State Farming Co. v. Comm'r of Internal Revenue, Docket Nos. 82920-82922.

CourtUnited States Tax Court
Citation40 T.C. 774
Docket NumberDocket Nos. 82920-82922.
PartiesTHE STATE FARMING COMPANY, INC., ET AL.,1 PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Decision Date31 July 1963

OPINION TEXT STARTS HERE

Jerry Phelan, for the petitioner.

Donald G. Daiker, for the respondent.

S Corporation paid a sum to California in settlement of an action under a California statute which prohibited corporations with shareholders of certain types of alien descent from owning land in California. S Corporation was wholly owned by two individual United States citizens of one such descent. Eight years later, California granted refunds for the payments and a check was issued which listed S Corporation and the two individual shareholders as payees. The shareholders deposited the warrant in a special account of thier own. No part of the refund was ever reported as taxable income by S Corporation or the individual shareholders. Held:

1. The Commissioner may disallow net operating loss carry-forwards by adjusting income in years prior to those covered in statutory notices of deficiency even though the relevant prior years are barred for deficiency purposes by the statute of limitations.

2. Payments under a 1951 California statute granting refunds for property taken under the California Alien Land law were refunds to S Corporation and constructive dividends to its shareholders.

OPINION

FORRESTER, Judge:

Respondent has determined the following deficiencies in income tax:

+----------------------------------------------------+
                ¦Docket¦Petitioner                    ¦Year¦Amount   ¦
                +------+------------------------------+----+---------¦
                ¦No.   ¦                              ¦    ¦         ¦
                +------+------------------------------+----+---------¦
                ¦82920 ¦The State Farming Company, Inc¦1955¦$2,344.61¦
                +------+------------------------------+----+---------¦
                ¦82921 ¦Edward K. Koda                ¦1953¦7,223.02 ¦
                +------+------------------------------+----+---------¦
                ¦82922 ¦William S. and Jean Y. Koda   ¦1953¦4,916.12 ¦
                +----------------------------------------------------+
                

Certain adjustments have been agreed to and the remaining issues for our determination are as follows:

(1) Whether the Commissioner may disallow certain net operating loss deductions by adjusting income in years prior to those covered in the statutory notices of deficiency when the relevant prior years are barred for deficiency purposes by the statute of limitations.

(2) Whether any part of a payment of $127,969.86 received in 1952 from the State of California constitutes taxable income to petitioner, the State Farming Co., In., or, in the alternative, to the individual petitioners.

(3) If the payment was received by State Farming, whether petitioners Edward K. Koda and William S. Koda received constructive dividends in 1952 from petitioner, the State Farming Co., Inc.

All of the facts have been stipulated and are so found.

The State Farming Co., Inc. (hereinafter referred to as State Farming), is a corporation organized on November 4, 1927, under the laws of the State of California. It filed corporate income tax returns for the calendar years 1951, 1952, 1953, and 1955 with the district director of internal revenue, San Francisco, Calif.

Edward K. Koda (hereinafter sometimes referred to as Edward) is an individual with mailing address at South Dos Palos, Calif., who filed individual income tax returns with the district director of internal revenue, San Francisco, Calif., for the calendar years 1952 and 1953.

William S. Koda and Jean Y. Koda (hereinafter sometimes referred to as William or Jean) are husband and wife with mailing address at South Dos Palos, Calif., who filed individual income tax returns with the district director of internal revenue, San Francisco, Calif., for the calendar years 1952 and 1953. Jean Y. Koda is a party solely by virtue of the filing of joint returns.

William and Edward have at all times been the sole stockholders of State Farming and own 29/48ths and 19/48ths, respectively, of the outstanding stock of State Farming.

Prior to 1943, State Farming was engaged in farming on its own lands located near South Dos Palos, Merced County, State of California.

In 1943, there existed in California a statute commonly referred to as the Alien Land Law, an initiative measure approved at an election on November 2, 1920, effective December 9, 1920, California Stats. 1921, p. lxxxvii,2 as amended. The Alien Land Law generally provided that certain natural persons, companies, associations, and corporations were precluded from owning land within the State of California and that if any land was owned in violation of the law, the land would escheat to the State of California.

In 1943, the State of California brought an action against State Farming based upon the Alien Land Law as originally enacted. This action was to have the land owned by State Farming escheat to the State of California, in accordance with section 7 of said Alien Land Law.

On May 8, 1943, State Farming and the State of California entered into a compromise agreement whereby State Farming would sell its lands and, from the proceeds of the sale, a payment of $100,000 would be made to the State of California in full satisfaction of the action then pending.

Pursuant to this agreement, the corporation lands were sold and a payment of $100,000 was made to the State of California in 1943. In 1943, State Farming reported a net operating loss of $128,742 on its income tax return, computed as follows:

+---------------------------------------------+
                ¦Net loss—ordinary                 ¦$22,261.27¦
                +----------------------------------+----------¦
                ¦Loss on sale of land and equipment¦106,480.73¦
                +----------------------------------+----------¦
                ¦Net loss per return               ¦128,742.00¦
                +---------------------------------------------+
                

The loss claimed on the sale of land and equipment in the amount of $106,480.73 was computed as follows:

+------------------------------------------------------------------------+
                ¦Land                                            ¦           ¦$200,000.00¦
                +------------------------------------------------+-----------+-----------¦
                ¦Improvements, machinery and equipment, rice mill¦           ¦41,200.00  ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Autos and farm implements                       ¦           ¦20,000.00  ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Total                                           ¦           ¦261,200.00 ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Less:                                           ¦           ¦           ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Payment to State of California in settlement    ¦           ¦           ¦
                +------------------------------------------------+-----------+-----------¦
                ¦of suit to release title                        ¦$100,000.00¦           ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Title transfer fees                             ¦4,440.51   ¦104,440.51 ¦
                +------------------------------------------------+-----------+-----------¦
                ¦Net proceeds                                    ¦           ¦156,759.49 ¦
                +------------------------------------------------------------------------+
                
+--------------------------------------------------------------------+
                ¦Less:                                       ¦           ¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦Cost or other bases adjusted for accumulated¦           ¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦depreciation:                               ¦           ¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦Land and water rights                       ¦$204,198.29¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦Buildings and improvements                  ¦24,212.26  ¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦Machinery and equipment                     ¦34,199.17  ¦           ¦
                +--------------------------------------------+-----------+-----------¦
                ¦Office furniture                            ¦632.50     ¦$263,240.22¦
                +--------------------------------------------+-----------+-----------¦
                ¦Net loss on sale                            ¦           ¦106,480.73 ¦
                +--------------------------------------------------------------------+
                

State Farming's 1943 tax return was examined by the Internal Revenue Service following its filing. As a result of this examination, a revised net loss for 1943 was determined as follows:

+---------------------------------------------------------------+
                ¦Loss on sale of assets per return       ¦          ¦$106,480.73¦
                +----------------------------------------+----------+-----------¦
                ¦Miscellaneous additional deductions, net¦          ¦20,000.00  ¦
                +----------------------------------------+----------+-----------¦
                ¦Total                                   ¦          ¦126,480.73 ¦
                +----------------------------------------+----------+-----------¦
                ¦Ordinary net operating loss per return  ¦$22,261.27¦           ¦
                +----------------------------------------+----------+-----------¦
                ¦Miscellaneous additional deductions, net¦3,050.45  ¦25,311.72  ¦
                +----------------------------------------+----------+-----------¦
                ¦Revised net loss for 1943               ¦          ¦151,792.45 ¦
                +---------------------------------------------------------------+
                

As a result of the allowance of a net loss for 1943 of $151,792.45, carryback losses from 1943 to 1941 and 1942 and carryover losses to 1944 were allowed. They resulted in refunds paid to State Farming as follows:

+---------------------------------------------------------+
                ¦                                 ¦Carryback   ¦          ¦
...

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