Dietzsch v. Commissioner

William J. Dietzsch and Anita Dietzsch, Petitioners v. Commissioner of Internal Revenue, Respondent Dietzsch v. Commissioner Docket No. 693-70 United States Tax Court 65 T.C. 1172; 1976 U.S. Tax Ct. LEXIS 139; March 31, 1976, Filed *139 Decision will be entered for the respondent. Petitioner entered into an agreement with GM for the financing of a corporate dealership. GM held the voting stock and petitioner held solely nonvoting stock. Petitioner received cash dividends in the taxable years 1965, 1966, and 1967 which, pursuant to agreement, petitioner was required to apply to the purchase of GM's stock. Petitioner was further required to convert that stock into additional nonvoting stock until such time as petitioner acquired all of the outstanding stock, which thereupon became voting stock. In a proceeding before the Court of Claims with respect to the taxable years 1965 and 1966, petitioner contended that the cash dividends received by him should be disregarded and the transaction deemed to be the distribution to him of a nontaxable stock dividend. The Court of Claims held that the cash dividends paid during the years 1965 and 1966 were taxable dividends. Dietzsch v. United States, 498 F.2d 1344 (Ct. Cl. 1974). In this proceeding, petitioner sought to relitigate that issue with respect to the taxable year 1967. Held, since the facts and the law were the same with respect*140 to the taxable years 1965, 1966, and 1967, petitioner is precluded under the doctrine of collateral estoppel from relitigating the issue previously decided by the Court of Claims. Richmond, Fredericksburg & Potomac Railroad Co., 62 T.C. 174 (1974), affd. 528 F.2d 917 (4th Cir. 1975), followed. Samuel B. Nimberger and Martin D. Cohen, for the petitioners. Theodore J. Kletnick, for the respondent. Quealy, Judge. QUEALY *1173 The respondent determined a deficiency of $ 8,577.24 in petitioners' income tax for*141 the calendar year 1967. The only issue for decision is whether petitioners received a taxable dividend from Dietzsch Pontiac-Cadillac, Inc., in the amount of $ 18,737.28 in the taxable year 1967. FINDINGS OF FACT Some of the facts have been stipulated by the parties. Such facts and the exhibits attached thereto are incorporated herein by this reference. Petitioners are husband and wife, residing in Binghamton, N.Y. At the time of filing the petition herein, petitioners resided in Endwell, N.Y. Petitioners filed a joint income tax return for the calendar year 1967 with the District Director of Internal Revenue, Buffalo, N.Y. Anita Dietzsch is a petitioner herein solely because she filed a joint return for the taxable year 1967 with her husband William J. Dietzsch (hereinafter referred to as petitioner). The petitioner kept books and records and filed his 1967 income tax return using the cash receipts and disbursements method of accounting. Until his death on July 27, 1964, one Guy F. Johnson was the owner of Guy F. Johnson, Inc., an authorized Pontiac-Cadillac dealership located in Binghamton, N.Y. In November 1959, *1174 Johnson employed petitioner as general manager of*142 Guy F. Johnson, Inc. For some time prior to his death Johnson had been in ill health, and petitioner ran the business. Upon his death, the dealership or franchise was terminated pursuant to the terms of various agreements between Guy F. Johnson and General Motors Corp. During Johnson's illness, discussions were held between the petitioner and the representatives of the Pontiac and Cadillac Divisions of General Motors with respect to the establishment of a Pontiac-Cadillac dealership by the petitioner at the same location as the Guy F. Johnson dealership. Petitioner had contacted the local banks and had been promised financial support to finance his dealership. Upon Johnson's death, definitive negotiations were undertaken by the petitioner and the representatives of General Motors with respect to the terms upon which petitioner would be offered the opportunity to become a Pontiac-Cadillac dealer. Such terms specifically provided for the financing of the dealer corporation pursuant to a plan entitled "Dealer Investment Plan," developed by the Motors Holding Division of General Motors. The Dealer Investment Plan comprised (1) a loan and stock subscription agreement to be entered *143 into by petitioner, as stockholder of the dealer company, and Motors Holding Division; (2) an option agreement to be entered into by petitioner and the Motors Holding Division; (3) a bonus agreement to be entered into by petitioner and the dealer company; (4) a "Dealer Selling Agreement" to be entered into by the dealer company and the Pontiac Motor Division; and (5) a "Direct Dealer Selling Agreement" to be entered into by the dealer company and the Cadillac Motor Division. Notwithstanding that financing could have been obtained elsewhere, if the petitioner wanted the Pontiac-Cadillac dealership he had to accept the plan offered by the Motors Holding Division. Accordingly, petitioner agreed to enter into the requisite agreements as prescribed in the Dealer Investment Plan. An agreement entitled "Offer to Loan and Subscription to Stock Prior to Incorporation" dated October 15, 1964, was entered into by petitioner and General Motors for the formation of a corporation to be known as Dietzsch Pontiac-Cadillac, Inc. The agreement provided for the formation of a corporation with *1175 an authorized capital stock of 950 shares of class A ($ 100 par) voting stock and 1,450 shares of*144 class B ($ 100 par) nonvoting stock, with the following rights and preferences: The two classes of stock to share equally in dividends; losses to be borne equally up to 15% of the par values; thereafter, the losses to be borne by the Class B stock up to its full par value; Class A shares redeemable at book value at discretion of Board of Directors; each share of each class convertible at holder's election into any other class of stock, except that conversion into a class having any preference over the class of stock to be converted requires the prior written approval of the holders of a majority of each class having such preference. Pursuant to the subscription agreement, Dietzsch Pontiac-Cadillac, Inc., was incorporated on October 16, 1964. General Motors subscribed to 750 shares of the class A stock for its par value of $ 75,000 and 500 shares of the class B stock for its par value of $ 50,000. The 500 shares of class B stock were thereupon transferred to petitioner for $ 50,000. The balance of $ 75,000 required as capital by the dealership was provided by General Motors as a loan, evidenced by promissory note, to be paid out of designated net earnings each year until November*145 30, 1969, after which date the entire balance in principal and interest became payable upon demand. It was provided in the subscription agreement that: (a) While any principal of the note remains unpaid, the corporation will: (1) allocate and pay in accordance with the terms of the note an amount equal to 45% of its net earnings available for dividends for each calendar year in satisfaction of the principal of the note before any redemptions of redeemable stock can be made or any dividends can be paid; and (2) allocate and pay $ 1 to redeem outstanding redeemable stock for each $ 1.20 declared and paid as cash dividends except that, whenever the number of shares of outstanding redeemable stock then held by the undersigned has been reduced to 20% of the total number of such shares theretofore purchased by undersigned, the $ 1 will instead be allocated and paid to further reduce the principal of the note; (b) When the note has been paid in full, $ 1 shall be allocated and paid to redeem outstanding redeemable stock for each $ 1 declared and paid as cash dividends until all such stock is redeemed; (c) Each time the principal of the note is reduced and/or redeemable stock is redeemed, *146 an amount equal to the amount by which the principal of the note is reduced and/or an amount equal to the total par value of the stock redeemed shall be transferred to capital from surplus and such amount shall be designated capital surplus and shall not be considered available surplus in declaring cash dividends. *1176 At the first meeting of the stockholders, petitioner was elected one of the corporation's three directors. Two other directors were elected as designees of General Motors. At all times material herein, a majority of the board of directors was made up of the designees of General Motors. An agreement entitled "Option Agreement" dated November 2, 1964, was entered into by petitioner and General Motors, setting forth the terms pursuant to which petitioner was required to purchase the class A stock from General Motors and to convert said stock into class B stock, as well as the basis upon which the petitioner's stock would be acquired by General Motors in the event of the termination of the dealership. Pursuant to the option agreement, petitioner agreed to apply all dividends received on his stock and at least one-half of any bonuses received by him from Dietzsch*147 Pontiac-Cadillac to purchase the class A stock held by General Motors, following which the petitioner would convert such class A stock into class B stock. Also included in the option agreement were provisions terminating the option to buy should petitioner cease to be president of the dealership. Upon termination, General Motors was required to buy petitioner's stock at book value or to liquidate the dealership. The basis for determining book value was delineated, and provision was made for the assignment of General Motors' interest to another. The first meeting of the board of directors of Dietzsch Pontiac-Cadillac was held on November 2, 1964. Petitioner was elected president, and Howard E. Custard was elected secretary-treasurer. In addition, the board of directors approved the pre-incorporation stock subscription agreement dated October 16, 1964, and a bonus agreement with petitioner to take effect November 2, 1964. Finally, the board of directors adopted a policy for the redemption of the notes and payment of dividends, as provided for in the subscription agreement, in the following resolution: Resolved: That it is the policy of the Board of Directors that effective on *148 and after this date, payments on the Company's long-term indebtedness, redemptions of the Company's redeemable stock and dividend payments by the Company shall be governed by the following: 1. While any principal of the Company's long-term indebtedness approved at this meeting remains unpaid, an amount equal to 45% of the Company's net earnings available for dividends for each calendar year must be allocated and *1177 paid in satisfaction thereof before any redemptions of redeemable stock can be made or any dividends can be paid. 2. An amount equal to the remaining earned surplus or net earnings available for dividends shall be distributed to the stockholders in the form of cash dividends, except that: (a) an amount equal to one month's fixed net loss shall be retained for short term contingencies. (b) while the Company's long-term indebtedness and redeemable stock are outstanding, one dollar ($ 1.00) shall be allocated and paid to redeem outstanding redeemable stock for each one dollar twenty cents ($ 1.20) of cash dividends declared and paid except that, if the then outstanding number of shares of redeemable stock is 20% of the total number of such shares theretofore issued, *149 the one dollar ($ 1.00) shall instead be allocated and paid to further reduce the principal of the Company's long-term indebtedness. (c) when the Company's long-term indebtedness is paid in full, then one dollar ($ 1.00) shall be allocated and paid to redeem outstanding redeemable stock for each one dollar ($ 1.00) declared and paid as cash dividends until all such stock is redeemed. On November 2, 1964, petitioner entered into a "Bonus Agreement" with Dietzsch Pontiac-Cadillac calling for the payment of an annual bonus to petitioner, in addition to his salary, in an amount equal to one-third of the corporation's earnings above 15 percent per annum on average monthend capital. Finally, Dietzsch Pontiac-Cadillac entered into the standard form of "Dealer Selling Agreement" with the Pontiac Division and the standard form of "Direct Dealer Selling Agreement" with the Cadillac Division of General Motors, whereby Dietzsch became a dealer authorized to sell the products of those divisions. During each of the taxable years 1965 to 1968, inclusive, the board of directors of Dietzsch declared and paid cash dividends to the holders of the class A stock and the holders of the class B stock, share*150 and share alike. The dividends received by petitioner were thereupon paid over to General Motors for the purchase of an allocable number of shares of class A stock. Petitioner likewise used his bonus to purchase additional shares of class A stock from General Motors. The class A stock purchased by the petitioner was thereupon surrendered to Dietzsch for conversion into an equal number of shares of class B stock. The amount of such dividends and bonuses received by petitioner, and the number of shares of class A stock purchased by petitioner with such funds, are shown below. *1178 Additional Total Dividends Class A Bonus class A class A Taxable received shares received shares shares year by petitioner purchased by petitioner purchased purchased [1965] $ 10,914.97 [78] $ 4,129.81 [1966] 10,199.65 [56] 17,401.73 [1967] 18,737.28 [88] 5,465.58 [1968] 4,456.71 [20] 8,871.18 [62] In addition, shares of the class A stock held by General Motors were redeemed by Dietzsch Pontiac-Cadillac, in accordance with the foregoing resolution, to the extent of the available funds. As a result of the foregoing, at the close *151 of each taxable year the numbers of shares of stock of Dietzsch Pontiac-Cadillac held by petitioner and by General Motors were, as follows: Taxable General Motors Petitioner year class A shares class B shares [917] In his Federal income tax returns for each of the taxable years 1965, 1966, and 1967, petitioner failed to include in income the amounts received as dividends, on the theory that by reason of his preexisting obligation the transaction should be considered as a nontaxable distribution of stock pursuant to section 305. 1 The respondent determined the amounts received by petitioner as a dividend for taxable years 1965, 1966, and 1967 were includable in income as a distribution of earnings and profits within the meaning of section 301(c). For the taxable years 1965 and 1966, petitioner paid the resulting deficiencies and*152 filed suit in the Court of Claims to recover the amounts paid. In a decision entered June 19, 1974, the Court of Claims held that the cash dividends received by petitioner were includable in gross income. . For the taxable year 1967, petitioner filed a petition with this Court to contest the amount of the asserted deficiency. In an amendment to his answer, respondent set forth the affirmative defense of collateral estoppel, claiming that the issue sought to be *1179 litigated in this Court by petitioner was the same one decided adversely to the petitioner by the Court of Claims in the prior suit. OPINION Petitioner seeks to avoid the tax on certain distributions out of earnings and profits paid in cash by Dietzsch Pontiac-Cadillac during the taxable year 1967. In support of this position, petitioner relies on section 305. While the distributions in question were made in cash, petitioner contends that by reason of a preexisting agreement between petitioner and General Motors, whereby petitioner was obligated to apply any dividends to the purchase of class A stock from General Motors and *153 to exchange such class A stock for class B stock of the distributing corporation, the distribution should be treated as a nontaxable stock dividend as defined in section 305(a). The respondent has pleaded collateral estoppel predicated upon the decision of the Court of Claims in , with respect to the taxable years 1965 and 1966. For collateral estoppel to apply, this Court must find that the facts in the decided case, as well as the law, are the same as those in the pending case. In order to make such determination, it is necessary first to decide whether the facts of the pending case differ materially from the earlier decision. . The case was submitted to this Court upon the basis of the same stipulation of facts which constitute the record for the decision of the Court of Claims in The only additional evidence presented consisted of testimony that petitioner could have borrowed the funds from the banks, but was under compulsion to accept the so-called "Dealer Investment Plan" developed*154 by General Motors. It was that or nothing. The same evidence was available to the petitioner at the time of the trial in the Court of Claims. See, e.g., . For personal reasons, the petitioner elected not to testify in the prior trial. Nevertheless the Court of Claims took into consideration "the fact that the form of the transaction was in no way his [petitioner's] choice." . The Court of Claims regarded this as immaterial. *1180 It is thus clear that except for the fact we are here dealing with the taxable year 1967, and the Court of Claims dealt with the taxable years 1965 and 1966, there are no new facts upon which the petitioner might rely in order to avoid the effect of the Court of Claims' decision. The obligation on the petitioner to use any dividends received from Dietzsch Pontiac-Cadillac for the purchase of the class A stock from General Motors and to convert such stock into class B stock was entered into in the taxable year 1964, and remained in full force and effect throughout the taxable year 1967. Even the formula fixing the*155 amount of the cash dividends to be paid had been agreed upon at that time. Petitioner does not seek to set aside those agreements. As this record shows, in accordance with the "Dealer Investment Plan," petitioner ended up as sole owner of the stock of Dietzsch Pontiac-Cadillac within the prescribed time frame. The fact that petitioner did not seek to strike a "better bargain," because of his eagerness to obtain the dealership, is of no significance. Similarly, the provision of the internal revenue laws which petitioner seeks to invoke -- namely section 305 -- is the same provision which petitioner relied on in the case before the Court of Claims. There has been no change in the law. In the absence of such change, and since the facts are the same, petitioner is estopped from relitigating this issue. , affd. ; . While this Court would not be inclined to reach any different result on the merits than was reached by the Court of Claims*156 in its decision, we need not consider that question. Decision will be entered for the respondent. Footnotes 1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩