Lead Opinion
Respondent determined the following deficiencies and additions to tax in petitioners’ Federal income taxes:
Docket Taxable Sec. 6653(a)2 Petitioner No. year Deficiency addition to tax
Anthony Yelencsics and Norma Yelencsics 2078-77 1967 $9,365.77
1968 3,146.59
1969 4,920.63
Steve Yelencsics and Rose Yelencsics 2079-77 1967 7,820.08
1968 4,790.31
1969 6,193.46
Joseph Yelencsics and Margaret Yelencsics 2080-77 1967 7,049.71
1968 3,664.59
1969 6,291.27
John Y. Rawson and Mabel Rawson 2224-77 1967 36,296.97 $1,814.85
1968 11,270.10 563.51
1969 17,988.24 899.41
Rawson Cadillac, Inc. 2223-77 (formerly Laing Motor Car Co.) 1969 14,900.70 745.04
After concessions, the remaining issues for decision are:
(1) Whether payments made by petitioner Rawson Cadillac, Inc., formerly Laing Motor Car Co., to Gordon Laing pursuant to a consulting agreement are deductible as compensation under section 162(a), or are constructive dividends to the individual petitioners.
(2) Whether certain payments by Rawson Cadillac, Inc., to Gordon Laing in partial satisfaction of notes issued him on the sale of his stock constitute constructive dividends to the individual petitioners.
(3) Whether the section 6653(a) addition to tax should be imposed on petitioners Rawson Cadillac, Inc., and John V. Rawson.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioners Anthony Yelencsics and Norma Yelencsics, husband and wife, resided in Edison, N.J., when they filed their
Petitioners Steve Yelencsics and Rose Yelencsics, husband and wife, resided in Edison, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Philadelphia, Pa., and when they filed their petition in this case.
Petitioners Joseph Yelencsics and Margaret Yelencsics, husband and wife, resided in Edison, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Newark, N.J., and when they filed their petition in this case.
Petitioners John V. Rawson and Mabel Rawson, husband and wife, resided in Watchung, N.J., when they filed their 1967, 1968, and 1969 joint Federal income tax returns with the Internal Revenue Service, Newark, N.J., and when they filed their petition in this case.
Petitioner Rawson Cadillac, Inc., formerly Laing Motor Car Co., a corporatiоn organized under the laws of the State of New Jersey, maintained its principal offices in Plainfield, N.J., when it filed its petition in this case. It filed Federal corporate income tax returns for the years 1967, 1968, and 1969 with the Internal Revenue Service, Newark, N.J.
Laing Motor Car Co. (hereinafter the corporation) was incorporated under the name “Laing Machine-Auto Repair Co.” on July 19,1905, by Allen B. Laing, who held 98 of the 100 shares issued. Upon the death of Allen Laing in 1961, his son Gordon continued the business as president and majority shareholder.
During the years 1967, 1968, and 1969, the corporation was a franchised dealer of the General Motors Corp. (hereinafter General Motors) with the exclusive right to sell Oldsmobile and Cadillac automobiles in Plainfield, N.J. At that time, the corporation operated under a dealer selling agreement with General Motors effective through October 1970. This agreement, at paragraph 3 thereof, provided that General Motors entered into the contract with the corporation in reliance upon, and in consideration of, the personal qualifications and representations of Gordon M. Laing (hereinafter Laing). No other person was listed in the agreement as owning or actively participating in the operation of the corporation. The agreement further provided
On August 31, 1964, the corporation borrowed $175,000 from the General Motors Acceptance Corp. (hereinafter GMAC) and executed a mortgage to GMAC on eight parcels of land located in Plainfield, N.J. As further security for this loan, Laing pledged 1249 shares of common stock of the corporation to GMAC. From 1966 through 1969, the 1249 shares of stock were held in escrow.
From late 1960 through July 1966, petitioner John V. Rawson (herеinafter Rawson) was employed by the corporation as sales manager of its automobile dealership. In this capacity, Rawson’s primary responsibility was running the sales department and he generally was not involved in any of the other aspects of the business.
Sometime prior to July 22, 1966, Laing told Rawson that he wanted to sell the business and offered Rawson the opportunity to purchase his stock interest in the corporation. The financial condition of the corporation had been deteriorating for some time and Laing was anxious to sell.
On July 22, 1966, following negotiations between the parties, Rawson entered into an agreement (hereinafter referred to as the stock purchase agreement) to purchase all the issued and outstanding stock of the corporation (1251 shares) from Laing for $265,000.
5. Buyer agrees to secure the Seller for the payment of all unpaid amounts at closing of title by executing promissory notes for the payment thereof according to the terms of this agreement, which said notes shall be made by Rawson and by Anthony Yelencsics, Steve Yelencsics and Joseph Yelencsics, and their wives as guarantors, and further guaranteed by Laing Motor Car Co. All guarantors shall be liable as co-makers. * * *
In addition to the foregoing collateral security, all shares of stock of Laing Motor Car Co. shall be held in escrow by Walter L. Leib, Esq., attorney for Rawson. He may release said shares starting January 16,1967 in a number and amount and ratio as the amount paid bears to the original total obligation on said date.
The stock purchase agreement required Laing, at closing, to provide Rawson with all unpledged stock certificates, properly endorsed in blank, and stock powers for all certificates pledged with GMAC. For purposes of this agreement, the stock powers were the equivalent of the stock certificates representing the pledged shares. Laing also agreed to sign all documents necessary for transferring the pledged certificates to Rawson upon their release by GMAC and to arrange for such transferred certificates to be recorded on the corporate books under Rawson’s name.
Rawson did not want General Motors to know that he had purchased all of Laing’s stock since he feared that they would terminate the automobile franchise. Accordingly, he required Laing to maintain secrecy with respect to the stock purchase agreement. As an additional measure designed to insure this secrecy, the agreement further provided that 25 percent of Laing’s stock was to be held nominally of record in his name endorsed in blank.
As part of the agreement, Laing agreed to remain as president of the corporation at the pleasure of the board of directors and as a director of the corporation at the pleasure of the stockholders. However, resignation of all other officers and directors of the corporation was to be delivered to Rawson at closing. Laing also agreed to attend all meetings of the board of directors and any other meetings and conferences requested of him by the board of directors, or as requested, to give an appropriate proxy to vote his shares of stock at any stockholders meeting and to vote his place at a board of directors meeting. In addition, he agreed not to own or operate a Cadillac or Oldsmobile dealership within 50 miles of Plainfield, N.J., for 5 years.
The following consulting arrangement was also provided form the agreement:
6. Laing shall be employed by Laing Motor Car Co. for a period for four years for a total salary of $70,000 to be payable as follows: during the year 1966, in equal monthly installments, the sum of $10,000.00 to begin August 15, 1966; during the year 1967, in equal monthly installments, the sum of $20,000.00; during the year 1968, in equal monthly installments, the sum of $20,000.00; and during the year 1969, in equal monthly installments, the sum of $20,000.00; * * *
Laing shall not be required to devote any prescribed hours in performance of any duties in connection with such employment in order to be entitled to receive the sums herein mentioned at the time herein mentioned, but all of such sums shall be considered as earned in return for consulting services and advice to Laing Motor Car Co., which shall be given from time to time and shall be payable to the heirs and assigns of Laing should he die or become disabled during the term of such consulting сontract.
During the term of this employment contract and for as long as any amounts were still due him under the stock purchase agreement, Laing had unlimited access to and right to examine all corporate books and records.
The agreement also prohibited Laing and Rawson from doing anything to adversely affect the dealership agreement between General Motors and the corporation so long as any amounts due Laing remained unpaid. If the Cadillac selling agreement should be terminated or transferred to Rawson, the agreement specified that, at Laing’s option, any unpaid amounts would become immediately due and payable.
The stock purchase agreement between Laing and Rawson was signed by them and approved by Laing on behalf of the corporation. Since Rawson lacked financial resources of his own, the entire $75,000 due Laing at or before the closing was paid by Anthony Yelenсsics, Joseph Yelencsics, and Steve Yelencsics (hereinafter referred to as the Yelencsics group) pursuant to a previous arrangement between those individuals and Rawson. Closing of title was consummated on July 22,1966.
Immediately following execution of the stock purchase agreement, a $35,000 promissory note and a $120,000 promissory note were executed and delivered to Laing in accordance with that agreement.
For value received, the undersigned do jointly and severally promise to pay to the order of
Gordon M. Laing
residing at Washington Rock Road, Watchung,
New Jersey,
the sum of * * * with interest thereon from * * * at the rate of five (5%) per cent per annum on the unpaid balance until fully paid.
The notes were signed by Rawson and his wife, the Yelencsics group and their respective wives, and by Laing, on behalf of the corporation.
Also on July 22, 1966, a separate agreement entitled “Shareholders’ Partnership and Buy and Sell Agreement” (hereinafter referred to as the shareholdеrs’ agreement) was executed between Rawson and the Yelencsics group. This agreement acknowledged that Rawson had purchased all the issued and outstanding stock of the corporation on that same date from Laing, referred to as the “former owner” thereof, with funds provided by the Yelencsics group. Moreover, in accordance with a prearranged plan between Rawson and the Yelencsics group to transfer 75 percent of such stock to the latter, the agreement provided, in part, as follows:
1. The First Party [Rawson] assigns all his right title and interest in all the issued and outstanding stock in Laing Motor Car Co. pursuant to the contract between Rawson and Laing and the closing of title, all of which were executed and finalized on July 22, 1966 to himself and the Second Party [Yelencsics Group] so that each individual shall have and continue to have title to 25 percent of the issued and outstanding stock of Laing Motor Car Co.
2. The Second Party [Yelencsics Group] shall have the sole right at their pleasure to determine the method of transfer of stock to them and in what proportion and ratio and further, in the event it is deemed advisable by them, they may place their shares of stock in the name of Stephen Yelencsics, as nominal or owner of record, who will represent them as an officer of the corporation and on the Board of Directors * * *
The shareholders’ agreement further provided that Rawson was to be the general manager in charge of operating the business with complete authority to hire and fire employees. However, all profits, dividends, bonuses, and the like arising from the operation and management of the corporation, including the sale of its assets, were to be divided among the individual owners in accordance with their respective percentages of stock ownership. The parties also agrеed to utilize their best efforts to arrange for the names of Rawson and Stephen Yelencsics to be
The shareholders’ agreement also provided that the board of directors of the corporation consist of Laing, Rawson, and Stephen Yelencsics and that the officers be Laing (president), Rawson (vice president and secretary), and Stephen Yelencsics (treasurer). In addition, all corporate checks were to be signed by both Rawson and Laing until such time as Laing was replaced in paragraph 3 of the dealer selling agreement.
At a special meeting of the stockholders of the corporation, held July 22, 1966, the new stockholders, Rawson and the Yelencsics group, accepted the resignation of all former directors of the corporation, except for Laing, and elected Rawson, Laing, and Stephen Yelencsics as new directors to serve for 1 year. They also ratified the stock purchase agreement and the shareholders’ agreement executed that same day. These individuals continued to serve as directors of the corporation from 1967 through 1969.
At a special meeting of the board of directors of the corporation, held July 22, 1966, the newly elected directors accepted the resignation of all former officers of thе corporation except for Laing, and elected Laing as president, Rawson as vice president and secretary, and Stephen Yelencsics as treasurer, for a 1-year term. These individuals continued to serve in their respective capacities from 1967 through 1969.
On August 16, 1967, Laing wrote letters to the Cadillac and Oldsmobile divisions of General Motors informing them that he intended to immediately transfer 30 percent of the stock of the corporation to Rawson, as a bonus, and to sell the remaining stock to Rawson within the next 5 years. Laing, therefore, requested that General Motors place Rawson’s name in paragraph 3 of the dealer selling agreement alongside his own. On that same day, Rawson wrote letters to those two automobile divisions acknowledging Laing’s letters and stating his intention to assume ownership of the corporation in the near future.
Subsequent to his stock sale on July 22, 1966, and continuing throughout most of 1967, Laing rendered a variety of services to the corporation. While Rawson, as general manager, was primarily concerned with the sales department, Laing generally monitored the operation of the service, parts, and paint shop departments, and met with zone representatives from General Motors. Rawson also consulted with Laing at various times about company policy, partiсularly with respect to car allotments.
In 1968, Laing sold his house in New Jersey and moved to Jupiter, Fla. He permanently resided in Florida during 1968 and 1969. Following his move, Laing frequently communicated with Rawson by telephone to discuss car allotments and other company decisions. Rawson also went to Florida approximately once a month to confer with Laing in person concerning the business.
Beginning in August 1966, and continuing once a month thereafter, petitioner Joseph Yelencsics, on behalf of the Yelenc-sics group, received financial statements of the corporation from Rawson. He also met with Rawson on a weekly basis to review the financial status and operations of the business.
During the years 1967 through 1969, Laing was the record owner of 1,249 of the 1,251
At a special board of directors meeting held on October 27, 1969, and a special meeting of the stockholders held on November 3, 1969, the name of the corporation was changed to Rawson Cadillac, Inc. On March 26, 1970, a new dealer selling agreement
In 1972, Rawson purchased all the stock of Rawson Cadillac, Inc., owned by the Yelencsics group. Rawson sold his interest in the business in 1975 at which time the unpaid balance on the $120,000 note was finally paid.
Pursuant to the consulting arrangement contained in the stock purchase agreement of July 22, 1966, the corporation paid Laing $20,000 during each of the years 1967,1968, and 1969 and deducted those amounts on its corporate income tax returns for those years as “compensation of officers.” During those same years, the corporation paid the following sums to Laing in partial satisfaction of the notes issued him on the sale of his stock.
1967 .$82,510.90
1968 .13,122.90
1969 . 13,734.90
The foregoing payments by the corporation were made by check signed by Rawson and rubberstamped with Laing’s signature.
From July 22, 1966, through December 31, 1969, petitioners John Rawson and the individual members of the Yelencsics group each owned a 25-percent stock interest in the corporation. Prior to the 1967 distributions to Laing, each had a basis in their stock of $66,250.
In his notice of deficiency issued to the corporation, respondent disallowed the corporation’s claimed compensation deductions for amounts paid Laing in 1967, 1968, and 1969, concluding that these payments were not for services rendered, but were in substance, payments for Laing’s stock in the corporation. Basеd upon his disallowance of the deduction for 1967, respondent further denied the corporation a net operating loss carryover deduction for 1969. Respondent also determined that part of the corporation’s underpayment of tax for 1969 was due to negligence or intentional disregard of rules and regulations under section 6653(a).
In separate statutory notices issued to the individual petitioners, respondent determined that the payments made by the corporation to Laing during 1967, 1968, and 1969, both for consulting services and in partial satisfaction of the notes issued
OPINION
We must decide the following issues:
(1) Whether payments made by petitioner Rawson Cadillac, Inc., formerly Laing Motor Car Co., to Gordon Laing pursuant to a consulting agreement are deductible as compensation under section 162(a), or are constructive dividends to the individual petitioners.
(2) Whether certain payments by Rawson Cadillac, Inc., to Gordon Laing in partial satisfaction of notes issued him on the sale of his stock constitute constructive dividends to the individual petitioners.
(3) Whether the section 6653(a) addition to tax should be imposed on petitioners Rawson Cadillac, Inc., and John V. Rawson.
Issue 1
The first issue for decision is whether payments by petitioner corporation to Laing during 1967, 1968, and 1969, pursuant to the consulting provision contained in the stock purchase agreement are deductible as ordinary and necessary business еxpenses under section 162(a)(1).
In evaluating the respective claims of the parties, we recognize that the substance of this transaction and not merely its form will control its treatment for Federal income tax purposes. Where, as here, respondent attacks the form of an agreement selected by a seller and buyer, this Court will examine its substance so that the operation of the tax laws will not be frustrated by the mere form in which the agreement is drawn. Gregory v. Helvering,
To support his argument that the consulting provision was a mere sham, respondent emphasizes that this provision did not require Laing to perform any services to the entitled to payment and that the corporation was still obligated to make the payments to Laing’s heirs and assigns even after his death. As additional support, respondent maintains that, in fact, Laing performed little or no consulting services during the years at issue.
Although we agree that Laing’s right to receive payment under this provision was not contingent upon his performing specific services or devoting prescribed hours in a consulting capacity, we have found as a fact that he actually rendered various services in each of the years before us. For a period of approximately 2 years аfter he sold his stock, Laing generally monitored the operation of various departments of the business, leaving the sales end for Rawson’s exclusive supervision. He often conferred with Rawson concerning company policy and also met with zone representatives from General Motors. Moreover, even after moving to Florida in 1968, Laing frequently communicated with Rawson by telephone and regularly met with him to discuss company business.
Respondent urges that we disregard these services, contending that they were nominal and only performed on a part-time basis. Aside from disagreeing with his conclusion as to the significance of Laing’s services, it is clear that respondent has failed to distinguish between a consulting arrangement and a
We also note that the stock purchase agreement contained a covenant by Laing not to own or operate a competing Cadillac or Oldsmobile dealership within 50 miles of Plainfield, N.J.,for 5 years. While this provision did not have a separately stated consideration, it did represent an additional commitment on Laing’s part, supplemental to his consulting commitment, and it added value to the consideration for which the corporation was obligated in the consulting arrangement to pay annually.
Finally, there is nothing in the record to suggest that the $265,000 Laing received for his stock was unduly low or that any portion of the consulting fees represented part of the purchase price for his stock. Cf. Nicholas Co. v. Commissioner,
Issue 2
The next issue for decision is whether payments by the corporation to Laing in partial satisfaction of the notes issued him for the sale of his stock are constructive dividends to petitioners Rawson and the Yelencsics group. Respondent contends that these payments were made on behalf of petitioners to pay for their purchase of Laing’s stock and constitute constructive dividends to them to the extent of the earnings and profits of the corporation.
Petitioners advance several arguments to avoid constructive
For purposes of Federal income taxation, a sale occurs upon transferring sufficient incidents of beneficial ownership rather than technical requirements for the passage of title under State law. See Maher v. Commissioner,
Guided by these principles, we are convinced that Laing sold his entire stock interest in the corporatiоn to petitioners on July 22, 1966.
Petitioners maintain, however, that Laing’s continued equity interest was evidenced by his right to examine corporate books, sign checks, and the fact that his name alone appeared in paragraph 3 of the dealer selling agreement. We find petitioners’ reliance on these facts misplaced.
Since the corporation also signed on the notes to Laing, his right to examine corporate books and records was merely a security measure to ensure that the corporation had sufficiеnt funds in the event Laing turned to it for payment. It was not, as petitioners suggest, a significant restriction on their stock ownership. In addition, although the shareholders’ agreement required Laing’s signature on all checks, we have found as a fact that those checks were actually signed by Rawson and only rubberstamped with Laing’s signature. Hence, Laing’s control over corporate moneys was illusory.
The fact that Laing remained the dealer of record does not affect our holding that petitioners were the beneficial owners of the stock. There is nothing in the stock purchase agreement which conditioned the sale upon placing their names in the dealer selling agreement. Based on the letters and agreements of August 16, 1967, we are convinced that petitioners considered the stock purchase agreement as effecting a completed sale despite the fact that no change had yet been made in the
As an alternative argument, the Yelencsics group assert that they were not shareholders because no stock certificates were ever issued to them. This contention is without merit.
On the facts before us, it is clear that the stock certificates were not physically transferred to the Yelencsics group because they were already pledged with GMAC as collateral for a previous loan to the corporation. Under the terms of the stock purchase agreement, however, petitioners received stock powers for those pledged certificates which were treated as the equivalent of the certificates themselves. In any event, we note that stock certificates are merely documentary evidence of corporate ownership and, therefore, their issuance and delivery to a purchaser is not a prerequisite to ownership of the shares represented by such certificates. Morgan v. Commissioner,
We now turn to petitioners’ second principal contention. Before doing so, however, it is first necessary to consider the applicable law governing constructive dividends.
It is well settled that if a corporation pays an obligation of its shareholder or makes a payment for his benefit, such payment may constitute a constructive dividend to that shareholder to the extent of available earnings and profits. Wall v. United States, supra; Smith v. Commissioner,
Petitioners maintain that the principle established in Wall v. United States, supra, does not apply where a corporation discharges a joint obligation of the corporation and its shareholders. Relying on Tucker v. Commissioner,
To be sure, petitioners would have received a taxable dividend had the corporation made an actual distribution to them from its earnings and profits and petitioners had then used the distributed funds to make the payments to Laing under the stock purchase аgreement. Sec. 316(a); sec. 301. Moreover, had the corporation not been primarily liable on the notes, but had paid the amounts in question directly to Laing, it is clear that these payments would be taxable to petitioners as dividends. Wall v. United States, supra; Deutsch v. Commissioner,
While we recognize that the corporation was discharging its own obligation on the notes when it paid these amounts to Laing, petitioners have not offered us, nor have we been able to discern any valid business purpose for the corporation incurring such primary liability. Cf. Gilbert v. Commissioner,
The cases relied on by petitioners are clearly distinguishable. In Tucker v. Commissionеr, supra, a Ford automobile franchise holder sought to comply with the manufacturer’s policy requiring the franchise holder to own a controlling interest in the dealership corporation. A minority shareholder agreed to sell the franchise holder sufficient stock to give the latter a controlling interest for a specified price plus 20 percent of the profits for 5 years. The franchise holder paid the named purchase price and had the corporation execute the contract to give the minority shareholder 20 percent of the profits for 5 years. The Eighth Circuit held that the yearly corporate payments were not taxable as constructive dividends to the franchise holder on the ground that the corporate obligation to the seller was supported by valuable consideration and was for a proper corporate purpose in that it preserved a valuable franchisе for the corporation. Here, no such consideration or proper corporate purpose can be found.
In Ruben v. Commissioner, supra, a court decree had been entered against taxpayer, two other individuals, a common law trust, and a corporation, in which the taxpayer held a 25-percent stock interest, directing that approximately $350,000 be paid by
Nevertheless, petitioners argue that they received no economic benefit from these corporate payments because the transaction could have been structured as a redemption with no tax consequences to them. See sec. 302. This argument surely misses the point. Taxation is more dependent upon what was actually done rather than what might have been done. Television Industries, Inc. v. Commissioner,
Issue 3. Negligence Penalty
Respondent imposed the section 6653(a) addition to tax against Rawson for his understatement of income. He argues that Rawson was negligent in failing to keep adequate records or seek tax advice concerning the proper treatment of corporate payments on the notes. Petitioner has the burden of proving that respondent’s imposition of this addition to tax was wrong. Enoch v. Commissioner,
On the basis of the record, we are satisfied that Rawson’s underpayment was not due to negligence or intentional disregard of rules and regulations, but solely to a good-faith misunderstanding of the law. Wofford v. Commissioner,
To reflect the foregoing,
Decisions will be entered under Rule 155.
Notes
All stautory references are to the Internal Revenue Code of 1954 as amended.
As of May 31, 1966, the net worth of the corporation per its books was $261,056.31.
“General Motors had a policy requiring its dealers to own at least 25 percent of the stock in the corporation holding the franchise. By adding this nominal ownership provision, Laing’s name remained on par. 3 of the dealer selling agreement despite the sale of his entire interest.
The stock purchase agreement called for the execution of three promissory notes, two for $35,000 and one for $120,000. The record indicates, however, that only one of the $35,000 notes wаs actually executed.
Robert McDonald and Betty R. Laing were each the record owners of 1 share of stock of the corporation.
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
See Muskogee Radiological Group, Inc. v. Commissioner,
Since respondent’s determination with respect to the corporation’s net operating loss carryover deduction for 1969 was based solely upon his disallowance of the compensation deduction in 1967, we further hold that the corporation is entitled to that net operating loss deduction.
In his separate statutory notices mailed to petitioners, respondent has taken an inconsistent position by charging the Yelencsics group with ownership of 75 percent of the corporation and, at the same time, determining that Rawson owned 100 percent of the corporation during these years. On brief, however, respondent has conceded that if we find that Laing sold his stock in equal amounts to Rawson and the individual members of the Yelencsics group in a single transaction, then Rawson would only be subject to a constructive dividend based on 25-percent stock ownership of the corporation.
Sec. 316. DIVIDEND DEFINED.
(a) General Role. — For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders—
(1) out of its earnings and profits accumulated after February 28,1913, or
(2) out of its earnings and profits of the taxable year * * *
[Emphasis supplied.]
Objective indicia of a sale to petitioners on that date were as follows: (1) The sale price for the stock was definitely fixed and there was a significant downpayment made on that date. See Clodfelter v. Commissioner,
Under the law of the State of New Jersey, joint makers of a promissory note are primarily jointly and severally liable to the payee. See Garon v. Becker,
Since we have held that the corporation is entitled to deduct the $20,000 yearly payments to Laing under the consulting agreement, the earnings and profits of the corporation are reduced by those amounts. See sec. 1.312-6(a), Income Tax Regs. Accordingly, the recomputed earnings and profits for 1967,1968, and 1969 were $48,997.59, $1,515.47, and $22,396.76.