Wiebusch v. Comm'r of Internal Revenue
| Decision Date | 08 March 1973 |
| Docket Number | Docket No. 1049-71. |
| Citation | 59 T.C. 777 |
| Parties | GEORGE W. WIEBUSCH AND CORINNA JANE WIEBUSCH, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
George W. Wiebusch, pro se.
Leonard A. Hammes, Jr., for the respondent.
Petitioners operated a ranching business as a sole proprietorship until Jan. 1, 1964. On Jan. 2, 1964, they transferred said assets to a corporation which then elected subch. S status. The fair market value of the assets transferred was $292,975, the liabilities transferred or assumed equaled $180,441.33, and the petitioners' adjusted basis in the assets was $119,219.08. Held, first, pursuant to the provisions of secs. 351 and 357(c) petitioners incurred a recognizable gain of $61,222.25 on the transfer and, second, the petitioners are not entitled to deduct any of the corporate losses on their own tax returns since their basis in the stock became zero after the transfer, secs. 358 and 1374(c)(2).
FINDINGS OF FACT
The Commissioner determined deficiencies in petitioner's Federal income tax as follows:
+--------------------------+
¦Calendar year ¦Amount ¦
+----------------+---------¦
¦ ¦ ¦
+----------------+---------¦
¦1964 ¦$5,862.80¦
+----------------+---------¦
¦1965 ¦107.01 ¦
+----------------+---------¦
¦1966 ¦1,071.80 ¦
+--------------------------+
Concessions have been made by the petitioners leaving the following issues for our determination:
(1) Whether petitioners must recognize as gain on the transfer of property to a corporation the excess of liabilities over the basis of the property transferred pursuant to section 357(c), I.R.C. 1954.1
(2) Whether petitioners are precluded by section 1374(c)(2) from deducting losses of an electing small business corporation against their personal income tax liability.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
The petitioners, George W. Wiebusch and Corinna Jane Wiebusch, are husband and wife residing at the time of the filing of the petition herein at Broken Bow, Nebr. Using the cash basis of accounting, they filed their joint Federal income tax returns for the calendar years 1964, 1965, and 1966 with the district director of internal revenue at Omaha, Nebr.
Prior to January 1, 1964, the petitioners operated a ranching business as a sole proprietorship. On January 2, 1964, they formed a corporation known as the Wiebusch Land & Cattle Co. (hereinafter referred to as L & C or the corporation). Articles of incorporation were duly filed with the secretary of state of Nebraska. L & C elected to be taxed as a small business corporation pursuant to the provisions of subchapter 5, sections 1371 through 1379.
The assets of the ranching operation were transferred to L & C in exchange for the corporation's stock. Immediately following this exchange, the stock was held as follows:
+----------------------------------------+
¦Shareholder ¦Number of shares ¦
+---------------------+------------------¦
¦ ¦ ¦
+---------------------+------------------¦
¦Corinna Jane Wiebusch¦880 ¦
+---------------------+------------------¦
¦Vaughn A. Wiebusch ¦60 ¦
+---------------------+------------------¦
¦Harold K. Wiebusch ¦60 ¦
+---------------------+------------------¦
¦Total issued shares ¦1000 ¦
+----------------------------------------+
Vaughn A. and Harold K. Wiebusch are the sons of petitioners.
The assets which the petitioners transferred to the corporation had adjusted bases in their hands as follows:
+-----------------------------------------------------------------------------+
¦Asset ¦Adjusted basis ¦
+------------------------------------------------------------+----------------¦
¦Blaine County Farm ¦$32,000.00 ¦
+------------------------------------------------------------+----------------¦
¦Improvement to Blaine County Farm ¦9,684.03 ¦
+------------------------------------------------------------+----------------¦
¦Custer County Farm ¦32,540.00 ¦
+------------------------------------------------------------+----------------¦
¦Improvements to Custer County Farm ¦1,200.00 ¦
+------------------------------------------------------------+----------------¦
¦Livestock, machinery, equipment, and other personal property¦43,795.05 ¦
+------------------------------------------------------------+----------------¦
¦Total ¦119,219.08 ¦
+-----------------------------------------------------------------------------+
The fair market value of these assets at the time of incorporation was $292,975. However, petitioners' ranching operation was subject to liabilities in the amount of $180,441.33. The following liabilities were assumed by the corporation as part of the exchange:
+-------------------------------------------------------------------------+
¦Creditor ¦ ¦Amount ¦
+--------------------------------------------------------------+----------¦
¦Prudential Insurance Co. (ranch loan, principal, and interest)¦$80,739.33¦
+--------------------------------------------------------------+----------¦
¦Prudential Insurance Co. (farm loan) ¦ ¦17,600.00 ¦
+--------------------------------------------------------------+----------¦
¦Broken Row Production Credit Co. (livestock, machinery, auto, ¦ ¦
+--------------------------------------------------------------+----------¦
¦truck, feed, pickup) ¦54,060.00 ¦
+--------------------------------------------------------------+----------¦
¦ ¦ ¦152,399.33¦
+-----------------------------------------------------+--------+----------¦
¦Miscellaneous debts: ¦ ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦First National Bank ¦$3,500 ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦Helen Wiebusch ¦9,882 ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦Protective Savings & Loan ¦12,000 ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦Ernest Poland ¦350 ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦Taxes ¦2,310 ¦ ¦
+-----------------------------------------------------+--------+----------¦
¦ ¦ ¦28,042.00 ¦
+-----------------------------------------------------+--------+----------¦
¦Total ¦ ¦180,441.33¦
+-------------------------------------------------------------------------+
Attached to petitioners' Federal income tax return for 1964, and substantially reiterated in the Federal income tax return (Form 1120-S) of L & C, was the following statement:
(6) With respect to liabilities of the transferors assumed by the controlled corporation:
(i & ii) The nature of the liabilities, when and under what circumstances created:
The liabilities are set out on page 1, totalling $180,441.33. All were created during the past twenty years while the farming and ranching business which is involved in the incorporation was being built. All loans were used for operating expenses, the purchase of breeding stock, improvements, machinery and equipment.
(iii) The corporate business reason for assumption by the controlled corporation:
Since the assets that were involved in the transfer owed their very existence to the indebtedness mentioned, the only logical conclusion is that repayment of such indebtedness should ultimately come from such assets.
(iv) Whether such assumption eliminates the transferor's primary liability:
It does not eliminate transferor's primary liability.
The above statement of all facts pertinent to the exchange of property for stock of the controlled corporation is made for the purpose of complying with the regulations of the Internal Revenue Service.
(Signed) CORINNA JANE WIEBUSCH, Taxpayer.
During the years in issue, promissory notes, mortgages, and other evidence of indebtedness, which were executed after the corporation was formed, were signed by George W. Wiebusch as president of L & C, Corinna Jane Wiebusch as secretary, and by Corinna Jane Wiebusch in her individual capacity.
L & C filed Federal income tax returns for 1964, 1965, and 1966 indicating the following net losses and petitioners' share of such losses:
+-----------------------------------------------+
¦Calendar year ¦Loss ¦Petitioners' share ¦
+---------------+----------+--------------------¦
¦ ¦ ¦ ¦
+---------------+----------+--------------------¦
¦1964 ¦$15,336.54¦$13,496.05 ¦
+---------------+----------+--------------------¦
¦1965 ¦27,224.88 ¦21,779.90 ¦
+---------------+----------+--------------------¦
¦1966 ¦18,104.91 ¦13,759.73 ¦
+-----------------------------------------------+
Petitioners deducted their share of the corporation's losses for the calendar years 1964, 1965, and 1966 in determining their personal income tax liabilities. In his statutory notice of deficiency respondent disallowed these...
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