Before Bauer, Circuit Judge, Cudahy, Circuit Judge, and Noland, District Judge.*fn*
This is an appeal from a finding by the Tax Court of a deficiency in income taxes by appellants Gino A. Speca and Joseph F. Madrigrano for the year 1971.*fn1 The sole issue for review is whether the Tax Court erred in holding that certain transfers of stock by appellants to their children lacked sufficient economic reality to permit income from the stock to be taxed to the transferee-children rather than the transferor-parents. A review of the record reveals the following undisputed facts.
Appellants are executives of Triangle Wholesale Company, Inc. (Triangle), a beer wholesaler and distributor operating in Wisconsin. Since 1969, Triangle has operated as a Subchapter S corporation. As of 1968, stock ownership in Triangle was completely within the Speca and Madrigrano families in the following amounts and percentages:
Joseph Madrigrano (Sr.) 376 18
Joseph Madrigrano (Jr.) 170 8
At all times relevant to these proceedings, Madrigrano was president, secretary, and a director of Triangle. Speca was also a director of Triangle in addition to serving in the capacity of vice-president and treasurer. Both Madrigrano and Speca received salaries of approximately $42,000 for each of the years 1971 through 1975.
On March 31, 1971, the date of the transfer at issue, Madrigrano conveyed all of his remaining 376 shares of Triangle stock to his sons, Joseph and Glenn. In exchange for the stock, Joseph and Glenn each executed a non-interest bearing promissory note in the amount of $7,110.97. The notes were made payable on March 31, 1972.
At the time of the above transfer, Joseph was 23 years of age and a full-time, second-year law student who worked part-time during the school year and during summer vacations as an employee of Triangle. Glenn was 21 years of age, and a full-time undergraduate student. Like Joseph, ...