Beckett v. Comm'r of Internal Revenue, Docket Nos. 95309-95311.
| Decision Date | 20 December 1963 |
| Docket Number | Docket Nos. 95309-95311. |
| Citation | 41 T.C. 386 |
| Parties | ARTHUR T. BECKETT AND GERTRUDE E. BECKETT, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
George N. Koster, Valentine Brookes, Paul E. Anderson, and Richard A. Wilson, for the petitioners.
Charles W. Nyquist, for the respondent.
A corporation which had sustained approximately $1 million of losses in a hardware business entered into an agreement with two partners engaged in numerous real estate development activities as partners and controlling stockholders of corporations, whereby a real estate department was established to develop a subdivision, the funds therefor being furnished by the two partners through purchases of the preferred stock in the corporation for an amount which was approximately two-fifths of the then value of the common stock of the corporation. The real estate department was operated independently of the other corporate business. The agreement provided that the real estate department should not be discontinued for a period of 6 years, that the preferred stockholders should not sell their stock for this period, and thereafter if the department were discontinued at the option of either the corporation or preferred stockholders, the preferred stock should be redeemed by distribution in kind of 90 percent of the department's assets to the preferred stockholders. A voting trust agreement was established to restrict the control of the common stockholders over the corporation for a period of 5 years. The hardware business was discontinued and the real estate business operated at a profit. From these real estate profits were deducted as loss carryovers the net operating losses which had been previously sustained by the hardware business. The agreement between the corporation and the new preferred stockholders was entered into on October 18, 1954, and was therefore governed by the provisions of Internal Revenue Code of 1954. Held: The principal purpose of the real estate partners in entering into the agreement of October 18, 1954, was to obtain the benefit of the loss carryover of the hardware business against the anticipated profits of the real estate subdivision business. Nevertheless, since the corporation in its corporate entity entered many business arrangements with respect to the real estate subdivision the transaction was not such a sham as to permit disregarding the corporate entity and taxing the profits from the real estate subdivision to the two partners. Held, further, limited strictly to the factual situation here involved, the net operating loss carryover from the hardware business is not allowable as a deduction against the earnings of the real estate subdivision under the principles of the case of Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957), even though the transaction does not fall within any of the changes-in-ownership situations set forth in sections 269 and 382, I.R.C. 1954.
Respondent determined deficiencies in the income taxes of petitioners for the years and in the amounts as follows:
+--------------------------------------------------------------------------+
¦Docket¦ ¦Fiscal ¦ ¦
+------+-----------------------------------------------+--------+----------¦
¦No. ¦Petitioners ¦period ¦Deficiency¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦ended— ¦ ¦
+------+-----------------------------------------------+--------+----------¦
¦95309 ¦Arthur T. Beckett and Gertrude E. Beckett ¦12/31/54¦$7,446.27 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/55¦58,944.16 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/56¦91,259.11 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/57¦51,767.72 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/58¦98,664.79 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦ ¦308,082.05¦
+------+-----------------------------------------------+--------+----------¦
¦95310 ¦Frederick J. Federighi and Mary Helen Federighi¦12/31/54¦7,479.45 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/55¦63,433.89 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/56¦91,702.71 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/57¦41,520.71 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦12/31/58¦99,401.00 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦ ¦303,537.76¦
+------+-----------------------------------------------+--------+----------¦
¦95311 ¦Maxwell Hardware Co ¦1/31/57 ¦47,770.04 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦1/31/58 ¦102,075.89¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦1/31/59 ¦111,952.58¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦1/31/60 ¦64,048.83 ¦
+------+-----------------------------------------------+--------+----------¦
¦ ¦ ¦ ¦325,847.34¦
+--------------------------------------------------------------------------+
Pursuant to joint motion of the parties after the granting by the Court of a continuance in certain of the cases here involved, a severance of issues in the cases of A. T. Beckett and Gertrude E. Beckett and Frederick J. Federighi and Mary Helen Federighi was granted, and the issues involved in those cases concerning the taxability to the individual petitioners of income reported by petitioner Maxwell Hardware Co. during each of the years involved in each of the individual cases was consolidated for trial with the sole issue involved in the case of Maxwell Hardware Co. Therefore, the issue for decision in the instant case with respect to the individual petitioners is whether income reported by Maxwell Hardware Co. from an operation which it denominated its real estate department should properly have been included in the partnership income of a partnership known as Beckett and Federighi, and thus reported in the returns of the individual petitioners who were partners in that partnership for each of the calendar years 1954, 1955, 1956, 1957, and 1958.
The issue with respect to the corporate petitioner Maxwell Hardware Co. is whether that company is entitled to carry over against its income from the operations which it denominated its real estate department net operating losses sustained by the corporation prior to its establishment of its real estate department. The issue in the case of the Maxwell Hardware Co. is an alternative issue since respondent recognizes even though no such indication is given in his notice of deficiency, that if in fact the income from the real estate department is the income of the partnership of Beckett and Federighi, this income is not includable in the income of Maxwell Hardware Co., and therefore the issue with respect to Maxwell Hardware Co. becomes moot.
Some of the facts have been stipulated and are found accordingly.
Petitioner Maxwell Hardware Co. (hereinafter referred to as Maxwell Hardware) is a corporation incorporated under the laws of the State of California on March 28, 1922. It filed its Federal income tax returns for its fiscal years ending January 31, 1957, 1958, 1959, and 1960, with the district director of internal revenue at San Francisco, Calif. The returns for each of these years were filed on an accrual method of accounting.
Petitioners Arthur T. Beckett and Gertrude E. Beckett, husband and wife residing in Orinda, Calif., filed joint Federal income tax returns for each of the calendar years 1954, 1955, 1956, 1957, and 1958, with the district director of internal revenue at San Francisco, Calif. Each of these returns was filed on the cash method of accounting.
Petitioners Frederick J. Federighi and Mary Helen Federighi, husband and wife residing in Orinda, Calif., filed joint Federal income tax returns for each of the calendar years 1954, 1955, 1956, 1957, and 1958 with the district director of internal revenue at San Francisco, Calif. Each of these returns was filed on the cash method of accounting.
Arthur T. Beckett (hereinafter referred to as Beckett) and Frederick J. Federighi (hereinafter referred to as Federighi) are and were throughout the years here involved members of a partnership known as Beckett and Federighi. This partnership throughout all the years here involved had its offices at 1441 Franklin Street, Oakland, Calif., and was engaged in a wide variety of business activities including the construction business, the ownership and operation of rental properties, the holding of real estate for investment, the operation of a restaurant, participation in an insurance brokerage business, and providing office space, bookkeeping services, and other services for a number...
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