WILSON PLYWOOD AND DOOR, INC. v. Commissioner
| Decision Date | 28 February 1980 |
| Docket Number | 1460-78,1514-78,1513-78,Docket No. 11416-77 |
| Citation | 39 TCM (CCH) 1132,1980 TC Memo 57 |
| Parties | Wilson Plywood and Door, Inc. (Formerly Venture Sales, Inc.), et al. v. Commissioner. |
| Court | U.S. Tax Court |
Anderson Wallace, Jr. 4300 First Natl. Bank Bldg., Dallas, Tex., for the petitioners. Richard D. Ames, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in petitioner corporations' income taxes for the fiscal years ending October 31 1974, and October 31, 1975:
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Petitioner Docket No. F/Y/E Deficiency2
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Wilson Plywood and Door, Inc. ..... 11416-77 10-31-74 $ 6,500.00
(formerly Venture Sales, Inc.) 10-31-75 12,330.14
Inland Sales Co., Inc. ............ 1460-78 10-31-74 4,333.42
10-31-75 8,220.26
Paint Sundries Co., Inc. .......... 1513-78 10-31-74 1,470.34
10-31-75 990.99
Dallas Wholesale Builders ......... 1514-78 10-31-74 4,333.16
Supply, Inc. 10-31-75 8,219.77
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The issue for decision is whether each petitioner corporation is entitled to a separate surtax exemption during each of the fiscal years ended October 31, 1974 and October 31, 1975, or whether the four corporations were component members of a controlled group limited to one surtax exemption under section 1561 (a) (1), I.R.C. 1954.3 Resolution of the issue presented depends on whether certain capital stock of three subsidiary corporations owned by their employees, which stock is subject to purchase options granted to the parent corporation, constitutes "excluded stock" within the meaning of section 1563(c)(2)(A)(iii) for the purpose of determining whether petitioner corporations form a parent-subsidiary controlled group.
Some of the facts have been stipulated and are found accordingly.4
Dallas Wholesale Builders Supply, Inc. (Dallas Wholesale), was incorporated in Texas on March 1, 1955. Its principal place of business at the time of filing its petition in this case was in Dallas, Texas. Dallas Wholesale timely filed its Federal income tax returns for fiscal years ending October 31, 1974, and October 31, 1975, with the Internal Revenue Service Center, Austin, Texas.
Paint Sundries Company, Inc. (Paint Sundries), was incorporated in Texas.5 Its principal place of business at the time of filing its petition in this case was Dallas, Texas. Paint Sundries timely filed its Federal income tax returns for fiscal years ending October 31, 1974, and October 31, 1975, with the Internal Revenue Service Center, Austin, Texas.
Inland Sales Company (Inland Sales) was incorporated in Texas on May 25, 1953. Its principal place of business at the time of filing its petition in this case was Dallas, Texas. Inland Sales timely filed its Federal income tax returns for fiscal years ending October 31, 1974, and October 31, 1975, with the Internal Revenue Service Center, Austin, Texas.
Venture Sales, Inc. (Venture Sales) was incorporated in Texas.6 The corporate name subsequently changed to Wilson Plywood and Door, Inc. (Wilson Plywood). The principal place of business of Wilson Plywood at the time of filing its petition in this case was Dallas, Texas. Wilson Plywood timely filed its Federal income tax returns for fiscal years ending October 31, 1974, and October 31, 1975, with the Internal Revenue Service Center, Austin, Texas.
Dallas Wholesale distributes lumber sundry items, including amongst others, plywood, screen doors, aluminum doors, roofing, and glass. This merchandise is sold directly to dealers and lumber yards.
During the tax years in issue the outstanding capital stock of Dallas Wholesale totaled 204 shares.7 Those shares were held by four shareholders in the following amounts:
Percentage
Number of of Shares
Shareholders Shares Outstanding
J. R. Byford ......... 124.8 61.18
Vernon E. Potter ..... 55.2 27.06
Roy H. Dale .......... 12.0 5.88
H. Hale .............. 12.0 5.88
In the years following the tax years in issue, Mr. Potter acquired the majority ownership from Mr. Byford. During fiscal years ending October 31, 1974, and October 31, 1975, the officers of Dallas Wholesale included:
Name Position
J.R. Byford ........ President
Vernon E. Potter ... Vice President
Roy H. Dale ........ Treasurer
On July 15, 1969, Dallas Wholesale purchased from A.C. Utterback at least 81.7 percent of the outstanding capital stock of each Paint Sundries and Inland Sales.8 At that time the board of directors of Paint Sundries had authorized the issuance of 10,000 shares of capital stock. Paint Sundries continued to operate its business of selling bulk packaged items, including plaster of paris and powdered goods, to commercial industrial maintenance accounts and Inland Sales.
On July 15, 1969, 50,000 shares of Inland Sales capital stock were authorized. After Dallas Wholesale purchased the capital stock of Inland Sales, the latter corporation remained a distributor of paint sundries, including the sale of such items as sandpaper, rollers, and cupboard brushes to lumberyards, hardware stores, and paint stores.
Even after the July 15, stock purchase, Dallas Wholesale maintained its offices at a location different from that of Inland Sales and Paint Sundries. The latter two companies continued to operate out of adjacent facilities.
On February 11, 1970, Dallas Wholesale sold for $4.08 per share 1,500 shares of the stock of Inland Sales to Marianna Ellsworth, and 1,000 shares of the capital stock of Inland Sales to Charles W. Fletcher. Mr. Fletcher paid for this stock with community property. Prior to 1970 Mr. Fletcher had been a shareholder of Inland Sales for approximately 14 years, during which time he had acquired 3,050 unrestricted shares of Inland Sales stock. Mr. Fletcher had been employed by the company since 1956. Ms. Ellsworth had been the bookkeeper for Inland Sales since approximately 1960, which position she retained in 1970 and the tax years here involved. In approximately 1970 Mr. Fletcher was elected president of Inland Sales, to which position he was re-elected during each tax year in issue. During fiscal years ending October 31, 1974, and October 31, 1975, other Inland Sales officers were Vernon E. Potter, vice president, and J.R. Byford, chairman of the board.
The February 11, 1970, stock ownership of Inland Sales remained essentially unchanged until 1978. During the tax years in issue, fiscal years ending October 31, 1974, and October 31, 1975, the capital stock of Inland Sales was owned as follows:
Number of Percentage
Shares of Shares
Shareholders Outstanding Outstanding
Dallas Wholesale ........ 38,350 76.7
Charles W. Fletcher ..... 1,000 2.0
Marianna Ellsworth ...... 1,500 3.0
Others .................. 9,150 18.3
(including 3,050 unrestricted shares owned by
Charles W. Fletcher prior to February 11
1970)
Unlike the 3,050 shares of Inland Sales capital stock owned by Mr. Fletcher prior to 1970, the 1,000 shares he purchased on February 11, 1970, are subject to a disposition restriction. The 1,500 shares of Inland Sales stock purchased by Ms. Ellsworth on February 11, 1970, are also subject to the same restriction. The stock certificates issued to each Mr. Fletcher and Ms. Ellsworth indicate by notation that "The shares represented by this certificate are transferable only upon compliance with the terms of a contract dated of even date, executed by the above shareholder and Dallas Wholesale Builders Supply, Inc." The terms of that shareholder agreement entitle Dallas Wholesale to exercise in certain circumstances a right of first refusal over the alienation of the Inland Sales stock owned by either Mr. Fletcher or Ms. Ellsworth.9 The events that trigger Dallas Wholesale's purchase option include: (1) either shareholder wishes to dispose of the stock; (2) either shareholder voluntarily or involuntarily ceases employment with Inland Sales; and (3) either shareholder dies. The agreement stipulates that the shares will be repurchased at the book value existing at the time of repurchase.
In the years following the tax years in issue, Ms. Ellsworth approached Mr. Fletcher and offered to sell her 1,500 shares of Inland Sales stock to Mr. Fletcher. Mr. Fletcher accepted the offer. Thereafter Mr. Fletcher informed Mr. Potter, then the majority stockholder of Dallas Wholesale, of the prospective stock transfer. Mr. Fletcher offered to allow Mr. Potter to purchase a portion of Ms. Ellsworth's Inland Sales stock, and Mr. Potter accepted. Therefore, the final purchase of Ms. Ellsworth's stock was split between Mr. Fletcher and Mr. Potter.
On February 11, 1970, Dallas Wholesale sold 270 shares of Paint Sundries capital stock to Mr. Fletcher at a price of $2.52 per share.10 At that time Mr. Fletcher was a salesman for Paint Sundries and had been a shareholder for approximately 15 years, during which time he had acquired 610 shares of Paint Sundries' unrestricted stock. However, all of those shares purchased on February 11, 1970, are restricted, as evidenced by the statement appearing upon the stock certificate: "The shares represented by this certificate are transferable only upon compliance with the terms of a...
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