The opinion
T.C. Memo. 1995-505
UNITED STATES TAX COURT
THOR ENERGY RESOURCES AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23161-92. Filed October 23, 1995.
Salvador E. Rodriguez, for petitioner.
Dennis M. Kelly, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CLAPP, Judge: Respondent determined a deficiency in
petitioner's Federal corporate income tax for the year ended
January 31, 1989, in the amount of $25,633.
2
After concessions by the parties, the issue for decision is
whether Shefferman & Bigelson Co. (S&B) distributed a dividend to
Thor Energy Resources, Inc. (Thor), in the amount of
$1,245,880.36, and if so, the effect of that distribution on
Thor's sale of S&B stock. We hold that the $1,245,880.36
constitutes a portion of the sale price of the S&B stock, and S&B
did not distribute a dividend in that amount.
All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. We
incorporate by reference the stipulation of facts and attached
exhibits.
Petitioner is Thor and subsidiaries. Thor is a corporation
organized under the laws of the State of Delaware and is engaged
through its subsidiaries in oil and gas exploration and
production, with its principal business location in Tyler, Texas.
Thor's board of directors included LaVelle D. Fender, David M.
Fender, Harris R. Fender, Jr., B. Bruce Freitag, and Leroy
LaSalle. David M. Fender served as Thor's president and chief
executive officer.
S&B is a corporation organized under the laws of the
District of Columbia on January 25, 1960, and its principal
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business activities included mechanical, electrical, and plumbing
engineering services. In 1987, Thor acquired 100 percent of the
issued and outstanding stock of S&B. S&B's board of directors
included LaVelle D. Fender, David M. Fender, and Sol M.
Shefferman. LaVelle D. Fender is David M. Fender's mother, and
she served as chairman of the board of directors of S&B.
During the tax year ending January 31, 1989, S&B was a
member of an affiliated group of corporations, as defined under
section 1504, and Thor was the common parent of that affiliated
group. Thor filed a consolidated return with the affiliated
group for the tax year ending January 31, 1989, which included
S&B for the period beginning February 1, 1988, and ending
November 17, 1988. Thor owned 100 percent of the S&B stock
during the entire period that S&B was a member of the affiliated
group.
In March 1988, Thor began negotiating with a management
group of S&B employees (the management group) regarding the
management group's desire to acquire S&B from Thor. The
management group intended that an employee stock ownership plan
would hold the S&B shares after they were acquired from Thor.
The management group formed S&B Acquisition Co. (the Buyer) to
purchase the S&B stock.
The S&B board of directors held a telephone conference
special meeting on April 26, 1988, and discussed the status of
the management group's proposal to purchase the S&B stock from
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Thor. During that meeting S&B's board set a target date of
August 1, 1988, for closing on the management group's purchase of
the S&B stock. The S&B board agreed to meet again on May 17,
1988, to discuss the management group's proposal. S&B's board
held quarterly meetings, and these meetings were always held by
telephone conference. The corporate secretary for S&B would
prepare minutes of the meeting, and these minutes would be
approved at each subsequent meeting.
Prior to July 5, 1988, Thor provided the management group
with a stand-still agreement that was effective until the
anticipated S&B stock closing in early September 1988. At their
annual meeting held on July 12, 1988, Thor's board of directors
discussed and approved the Buyer's offer.
In a letter dated September 27, 1988, to each of the members
of Thor's board of directors, David M. Fender (Fender) described
generally the sale of S&B and forwarded to each director a
"UNANIMOUS CONSENT OF DIRECTORS" form seeking consent of Thor's
board for Thor to enter into a stock purchase agreement with the
Buyer. In that letter, Fender described the sale price of the
S&B stock to the Buyer as $3.3 million (net cash), plus
cancellation of approximately $724,000 of the intercompany
receivable due to S&B from Thor.
On September 30, 1988, Thor's board of directors authorized
the sale of the S&B stock pursuant to the terms of a stock
purchase agreement (SPA), and on October 3, 1988, Thor, as
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seller, and the Buyer executed the SPA regarding the sale of the
S&B stock. The relevant sections of the SPA provide:
4.6 Corporate Documents. Complete and correct
copies of the articles or certificate of incorporation
of the Company [S&B] and all amendments thereto,
certified by the Secretary of State or comparable
official of its jurisdiction of incorporation, and the
bylaws of the Company, as amended, certified by its
Secretary, are attached hereto as Exhibit A. The
Company is not in default in the performance,
observation or fulfillment of its articles or
certificate of incorporation or bylaws. The minute
books of the Company as previously furnished to the
Buyer are complete and correctly reflect in all
material respects all formal meetings of directors
(including committees thereof) and stockholders, and
correctly record all resolutions, certified copies of
which have been delivered to other parties. No
material transactions or actions have been approved at
any informal meeting of directors or stockholders the
minutes of which are not included in such minute books.
* * * * * * *
4.8 Financial Statements.
(a) Attached hereto as Exhibit B are true and
complete copies of the unaudited balance sheets of the
Company as at January 31, 1988 and January 31, 1987,
and the related statements of operations and changes in
financial position for the years ended January 31, 1988
and January 31, 1987, and the unaudited balance sheets
of the Company as at July 31, 1988 and the related
statements of operations and changes in financial
position for the six month period ended July 31, 1988
(collectively, the "Financial Statements").
(b) The Financial Statements (including the notes
thereto) are true and correct in all material respects,
are in accordance with the books and records of the
Company present fairly the financial condition and
results of operations of the Company at and for the
periods indicated, and have been prepared in accordance
with generally accepted accounting principles applied
on a consistent basis.
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(c) All notes and accounts receivable of the
Company shown on the balance sheets as at July 31, 1988
contained in the Financial Statements, or thereafter
acquired, have been paid or collected or are current
and will be collectible (in the case of any such notes,
in accordance with their terms, and in the case of any
such accounts receivable, within 360 days after
billing) at the aggregate recorded amounts thereof on
the books of the Company, less applicable reserves
provided therefor on such balance sheets, which
reserves have been computed in accordance with
generally accepted accounting principles and are
adequate.
(d) The Company has no liabilities, commitments
or obligations of any nature, whether absolute,
accrued, contingent, known or unknown, due or to become
due or otherwise, except (i) as reflected in its July
31, 1988 balance sheet included as part of the
Financial Statements and not heretofore discharged,
(ii) as incurred as a result of the normal and ordinary
course of its business since the date of such balance
sheet, none of which is materially adverse, or (iii) as
set forth in Schedule 4.8 attached hereto.
* * * * * * *
4.18. No Material Change. Since July 31, 1988,
except as disclosed in Schedule 4.18 attached hereto,
there has not been, to the best knowledge of the Seller
[Thor], and prior to the Closing there will not be
(except with the prior approval of the Buyer and the
Seller):
(i) any materially adverse change
(whether or not in the ordinary and usual
course of business) in the financial
condition, net worth, assets, liabilities,
personnel, business, or results of operations
of the Company,
* * * * * * *
(iii) any material increase in the
compensation payable or to become payable by
the Company to its officers or key employees,
pursuant to any agreement, bonus, insurance,
pension or other beneficial plan or
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arrangement made to or for the benefit of any
such officers or key employees,
(iv) any loan, guarantee, gift, bonus,
pension, retirement, insurance, death or
other fringe benefit accrued, paid or granted
to any officer or employee of the Company,
(v) any loans to or borrowing by the
Company, any mortgage or pledge with respect
to any of its properties or assets or any
assumption, guarantee, endorsement or other
agreement to become liable (directly,
contingently or otherwise) for the
obligations of any other person or entity,
* * * * * * *
(vii) any sale or disposition (or
agreement to sell or dispose) of any assets,
tangible or intangible, of the Company except
in the ordinary course of business,
(viii) any cancellation or compromise
(or agreement to cancel or compromise) any
debts owed or claims of the Company,
(ix) any declaration or payment of any
dividend or other distribution in respect of,
or purchase, redemption or acquisition of any
shares of the capital stock of the Company,
* * * * * * *
(xii) any other event or condition of
any character pertaining to and materially
adversely affecting the Company or its
business.
* * * * * * *
4.20 Intercompany Documents. Schedule 4.20
attached hereto sets forth a true and complete list of
all agreements, contracts, commitments and
understandings (including, but not limited to,
intercompany loans) between the Company and/or the
Seller or between either of the foregoing and any of
their affiliates.
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* * * * * * *
7.4 Loans Repaid. Except as provided in Section
8.4 below with respect to Intercompany Advances, all
loans made by the Company to the Seller or any
affiliate thereof, shall have been repaid in full,
including all applicable interest. All amounts
reflected on the July 31 balance sheet as "Dividends
Payable" shall be cancelled effective as of the date of
Closing.
* * * * * * *
8.4 Cancellations. All amounts reflected in the
July 31, 1988 Financial Statements of "Intercompany
Advances" shall be cancelled, effective as of the date
of Closing.
* * * * * * *
Schedule 4.8: Undisclosed contingent liabilities
None.
* * * * * * *
Schedule 4.18: Material changes since July 31, 1988
None.
* * * * * * *
Schedule 4.20: Intercompany documents
None.
S&B's July 31, 1988, financial statements indicate
"intercompany accounts and investments" of negative $724,000. No
"dividends payable" are reflected on S&B's July 31, 1988, balance
sheet.
On October 3, 1988, Thor announced publicly that it had
executed an agreement to sell the outstanding stock of S&B in
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exchange for $3.5 million cash and cancellation of a $724,000
intercompany receivable owed by Thor to S&B.
The S&B board of directors held a telephone conference
special meeting on November 14, 1988. The minutes of that
meeting state:
RATIFICATION
Mr. Fender asked for ratification by the Board of
the previous informal discussion after the previous
meeting concerning the declaration on April 29, 1988,
of an asset distribution dividend to the shareholders
of record on May 31, 1988. The dividend will consist
of the balance classified on the Company's books as
"Intercompany" and will be distributed in the same form
and character as it is carried on the Company's books
as of six months from the date of declaration. The
dividend will be distributed on January 31, 1989.
There will be no adverse tax consequences to Shefferman
& Bigelson Company. Mr. Shefferman made a motion that
the Board ratify the details set out above regarding
the informal discussion after the previous meeting.
Mrs. Fender seconded and the motion carried
unanimously.
There were no restrictions, qualifications, or contingencies
associated with the payment of the dividend distribution
referenced in the minutes of the November 14, 1988, meeting.
Richard Anderson, an accountant who advised petitioner on the S&B
stock sale, did not attend or participate in any April 29, 1988,
meeting of the S&B board of directors, and there are no minutes
of that April 29, 1988, meeting.
On November 17, 1988, Thor and the Buyer entered into an
agreement whereby the Buyer approved, pursuant to section 4.18 of
the SPA, the dividend declaration set forth in the November 14,
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1988, minutes of the S&B board meeting, and the Buyer waived any
rights or causes of action that the Buyer may have had under the
SPA stemming from the dividend declaration. On November 17,
1988, Thor delivered 100 percent of the S&B stock to the Buyer,
and Thor received $3.5 million cash. On November 18, 1988, Thor
issued a press release stating that Thor had consummated the sale
of S&B, and the "net sales proceeds after deduction of the
related transaction costs was $3.3 Million plus certain
accumulated tax benefits."
S&B maintained an "intercompany account" to record
transactions between Thor and S&B. The books of S&B reveal the
following intercompany account balances that represent funds
transferred to Thor from S&B:
Amount due
As of from Thor
Feb. 1, 1988 $993,880.36
July 31, 1988 724,000.00
Oct. 29, 1988 1,245,880.36
Nov. 17, 1988 1,245,880.36
In November 1988, S&B recorded on its books a dividend
payable in the amount of $1,245,880.36 and charged the same
amount against preacquisition retained earnings and profits of
S&B. On January 31, 1989, S&B and Thor each offset the
intercompany account balance due S&B from Thor and the dividend
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payable amounts due Thor from S&B and removed these items from
their respective books.
OPINION
Petitioner argues that S&B declared a dividend, and then in
a separate transaction, Thor sold the stock of S&B to the Buyer.
Petitioner concludes that the dividend and the subsequent sale
are independent transactions that fall within the purview of
Litton Indus., Inc. v. Commissioner, 89 T.C. 1086 (1987), and
that the regulations relied on by respondent are inapplicable to
the facts of this case. Respondent argues that, assuming S&B
paid a dividend in the amount of $1,245,880.36, Thor must reduce
its basis in the S&B stock by the amount of the dividend pursuant
to section 1.1502-32(b)(2)(iii), Income Tax Regs., if the
dividend was paid before the stock sale transaction or, in the
alternative, pursuant to section 1.1502-32(b)(2)(iii), Income Tax
Regs., in combination with section 1.1502-32T(b), Temporary
Income Tax Regs., 54 Fed. Reg. 10981 (Mar. 16, 1989), if the
dividend was paid after the stock sale transaction. Petitioner
bears the burden of proving that respondent's determination is
not correct. Rule 142(a); Welch v. Helvering, 290 U.S. 111
(1933).
Petitioner took the position during trial, presented
evidence, and argued on brief that a dividend had been declared
and paid. Respondent, in her brief, conceded that there had been
a dividend and argued that the effect of the dividend in this
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context was negated by application of section 1.1502-
32(b)(2)(iii), Income Tax Regs., and section 1.1502-32T(b),
Temporary Income Tax Regs., supra, the later section being
promulgated on March 14, 1989, and applicable to distributions
described in section 301 that are declared in taxable years for
which the due date (without extensions) of the Federal income tax
return is after March 14, 1989. We are not bound by a concession
if we conclude that it is contrary to the facts. Weinberg v.
Commissioner, 44 T.C. 233, 244 (1965), affd. in part, revd. in
part and remanded sub nom. Commissioner v. Sugar Daddy, Inc., 386
F.2d 836 (9th Cir. 1967). We find that S&B paid no dividend and
that Thor and the Buyer agreed to cancel the $1,245,880.36 debt
payable to S&B from Thor as part of the purchase price of the S&B
stock. Respondent's concession made without regard to, and
contrary to, the evidence in this case will not change our
conclusion. It is therefore unnecessary to consider the validity
of the cited regulations. We hold that S&B never declared or
paid a dividend to Thor.
Petitioner argues that S&B declared a dividend on April 29,
1988, as memorialized in the minutes of S&B's board meeting on
November 14, 1988. We find that S&B did not declare a dividend.
None of the relevant financial documents indicate that S&B
declared a dividend. S&B's financial statements of July 31,
1988, do not reflect any dividends payable as of that date. The
parties executed the SPA on October 3, 1988, and any dividend
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declared by S&B on April 29, 1988, should have been revealed in
one or more of the SPA sections 4.8, 4.18, or 4.20. Yet no
dividend is mentioned in the corresponding schedules in the SPA.
It was not until November 1988 that S&B recorded on its books a
dividend payable in the amount of $1,245,880.36 and charged the
same amount against preacquisition retained earnings and profits
of S&B.
We conclude that the minutes of S&B's board meeting held on
November 14, 1988, did not reflect accurately events, if any,
that transpired on April 29, 1988. Fender testified as follows:
Q. Was there a meeting of the board of April 29, 1988,
wherein the board of directors of the subsidiary
declared a dividend from the subsidiary to the parent?
A. I don't specifically recall it, but it was our
practice to have a meeting every quarter and we
obviously did, based on the ratification of the minutes
of that meeting in November. * * *
Petitioner's only other witness at trial, Richard Anderson, had
no personal knowledge of any meeting or informal discussion of
the S&B board on April 29, 1988. The minutes of the special
meeting of S&B's board of directors held on April 26, 1988,
indicate that the board discussed the status of the management
group's proposal to purchase the S&B stock, but there is no
mention of S&B's declaring a dividend.
Petitioner argues that, pursuant to Litton Indus., Inc. v.
Commissioner, 89 T.C. 1086 (1987), the amount at issue in this
case constitutes a dividend to Thor and not part of the proceeds
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received from the sale of the S&B stock. In Litton Industries,
Litton's board of directors discussed the sale of its subsidiary
(Stouffer) in early 1972. On August 23, 1972, Stouffer declared
and paid a $30 million dividend, and on September 7, 1972, Litton
announced publicly its interest in disposing of Stouffer. From
September 1972 through December 1972, Litton and Stouffer
discussed with various underwriters a public offering of Stouffer
stock. On March 1, 1973, Nestle Alimentana S.A. Corp. (Nestle)
offered to buy all of Stouffer's stock, and Litton completed that
sale to Nestle on March 5, 1973.
When Stouffer declared a dividend, Litton had taken no
formal action to initiate the sale of Stouffer. Id. at 1097. In
contrast, during their special meeting on April 26, 1988, which
was before the alleged dividend declaration on April 29, 1988,
S&B's board of directors set a target date of August 1, 1988, for
closing on the management group's purchase of the S&B stock.
There is no evidence that Thor discussed the sale of S&B to any
buyer other than the management group. Litton, on the other
hand, discussed the disposition of Stouffer with various
corporations, investment banking houses, business brokers, and
underwriters. Id. Stouffer declared a dividend and definitely
committed itself to the dividend before even making a public
announcement that Stouffer was for sale. Id. at 1098. This is
in stark contrast to S&B's alleged dividend that did not surface
until November 14, 1988, 3 days before Thor's sale of the S&B
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stock to the Buyer. This case is controlled by the principles
set forth in Waterman Steamship Corp. v. Commissioner, 430 F.2d
1185 (5th Cir. 1970), revg. 50 T.C. 650 (1968). Here, as in
Waterman Steamship, there was no dividend, only an adjustment in
the sale price of the S&B stock.
Petitioner's dividend argument is nothing more than a
belated attempt by Thor and/or S&B to acquire some perceived tax
advantages by offsetting the intercompany account balance due
from Thor with a dividend from S&B. We hold that S&B neither
declared nor paid a dividend to Thor, and that Thor and the Buyer
merely agreed to cancel the intercompany account balance due from
Thor to S&B as part of the purchase price of the S&B stock.
To reflect the foregoing and the concessions by the parties,
Decision will be entered
under Rule 155.