Watson v. Commissioner
| Decision Date | 30 November 1960 |
| Docket Number | 56276,56329,56237,56260,Docket No. 55521,57397.,56269,56268,56225,56271,56255 |
| Parties | Paul E. Watson, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Keith I. Parsons, Esq., 231 S. LaSalle St., Chicago, Ill., C. Ives Waldo, Jr., Esq., William Cyril Burns, Esq., Harold L. Feigenholtz, Esq., 139 N. Clark St., Chicago, Ill., and Theodore C. Weinberg, Esq., for the petitioners.2 Andrew Kopperud, Jr., Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined income tax deficiencies for the years 1944-1947, inclusive, as follows:
Dkt. No. Petitioner Years Deficiency
55521 P. E. Watson .... 1944 $ 9,990.75
1945 10,815.52
1946 9,922.37
1947 10,082.83
56225 W. P. Littell ... 1944 2,974.94
1945 3,159.01
1946 3,238.98
1947 6,853.93
56237 C. Emery ........ 1944 140.00
1945 321.25
1946 954.01
1947 1,905.70
56255 H. B. Ketting ... 1947 2,711.93
56260 K. D. Stewart ... 1944 1,093.00
1945 1,105.35
1946 1,061.40
1947 4,156.52
56268 D. R. Willis .... 1944 245.00
1945 140.00
1946 499.49
1947 787.29
56269 R. V. Rice ...... 1944 220.00
1945 418.41
1946 408.50
1947 180.50
56271 R. W. Metzger ... 1944 770.18
1945 915.59
1946 1,067.89
1947 1,908.93
56276 H. S. Vanderbie . 1947 390.34
56329 H. B. Groseth ... 1947 396.99
57397 O. Zahner ....... 1944 684.29
1945 790.77
1946 672.95
1947 873.96
All of the petitioners are employees of the same corporation. Common stock of the corporation was sold to each petitioner who transferred all, or most, of such stock to a member of his family. All of the common stock involved was eventually transferred to the trustees of a voting trust in exchange for voting trust certificates. The issue is whether the dividends are taxable to the petitioners. If not, whether they were compensation for petitioners' services in the guise of dividends and therefore taxable to petitioners.
All of the petitioners, except Oscar A. Zahner, resided in Illinois, in Chicago or its vicinity, during the taxable years, and they filed their respective income tax returns with the collector of internal revenue for the first district of Illinois. Oscar A. Zahner was a resident of St. Louis, Missouri, and he filed his returns with the collector of internal revenue for the first district of Missouri.
In 1943 and for several prior years, each petitioner was an employee of Ruthrauff & Ryan, Inc., which is referred to hereinafter as R & R. All of the petitioners were employed in the Chicago office of R & R except Oscar Zahner who was employed in the corporation's office in St. Louis, Missouri. In 1943, Paul E. Watson was an executive vice-president of R & R, the manager of its western division, and a director. Littell, Emery, Stewart, Willis, Rice, Metzger, and Zahner were vice-presidents in 1943; Ketting and Groseth became vice-presidents in 1944; and Vanderbie became vice-president in 1946. All of petitioners were among the top personnel. In 1946, Stewart became a director.
In 1943, there were issued and outstanding 15,000 shares of no par value common stock of R & R. On November 22, 1943, a voting trust agreement between R & R, Raymond F. Sullivan, a holder of common stock, and three individuals, as voting trustees, was executed. During 1944 and thereafter, all of the common stock was assigned and transferred to the voting trustees who issued common stock voting trust certificates for the common stock.
During the years 1943, 1945, 1946, and 1947 certificates representing shares of common stock in various amounts were issued to the respective petitioners, or voting trust certificates. The total amount of common stock involved is 3,250 shares. Dividends were declared on this common stock in each of the taxable years here involved, 1944-1947, inclusive, which were received by the holders of the voting trust certificates which were issued for the common stock. The respondent has determined that the amounts distributed as common stock dividends in the years involved are taxable to each of the petitioners, respectively. Originally, the number of shares of the common stock, or of common stock voting trust certificates, which were acquired by each of the petitioners was as follows:
No. of Shares of
Name of Taxpayer Common Stock
Watson ............... 1,600
Littell .............. 1,050
Emery ................ 300
Ketting .............. 400
Stewart .............. 750
Willis ............... 200
Rice ................. 100
Metzger .............. 400
Vanderbie ............ 150
Groseth .............. 100
Zahner ............... 200
_____
3,250
The facts relating to the organization and operations of R & R, the creation of the voting trust, the salaries paid to the petitioners and other employees of R & R, the acquisition by the petitioners of common stock certificates or common stock voting trust certificates, the transfers thereof to the respective wives and members of the families of the petitioners, or to trusts, the distributions of dividends declared on the common stock involved, and the use of such distributions are as follows:
Ruthrauff & Ryan, Inc.
Wilbur B. Ruthrauff and Frederick B. Ryan organized a partnership in 1912. In 1917, the business was incorporated under the laws of New York as Ruthrauff & Ryan, Inc. The corporation has at all times conducted a national advertising agency business having its main office and headquarters in New York City and branch offices in 13 other cities throughout the United States, from coast to coast. Included in all of the branch offices are offices in Chicago, Illinois, Detroit, Michigan, St. Louis, Missouri, and Hollywood, California. The Chicago office is the headquarters for the so-called western division of the business. R & R had approximately 650 employees in all of its offices and organization during the taxable years.
R & R was, in 1943 and before, a closely held family corporation, all of its stock being owned by the members of the respective families of Wilbur B. Ruthrauff and Frederick B. Ryan. Wilbur B. Ruthrauff died on March 13, 1941.
In 1941 the authorized capital of R & R was $100,000, and the authorized capital stock was 15,000 shares of common stock without par value, all of which was issued and outstanding and was held in equal amounts by the members of the two families, as follows:
Ruthrauff Family No. of Shares
Estate of W. B. Ruthrauff .... 3,198
Abbie H. B. Ruthrauff ........ 2,952
F. Bourne Ruthrauff .......... 675
Florence Ruthrauff ........... 675
_____
7,500
Ryan Family No. of Shares
Frederick B. Ryan ............ 3,198
Elizabeth C. Ryan ............ 2,952
Frederick B. Ryan, Jr. ....... 450
Quincy G. Ryan ............... 450
Bruce E. Ryan ................ 450
_____
7,500
There were no changes in the holdings of stock of R & R until 1943.
The common stock which was issued and outstanding, above referred to, was not subject to any repurchase agreement with R & R.
The balance sheet of R & R as of December 31, 1942, showed that its assets, liability, surplus, and capital stock were as follows:
Assets
Cash ............................. $ 473.199.65
Accounts receivable .............. 1,428,985.00
Notes receivable ................. 88,220.00
Work in process .................. 35,028.65
Investments ...................... 1,771.00
Office equip. less deprec. ....... 64,099.45
Deferred items ................... 5,092.01
_____________
$2,096,395.76
Liabilities and Capital
Accounts payable ................. $1,108,198.31
Accrued payroll and compensation . 162,247.51
Reserve for taxes payable ........ 162,907.43
Reserve for bond purchases ....... 14,788.21
Reserve for commissions .......... 28,077.12
Deferred credit, group ins. ...... 1,032.44
Reserve for contingencies ........ 138,007.49
Surplus .......................... 381,137.25
Capital stock .................... 100,000.00
_____________
$2,096,395.76
The earnings of R & R after Federal income tax and dividends paid for each of the years 1939-1942, inclusive, were as follows:
Earnings
Year After Taxes Dividends Paid...To continue reading
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