and Margaret A. Tollefsen, are husband and wife. They resided in Brooklyn, N.Y., at the time of the filing of their petition herein. They filed a joint income tax return for the calendar year 1961 with the district director of internal revenue, at Brooklyn, N.Y.
From 1933 to the date of the hearing herein petitioner George R. Tollefsen (Tollefsen) has been engaged in the organization and operation of a number of corporations in which he was the sole or principal shareholder or over which he maintained control. To date, he has organized approximately 25 different corporations and he has served as an officer and director of such corporations during the periods of their existence. On the average, 6 to 10 of Tollefsen's corporations have been in existence every year since 1933.
Tollefsen at times made interest-free personal loans to some of his corporations. As of December 31, 1961, he had made advances to six of his corporations in the aggregate amount of about $170,000 which were characterized as ‘loans.’ Tollefsen rarely borrowed from his corporations.
During 1961 Tollefsen alone, or in conjunction with his wife, owned all, or at least 50 percent of the stock of six corporations. One of these corporations was Tollefsen Bros., Inc. (Tollefsen Bros.), which was incorporated on October 19, 1933, under the laws of the State of New York. From 1940 to the date of the hearing in this case Tollefsen and his wife owned all of the stock of Tollefsen Bros. He also was president of that corporation, and was paid a salary for his services in that capacity. Tollefsen Bros. is essentially a holding company, though it owns and operates certain real estate and machinery. For its taxable year ended December 31, 1961, it reported total income of $9,486.66 from rents, dividends, and capital gains and taxable income of $1,259.06. As of that date, it had ‘earned surplus and undivided profits' in the amount of $72,019.48. It has not paid a dividend, at least from 1956 to the date of the hearing herein, and the record does not disclose that it ever paid a dividend.
From sometime in 1950 to December 19, 1955, Tollefsen Bros. had an exclusive contract with Baldwin Hill Co. (Baldwin), a manufacturer of mineral shot and grit products used as abrasive materials in the cleaning of ships and tanks, for the sale and distribution of these products throughout the world. In 1955 Baldwin discontinued its manufacturing operations and sold its fixed assets to Tollefsen Bros. On December 19, 1955 Tollefsen Manufacturing Corp. (Tollefsen Manufacturing), a New York corporation, was organized for the purpose of carrying on the foregoing business of manufacturing and producing mineral shot and grit. Tollefsen became the president of Tollefsen Manufacturing. Tollefsen Sales Corp. (Tollefsen Sales) was also organized at the same time to carry on the sales activities of Tollefsen Manufacturing.
On January 30, 1956, Tollefsen Manufacturing issued 68 shares of its common stock, without par value, to Tollefsen Bros., at a fixed value of $200 per share, and for which shares Tollefsen Bros. paid $13,600. These 68 shares represented 80 percent of all the stock in Tollefsen Manufacturing. The remaining 20 percent was purchased by a Mr. Hellerman, a former salesman of Tollefsen Bros. Tollefsen Bros. and Hellerman held the same proportionate share of the stock of Tollefsen Sales. The record does not disclose how the fixed assets of the manufacturing business found their way into the hands of Tollefsen Manufacturing, or whether such assets were accounted for in the $13,600 purchase price of the 68 shares of stock.
During 1955 and 1956 Tollefsen, personally, made advances to and on behalf of Tollefsen Manufacturing in the total amount of $1,790.54. These advances were recorded on the books of Tollefsen Manufacturing as an account payable. Tollefsen was repaid for these advances by Tollefsen Manufacturing in January of 1957.
Tollefsen Manufacturing operated as a manufacturer of mineral shot and grit products until March 8, 1960. At that time, it sold for $65,000 its machinery, equipment, and other fixed assets, together with all its rights to manufacture mineral shot and grit, to Anchor Abrasive Corp., a corporation organized by Hellerman for the purpose of purchasing such assets. At the same time, Hellerman sold to Tollefsen Bros. his 20-percent stock interest in Tollefsen Manufacturing, which resulted in making Tollefsen Bros. the sole owner of the stock of Tollefsen Manufacturing. Also, as part of the sales agreement, Tollefsen, Tollefsen Manufacturing, and Tollefsen Sales agreed ‘not to manufacture and/or sell abrasive blasting materials or to be or become in anywise interested in any entity engaging in such activity’ in the continental United States for a period of 5 years.
After the above sale had been completed Tollefsen Manufacturing became inactive. On its income tax return for the fiscal year ended November 30, 1961, it reported no operating income and claimed a loss of $204.84; it was a personal holding company for that year. Tollefsen considered liquidating Tollefsen Manufacturing into its parent, Tollefsen Bros., but decided instead that Tollefsen Manufacturing should retain its corporate form at least until the end of the 5-year period during which its activities were restricted.
Tollefsen began making cash withdrawals from Tollefsen Manufacturing during 1960, after the completion of the above sale and after Tollefsen Bros. became the owner of all the stock in Tollefsen Manufacturing. The payable and receivable accounts of Tollefsen Manufacturing showed the following cash withdrawals by Tollefsen during 1960:
+--------------------+
¦June 30 ¦$10,000¦
+------------+-------¦
¦August 31 ¦5,000 ¦
+------------+-------¦
¦October 31 ¦10,000 ¦
+------------+-------¦
¦November 30 ¦9,500 ¦
+------------+-------¦
¦Total ¦34,500 ¦
+--------------------+
After certain credits (including accrued salary as of November 30, 1959, in the amount of $6,143.18), the net amount withdrawn by Tollefsen during 1960 totaled $27,810.97.
During 1961, Tollefsen made cash withdrawals from Tollefsen Manufacturing in the Net amount of $24,665.40, as follows:
+------------------------------------------------------+
¦Cash withdrawals ¦Credits ¦
+----------------------+-------------------------------¦
¦Feb. 14 ¦$5,000¦May 31 ¦ ¦1 $434.50 ¦
+---------------+------+-------+----------+------------¦
¦Feb. 27 ¦5,000 ¦Nov. 30¦ ¦2 1,552.00¦
+---------------+------+-------+----------+------------¦
¦Apr. 30 ¦5,000 ¦Nov. 30¦ ¦1 348.10 ¦
+---------------+------+-------+----------+------------¦
¦May 2 ¦5,000 ¦ ¦ ¦ ¦
+---------------+------+-------+----------+------------¦
¦May 12, ¦3,000 ¦ ¦ ¦ ¦
+---------------+------+-------+----------+------------¦
¦Oct. 31, ¦4,000 ¦ ¦ ¦ ¦
+---------------+------+-------+----------+------------¦
¦Total ¦27,000¦ ¦ ¦2,334.60 ¦
+---------------+------+-------+----------+------------¦
¦Net withdrawals¦ ¦ ¦$24,665.40¦ ¦
+------------------------------------------------------+
FN2 Accrued salary.
The net debit balance against Tollefsen as of January 1, 1962, was $52,476.37.
The amounts withdrawn by Tollefsen during 1960 and 1961 were reflected on the books of Tollefsen Manufacturing as loans receivable, and Tollefsen issued promissory notes in respect of his withdrawals from that corporation, dated and in the amounts as follows:
+------------------------------------------------+
¦Date ¦Amount ¦Date ¦Amount ¦
+-------------+---------+-------------+----------¦
¦June 3, 1960 ¦$3,850.82¦Feb. 28, 1961¦$10,000.00¦
+-------------+---------+-------------+----------¦
¦Aug. 3, 1960 ¦5,000.00 ¦Apr. 8, 1961 ¦5,000.00 ¦
+-------------+---------+-------------+----------¦
¦Oct. 3, 1960 ¦10,000.00¦May 12, 1961 ¦8,000.00 ¦
+-------------+---------+-------------+----------¦
¦Nov. 30, 1960¦9,960.15 ¦Oct. 4, 1961 ¦4,000.00 ¦
+-------------+---------+-------------+----------¦
¦1960 Total ¦27,810.97¦1961 Total ¦27,000.00 ¦
+------------------------------------------------+
These notes were payable on demand to Tollefsen Manufacturing and bore no interest. No interest was paid at any time by Tollefsen in respect of the above cash withdrawals.
Tollefsen Manufacturing has not paid a dividend from the time of its incorporation to the date of the hearing herein. As of November 30, 1961,...
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