Sieh
v.
Comm'r of Internal Revenue

United States Tax CourtSep 29, 1971
56 T.C. 1386 (U.S.T.C. 1971)
56 T.C. 1386T.C.

Dockets Nos. 5157-68 5158-68.

1971-09-29

ALFRED M. SIEH, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTBONA FIDE, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Francis J. Pruss, for the petitioners. Ivan L. Onnen and Robert H. Burgess, for the respondent.


Francis J. Pruss, for the petitioners. Ivan L. Onnen and Robert H. Burgess, for the respondent.

1. Held, during the taxable years 1959 and 1960 the corporate petitioner was a personal holding company within the meaning of sec. 542, I.R.C. 1954.

2. Held, further, the corporate petitioner's subch. S election to be taxed as a small business corporation was involuntarily terminated in 1960.

3. Held, further, a corporate distribution received by the individual petitioner in taxable year 1964 is a taxable dividend.

FAY, Judge:

Due to common issues of fact and questions of law, two cases have been consolidated for purposes of trial, briefing, and opinion. Respondent determined deficiencies in petitioner's income taxes as follows:

+--------------------------------------------------+ ¦ ¦Deficiency ¦ +----------+---------------------------------------¦ ¦Docket No.¦ ¦ +----------+---------------------------------------¦ ¦ ¦1959 ¦1960 ¦1962 ¦1964 ¦ +----------+---------+---------+---------+---------¦ ¦5157-68 ¦ ¦ ¦$2,728.07¦$3,684.22¦ +----------+---------+---------+---------+---------¦ ¦5158-68 ¦$1,569.44¦$1,251.69¦93.53 ¦ ¦ +--------------------------------------------------+

Concessions having been made, the issues left for decision are: (1) Whether Bona Fide, Inc., was a personal holding company during the years 1959 and 1960 and therefore subject to the personal holding company tax imposed by section 541; (2) whether Bona Fide, Inc.‘s election to be taxed as a small business corporation under subchapter S of the Internal Revenue Code of 1954 was terminated as of January 1, 1960; and (3) whether petitioner Alfred M. Sieh received a dividend of $2,404.10 from Bona Fide, Inc., in taxable year 1964.

All section references are to the Internal Revenue Code of 1954, unless otherwise indicated.

FINDINGS OF FACT

Some of the facts have been stipulated and are incorporated herein by this reference.

Petitioner Alfred M. Sieh (sometimes referred to as petitioner or Alfred) resided in Cedar Rapids, Iowa, at the time of filing the petition in this case. He filed Federal income tax returns for taxable years 1962 and 1964 with the district director of internal revenue, Des Moines, Iowa.

Bona Fide, Inc. (sometimes referred to as Bona Fide or the corporation), was incorporated under the laws of the State of Iowa in 1956. At the time of filing the petition herein, its principal place of business was in Cedar Rapids, Iowa. Bona Fide filed a corporate income tax return for taxable year 1959 with the district director of internal revenue, Des Moines, Iowa. For taxable years 1960 through 1964 Bona Fide filed small business corporation information returns with the same district director.

During the years in question, Alfred was employed as a real estate sales manager of the Iowa Securities Co. (sometimes referred to as Iowa Securities) in Cedar Rapids, Iowa. Serving in this capacity, it was his primary duty to supervise the sale of real estate by Iowa Securities. To facilitate the making of sales, petitioner formed Bona Fide in 1956. Bona Fide, during 1959, 1960, and 1962, had 82 shares of common stock outstanding, 81 owned by Alfred and 1 by his brother.

The function of Bona Fide was to provide financing to prospective purchasers who could not otherwise finance the purchase of a home. Bona Fide was particularly useful in situations where a good-risk purchaser was unable to raise sufficient funds to meet downpayment requirements or to purchase the seller's equity. In such instances, Bona Fide would purchase the home through Iowa Securities and in turn resell the property to the buyer on terms (usually a small downpayment was involved) mutually agreeable to both. Payments made on these loans consisted or principal, interest, and escrow payments. The escrow payments included necessary premiums for insurance and advance property taxes. The portion of each payment constituting principal, interest, or escrow payment was noted on the back of the real estate contracts written between Bona Fide and the buyers. In purchasing real estate from sellers, Bona Fide either paid the seller for his equity and assumed the outstanding mortgage or would make the required downpayment and execute its own new mortgage. Under either of these procedures, Bona Fide incurred and paid interest on the mortgages. Bona Fide was simultaneously receiving interest income and making interest payments. Treating the receipt and payment of interest as a wash transaction, Bona Fide reported only the following net amounts as income on its returns:

+---------------+ ¦1959¦$3,072.50 ¦ +----+----------¦ ¦1960¦6,044.55 ¦ +----+----------¦ ¦1962¦4,359.31 ¦ +---------------+

The gross amounts if interest, principal, and escrow payments actually received were:

+------------------------------------+ ¦ ¦1959 ¦1960 ¦ +---------------+---------+----------¦ ¦Total interest ¦$9,148.37¦$13,741.95¦ +---------------+---------+----------¦ ¦Total principal¦26,921.57¦20,028.81 ¦ +---------------+---------+----------¦ ¦Total escrow ¦2,479.85 ¦4,616.45 ¦ +------------------------------------+

In 1964, Alfred received a distribution in the amount of $2,404.10 from Bona Fide.

Respondent, concluding that Bona Fide was a personal holding company and also that its election to be taxed as a subchapter S small business corporation had terminated, determined the deficiencies here in question. In addition, the distribution of $2,040.10 made to Alfred in 1964 was treated as a dividend, thereby giving rise to the only deficiency with respect to Alfred still in dispute.

OPINION

The issues to be decided are: First, whether Bona Fide received sufficient personal holding company income to warrant imposition of the personal holding company tax levied by section 541; second, whether receipt of interest income in excess of the personal holding company income limit permitted by section 1372(e)(5) resulted in the termination of Bona Fide's election to be taxed as a small business corporation; and, finally, whether the distribution admittedly received by Alfred from Bona Fide constitutes a dividend under sections 301 and 316.

Alfred, as sales manager of Iowa Securities, was involved in the sale of residential housing. To facilitate the sale of houses, Alfred formed Bona Fide, Inc. In 1960 Bona Fide filed an election to be taxed as a small business corporation under sections 1371 et seq. of the Internal Revenue Code of 1954. The principal function of Bona Fide was to assist buyers whose financial condition made it impossible to meet either the sellers' financial requirements or those demanded by conventional housing loans. In practice, a prospective purchaser of property listed by Iowa Securities would f