Mun. Bond Corp. v. Comm'r of Internal Revenue, Docket No. 85810.

Citation41 T.C. 20
Decision Date01 October 1963
Docket NumberDocket No. 85810.
PartiesTHE MUNICIPAL BOND CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Joseph A. Hoskins, Charles P. Schleicher, and William B. Springer, for the petitioner.

Donald Sturm and Merrill R. Talpers, for the respondent.

1. Gains on the sale of real estate by a corporation engaged exclusively in purchasing, renting, and selling real estate with its income about equally divided between rentals and gains on sales, held, ordinary income rather than long-term capital gains.

2. Respondent held not estopped from treating as ordinary income installment payments received in taxable years on sales made in prior years and treated as sales of capital assets in prior returns.

FISHER, Judge:

This proceeding involves income tax deficiencies for the calendar years 1954 to 1958, inclusive, as follows:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦1954  ¦$17,016.39   ¦
                +------+-------------¦
                ¦1955  ¦4,239.51     ¦
                +------+-------------¦
                ¦1956  ¦4,499.87     ¦
                +------+-------------¦
                ¦1957  ¦9,371.37     ¦
                +------+-------------¦
                ¦1958  ¦2,932.94     ¦
                +--------------------+
                

The sole question in issue is whether the gains realized by petitioner on sales of real estate are taxable as long-term capital gains or as ordinary income.

Some of the payments received during the taxable years 1954 to 1958, inclusive, were on installment sales of real estate made in prior years. A further question is raised as to whether the payments on those sales can now be taxed as ordinary income, notwithstanding that in petitioner's prior returns such payments were reported, and accepted by respondent in his audit of the returns, as long-term capital gains.

FINDINGS OF FACT

Petitioner is a corporation engaged in the real estate business. Its returns for the years involved were filed with the district director of internal revenue at Kansas City, Mo., where its office was located.

At all times here material, Charles F. Curry, hereinafter referred to as Curry, was petitioner's principal stockholder and chief executive officer.

During the taxable years petitioner had outstanding 2,310 shares of capital stock par value $1 each, of which 2,063 shares were owned by Curry; 5 shares by him and his wife, Janet B. Curry, jointly; and 228 shares by his son, Charles E. Curry.

During some or all of the years involved there were several other corporations engaged in some phase of the real estate business in the Kansas City area which were owned, wholly or in part, or controlled by Curry or members of his family.

Charles F. Curry Real Estate Co. was engaged in buying, selling, and managing real estate for others. It acted as managing agent for the properties held by petitioner and was paid by petitioner for such services. It did not buy or sell real estate on its own account. At all times here material a majority of its stock was owned by Curry, and minority interests were held by his son, Charles E. Curry, and his son-in-law, Donald R. Elbel.

Vineyard Investment Co., organized in 1950, was engaged in subdividing and developing real estate and selling building lots. In 1950 Curry, or his nominee, owned 40 of its 100 shares of stock and Elbel owned 30 shares.

Vineyard Residences, Inc., organized in 1951, was engaged in subdividing real estate and building and selling houses and lots. Originally, its 100 shares of stock were owned equally by Curry and Elbel. After 1951, minority interests were owned by Curry's nephew, Robert McAllister, and others. After 1955 a majority of the stock was owned by Elbel Enterprises, Inc. The other stockholders were officers or members of Elbel Construction Co. which did the building for Vineyard Residences, Inc. Curry was not a stockholder after 1957.

Elbel Construction Co. was organized about 1948. Its stock was owned in equal shares by Curry and Elbel until 1957 when Curry disposed of his interests. The company built houses, mostly residences, for Vineyard Investment, Inc., Vineyard Residences, Inc., and others.

E. K. Carter Development Co., organized in 1923, constructed and operated apartment buildings and also purchased properties, both improved and unimproved. It was owned about equally by E. K. Carter and Curry, or his wife, until 1953. In that year all of its stock was acquired by Curry. The company operated on a limited scale. It built and purchased properties only occasionally for investment purposes.

Kansas City Ground Investment Co. was engaged principally in purchasing income-producing real estate for investment purposes. Since 1947 a majority of its stock has been owned or controlled by Curry or members of his family. The minority interests were held by members of the Elbel family.

Baltimore Avenue Realty Co. was owned in about equal shares by the Currys (Charles F. and Charles E.) and the Elbels. It purchased real estate properties for investment and owned a number of rental properties, including a supermarket, an A&P store, a motor terminal, parking lots, and residences.

Jach Investment Co. was organized in 1940 to hold title to a single piece of real estate in downtown Kansas City at 1013 Walnut Street. The property was owned by Curry and his wife and they held equal shares of the company stock.

The several corporations above described, as a group, will be referred to hereinafter sometimes as the related companies.

Petitioner had no office of its own during the 1954-58 period, but occupied, rent free, space in the office of Charles F. Curry Real Estate Co. In some of the years involved it had no regularly paid employees. Its clerical work was sometimes performed by employees of the related companies.

The properties which petitioner acquired were for the most part in the low price range. Some were improved and some were vacant lots. Petitioner acquired most of them by first purchasing tax certificates at distress sales. The improved properties were usually rented for several years before they were sold. Petitioner made a practice of selling the rented properties when the houses could no longer be rented without extensive repairs or when the sale values exceeded the rental values. Sales of the properties were often made to tenants already in possession.

Petitioner never at any time maintained a sales force or regularly engaged in sales activities. Many of its sales resulted from inquiries made by prospective purchasers.

On December 31, 1945, petitioner's real estate holdings consisted of 15 parcels with a total cost of approximately $29,350 and an everage cost of $2,623 each.

At December 31, 1953, petitioner owned 25 parcels of real estate with a total cost of $222,620.08, and an average cost of approximately $8,900 each.

Petitioner's sales of real estate in each of the years 1954 to 1958, inclusive, were as follows:

+-----------------------------------------------------------------------------+
                ¦Property                      ¦Date     ¦Date sold¦Sale  ¦Cost     ¦Profit   ¦
                ¦                              ¦purchased¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦                              ¦         ¦         ¦price ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦916 East 8th St               ¦October  ¦August   ¦$6,750¦$607.82  ¦$6,160.58¦
                ¦                              ¦1948     ¦1954     ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦5-acre tract in Blue Valley   ¦February ¦May 1954 ¦20,000¦420.85   ¦19,579.15¦
                ¦(vacant land)                 ¦1947     ¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦7.91-acre tract in Blue Valley¦February ¦June 1954¦31,640¦700.98   ¦30,939.02¦
                ¦(vacant land)                 ¦1947     ¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦914 East 8th St               ¦October  ¦May 1954 ¦3,500 ¦428.85   ¦3,071.15 ¦
                ¦                              ¦1948     ¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦924 East 8th St               ¦October  ¦May 1954 ¦4,700 ¦660.50   ¦4,039.50 ¦
                ¦                              ¦1948     ¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦Lots 1 and 4, block 3,        ¦August   ¦January  ¦1,500 ¦1,311.65 ¦188.35   ¦
                ¦resurvey of Perwin Pl         ¦1949     ¦1955     ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦1308 Locust                   ¦April 2, ¦January  ¦20,000¦3,430.49 ¦16,569.51¦
                ¦                              ¦1947     ¦1955     ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦4502 Elmwood                  ¦January  ¦January  ¦1,750 ¦1,351.13 ¦398.87   ¦
                ¦                              ¦1950     ¦1955     ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦1720 Walnut St                ¦December ¦August   ¦3,100 ¦2,970.51 ¦129.49   ¦
                ¦                              ¦1946     ¦1955     ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦4601 Elmwood                  ¦January  ¦)        ¦      ¦         ¦         ¦
                ¦                              ¦1950     ¦         ¦      ¦         ¦         ¦
                +------------------------------+---------+---------+------+---------+---------¦
                ¦                              ¦March    ¦)        ¦      ¦         ¦         ¦
                ¦4609 East 45th St             ¦1954     ¦September¦27,650¦27,378.42¦271.58   ¦
                ¦                              ¦         ¦1955     ¦      ¦         ¦         ¦
...

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