Speca v. Commissioner

Gino A. Speca and Joseph F. Madrigrano (plaintiffs) were directors and shareholders of Triangle Wholesale Company, Inc. (Triangle), an S corporation that was wholly owned by the Speca and Madrigrano families. Both Speca and Madrigrano transferred all of their shares to their sons. Madrigrano’s adult sons, who were part-time employees of Triangle and full-time students, executed promissory notes in exchange for the stock they received from Madrigrano. However, Madrigrano continued to be intimately involved with Triangle at a level above and beyond that of a typical executive. Speca’s sons were minors, and, although they were expected to pay for the stock, they did not execute promissory notes or other sales documents. The Speca sons also were not appointed any custodian or representative to represent their interests in Triangle, and Speca continued to participate in stockholder meetings and sign documents on his sons’ behalf. Both the Speca sons and Madrigrano sons received minimal dividends not commensurate with Triangle’s profits. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that both stock transfers were not bona fide because they lacked economic substance, and therefore, the Commissioner attributed the income from the purported stock transfer to Speca and Madrigrano for tax purposes. The tax court agreed with the Commissioner, and Speca and Madrigrano appealed.