1977 U.S. Tax Ct. LEXIS 131">*131
In the taxable years 1970 and 1971, a banking corporation distributed as a dividend in kind U. S. Treasury bonds and notes which had appreciated in value to its parent bank holding company in anticipation of the sale or redemption of such obligations. The primary purpose for the distribution in kind was to avoid the impact on the banking corporation of
67 T.C. 1022">*1023 OPINION
Respondent determined deficiencies in petitioner's Federal income taxes for the calendar years 1970 and 1971 in the amounts of $ 18,139.05 and $ 26,476.06, respectively.
The sole question for decision is whether the income resulting from the sale of U. S. Treasury notes distributed to the petitioner as a dividend in kind by Birmingham Trust National Bank (hereinafter sometimes referred to as Birmingham Trust), its subsidiary, is allocable to the subsidiary pursuant to
All of the facts have been stipulated and are so found. The stipulation of facts together with exhibits attached thereto1977 U.S. Tax Ct. LEXIS 131">*133 are incorporated herein by this reference.
The petitioner, Southern Bancorporation (formerly the Alabama Financial Group, Inc., formerly BTNB Corp.), is a corporation organized and existing under the laws of the State of Delaware, having its principal place of business at Birmingham, Ala. The petitioner filed consolidated Federal income tax returns with its subsidiary, Birmingham Trust National Bank, for the taxable years 1970 and 1971 with the Internal Revenue Service Center at Chamblee, Ga.
The deficiencies here involved as determined by the Commissioner are for income taxes for the calendar year ended December 31, 1970, in the amount of $ 18,139.05, all of which is in dispute, and income taxes for the calendar year ended December 31, 1971, in the amount of $ 26,476.06, all of which is in dispute.
At all times material herein the petitioner owned substantially all (99.75 percent) of the capital stock of Birmingham Trust, which was a "bank" as defined in section 581 of the Code.
67 T.C. 1022">*1024 Birmingham Trust acquired U. S. Treasury bonds and notes, hereinafter sometimes referred to as the notes, on the dates and in the amounts set forth below:
Purchase date | Par value |
May 5, 1970 | $ 1,210,000 |
May 5, 1970 | 310,000 |
May 5, 1970 | 353,000 |
May 4, 1970 | 380,000 |
May 4, 1970 | 838,000 |
1977 U.S. Tax Ct. LEXIS 131">*134 The notes were transferred by Birmingham Trust to its parent, the petitioner herein, as dividends on the dates and in the amounts set forth below:
Amount | ||
Date transferred | of dividend | |
Par value | to petitioner | (adjusted basis) |
$ 1,210,000 | Nov. 30, 1970 | $ 1,110,175.00 |
310,000 | Feb. 15, 1971 | 284,425.00 |
353,000 | May 12, 1971 | 323,877.50 |
380,000 | Oct. 1, 1971 | 335,231.25 |
838,000 | Nov. 5, 1971 | 742,939.38 |
The notes received during 1970 and 1971 as dividends from Birmingham Trust were sold in the open market by the petitioner on the dates and for the selling prices and resulting profits, as set forth below:
Date transferred | Date sold | ||
to petitioner | by petitioner | Selling price | Profit |
Nov. 30, 1970 | Dec. 1, 1970 | $ 1,198,656 | $ 88,481 |
Total for 1970 | 88,481 | ||
Feb. 15, 1971 | Feb. 17, 1971 | $ 312,906.25 | 28,481.25 |
May 12, 1971 | May 20, 1971 | 349,249.38 | 25,371.88 |
Oct. 1, 1971 | Oct. 1, 1971 | 366,937.50 | 31,706.25 |
Nov. 5, 1971 | Nov. 15, 1971 | 821,501.88 | 78,562.50 |
Total for 1971 | 164,121.88 |
During 1970, in addition to the dividends in the form of notes paid to the petitioner, Birmingham Trust paid cash dividends in the amounts of $ 1,221,1201977 U.S. Tax Ct. LEXIS 131">*135 to the petitioner and $ 2,880 to its remaining stockholders. During 1971, in addition to the dividends in the form of notes paid to the petitioner, Birmingham Trust paid cash dividends in the amount of $ 3,310 to its other stockholders.
The dividends paid by Birmingham Trust to the petitioner during 1970 and 1971 were paid at regular intervals shortly 67 T.C. 1022">*1025 before the petitioner's regular quarterly dividend dates, and the petitioner intended to sell the notes to acquire cash for (among others) the purpose of paying its regular quarterly dividends and paying its own operating expenses.
In causing Birmingham Trust to declare and distribute U. S. Treasury obligations as a dividend in kind, the petitioner was motivated, at least in part, by the tax savings which would result upon the sale of such obligations by petitioner. 2
1977 U.S. Tax Ct. LEXIS 131">*136 In his notice of deficiency, respondent seeks pursuant to
The petitioner points out that the pleadings in this case, the stipulation of facts, and allegedly the negotiations between the parties were predicated on the understanding that the respondent relied solely on
Petitioner's position is well taken.
67 T.C. 1022">*1026 Petitioner and Birmingham Trust are commonly controlled corporations1977 U.S. Tax Ct. LEXIS 131">*138 within the meaning of
The Court must thus consider whether, if the transaction is allowed to stand, there would be an evasion of taxes or distortion of income as between Birmingham Trust and the petitioner. If the result sought by respondent could have been achieved in reliance on the
To the question whether the transaction between petitioner and Birmingham Trust, its controlled corporation, resulted in the evasion of tax or the distortion of the income of Birmingham Trust, the answer must be in the affirmative.
The appreciation in the U. S. Treasury obligations was attributable to the purchase of such obligations by Birmingham Trust. It was the bank's money that was invested and produced the income. In fact, it may be assumed1977 U.S. Tax Ct. LEXIS 131">*140 that Birmingham Trust paid its depositors for the use of that money. The corresponding income or gain was sought to be diverted to the petitioner prior to the sale of the obligations by the distribution of a dividend in kind. This clearly resulted in the distortion of the income of Birmingham Trust. Accordingly, there were present in this case the prerequisites for the application of
Petitioner argues that the application of
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩
2. Prior to the enactment of
3.
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.↩