1955 U.S. Tax Ct. LEXIS 133">*133 Decisions will be entered for the deficiencies as determined by the Commissioner.
1. Capital Gain or Ordinary Income -- Employee Trust -- Distribution on Termination -- Separation From Service. -- The principal of a nonexempt employee profit-sharing trust, distributed upon its termination, is taxable as ordinary income, and not as capital gain under section 165 (b), to an employee-participant who continued in the service of the employer.
2. Deduction -- Bad Debt -- Advances to Corporation -- Proof. -- The evidence which leaves strong inferences inconsistent with the existence of a deductible worthless nonbusiness debt is insufficient to overcome the presumption of correctness which attaches to the determination of the Commissioner.
24 T.C. 744">*744 The Commissioner determined deficiencies in income taxes and additions thereto for the year 1950, as follows: 24 T.C. 744">*745
| Additions under | |||
| Deficiency | |||
| Sec. 294 (d) | Sec. 294 (d) | ||
| (1) (A) | (2) | ||
| Harry K. Oliphint | $ 7,004.82 | $ 977.51 | $ 1,629.17 |
| Anna LeBlanc Oliphint | 10,044.52 | 1,933.15 | 1,159.89 |
The Commissioner has conceded that no additions are due from either petitioner under sections 294 (d) (1) (A) and 294 (d) (2) of the Internal Revenue Code of 1939. The only issues presented for decision are:
(1) Whether the sum of $ 17,259.69 received by the petitioner Harry K. Oliphint in 1955 U.S. Tax Ct. LEXIS 133">*135 1950 upon the termination of his employer's profit-sharing trust is taxable as ordinary income or as capital gain.
(2) Whether the petitioners are entitled to a deduction in 1950 of $ 20,776.40 as a nonbusiness bad debt.
FINDINGS OF FACT.
The petitioners, Harry K. Oliphint and Anna LeBlanc Oliphint, are husband and wife and reside in New Orleans, Louisiana. Each filed a separate Federal income tax return for the year 1950 with the collector of internal revenue for the district of Louisiana, reporting therein their income on a community property basis. They reported for 1950 long-term capital gains of $ 186,126.03, ordinary income of $ 34,283.82 and, as deductions, farm loss of $ 41,587.27 and bad debt Circle-A Ranch $ 20,776.40 to arrive at gross community income of $ 64,983.17.
Harry, throughout the year 1950 and for a number of years prior thereto, was an officer or employee of Paramount-Richards Theatres, Inc., hereafter called Theatres, and, as such, was a beneficiary of a profit-sharing trust which was inaugurated by that corporation and its subsidiaries during the year 1941 for the benefit of employees. The Commissioner of Internal Revenue granted tentative approval to that1955 U.S. Tax Ct. LEXIS 133">*136 trust on June 10, 1946, but subsequently determined that the plan did not meet the requirements of section 165 (a) of the Internal Revenue Code of 1939, and on May 18, 1949, the respective corporations were notified by the Commissioner that no deductions would be allowed for contributions made to the trust after December 31, 1948.
The shares of Theatres were held as follows until January 3, 1950:
| 3,000 class B | Paramount Pictures, Inc. |
| 150 class A | E. V. Richards, Jr. |
| 150 class A | Harry K. Oliphint |
| 150 class A | N. L. Carter |
| 150 class A | G. J. Dureau |
| 150 class A | M. F. Barr |
| 150 class A | Estate of H. W. McCoy |
| 2,100 class A | Trustees for Richards' children |
24 T.C. 744">*746 A consent decree of March 3, 1949, in an antitrust action ordered, inter alia, that Paramount Pictures, Inc., and other holders could no longer continue as contemporaneous owners of shares in Theatres. Thereafter, negotiations were had among all the shareholders and Paramount Pictures, Inc., agreed to buy all of the class A shares from the other shareholders named above. The contract for the purchase and sale of the stock of Theatres was signed in October 1949. The consent decree also required Theatres to dispose of1955 U.S. Tax Ct. LEXIS 133">*137 36 of the 76 theatres owned and operated by it.
The board of directors of Theatres resolved on November 1, 1949, that the profit-sharing trust be liquidated due to the substantial change in ownership and reorganization of the company. The corporation's shareholders determined that the profit-sharing plan would not be amended to meet the objections of the Commissioner but would be terminated. The trust was terminated on January 3, 1950, and the trustees made distributions to all participating employees. Harry received $ 19,029.69 in January 1950 in liquidation of the trust, of which $ 1,770 represented contributions previously made by him.
The board of directors of Theatres, consisting of the same directors as prior thereto, at a meeting on January 3, 1950, resolved that the following officers be reelected:
| N. L. Carter | President |
| Gaston Dureau | Vice president |
| Maurice Barr | Secretary |
| H. K. Oliphint | Treasurer |
| C. F. Dixon | Assistant secretary |
The certificate of incorporation of Theatres was amended on January 18, 1950, in accordance with a resolution of the board of directors, to change its corporate name to Paramount Gulf Theatres, Inc.
Harry reported $ 17,259.69, the net amount1955 U.S. Tax Ct. LEXIS 133">*138 received by him upon termination of the trust after deduction of his contributions, in his 1950 Federal income tax return as a long-term capital gain. The Commissioner, in determining the deficiencies, held that the gain on the liquidation of the profit-sharing trust was ordinary income to the extent to which it exceeded the amount contributed by Harry.
The Circle-A Ranch, Inc., was incorporated under the laws of Louisiana on August 28, 1947. The stated purpose of the corporation was "to conduct a live stock business including the breeding, raising, buying and selling of live stock of every character and to do all things pertinent and incident thereto; to conduct farming operations and, also the things pertinent and incident thereto." The authorized number of shares was 100 shares of $ 100 par value and the amount of paid-in capital with which the corporation was to begin business was $ 1,000. The incorporators were the first directors, and the shares of stock were issued as follows: 24 T.C. 744">*747
| Harry | 8 shares |
| Anna | 1 share |
| Gibbons Burke | 1 share |
The corporation purchased 66 acres of farm land from Harry in August of 1949. The original cost and additions and improvements 1955 U.S. Tax Ct. LEXIS 133">*139 made to the farm up to December 16, 1950, were as follows:
| Land: | |||
| Original cost | $ 2,700.00 | ||
| Additions 1949 (roads) | 128.00 | ||
| Balance 12/31/49 | $ 2,828.00 | ||
| Additions 1950 | $ 1,485.67 | ||
| Less: Sale of lot | 100.00 | 1,385.67 | |
| Balance 12/16/50 | $ 4,213.67 | ||
| Buildings: | |||
| Original cost -- residence | $ 4,500.00 | ||
| tenant houses | 1,500.00 | ||
| Total | $ 6,000.00 | ||
| Improvements 1949 | 2,388.16 | ||
| Balance 12/31/49 | $ 8,388.16 | ||
| Improvements 1950 | $ 3,446.15 | ||
| Less: Tenant houses moved | 1,500.00 | 1,946.15 | |
| Balance 12/16/50 | $ 10,334.31 | ||
| Additions: | |||
| Tool shed -- built latter part of 1950 | 624.92 | ||
| Feed house -- built latter part of 1950 | 804.17 | ||
| Poultry house -- built latter part of 1950 | 592.28 | ||
| Barn -- built between January and July, 1950 | 14,321.96 | ||
| Fences -- built in 1949 | $ 3,102.00 | ||
| built between Sept. and Nov. 1950 | 5,462.44 | ||
| Balance 12/16/50 | 8,564.44 | ||
| Total investment in farm to 12/16/50 | $ 39,455.75 |
The funds for these purchases and improvements came from advances from Harry and from a bank loan of $ 17,500 guaranteed by him. Harry used $ 14,101 of corporate funds for the construction1955 U.S. Tax Ct. LEXIS 133">*140 of a house on adjoining property owned by Anna, and this amount was debited against his account with the corporation. The corporation had no income during the period 1947 through 1950, but did have expenses amounting to $ 2,268.46.
The corporation's land together with all buildings and improvements thereon was sold on December 6, 1950, to Hattie Lurline LeBlanc, Anna's sister, for a stated price of $ 20,000, to consist of $ 2,500 cash and a $ 17,500 mortgage. The $ 2,500 cash was a gift from the petitioners to Hattie. She owned a ranch across the road from 24 T.C. 744">*748 the corporation's property and also was an heir with Anna to 80 acres of land adjoining the Circle-A farm. The corporation was dissolved and its affairs wound up on December 15, 1950. Harry received only the $ 17,500 mortgage in liquidation. The bank to which the corporation was indebted did not want this mortgage and Harry substituted his personal note and the mortgage as collateral at the bank in place of the corporation's note which he had guaranteed.
Hattie reported taxable income for 1949 and 1950 on her Federal income tax returns as follows:
| 1949 | 1950 | |
| Wages received from petitioner | $ 762.50 | $ 625 |
| Income from land | 600.00 | 600 |
| Totals | $ 1,362.50 | $ 1,225 |
1955 U.S. Tax Ct. LEXIS 133">*141 Harry and another man occupied the former Circle-A property at the time of the hearing under a month-to-month lease from Hattie. They were engaged in a joint venture for the raising of cattle. Harry paid $ 3,637 rent in 1951 through the construction of a barn for the cattle and $ 900 in 1952 including taxes and insurance.
The Commissioner, in determining the deficiencies, disallowed a bad debt deduction of $ 20,776.40 claimed by the petitioners on their returns for 1950 with respect to the advances by Harry to Circle-A Ranch, Inc.
The stipulation of facts is incorporated herein by this reference.
OPINION.
The petitioners contend that the change in the stock ownership of Theatres, which resulted in the termination of its profit-sharing plan in which Harry was a participant, was tantamount to Harry's separation from the service of his employer, and the distribution to him in 1950 of his share of the trust should be taxed to him as long-term capital gain under the provisions of section 165 (b) of the Internal Revenue Code of 1939. 1 They have cited no authority in support of this proposition.
1955 U.S. Tax Ct. LEXIS 133">*142 The tentative approval under section 165 (a) granted to the trust by the Commissioner of Internal Revenue on June 10, 1946, was withdrawn as of December 31, 1948. The provisions of section 165 (b) do 24 T.C. 744">*749 not apply to distributions from a trust which is not exempt under section 165 (a) for the taxable year of the trust in which the distribution is made and the taxability of such distribution depends upon other provisions of the Internal Revenue Code. Regs. 111, sec. 29.165-6. Furthermore, it is clear from the stipulated facts that Harry was not separated from the service of his employer within the meaning of section 165 (b). The trust was terminated on January 3, 1950, the same day that Harry was reelected treasurer of Theatres and while the stock was still held by the old stockholders. There is nothing in the record to show when, if ever, Harry ceased to render services to and severed his connection with the original corporate employer. The petitioners' contention on this issue is clearly erroneous and the Commissioner's determination is sustained. Estate of Frank B. Fry, 19 T.C. 461, affirmed per curiam 205 F.2d 517;1955 U.S. Tax Ct. LEXIS 133">*143 Edward Joseph Glinske, Jr., 17 T.C. 562; cf. Mary Miller, 22 T.C. 293.
The petitioners' other contention is that they are entitled to a deduction of $ 20,776.40 as a nonbusiness bad debt under section 23 (k) (4). The amount is alleged to represent the difference between the total advances of Harry to Circle-A Ranch, Inc., and the amount which he received in the complete liquidation of that corporation. The Commissioner argues that the corporation was a fiction for tax purposes, no valid debt existed, and the advances were intended to be gifts to his sister-in-law prompted in part by the fact that they would offset large capital gains which the petitioners had to report for 1950.
The Commissioner's determination that the petitioners are not entitled to the deduction claimed as a nonbusiness bad debt is presumed to be correct until shown to be otherwise by a fair preponderance of the evidence. The corporation was organized in August 1947 by the petitioners. No more than $ 1,000 was paid in as capital. The corporation never engaged in business and had no income, although it had expenses of $ 2,268.46. It never acquired1955 U.S. Tax Ct. LEXIS 133">*144 any property until August 1949 when it bought 66 acres of farm land and improvements from Harry for $ 8,700. He put up the money for the purchase. The land was adjacent to other land which Anna and her sister had acquired through inheritance. Thereafter the land and buildings thereon were improved at a cost of $ 30,755.75 derived from advances made by Harry and from a bank loan of $ 17,500 guaranteed by him. The corporation gave Harry no note, there was no provision for interest, no date was fixed for payment and no security was furnished for his advances. Cf. Joseph B. Thomas, 2 T.C. 193. The land was transferred to Anna's sister on December 6, 1950, which was shortly after the improvements had been completed. The stated purchase price was $ 20,000, to consist of $ 2,500 cash and a mortgage for $ 17,500. Actually the purchaser paid no cash. Harry gave to the bank his personal note with the mortgage as collateral in place of the corporation's 24 T.C. 744">*750 note which he had guaranteed. It is difficult to understand from the essential facts recited above just what Harry was trying to do in carrying out these various transactions. He gave no satisfactory1955 U.S. Tax Ct. LEXIS 133">*145 explanation in his testimony of why he turned over to his sister-in-law for nothing except her obligation on the $ 17,500 mortgage, the property in which he had just invested $ 39,455.75. The record shows that Hattie was employed by Harry, she had relatively small income, she and Anna owned other adjacent land, some of which had been in their family previously, and Harry had substantial income and large capital gains in 1950. A logical conclusion would be that Harry was taking care of his sister-in-law, but whatever his purpose may have been, the evidence leaves strong inferences inconsistent with the existence of a worthless debt for tax purposes and fails to overcome the presumption of correctness attached to the Commissioner's determination that no loss was sustained from a nonbusiness bad debt.
Decisions will be entered for the deficiencies as determined by the Commissioner.
Footnotes
1. SEC. 165. EMPLOYEES' TRUSTS.
(b) Taxability of Beneficiary. -- The amount actually distributed or made available to any distributee by any such trust shall be taxable to him, in the year in which so distributed or made available, under section 22 (b) (2) as if it were an annuity the consideration for which is the amount contributed by the employee, except that if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's separation from the service, the amount of such distribution to the extent exceeding the amounts contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. * * *↩