Farr v. Comm'r of Internal Revenue
| Decision Date | 09 June 1955 |
| Docket Number | Docket No. 39335. |
| Citation | 24 T.C. 350 |
| Parties | RENA B. FARR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
M. Alfred Roemisch, Esq., and Herbert . Wright, Esq., for the petitioner.
Michael J. Clare, Esq., for the respondent.
1. Corporation A, which was organized in 1945, had a franchise from the Studebaker Corporation under which it carried on a business of buying and selling automobiles. It carried on its business in rented space. All of the outstanding stock of corporation A, 250 shares was owned by petitioner. Studebaker required that the corporation should obtain better facilities and space for the conduct of its business. Two unimproved lots located on different streets were purchased with the intention of constructing a building, on the better of the two locations, in which the corporation would carry on its business. A building was constructed on one of the lots. Upon the facts it is held, that corporation A, rather than petitioner, was the owner of the 2 lots and of the new building, and that corporation A owned the lots and the building prior to a corporate reorganization.
2. In 1949, in pursuance of a plan of reorganization, corporation A transferred the 2 lots and the building to a newly organized corporation, B, in exchange for all of B's stock. Shortly thereafter, as part of the plan of reorganization, A transferred all of the stock of B to petitioner in exchange for one-fifth of the stock of A which petitioner owned. Held, there was ‘business purpose’ in the transfer of real estate assets of A to B, that there was ‘continuity of interest’ in the exchange, and that the transaction was a statutory reorganization under section 112(g)(1)(D) of the 1939 Code; and that the exchange by the stockholder of A, the petitioner, of one-fifth of her stock in A for all of the stock of B, the new corporation, was an exchange upon which no gain will be recognized under the provisions of section 112(b) (3). Chester E. Spangler, 18 T.C. 976, followed.
The Commissioner determined a deficiency in income tax for 1949 in the amount of $23,204.85. Petitioner does not contest a minor adjustment. The chief questions are whether there was a statutory reorganization under section 112(g) (1)(D) of the 1939 Code, and whether an exchange of part of the stock of one corporation for all of the stock of another corporation was a tax-free exchange within section 112(b)(3). Other related questions are whether certain pieces of real estate and the improvements on one of the pieces of real estate were assets of Farr Motor Sales, Inc., immediately prior to the reorganization.
The stipulated facts are found as stipulated. The stipulation is incorporated herein by reference.
The petitioner is a resident of Shaker Heights, Ohio. Her return for 1949 was filed with the collector of internal revenue for the eighteenth district of Ohio.
Petitioner is the widow of George A. Farr who died testate in September 1944. He bequeathed to petitioner, his sole legatee, a sole proprietorship business known as Farr Motor Sales, located at 350 East 152nd Street, Cleveland, Ohio. Farr was the sole owner of the business which was the selling at retail and the servicing of new and used Studebaker automobiles and trucks. A service garage was operated in a rented building about 46 feet by 140 feet. George A. Farr had a franchise from the Studebaker Corporation. It terminated upon his death.
After the death of George A. Farr, petitioner continued to operate the business of Farr Motor Sales as proprietor and manager until December 31, 1945.
At some time after the death of her husband, the petitioner discussed with representatives of the Studebaker Corporation her desire to obtain a new franchise from Studebaker. Studebaker officials advised petitioner that Farr Motor Sales ought to have a new building containing larger space and better facilities than the building which it was then renting at 350 East 152d Street provided, and that they considered that it would be desirable for her to make arrangements to have a man associated with her in the business as a manager and as a part owner. Petitioner agreed to meet the conditions imposed by Studebaker. Accordingly, she purchased, on September 26, 1945, an unimproved lot for $6,050 at 800 East 152d Street. She intended to construct a building on the lot which would provide the facilities which Studebaker had requested. At about the same time, she hired John Algoe as general manager of Farr Motor Sales.
Studebaker granted a franchise to petitioner in the spring of 1946.
Farr Motor Sales, Inc., hereinafter referred to as Motor Sales corporation, was organized under the laws of Ohio on December 24, 1945. Alfred Roemisch, Clarence Berndsen, and the petitioner were elected directors. The petitioner was elected president and treasurer; Berndsen, vice president; and Roemisch, secretary. Berndsen was the service manager of Farr Motor Sales; Roemisch was petitioner's attorney. He was also the owner of interests in several automobile dealerships in the Cleveland area.
On December 31, 1945, the following assets were carried on the books of the sole proprietorship, Farr Motor Sales, in the amounts set forth below:
+-----------------------------------------------------+
¦Cash in bank ¦$7,984.39 ¦
+------------------------------------------+----------¦
¦Accounts receivable ¦641.91 ¦
+------------------------------------------+----------¦
¦Used-car inventory ¦1,075.00 ¦
+------------------------------------------+----------¦
¦Studebaker parts and accessories inventory¦4,166.59 ¦
+------------------------------------------+----------¦
¦Gas, oil and grease inventory ¦78.12 ¦
+------------------------------------------+----------¦
¦Paint and paint material inventory ¦387.35 ¦
+------------------------------------------+----------¦
¦Prepaid sales tax ¦15.02 ¦
+------------------------------------------+----------¦
¦Machinery tools and equipment ¦3,801.12 ¦
+------------------------------------------+----------¦
¦Office furniture and fixtures ¦557.55 ¦
+------------------------------------------+----------¦
¦Leasehold and improvements ¦242.95 ¦
+------------------------------------------+----------¦
¦800 East 152d Street lot ¦6,050.00 ¦
+------------------------------------------+----------¦
¦ ¦$25,000.00¦
+-----------------------------------------------------+
At the first meeting of the directors of Motor Sales corporation on January 2, 1946, a resolution was adopted that the entire capital stock of the corporation would be issued to petitioner in exchange for her transfer to the corporation of all of the assets of the proprietorship. The capital stock consisted of 250 shares of common stock without par value, but having a declared value of $100 per share. The asset accounts in the books of Motor Sales corporation were opened with the assets set forth above, and petitioner received all of the stock of Motor Sales, 250 shares.
Although the resolution required petitioner to execute all of the papers necessary to accomplish the transfer of all of the assets, she failed to deliver the deed to the lot at 800 East 152d Street to the corporation and it never had the record title to the property. However, during 1946, 1947, and 1948, the lot was carried as an asset on the books of the corporation at a cost of $6,050. Also, during these years the lot was listed as an asset of the corporation in the monthly financial statements which Motor Sales corporation issued to the Studebaker Corporation; it was listed in the corporate franchise returns filed with the secretary of state of Ohio, in the corporation's ‘return of taxable property’ filed with the auditor of Cuyahoga County, Ohio, and in the corporation's Federal income tax returns. Motor Sales corporation paid the real estate taxes on the lot through 1948. It was intended by petitioner and the directors of Motor Sales corporation that all of petitioner's interest in the lot would pass to the corporation as part of the exchange of all of the assets of the proprietorship for the stock of Motor Sales corporation.
During 1946, Studebaker officials continued to express their desire that a man should be a part owner of Motor Sales corporation. Motor Sales received about 26 new automobiles from Studebaker during 1946. Petitioner believed that a considerably larger number would have been received if part of the stock of Motor Sales had been owned by a man as had been suggested.
Algoe left Motor Sales in the spring of 1947. Richard Michael was employed as general manager on April 15, 1947, at the suggestion of Roemisch. Michael had gained considerable experience selling automobiles. He had been sales manager of East End Nash Company, Cleveland, in which Roemisch held a majority of stock. Michael's compensation was fixed at $100 per week, plus a bonus of 15 per cent of profits before taxes. Petitioner and Michael agreed that Michael would have an opportunity to purchase Motor Sales stock if his service were satisfactory. On many occasions thereafter Michael was urged by the petitioner and by Studebaker to acquire stock in Motor Sales. However, during these conversations, no mention was made of a specific number of shares of stock or the amount of an investment to be made by Michael. In 1947, Michael did not have sufficient funds to acquire any substantial interest in Motor Sales corporation. The possibility of his borrowing funds to purchase stock was not discussed.
At some time prior to July 1947, petitioner and Michael were of the opinion that Euclid Avenue, Cleveland, would be a better location for Motor Sales corporation than East 152d Street. Michael found 2 neighboring...
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