Yelencsics v. Comm'r of Internal Revenue
| Decision Date | 29 September 1980 |
| Docket Number | Docket Nos. 2078-77—-2080-77,2224-77.,2223-77 |
| Citation | 74 T.C. 1513 |
| Parties | ANTHONY YELENCSICS and NORMA YELENCSICS, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners purchased all the issued and outstanding stock of X corporation from its sole shareholder for cash and promissory notes. Petitioners and X corporation cosigned the notes. The purchase agreement included an employment provision under which X corporation would pay seller $70,000 over 4 years for his remaining available to provide consulting services to X corporation. Held, payments by X corporation to seller under the consulting agreement are deductible under sec. 162, I.R.C. 1954. Held, further, payments by X corporation in partial satisfaction of the promissory notes issued seller are constructive dividends to petitioners. Held, further, sec. 6653(a) addition to tax not imposed on X corporation or on individual petitioner. Bernard Sobelsohn, Benjamin Weiner, and Jack N. Honart, for the petitioners.
Robert B. Marino, for the respondent.
Respondent determined the following deficiencies and additions to tax in petitioners' Federal income taxes:
After concessions, the remaining issues for decision are:
(1) Whether payments made by petitioner Rawson Cadillac, Inc., formerly Laing Motor Car Co., to Gordon Laing pursuant to a consulting agreement are deductible as compensation under section 162(a), or are constructive dividends to the individual petitioners.
(2) Whether certain payments by Rawson Cadillac, Inc., to Gordon Laing in partial satisfaction of notes issued him on the sale of his stock constitute constructive dividends to the individual petitioners.
(3) Whether the section 6653(a) addition to tax should be imposed on petitioners Rawson Cadillac, Inc., and John V. Rawson.
Some of the facts have been stipulated and are found accordingly.
Petitioners Anthony Yelencsics and Norma Yelencsics, husband and wife, resided in Edison, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Philadelphia, Pa., and when they filed their petition in this case.
Petitioners Steve Yelencsics and Rose Yelencsics, husband and wife, resided in Edison, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Philadelphia, Pa., and when they filed their petition in this case.
Petitioners Joseph Yelencsics and Margaret Yelencsics, husband and wife, resided in Edison, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Newark, N.J., and when they filed their petition in this case.
Petitioners John V. Rawson and Mabel Rawson, husband and wife, resided in Watchung, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Newark, N.J., and when they filed their petition in this case.
Petitioner Rawson Cadillac, Inc., formerly Laing Motor Car Co., a corporation organized under the laws of the State of New Jersey, maintained its principal offices in Plainfield, N.J., when it filed its petition in this case. It filed Federal corporate income tax returns for the years 1967, 1968, and 1969 with the Internal Revenue Service, Newark, N.J.
Laing Motor Car Co. (hereinafter the corporation) was incorporated under the name “Laing Machine-Auto Repair Co.” on July 19, 1905, by Allen B. Laing, who held 98 of the 100 shares issued. Upon the death of Allen Laing in 1961, his son Gordon continued the business as president and majority shareholder.
During the years 1967, 1968, and 1969, the corporation was a franchised dealer of the General Motors Corp. (hereinafter General Motors) with the exclusive right to sell Oldsmobile and Cadillac automobiles in Plainfield, N.J. At that time, the corporation operated under a dealer selling agreement with General Motors effective through October 1970. This agreement, at paragraph 3 thereof, provided that General Motors entered into the contract with the corporation in reliance upon, and in consideration of, the personal qualifications and representations of Gordon M. Laing (hereinafter Laing). No other person was listed in the agreement as owning or actively participating in the operation of the corporation. The agreement further provided that no change in ownership, financial interest, or active management of the corporation shall be made without the prior written approval of General Motors.
On August 31, 1964, the corporation borrowed $175,000 from the General Motors Acceptance Corp. (hereinafter GMAC) and executed a mortgage to GMAC on eight parcels of land located in Plainfield, N.J. As further security for this loan, Laing pledged 1249 shares of common stock of the corporation to GMAC. From 1966 through 1969, the 1249 shares of stock were held in escrow.
From late 1960 through July 1966, petitioner John V. Rawson (hereinafter Rawson) was employed by the corporation as sales manager of its automobile dealership. In this capacity, Rawson's primary responsibility was running the sales department and he generally was not involved in any of the other aspects of the business.
Sometime prior to July 22, 1966, Laing told Rawson that he wanted to sell the business and offered Rawson the opportunity to purchase his stock interest in the corporation. The financial condition of the corporation had been deteriorating for some time and Laing was anxious to sell.
On July 22, 1966, following negotiations between the parties, Rawson entered into an agreement (hereinafter referred to as the stock purchase agreement) to purchase all the issued and outstanding stock of the corporation (1251 shares) from Laing for $265,000.3 Under the terms of this agreement, Laing was to receive payment for his stock as follows: $75,000 upon closing, $70,000 on January 15, 1967, and the balance payable over 8 years beginning January 15, 1967, in 96 equal monthly installments of $1,519.20 (consisting of principal and interest at 5 percent per annum). The agreement included the following provision for securing payment of the unpaid purchase price:
5. Buyer agrees to secure the Seller for the payment of all unpaid amounts at closing of title by executing promissory notes for the payment thereof according to the terms of this agreement, which said notes shall be made by Rawson and by Anthony Yelencsics, Steve Yelencsics and Joseph Yelencsics, and their wives as guarantors, and further guaranteed by Laing Motor Car Co. All guarantors shall be liable as co-makers. * * * In addition to the foregoing collateral security, all shares of stock of Laing Motor Car Co. shall be held in escrow by Walter L. Leib, Esq., attorney for Rawson. He may release said shares starting January 16, 1967 in a number and amount and ratio as the amount paid bears to the original total obligation on said date.
The stock purchase agreement required Laing, at closing, to provide Rawson with all unpledged stock certificates, properly endorsed in blank, and stock powers for all certificates pledged with GMAC. For purposes of this agreement, the stock powers were the equivalent of the stock certificates representing the pledged shares. Laing also agreed to sign all documents necessary for transferring the pledged certificates to Rawson upon their release by GMAC and to arrange for such transferred certificates to be recorded on the corporate books under Rawson's name.
Rawson did not want General Motors to know that he had purchased all of Laing's stock since he feared that they would terminate the automobile franchise. Accordingly, he required Laing to maintain secrecy with respect to the stock purchase agreement. As an additional measure designed to insure this secrecy, the agreement further provided that 25 percent of Laing's stock was to be held nominally of record in his name endorsed in blank.4
As part of the agreement, Laing agreed to remain as president of the corporation at the pleasure of the board of directors and as a director of the corporation at the pleasure of the stockholders. However, resignation of all other officers and directors of the corporation was to be delivered to Rawson at closing. Laing also agreed to attend all meetings of the board of directors and any other meetings and conferences requested of him by the board of directors, or as requested, to give an appropriate proxy to vote his shares of stock at any stockholders meeting and to vote his place at a board of directors meeting. In addition, he agreed not to own or operate a Cadillac or Oldsmobile dealership within 50 miles of Plainfield, N.J., for 5 years.
The following consulting arrangement was also provided for in the agreement:
6. Laing shall be employed by Laing Motor Car Co. for a period for four years for a total salary of $70,000 to be payable as follows: during the year 1966, in equal monthly installments, the sum of $10,000.00 to begin August 15, 1966; during the year 1967, in equal monthly installments, the sum of $20,000.00; during the year 1968, in...
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