Hiawatha Home Builders, Inc. v. Comm'r of Internal Revenue, Docket No. 74811.

• Citation: 36 T.C. 491
• Decision Date: 09 June 1961
• Docket Number: Docket No. 74811.
• Parties: HIAWATHA HOME BUILDERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

36 T.C. 491

HIAWATHA HOME BUILDERS, INC., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 74811.

Tax Court of the United States.

Filed June 9, 1961.

[36 T.C. 491]

O. A. Brecke, Esq., and J. Robert Nygren, Esq., for the petitioner.

Joseph D. Skinner, Esq., for the respondent.

1. Held, that sale of property to petitioner was a ‘transfer’ of property as that term is used in section 15(c) of the 1939 Code and section 1551 of the 1954 Code.

2. Held: That petitioner has established by the clear preponderance of the evidence that a major purpose of such transfer was not the securing of surtax exemption or minimum excess profits credit. Respondent's disallowance of such exemption and credit is accordingly disapproved.

[36 T.C. 492]

PIERCE, Judge:

The respondent determined deficiencies in the income taxes of the petitioner, as follows:

+-------------------------------------------+
                ¦Fiscal year ended Mar. 31— ¦Deficiency ¦
                +------------------------------+------------¦
                ¦1954 ¦$8,107.99 ¦
                +------------------------------+------------¦
                ¦1955 ¦5,500.00 ¦
                +------------------------------+------------¦
                ¦1956 ¦5,500.00 ¦
                +-------------------------------------------+
                

The issues presented for decision are:

(1) Whether there was a ‘transfer’ of property to the petitioner in 1951, within the meaning of that term as used in section 15(c) of the Internal Revenue Code of 1939 and in the cognate provisions of section 1551 of the Internal Revenue Code of 1954.

(2) Whether, if there was such a ‘transfer’ of property, a major purpose thereof was the securing of the surtax exemption provided in section 15(b) of the 1939 Code and in section 11(c) of the 1954 Code, or the securing of the minimum excess profits credit provided in section 431 of the 1939 Code. The excess profits credit phase of this issue has application only to petitioner's first taxable fiscal year ended March 31, 1954, inasmuch as said section 431 was repealed, effective December 31, 1953.

FINDINGS OF FACT.

Some of the facts were stipulated. The stipulation of facts, together with the exhibits identified therein, is incorporated herein by reference.

The petitioner, Hiawatha Home Builders, Inc., is a corporation organized under the laws of the State of Minnesota. It filed its Federal income tax return for each of the taxable fiscal years ended March 31, 1954, 1955, and 1956, with the district director of internal revenue for the district of Minnesota.

On March 31, 1948, Antonio Favero and five other man¹ found a Minnesota corporation bearing the name of Minnehaha Terrazzo and Cement Company (hereinafter called Minnehaha).² Among the purposes for which Minnehaha was organized were the following, as set out in its articles of incorporation:

To construct and install terrazzo, tile and cement work of all kinds.

To carry on a general construction and contracting business including the designing, construction, installation and erection of buildings, structures, roads, bridges, plants and utilities and the performance of construction work of all types, and to furnish all or any part of the labor, material, equipment and supplies required therefor.

At all times material, the capital stock of Minnehaha was held in equal shares by each of the seven above-named individuals.

[36 T.C. 493]

Favero and his associates in Minnehaha had, earlier in their lives, been laborers in Italy; and when they came to the United States each of them took up the trade of terrazzo and cement finishing. In the years following the termination of World War II and prior to the organization of Minnehaha, Favero and Peschiutta had plied their trade as partners; and all the others (except Casagrande) were the members of another partnership. The six incorporators decided to conduct a terrazzo- and cement-finishing business in corporate form, principally to avail themselves of the limited liability feature of conducting a business in that fashion. Favero was the president of Minnehaha; and he continued to hold that office throughout the taxable years involved. Favero and each of the other stockholders acted as foremen on the various jobs which Minnehaha contracted to perform.

During the first 2 years of Minnehaha's existence, its business consisted entirely of performing cement and masonry work on building projects, under subcontracts with prime contractors. In the spring of 1950, the directors of Minnehaha decided that the corporation should enter into the housebuilding field on a small scale. At a special meeting of the board on March 8, 1950, the directors took the following action, as reflected in the minutes of such meeting:

The directors then discussed the advisability of undertaking the building of houses. This matter had been considered informally by the directors from time to time and the Board was of the opinion that the Company should acquire a site and build several small houses on an experimental basis to determine whether such work could be handled on a profitable basis.

Pursuant to the foregoing action by the board, Minnehaha proceeded to erect three or four houses during the spring, summer, and early fall of 1950. Thereafter, on November 22, 1950, at another special meeting of Minnehaha's board of directors, the following action...