Cuckler v. Commissioner

Harold W. and Mary E. Cuckler, Petitioners, v. Commissioner of Internal Revenue, Respondent. Royden Brown and Doris Brown, Petitioners, v. Commissioner of Internal Revenue, Respondent Cuckler v. Commissioner Docket Nos. 87982, 932681 United States Tax Court 39 T.C. 1107; 1963 U.S. Tax Ct. LEXIS 163; March 29, 1963, Filed *163 Decisions will be entered under Rule 50. Dividend -- Stockholders -- Ambiguous Contract. -- The Commissioner erred in holding that the petitioners sold bank stock for $ 375,000 and sold the bank building to the purchaser of the stock for $ 100,000, after receiving that real estate as a bargain purchase dividend from the bank. Gene W. Reardon, Esq., for the petitioners in Docket No. 87982. John Corbridge, Esq., for the petitioners in Docket No. 93268. Jack Morton, Esq., for the respondent. Murdock, Judge. MURDOCK *1107 The Commissioner determined deficiencies against the Cucklers of $ 1,813.38 for 1954, $ 38,017.62 for 1955, and $ 4,006.80 for 1956, and against the Browns, deficiencies of $ 485.10 for 1954, $ 39,964.52 for 1955, $ 636.39 for 1956, and $ 77.75 for 1957, plus an addition to tax for 1956 of $ 70.10. The issues for decision are whether Cuckler, Brown & Co., a partnership, received a dividend of $ 100,000 from the Trinidad National Bank in July 1955 from the transfer of the bank building to the partnership and its transfer 2 days later to the purchaser of the bank stock, and whether Cuckler and Brown received a dividend of $ 48,553.97 from the*164 bank in 1955 through the transfer by the bank of charged-off notes. *1108 FINDINGS OF FACT. The Cucklers and the Browns, married couples, filed joint returns for 1955 with the director of internal revenue for the district of Colorado. The parties hereto have settled numerous issues by a stipulation which is incorporated herein by this reference. Harold and Royden were equal partners in Cuckler, Brown & Co., each owning one-half. All of the 1,000 shares of stock of Trinidad National Bank, of Trinidad, Colo. (hereinafter called the bank), were owned by that partnership, or by the individual partners prior to their sale of that stock on July 16, 1955. The bank owned the land and building, lot 6, Block 114, where it conducted its business (herein called the bank building) and was carrying that property on its books at $ 33,000 at the time of the sale. Cuckler and Brown gave a brokerage firm in Omaha exclusive rights to sell their stock in the bank and that firm introduced them to Lillian Briggs, on or about July 6 or 7, 1955. Lillian is the mother of Walter Lacy. Cuckler and Brown made an offer to sell their bank stock for $ 475,000 to Lillian and Walter. Cuckler discussed the*165 assets of the bank with Lillian, who examined the assets and the books of the bank, after which the offer for the sale of the bank stock for $ 475,000 was accepted verbally. Walter Lacy was present at some or all of these conferences. Cuckler did not act on behalf of the bank in any of the negotiations with Lacy or his mother. Those negotiations led to a written agreement dated July 16, 1955, between Walter Lacy as buyer, and Cuckler, Brown & Co. as seller. It was in part as follows: 1. Buyers agree to buy from Seller One Thousand Shares of the Present One Thousand Shares of Capital Stock of the Trinidad National Bank, Trinidad, Colorado, for the gross Sum of Four Hundred Seventy-Five Thousand Dollars ($ 475,000.00) to be the total amount received by the Sellers for the Banking Corporation Stock and the Banking Building, other than the interest on the Bank Building Loan. THE ABOVE TO BE EFFECTED IN THE FOLLOWING MANNER * * * 1. The sellers are to purchase the Trinidad National Bank Building from the Trinidad National Bank of Trinidad, Colorado, at a purchase price of $ 33,000.00 -- with the said named $ 33,000.00 being furnished by the Buyer for his interests in holding the bank*166 undivided profits the same as it were before the transaction. 2. The buyer agrees to purchase the One Thousand Shares of the Capital stock of the Trinidad National Bank (Without the Banking Bldg.) for the Amount of $ 375,000.00. 3. The Buyer of the Stock of the Trinidad National Bank also enters into an agreement and contract to purchase the Bank Building for the sum of *1109 $ 100,000.00 to be paid in the following manner: Quarterly payments of $ 3,000.00 principal plus interest at 3% with there being eleven such payments and the balance becoming due on the twelfth payment or at the end of the third year. 4. The Banking Corporation is to procure a long term lease for the Banking Building and this lease is to be used with the Bank Building to effect a loan on the building in the amount of $ 100,000.00. Lacy obtained a loan of $ 375,000 from an Oklahoma bank by agreeing to pledge the bank stock being purchased. He paid that amount to the sellers. He needed an additional $ 100,000 to complete the purchase from Cuckler, Brown & Co. and to accommodate Lacy the provisions relating to the bank building were inserted in the agreement. The minutes of a meeting of "stockholders" of *167 the bank held at 1:30 p.m. on July 18, 1955, in which the stock was voted by Cuckler, Brown, and their nominees, records the adoption of a motion to sell the bank building to Cuckler, Brown & Co. for $ 33,000 to be paid in cash by the purchaser. Cuckler, Brown & Co. did not pay the $ 33,000. The minutes of a board of directors meeting at 2 p.m. on July 18, 1955, records the resignation of the old Cuckler and Brown board and officers and the election of a new Lacy board and officers. Lacy paid $ 33,000 to the bank, on July 16, 1955, to take the place of the bank building carried on its books at that amount and thus leave the total bank book-assets unchanged. A deed for the bank building from the bank to Cuckler, Brown & Co. was executed on July 18, 1955. Cuckler, Brown & Co. entered into an agreement with the bank, dated July 19, 1955, leasing the bank building to the bank for 20 years at $ 1,000 a month. A deed for the bank building from Cuckler, Brown & Co. to Walter Lacy was executed on July 20, 1955. Lacy then pledged the bank building as collateral for a $ 100,000 loan from a Denver bank, which amount he then paid to Cuckler, Brown & Co. on or about July 26, 1955, to complete*168 the $ 475,000, which he owed under the contract of July 16, 1955. Lacy reduced the rent on the bank building by an agreement dated August 10, 1955, and conveyed the bank building to the bank on December 19, 1957, for $ 133,000. Cuckler, Brown & Co. never received any rent, any "quarterly payments of $ 3,000.00 principal" or any "interest at 3%" relating to the bank building. Lacy paid for the Federal documentary stamps placed on the two deeds. The transfer of the bank building to Cuckler, Brown & Co. was a temporary measure to accommodate Lacy by protecting Cuckler, Brown & Co. for a few days until Lacy could complete arrangements for the $ 100,000 loan from the Denver bank, secured by a pledge of the bank building, with which to complete his cash payment of $ 475,000 to Cuckler, Brown & Co. for the bank stock. *1110 The purpose of the transactions described above was to enable Lacy to purchase the 1,000 shares of bank stock for $ 475,000. The sellers reported the difference between their bases for the bank stock and $ 475,000, as long-term capital gain on their 1955 returns. The Commissioner, in determining the deficiencies, held that only $ 375,000 was received for the stock*169 and that $ 100,000, the excess of the fair market value of the bank building over $ 33,000 paid to the bank for those premises, was a taxable dividend from the bank. Cuckler and Brown owned all of the stock of First Property Management, Inc. Certain old promissory notes which the Trinidad National Bank had charged off from time to time in the past were transferred to First Property Management, Inc., for $ 1,000 on April 18, 1955. The parties have stipulated that Cuckler and Brown, in 1955, realized taxable income to the extent of the fair market value of the stipulated unpaid balances due on the notes on April 18, 1955. The Commissioner, in determining the deficiencies, held that that fair market value was $ 48,553.97. The fair market value, on April 18, 1955, of the then unpaid balances on the notes was $ 10,500. OPINION. The principal question for decision in this case and the only question for decision in the Lacy case is whether the bank stock was sold to Lacy for $ 475,000, as Cuckler and Brown contend, or whether there was a sale of the bank stock for $ 375,000 and a sale by Cuckler, Brown & Co. of the bank building to Lacy for $ 100,000, as Lacy contends. The Commissioner*170 has taxed a dividend to both resulting from a bargain sale of the bank building but concedes that only one tax is due. There is confusion because of the peculiar wording of the written contract of July 16, 1955. It is proper in tax cases to look through form to substance, if that is necessary, in order to determine the correct tax consequences of the acts of each taxpayer and those dealing with him in the transaction or transactions in dispute. . Cf. . Niceties of title or conveyancing should not hide the tax effects of whole transactions. Cf. ; ; , affirming ; . Cuckler and Brown rely on Cuckler's testimony in explanation and clarification of the written contract dated July 16, 1955. Cuckler was*171 called by the Commissioner and gave his testimony as the Commissioner's witness. There was no objection to his testimony by any counsel in this case, all of whom seem to agree that the contract is *1111 ambiguous and parol evidence is proper. The Court agrees. See (promulgated with this case). All counsel agreed that all testimony received during the trial of the related cases would apply in all of those cases. Lacy's counsel objected to the admission of parol evidence and stated at the trial: "So far as Mr. Lacy is concerned he does not care to give the Court an explanation of the Contract before the Court." However, the Commissioner called Lacy as a witness and in the course of his testimony he said that Cuckler "increased the price of the bank building $ 33,000" and also stated: "This was an additional $ 33,000 over and above the price of this contract of three seventy-five for the bank and also a hundred thousand for the building, and there was some discussion between Mrs. Briggs and I whether we were willing to pay this additional $ 33,000, and we finally decided this was a good transaction in purchasing the bank, *172 regardless of an additional $ 33,000." It is clear, even under the terms of the contract, that Cuckler and Brown received only $ 475,000, received no part of an "additional $ 33,000," and parted only with their bank stock. The Court concluded that the July 16 agreement was sufficiently ambiguous to permit parol evidence by both Cuckler and Lacy to explain what they intended and what the $ 475,000 was paid for. Certainly that agreement needs clarification for tax purposes and the Commissioner gave both Cuckler and Lacy full opportunity to explain their actions. Lacy did not attempt a full explanation and his statement in regard to the $ 33,000 was less than convincing. The sellers never asked more than $ 475,000 for the only property they had to sell, the stock, which carried with it all assets of the bank, including the bank building. If Lacy could have raised and paid the $ 475,000 for the stock, he could have avoided the $ 33,000 payment to the bank, the transfers of title to the bank building, the $ 146.30 cost of documentary stamps, and all of the deficiencies in these cases based upon the transfers of the bank building. Furthermore, if Cuckler and Brown had received the *173 bank building as a dividend, it would be one of $ 133,000, not $ 100,000, as determined by the Commissioner, since that real estate had then a fair market value of $ 133,000 and Cuckler and Brown paid nothing for it. Cuckler gave an explanation which impresses the Court as a reasonable one. It appears, from his testimony and from other evidence applicable to all cases, that Lacy (perhaps with the assistance of his mother) had arranged with an Oklahoma bank for a loan of $ 375,000, with the bank stock to be pledged as security; he needed an additional $ 100,000 to complete the purchase of the stock; and all references to the "Bank Building," were placed in the agreement at Lacy's request solely to give him time and means to complete arrangements *1112 with a Denver bank for a loan of $ 100,000 on which he would pledge the "Bank Building" as security. Lacy paid $ 33,000 into the Trinidad Bank to keep its book assets unchanged in amount so that the lender of the $ 375,000 might not complain. Cuckler, Brown & Co. held title to the bank building for 2 days as security for the balance owed them and only until Lacy completed arrangements to borrow the balance he owed Cuckler and Brown. *174 It is reasonably clear that Cuckler and Brown did not want to own the bank building and that Lacy had no intention to permit them to own it. The complicated provisions in the July 16, 1955, agreement, all placed there at Lacy's insistence and for his benefit, should not conceal the fact that what Cuckler and Brown sold for $ 475,000 was their bank stock. Cuckler and Brown started off with 1,000 shares of bank stock which they desired to sell for $ 475,000, they parted with that stock and nothing more, and they received $ 475,000 and nothing more. All acts performed by the bank "stockholders," officers, and directors, after Lacy acquired beneficial ownership and control of all of the bank stock on July 16, 1955, in carrying out the terms of the agreement of July 16, 1955, with respect to the bank building, are chargeable to Lacy who then alone was in position to require those acts to be performed. , and cases there cited. Cuckler and Brown were not the beneficial owners of the stock on July 18, 1955, when title to the bank building was transferred to them and had no right to bind the corporation except to carry*175 out Lacy's directions. Cuckler and Brown realized a long-term capital gain and nothing else taxwise. The Commissioner erred in taxing them with a dividend from the bank. Lacy paid $ 475,000 to Cuckler and Brown and acquired their 1,000 shares of stock, he paid $ 33,000 to the bank, plus $ 146.30 for transfer stamps, and acquired the bank building. The Commissioner determined that Lacy received a taxable dividend from the bank through acquisition of the bank building worth $ 133,000, for which he paid the bank $ 33,000. The Court has held in his case that the evidence does not show that the Commissioner erred. The only remaining question for decision is the fair market value on April 18, 1955, of the unpaid balances on nine notes which the bank had previously charged off. The Commissioner relies upon the presumption of correctness attaching to his determination and upon some evidence of later collections on one or two of the debts. These collections were shown to be due to events unexpected in April 1955 The petitioners have introduced evidence overcoming the presumption and from which the Court, using its best judgment, has determined a fair market value of $ 10,500. Decisions*176 will be entered under Rule 50. Footnotes 1. The Cuckler and Brown cases, Docket Nos. 87982 and 93268, were consolidated for trial and briefing. These two cases and two other related but separate cases, Walter Lacy and Alois Lacy, Docket No. 93334, and Trinidad National Bank, Docket No. 93182, were all tried together with the agreement that all testimony and evidence introduced at the trial, except separate written stipulations previously agreed upon in each case and introduced only in the case to which each related, would apply to and be part of the record in every case. All counsel were permitted to question all witnesses.↩