Zipp v. Comm'r of Internal Revenue, Docket Nos. 55934
| Decision Date | 30 April 1957 |
| Docket Number | 60820,Docket Nos. 55934,60821. |
| Citation | 28 T.C. 314 |
| Parties | LOUIS H. ZIPP AND PEARL ZIPP, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Cyrus A. Neuman, Esq.,2 and Bennet Kleinman, Esq.,3 for the petitioners.
Hugh G. Isley, Esq., for the respondent.
All of the stock of a corporation, 50 shares, was owned by L. and his 2 sons in 1947 when L. transferred 23 shares into the names of each son. In 1950, the corporation paid L. $93,782.50 pursuant to an agreement by which he retired from all participation in the corporation's affairs and, thereafter, its business was managed by the sons. When the above payment was made the corporation had an accumulated earned surplus in excess of the sum paid to L. Upon the facts, it is held: (1) L. did not make a gift of 46 shares of stock in 1947 to his sons; they were only his nominees. (2) L. sold 48 shares of stock in 1950, and the profit realized is taxable as capital gain. (3) In effect, the corporation's funds were used for the benefit of the sons to purchase 48 shares from L. for the sons, and they received constructive dividends of $93,782.50, one-half of which is taxable to each as a dividend.
The Commissioner determined the deficiencies in income tax for the taxable year 1950 as follows:
+-----------------------------------------------+
¦Docket No. ¦Petitioner ¦Deficiency ¦
+------------+---------------------+------------¦
¦55934 ¦Louis and Pearl Zipp ¦$35,837.61 ¦
+------------+---------------------+------------¦
¦60820 ¦Monroe and Helen Zipp¦20,926.88 ¦
+------------+---------------------+------------¦
¦60821 ¦Bernard and Jean Zipp¦20,926.88 ¦
+-----------------------------------------------+
In Docket No. 55934, Louis H. Zipp, several adjustments are accepted by petitioner. Prior to 1950, all of the stock of a corporation, 50 shares, was owned by Louis Zipp and his sons, Bernard and Monroe; Louis Zipp owned 48 shares and each son owned 1 share. In 1950, Louis was paid $93,782.50 by the corporation under an agreement pursuant to which Louis Zipp surrendered his stock and retired from all connections with the corporation whose business was operated thereafter by the sons. The questions to be decided are as follows: (1) Whether Louis Zipp made gifts in 1947 to his sons of 46 shares of his stock. (2) Whether, in 1950, a payment of $93,782.50 by the corporation to Louis Zipp was either consideration for his withdrawal from management of the corporation, surrender of rights to future income, and various noninterference covenants, so as to constitute ordinary income, or was payment for his stock resulting in capital gain. (3) Whether, as a result of the corporation's payment to Louis Zipp, each of his sons constructively received taxable dividends. (4) In Docket Nos. 60820 and 60821, whether the provisions of section 275(c), 1939 Code, do not apply so that the deficiencies are barred.
Respondent's determinations in Docket Nos. 60820 and 60821 are inconsistent with his determination in Docket No. 55934. He made those inconsistent determinations for protective reasons.
Louis and Pearl Zipp, residents of Miami, Florida, filed a joint return for the taxable year 1950 with the collector of internal revenue for the district of Florida. Monroe and Helen Zipp, and Bernard and Jean Zipp, were residents of Cleveland, Ohio, in 1950, and they filed joint returns, respectively, with the collector of internal revenue for the eighteenth district of Ohio. Monroe and Helen Zipp now are residents of Miami, and Bernard and Jean Zipp now live in Los Altos, California.
Louis Zipp is the father of Monroe and Bernard Zipp (hereinafter called Monroe and Bernard). The questions to be decided relate to them only; their respective wives are before us only because joint returns were filed.
Monroe was born in 1919, or close to that year, and Bernard was born in about 1921. Their father (hereinafter called Louis) was born in 1898. The mother of Louis is Sara Zipp. Louis has been married more than once. In 1938 his wife was Freda. She passed away in 1946. Louis married his present wife, Pearl, in 1947, at some time after May 24.
Paramount Steel & Supply Co. (hereinafter referred to as Paramount) is an Ohio corporation which was organized on August 27, 1936, and had its principal place of business, an office, plant, and yard, in Cleveland, Ohio. Its authorized stock was 100 shares of no-par-value common stock. Louis organized Paramount. When the corporation was organized, capital in the amount of $500 was paid into the corporation for which 50 shares of stock were issued which were declared to have a value of $10 per share. From 1936 to 1950, inclusive, no further capital was paid into the corporation.
Paramount's business at all times has been the purchase, processing, and resale of scrap iron. The business involved the purchase of scrap iron from various concerns and the preparation of the scrap so purchased for use in making steel. After processing the scrap, it was resold to scrap brokers. This business is highly competitive and its success was dependent upon buying skills, market fluctuations, and good relationships with those concerns with which there were dealings.
Paramount discontinued its business on October 1, 1953, and thereafter it was dissolved.
The 50 shares of stock of Paramount were issued originally in the names of Sara and Louis Zipp and two qualifying stockholders, J. Surany and Irving Glicken, as follows:
+-------------------------------+
¦Stockholders ¦No. of shares ¦
+--------------+----------------¦
¦Sara Zipp ¦47 ¦
+--------------+----------------¦
¦Louis Zipp ¦1 ¦
+--------------+----------------¦
¦J. Surany ¦1 ¦
+--------------+----------------¦
¦Irving Glicken¦1 ¦
+--------------+----------------¦
¦Total ¦50 ¦
+-------------------------------+
At all times, Paramount's stock has been owned and controlled by a member or by members of the Louis Zipp family, and it was, therefore, a family owned and controlled corporation; and, also, its shares of stock were at all times closely held. During the years 1936-1950, inclusive, there were a few changes in the individuals who were the qualifying shareholders, Glicken assigning his 1 share to Sara in September 1936, and Surany assigning his 1 share to Freda in January 1938. One share of stock stood in the name of Freda for 8 years, until January 15, 1946, when that share was assigned to Monroe. One qualifying share was assigned by Sara to Saul Zipp, who later assigned the share to Irene Konfal, who assigned that share to Bernard on January 15, 1946. Sara held a certificate for 47 shares of stock continuously from August 29, 1936, to January 15, 1946; and Louis held a certificate for 1 share from August 29, 1936, until January 15, 1940, when he assigned that share to Sara, so that, then, 48 shares stood in Sara's name. No shares of stock stood in Louis's name during a period of 6 years, from January 15, 1940, until January 15, 1946. At some time in 1936, 47 shares of stock were held in Sara's name because Louis owed her money.
On January 15, 1946, Sara assigned her 2 certificates for the aggregate amount of 48 shares to Louis and 1 certificate for 48 shares was issued in his name. On the same date (as set forth above) 1 share was assigned to Monroe by Freda, and 1 share was assigned to Bernard by Irene. Accordingly, on January 15, 1946, and thereafter, all of the 50 shares of outstanding stock stood in the names of Louis, Monroe, and Bernard. In January 1946, Monroe and Bernard were about 27 and 25 years of age, respectively.
During the years 1936-1946, inclusive, the directors of Paramount, 3, and later 4, included various members of the Louis Zipp family, including his mother, or his wife, or Saul Zipp, or Monroe, or Bernard; and the officers included such members of the family, the personnel of the board of directors and officers changing from time to time.
At all times, from the organization of Paramount until May 29, 1950, Louis was the general manager and dominating personality in the affairs of Paramount.
Louis was the first president of Paramount, holding that office from August 29, 1936, until January 15, 1940, when he was succeeded by Sara, and he then became secretary, which office he held continuously until January 15, 1949, when he became vice president, which office he held continuously until May 29, 1950, when he resigned.
The original officers of Paramount, on August 29, 1936, were as follows: Louis, president; Sara, vice president and treasurer; and J. Surany, secretary.
From January 15, 1946, until May 29, 1950, Paramount's officers were: Monroe, president; Louis, vice president; and Bernard, secretary and treasurer. During this period, Monroe was employed by Paramount as officer manager, and Bernard was employed as sales manager and solicitor of business.
Since its organization, Paramount has never declared and paid dividends.
Paramount paid a weekly salary to Louis, Monroe, and Bernard. In addition, beginning in 1941, Louis was paid extra compensation in a sum equal to 50 per cent of net profits, not to exceed $5,000 a year (which was in addition to his weekly salary of $100, or $150 a week). His weekly salary and extra compensation, or bonus, were increased periodically after 1941, until on January 16, 1950, his weekly salary as general manager was $200, and his bonus was 50 per cent of net profits, not to exceed $7,500. His weekly salary and extra compensation were fixed in January of each year for the ensuing year by the directors of Paramount.
Monroe and Bernard were voted extra compensation on December 2, 1946. Monroe and Bernard were to receive extra compensation of $1,500 for 1946, in addition to their salaries during 1946 of $90 per week. Extra compensation was authorized for Monroe and...
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