(Tax Court Docket Nos. 2753-70; 2756-70 and 2757-70) APPEALS FROM THE DECISIONS OF THE UNITED STATES TAX COURT.
McLaughlin, Gibbons and Garth, Circuit Judges.
We have before us three appeals from the Tax Court presenting two different factual situations, but involving related parties and similar issues.
Appeal No. 73-1588 ("Penn Wynn") involves transfers made by Joseph Lupowitz Sons, Inc. to Penn Wynn, Inc. The Commissioner contended and the Tax Court held that these transfers resulted in a debtor/creditor relationship between the two companies.
Appeal Nos. 73-1589 and 73-1590 ("Mansfield") involved transfers made by Mansfield Homes, Inc. to Lupowitz. The Commissioner contends that the individual taxpayers Harold Lupowitz and Esther Lupowitz (Meisler), each of whom owned 50% of Mansfield Homes stock, received constructive dividends in 1965 as a result of such transfers. The Tax Court disagreed and held that a bona fide obligation arose between the two companies.
We deal first with the Penn Wynn appeal.
APPEAL NO. 73-1588 (PENN WYNN)
This is an appeal from a decision of the Tax Court holding that for the years 1965 and 1966 a debtor/creditor relationship existed between Penn Wynn, Inc. (hereinafter "Penn Wynn") and Joseph Lupowitz Sons, Inc. (hereinafter "Lupowitz"). Having found that Lupowitz was the creditor of Penn Wynn, the Tax Court implied an agreement for the payment of interest and concluded that such interest was includable in Lupowitz's gross income. As a result, Lupowitz was subject to the personal holding company tax. 26 U.S.C. § 541 et seq.*fn1 The Tax Court made the following findings.
Lupowitz is a closely held corporation, the voting stock of which in 1958 was equally held by four related individuals (Sidney Lupowitz, Emanuel Lupowitz, Martha Lupowitz Kaufman and Harold B. Lupowitz).*fn2 Planning the construction and operation of a new apartment building, and wishing to limit their liability, they incorporated Penn Wynn, Inc. in February 1959. Each of them paid $2,500 for a one-fourth stock interest in Penn Wynn. On February 24, 1959 Lupowitz transferred $73,000 to Penn Wynn. The following day Penn Wynn purchased an $80,000 building site. Subsequently in 1960, a $2,600,000 construction loan was obtained by Penn Wynn from Frankford Trust Company, but on the condition that no loan disbursements would be made until $543,000 of Penn Wynn's own money was committed to the project. As of August 1960, the time that the required funds had been committed, $575,000 had been transferred from Lupowitz to Penn Wynn.*fn3 Frequent transfers of money between the two "brother-sister" corporations continued, but the net monies transferred to Penn Wynn from 1960 through 1966 never totalled less than $548,500.*fn4 The parties (Lupowitz and Penn Wynn) never entered into any oral or written agreement evidencing these transactions. No agreements, express or otherwise, were ever made respecting repayment of principal, default, payments of interest, and the like.
In 1962, upon audit of Lupowitz's 1960 and 1961 returns the Internal Revenue Service proposed an accrual of interest on the monies transferred. Lupowitz consented to these adjustments and paid the resulting income tax deficiencies. Interest for 1962 was accrued with consent, and the resulting tax deficiency paid after an audit in 1965. After the audits, Penn Wynn was permitted to deduct the interest for 1960, 1961 and 1962, although these deductions provided no tax benefit to Penn Wynn due to losses in each of the years. Lupowitz voluntarily accrued interest in the years 1963 through 1966.
The accrued interest for 1960 through 1963 was actually paid to Lupowitz by Penn Wynn. No 1964 payment was made. In 1965 and 1966 only an amount sufficient to cover the tax liability generated by the interest was paid.
The Internal Revenue Service determined that for 1965 and 1966 because Lupowitz's interest income exceeded 10% of its ordinary gross income, and because no dividends were paid, the rents otherwise received by Lupowitz became personal holding company income.*fn5 Personal holding company tax was assessed. Lupowitz contested that liability in the Tax Court claiming the transfers which it made to Penn Wynn were capital contributions and not loans. The Tax Court, however, held as an ...