Vantress v. Commissioner, Docket No. 93720.
| Decision Date | 04 May 1964 |
| Docket Number | Docket No. 93720. |
| Citation | 23 TCM (CCH) 711,1964 TC Memo 123 |
| Parties | Charles D. Vantress and Jane F. Vantress v. Commissioner. |
| Court | U.S. Tax Court |
Earle B. May, Jr., and Edward R. Kane, Haas-Howell Bldg., Atlanta, Ga., for the petitioners. George W. Calvert, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in income tax of petitioners in the amount of $331,591.61 for 1956.
The only issue to be determined is whether or not petitioners received ordinary income (dividends) in the amount of $526,000 for 1956 on the sale and redemption of 6 percent debenture bonds of Chas. Vantress Farms, Inc.
The stipulated facts are found accordingly and the stipulation, together with the exhibits identified, are included herein by reference.
Petitioners are husband and wife residing at 3140 West Andrews Drive, N. W., Atlanta, Georgia. They filed their joint Federal income tax return for 1956 with the district director of internal revenue for the district of Georgia, Atlanta, Georgia. Since Jane F. Vantress is a party to this proceeding only because she filed a joint income tax return for the year 1956, Charles D. Vantress will hereinafter be referred to as petitioner.
Prior to February 28, 1954, petitioner, a practicing geneticist, was a member of a family partnership known as Vantress Hatchery, located in Marysville, California. The other members of the partnership, which was engaged in the poultry business, were petitioner's two brothers and his mother.
The partnership was made up of two separate businesses. One business was the Vantress Hatchery which was a commercial hatchery engaged in the business of selling baby chicks. The other division of the business was the Vantress Poultry Breeding Farm which was engaged in breeding, developing, and selling chickens for breeding stock. Petitioner was in charge of this latter division of the partnership.
Since 1938 petitioner has been engaged in the business of pedigree breeding and selling a new type of chicken, known as the Vantress male line, which is used for breeding purposes by the meat chicken industry.
By using meat chickens sired by the Vantress male line, the meat chicken industry since 1949 has lowered its cost of production of meat chickens, and has increased the value of its meat chickens sold. This results from the fact that meat chickens sired by the Vantress male line have many qualities which make them superior to ordinary meat chickens.
In 1948 meat chickens sired by the Vantress male won first place by a substantial margin in a national Chicken of Tomorrow contest conducted by A & P Food Stores, the United States Department of Agriculture, and others interested in the meat chicken business. Meat chickens sired by the Vantress male also won first place by an even bigger margin in a similar Chicken of Tomorrow contest held in 1951. The winning of such contests brought the Vantress male to the attention of the entire meat chicken industry.
During the period from 1949 through 1953 sales and earnings from the business of breeding and selling the Vantress male chickens were increasing rapidly. In 1949 approximately 5 percent of meat chickens grown in the United States were sired by the Vantress male; in 1953 approximately 20 percent meat chickens grown in this country were sired by the Vantress male; and by 1957 the percentage had risen to approximately 80 percent. In 1949 the earnings from breeding and selling the Vantress male were about $24,000 and for 1953 the earnings from such business were approximately $115,000.
The partnership (Vantress Hatchery) was dissolved in February 1954. On dissolution petitioner received the entire ownership of the Vantress male, the genealogical breeding records thereof, the breeding flocks used in producing the Vantress male and the egg inventory. Petitioner also received the right to sell Vantress male breeding stock in all of the United States except seven western states. The right to sell in the latter states was obtained in March 1957. In addition, he received 20 percent of the depreciated book value of the assets of the partnership.
The net earnings of the Vantress Hatchery in 1949 to the date of its dissolution in 1954 are as follows:
Year Amount
1949 ................. $254,026.90
1950 ................. 442,670.10
1951 ................. 387,778.85
1952 ................. 321,174.35
1953 ................. 383,117.18
1-1-54 to 2-28-54 .... 109,557.27
In 1954 petitioner moved his main business of operations from California to Georgia. He located in the Duluth area, near Gainsville, and conducted the development, breeding, and sale of the Vantress male chicken as a sole proprietorship.
In connection with his operation of developing, breeding, and selling the Vantress male chicken, petitioner acquired land, built the necessary buildings, and purchased the necessary equipment. He also needed an office, pedigree pens, production houses, incubators and related equipment. In addition to the pedigree Vantress male chickens (which were the production flocks) an inventory of eggs of said line, and the pedigree records thereof, he required a substantial amount of cash. The breeding, development, and sale of the Vantress male could not be carried on without the breeding records, breeding flocks, and the egg inventory.
In 1954 petitioner commenced to convert his sole proprietorship into a corporation. He caused Chas. Vantress Farms, Inc., (hereinafter sometimes referred to as Farms, Inc.) to be incorporated under the laws of the State of Georgia on September 24, 1954. Its authorized capital stock at the date of incorporation was $725,000, consisting of 4,000 shares of common stock with a par value of $100 per share, and 3,250 shares of noncumulative 4 percent preferred stock, par value $100, having no voting rights. The charter was amended on September 1, 1955, to increase the maximum authorized capital stock to $755,000 consisting of 4,000 shares of common stock with a par value of $100 per share, 3,250 shares of noncumulative 4 percent preferred stock without voting rights, with a par value of $100 per share, and 300 shares of Class "A" cumulative redeemable 5 percent preferred stock with voting rights, with a par value of $100.
On or about October 1, 1954, Farms, Inc., issued to petitioner 2,000 shares of its common stock and 3,250 shares of its 4 percent noncumulative preferred stock having a total par value of $525,000. In addition, the corporation issued to petitioner 6 percent debenture bonds (hereinafter sometimes referred to as bonds) with face amounts totaling $500,000. There were 5 such bonds, each in the amount of $100,000.
The bonds read as follows:
Attest: CHAS. VANTRESS FARMS, INC. /s/ Randolph W. Thrower Secretary BY (signed) Chas. Vantress President
The five bonds represented the entire written agreement between petitioner and the corporation. There was no security or collateral agreement to protect the debenture bonds in addition to the bonds themselves.
In exchange for the stock and bonds in the total face amount of $1,025,000 of Farms, Inc., petitioner on or about October 1, 1954, transferred to Farms, Inc., the following assets:
(a) All pedigree records and breeding flocks pertaining to the Vantress male line.
(b) All inventory...
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