Zinniel v. Comm'r of Internal Revenue, Docket Nos. 31100-84
| Decision Date | 26 August 1987 |
| Docket Number | 31102-84., Docket Nos. 31100-84,31101-84 |
| Citation | 89 T.C. No. 32,89 T.C. 357 |
| Parties | JOHN C. ZINNIEL AND GAYLE A. ZINNIEL, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Messrs. M, S, and Z each owned 300 shares of stock of a corporation. The corporation used a fiscal taxable year ending March 31. The corporation made an election under section 1372(a) to be taxed under subchapter S, I.R.C. 1954 (‘subchapter S election‘), and the election was first effective for its fiscal taxable year ended March 31, 1977. On November 30, 1977, each shareholder transferred 30 shares of the corporation's stock to his spouse. At that time, the spouses executed a document that indicated that the spouses refused to consent to the corporation's subchapter S election, and they filed the document with the corporation. HELD, the plain meaning of the statutory language under section 1372(e)(1), as amended by the Tax Reform Act of 1976, does not require that new shareholders file an affirmative refusal to consent to a corporation's subchapter S election with the Internal Revenue Service (‘Service‘) in order to terminate the corporation's election. HELD, FURTHER, the legislative history of section 1372(e)(1), as amended, does not clearly indicate that Congress intended to require by statute that new shareholders file an affirmative refusal to consent to a corporation's subchapter S election with the Service in order to terminate the election. HELD, FURTHER, sections 1.1372- 3(b)(1) and 1.1372-3(b)(2), Proposed Income Tax Regs., 45 Fed. Reg. 26097 (April 17, 1980), which proposed to require a new shareholder in a corporation that has made a subchapter S election to file an affirmative refusal to consent with the Service, do not have the force of law. Eugene O. Duffy, for the petitioners.
James M. Klein, for the respondent.
*
By statutory notices of deficiency dated June 6, 1984, respondent determined deficiencies in petitioners' income taxes for the taxable years ended December 31, 1978, and December 31, 1979, as follows:
+-------------------------------------------------+
¦Docket No.¦Petitioner ¦Year¦Deficiency¦
+----------+----------------------+----+----------¦
¦31100-84 ¦John C. Zinniel ¦1978¦$6,552 ¦
+----------+----------------------+----+----------¦
¦ ¦and Gayle A. Zinniel ¦1979¦631 ¦
+----------+----------------------+----+----------¦
¦31101-84 ¦David N. Merryfield ¦1978¦7,551 ¦
+----------+----------------------+----+----------¦
¦ ¦and Jane A. Merryfield¦1979¦632 ¦
+----------+----------------------+----+----------¦
¦31102-84 ¦James G. Samuels ¦1978¦5,857 ¦
+----------+----------------------+----+----------¦
¦ ¦and Margaret Samuels ¦1979¦406 ¦
+-------------------------------------------------+
The issue presented for our decision is whether a new shareholder in a ‘small business corporation‘ that has made an election under section 1372(a)2 to be taxed under subchapter S of the Code is required to file an affirmative refusal to consent with the Internal Revenue Service in order to terminate the corporation's election.
This case was submitted fully stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by reference.
Petitioners John C. Zinniel and Gayle A. Zinniel are husband and wife, and resided in Dousman, Wisconsin, at the time their petition in this case was filed. They filed joint Federal income tax returns for taxable years 1978 and 1979.
Petitioners David N. Merryfield and Jane A. Merryfield are husband and wife, and resided in Dousman, Wisconsin, at the time their petition in this case was filed. They filed joint Federal income tax returns for the taxable years 1978 and 1979.
During the taxable years 1978 and 1979, petitioners James A. Samuels and Margaret Samuels were husband and wife. At the time their petition in this case was filed, Mr. Samuels resided in North Prairie, Wisconsin, and Ms. Samuels resided in Dousman, Wisconsin. The Samuels filed joint Federal income tax returns for the taxable years 1978 and 1979.
Sierra Limited (‘Sierra‘) was incorporated under the laws of Wisconsin on March 5, 1976. At that time, Messrs. Merryfield, Samuels, and Zinniel each owned one-third of the outstanding 900 shares of stock in Sierra (or 300 shares each). Sierra used a fiscal taxable year ending March 31. Sierra made an election under section 1372(a) to be taxed under subchapter S of the Code (the election is hereinafter referred to as a ‘subchapter S election‘), and the election was first effective for Sierra's fiscal taxable year ended on March 31, 1977.
It was decided that Sierra would adopt a qualified pension plan during 1977. Sierra's advisers were asked to ‘make the necessary changes.‘3
Petitioners' legal adviser, Patrick J. O'Neil (‘O'Neil‘), advised petitioners that a termination of Sierra's subchapter S election could be effected by a failure of new shareholders to consent to the election after becoming shareholders.4
On November 30, 1977, each Sierra shareholder (i.e., Messrs. Merryfield, Samuels, and Zinniel) transferred 30 shares of Sierra stock to his spouse. At that same time, a document entitled ‘Refusal to Consent to Small Business Corporation Election‘ (hereinafter referred to as the ‘Refusal to Consent‘) was executed by the spouses (hereinafter referred to as the ‘new Sierra shareholders‘) and filed with Sierra. The Refusal to Consent states as follows:
+--------------------------------------+
¦REFUSAL TO CONSENT ¦
+--------------------------------------¦
¦TO SMALL BUSINESS CORPORATION ELECTION¦
+--------------------------------------¦
¦ ¦
+--------------------------------------¦
¦SIERRA LIMITED ¦
+--------------------------------------¦
¦2306 Grandview Blvd. ¦
+--------------------------------------¦
¦Waukeshe, Wisconsin 53186 ¦
+--------------------------------------+
WE, the undersigned shareholders hereby refuse to consent to the election of the above corporation, SIERRA LIMITED, to be treated as a small business corporation under Section 1372(a) of the Internal Revenue Code.
+-----------------------------------------------------------------------------+
¦ ¦ ¦ ¦DATE ¦
¦ ¦ ¦ ¦SHARES ¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦ ¦NUMBER OF ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦NAME ¦ADDRESS ¦SHARES ¦ACQUIRED¦
+-----------------------+-----------------------------+--------------+--------¦
¦Jane Merryfield ¦____________________ ¦30 ¦11/30/77¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦Margaret Samuels ¦____________________ ¦30 ¦11/30/77¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦Gayle Zinniel ¦____________________ ¦30 ¦11/30/77¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------+-----------------------------+--------------+--------¦
¦ ¦____________________ ¦ ¦ ¦
+-----------------------------------------------------+-----------------------¦
¦Dated: November 30, 1977 ¦(S) Jane Merryfield ¦
+-----------------------------------------------------------------------------¦
¦------------------------------------------------------------------- ¦ ¦
+-----------------------------------------------------------------------------¦
¦ ¦ ¦JANE MERRYFIELD ¦
+-----------------------------------------------------+-----------------------¦
¦Dated: November 30, 1977 ¦(S) Margaret Samuels ¦
+-----------------------------------------------------------------------------¦
¦--------------------------------------------------------------------¦ ¦
+-----------------------------------------------------------------------------¦
¦ ¦ ¦MARGARET SAMEULS [sic] ¦
+-----------------------------------------------------+-----------------------¦
¦Dated: 11/30/77 ¦(S) Gayle A. Zinniel ¦
+-----------------------------------------------------------------------------¦
¦--------------------------------------------------------------------¦ ¦
+-----------------------------------------------------------------------------¦
¦ ¦ ¦GAYLE ZINNIEL ¦
+-----------------------------------------------------------------------------+
On November 30, 1977 (the same date that the Refusal to Consent was filed with Sierra), a Form 5301, Application for Determination for Defined Contribution Plan, was...
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