Opinion
Docket Nos. 41213 42044.
1954-04-15
ALBERT E. CRABTREE AND CLAIRE C. CRABTREE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOHN J. O'KEEFE, JR., AND LUCILE E. O'KEEFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas L. Zimmerman, Esq. , for the petitioners. Robert J. McDonough, Esq. , for the respondent.
Petitions undertook to transfer a franchise to sell automobiles to a corporation in return for all of the stock of the corporation and the corporation's promise to pay to them 50 per cent of its profits for a period of 10 years. Held, amounts received pursuant to the corporation's promise were in fact disguised dividends and taxable as such. Thomas L. Zimmerman, Esq., for the petitioners. Robert J. McDonough, Esq., for the respondent.
The respondent determined deficiencies in income tax for the year 1948 as follows:
+-----------------------------------------------------------------+ ¦Docket No.¦Petitioners ¦Deficiency¦ +----------+-------------------------------------------+----------¦ ¦41213 ¦Albert E. Crabtree and Claire C. Crabtree ¦$3,134.28 ¦ +----------+-------------------------------------------+----------¦ ¦42044 ¦John J. O'Keefe, Jr., and Lucile E. O'Keefe¦2,693.44 ¦ +-----------------------------------------------------------------+ One of the adjustments made by respondent in determining the deficiency in Docket No. 41213 is not contested by petitioners therein. The sole remaining issue, which is common to both dockets, is whether cetain amounts, received by Albert E. Crabtree and John J. O'Keefe, Jr., from a corporation in which they were the sole stockholders, are taxable to them as ordinary income or capital gain.
FINDINGS OF FACT.
Some of the facts have been stipulated and are incorporated herein by this reference.
Petitioners Albert E. Crabtree and Claire C. Crabtree are husband and wife. They filed their joint income tax return for the year 1948 with the collector of internal revenue for the second collection district of New York. Petitioners John J. O'Keefe, Jr., and Lucile E. O'Keefe are husband and wife. They filed a joint income tax return for the year 1948 with the same collector. Petitioners Albert E. Crabtree and John J. O'Keefe, Jr., will be sometimes hereinafter referred to together as the petitioners or individually as Crabtree and O'Keefe.
In 1941 and 1942 Crabtree had an interest in and was president of Mount Vernon Motors Corporation, which had a franchise from Chrysler Corporation to sell Dodge and Plymouth automobiles in Mount Vernon, New York. By reason of the war and consequent lack of automobiles the franchise was relinquished and Mount Vernon Motors Corporation was dissolved. Thereafter, and particularly in March and April 1944, Crabtree had discussions with representatives of Chrysler looking toward the granting of a franchise for the sale of De Soto and Plymouth automobiles. He received oral assurances that such a franchise would be forthcoming, and he executed certain papers which in effect constituted an application for the franchise. On September 29, 1944, Crabtree and the Chrysler Corporation, De Soto Division (hereinafter referred to as De Soto), executed a formal agreement granting Crabtree the De Soto-Plymouth franchise. This franchise agreement provided that it would automatically terminate in the event that Crabtree attempted to assign it to another person without the written consent of De Soto. In conjunction with the franchise agreement Crabtree and De Soto on the same day entered into a supplementary agreement defining the area and zone within which the franchise was operative.
O'Keefe and Crabtree were friends. In 1943, there was an oral agreement between them that when Crabtree obtained a franchise, they ‘would go in together’ on a ‘50–50 basis.’
Mount Vernon Sales Corporation, Inc., was organized in 1944. By letter dated December 4, 1944, addressed to that corporation and signed by Crabtree and O'Keefe, the offer was made to transfer to the corporation the franchise obtained by Crabtree (half of which was said to have been assigned to O'Keefe), in exchange for stock of the corporation and one-half of the net profits, after income taxes, for a period of 10 years. That offer was accepted on December 4, 1944, and all of the stock of Mount Vernon Sales Corporation, Inc., was transferred to petitioners in equal amounts.
At all times pertinent to these proceedings Crabtree and O'Keefe together owned 100 per cent of the capital stock of the corporation, and during the tax year 1948 they each owned 50 per cent of the stock. The franchise which petitioners undertook to transfer to the corporation had a zero basis for tax purposes in the hands of the petitioners. Prior to March 29, 1945, the name of the corporation was changed to Crabtree and O'Keefe, Inc.
On March 29, 1945, a formal franchise agreement similar to the one executed by Crabtree and De Soto was entered into by De Soto and Crabtree and O'Keefe, Inc., and on the same day the same parties executed a supplementary agreement defining the area and zone involved, which was identical with that which had previously been awarded to Crabtree. On March 31, 1945, by mutual consent Crabtree and De Soto terminated as of March 29, 1945, the franchise agreement of September 29, 1944.
Petitioners each received $12,196.96 during the year 1948 from Crabtee and O'Keefe, Inc., which represented in the aggregate 50 per cent of the net proceeds of Crabtee and O'Keefe, Inc., after payment of State and Federal income taxes, for the year 1947. Petitioners included such amounts in their income tax returns for the year 1948 as gain from the sale of a capital asset held for a period longer than 6 months. The deficiency was determined by the respondent on the assumption that such amounts were taxable as ordinary income. Although the corporation had net profits in other years, the payments here in controversy are the only ones that the corporation has made pursuant to the contract of December 4, 1944.
The amount of $12,196.96, which petitioners Crabtree and O'Keefe each received in 1948, was not in fact consideration for the sale or exchange of a capital asset; it represented a distribution of corporate earnings.
OPINION.
RAUM, Judge:
The Commissioner's principal contention is that the amounts received by petitioners from Crabtree and O'keefe, Inc., did not really represent consideration for the franchise, which might be treated as capital gain, but were in fact merely disguised dividends constituting a distribution of corporate earnings taxable as ordinary income. We agree.
The franchise was transferred to the corporation for all of its stock. In addition, the corporation promised to pay to petitioners one-half of its net profits for 10 years. But the stock itself was full and adequate consideration for the franchise. Moreover, as the owners of all the stock petitioners were in a position to control the future distribution of corporate profits to themselves from year to year, and we are satisfied that the provision for paying out 50 per cent of the profits for 10 years was merely an anticipatory arrangement for the distribution of dividends over that period. Crabtree himself admitted that he and O'Keefe could, with equal facility, have provided for the distribution of profits to the extent of 10, 20, 50, 80, or even 100 per cent, and that the 50 per cent figure was selected merely on advice of counsel. No evidence was presented as to any convincing business reason, apart from tax considerations, for this arrangement.
We do not, of course, suggest that tax motives will render nugatory a bona fide business arrangement. The difficulty with petitioners' position here is that we cannot find that the payments in question were in fact part of the consideration for the franchise. Instead, it is our conclusion that although these payments may have been cast in that form, they were in truth and in fact merely distributions of corporate earnings, masquerading as something that might produce more beneficial tax consequences. Cf. Ingle Coal Corporation, 10 T. C. 1199, affirmed 174 F. 2d 569 (C. A. 7); Pompeian Manufacturing Co., 1 B. T. A. 825. Indeed, although there were corporate earnings for years other than the one in question, no distributions were made with respect to such years, pursuant to the agreement of December 4, 1944, purportedly because the corporation was said to have required additional capital. This circumstance confirms, if further confirmation is thought necessary, the conclusion that the 50 per cent provision was merely a convenient device through which petitioners could, if they should so choose, cause the corporation to pay out earnings, and that it did not represent an element of genuine consideration for the franchise.
In view of the conclusion that we have reached as to respondent's principal contention, it is unnecessary to decide the alternative issue pressed by him as to whether, in any event, the franchise was a capital asset held for a period longer than 6 months. We have not felt justified in making the finding requested by petitioners that they acquired the franchise in April 1944, and there is therefore considerable doubt whether they can prevail here even if the principal issue should be disposed of in their favor. However, that is a bridge that we need not cross.
Decisions will be entered for the respondent.