Henry C. Beck Builders, Inc. v. Comm'r of Internal Revenue, Docket Nos. 90101
| Decision Date | 18 February 1964 |
| Docket Number | 90108,90102,Docket Nos. 90101,90109. |
| Citation | 41 T.C. 616 |
| Parties | HENRY C. BECK BUILDERS, INC., ET AL.,1 PETITIONERS, v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
W.J. McFarland, Harry R. Horrow, David P. Brown, and Sam G. Winstead, for the petitioners.
John Hargrove, for the respondent.
A parent corporation's intercompany profit, properly eliminated from a consolidated return in 1953, held not to constitute income to the parent in 1957, when the parent sold all the subsidiary's stock to an unrelated party. On redemption of the subsidiary's preferred stock, the parent's basis is reduced by the subsidiary's losses sustained during taxable years prior to the redemption, but only to the extent such losses were availed of by the parent (there being no other subsidiaries here) during the taxable years prior to the redemption and could not have been availed of by the subsidiary during taxable years prior to the redemption if it had then been filing separate returns.
Respondent determined a deficiency in income tax of petitioner Salina Management Co., Inc. (docket No. 90108), in the amount of $129,673.89 for its taxable year ended June 30, 1957.
Respondent further determined that the remaining petitioners were liable, as transferees, for Salina Management Co., Inc.‘s deficiency, as follows:
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¦Henry C. Beck Builders, Inc. (docket No. 90101) ¦$41,436.06¦
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¦First National Bank in Dallas and Henry C. Beck, Jr., Trustees¦ ¦
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¦under the will of Henry C. Beck, Deceased (docket No. 90102) ¦10,631.86 ¦
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¦Utah Construction & Mining Co. (docket No. 90109) ¦52,067.92 ¦
+--------------------------------------------------------------+----------¦
¦Total ¦104,135.84¦
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The issues remaining to be decided relate to the deficiency determined against the transferor:2
(1) Whether a parent corporation's intercompany profit eliminated in a prior taxable year in a consolidated income tax return is realized by the parent corporation and taxable as ordinary income upon the sale of the stock of the subsidiary to a purchaser outside the affiliation; and
(2) Whether the basis of the parent's investment in the preferred and common stock of the subsidiary-affiliate is to be reduced, on redemption or sale, by certain losses of the subsidiary which were incurred during the period of affiliation, and, if so, to what extent such basis is to be reduced.
The facts in this case have been fully stipulated and are hereby found as stipulated.
Petitioner Henry C. Beck Builders, Inc. (hereinafter sometimes referred to as Builders), is a corporation with its principal place of business in Dallas, Tex. Petitioners First National Bank in Dallas and Henry C. Beck, Jr. (hereinafter sometimes referred to as Trust), are cotrustees of a trust created under the will of Henry C. Beck, deceased, with their principal places of business in Dallas, Tex. Petitioner Utah Construction & Mining Co. (formerly Utah construction Co., hereinafter sometimes referred to as Utah) is a Delaware corporation with its principal office in San Francisco, Calif.
Builders, Trust, and Utah are transferees of a dissolved corporation, i.e., petitioner Salina Management Co., Inc., hereinafter sometimes referred to as Management. Its principal office was at Salina, Kans. Management's income tax return for its taxable year ended June 30, 1957, was filed with the district director of internal revenue at Wichita, Kans.
Management was incorporated in Kansas on August 18, 1952, and completely dissolved on March 27, 1958. During this period its stock was owned as follows:
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¦ ¦Aug. 18, 1952¦ ¦July 24, 1956,¦
+----------------+-------------+-------------+--------------¦
¦ ¦to ¦Feb. 4 to ¦to ¦
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¦ ¦Feb. 4, 1956 ¦July 24, 1956¦Mar. 27, 1958 ¦
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¦Preferred stock:¦ ¦ ¦ ¦
+----------------+-------------+-------------+--------------¦
¦Utah ¦150 ¦150 ¦150 ¦
+----------------+-------------+-------------+--------------¦
¦Henry C. Beck Co¦150 ¦150 ¦0 ¦
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¦Builders ¦0 ¦0 ¦150 ¦
+----------------+-------------+-------------+--------------¦
¦Common stock: ¦ ¦ ¦ ¦
+----------------+-------------+-------------+--------------¦
¦Utah ¦100 ¦100 ¦100 ¦
+----------------+-------------+-------------+--------------¦
¦Henry C. Beck Co¦100 ¦67 1/2 ¦0 ¦
+----------------+-------------+-------------+--------------¦
¦Builders ¦0 ¦0 ¦67 1/2 ¦
+----------------+-------------+-------------+--------------¦
¦Trust ¦0 ¦32 1/2 ¦32 1/2 ¦
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Salina Homes, Inc. (hereinafter sometimes referred to as Homes), was incorporated in Kansas on August 18, 1952. During the period August 18, 1952, to October 31, 1956, its 280 shares of preferred stock were owned entirely by Management and its common stock was owned as follows:
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¦ ¦Aug. 18, 1952,¦Mar. 30, 1954,¦
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¦Common stock (class A)¦to ¦to ¦
+----------------------+--------------+--------------¦
¦ ¦Mar. 30, 1954 ¦Oct. 31, 1956 ¦
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¦Management ¦95 ¦100 ¦
+----------------------+--------------+--------------¦
¦R. H. Hopkins ¦5 ¦0 ¦
+----------------------------------------------------+
The 95 shares of Homes common stock had an original cost basis to Management of zero. The five shares of common stock originally issued to R.H. Hopkins were purchased from him by Management on March 30, 1954, for $1,750. The preferred stock was received by Management upon the incorporation of Homes in exchange for unimproved real property having a basis to Management at that time of $23,471. The preferred stock had a par value of $100, did not carry voting rights, and was limited as to dividends.
Management was organized to construct and manage a 150-dwelling-unit housing project situated near Salina, Kans., and known as the Beck-Utah Development, Edgemere Addition to the City of Salina, Kansas,‘ hereinafter sometimes referred to as the Project. Homes was organized to own and finance the construction of the Project.
Pursuant to an agreement of August 2, 1952, with Homes, Management constructed the Project for Homes. Construction was completed during the fiscal year ended June 30, 1953, at a cost to Management of $998,402.05. Homes paid Management $1,275,308.95 for constructing the Project. The entire amount was financed by Homes by means of a U.S. Government-insured loan from the Federal National Mortgage Association and secured by the Project.
Management recorded its $276,906.90 profit from the Project's construction on its books of account and on its Federal income tax returns to the extent of $273,780.09 during its taxable year ended June 30, 1953, and $3,126.81 during its taxable year ended June 30, 1954. The entire profit was eliminated in determining consolidated net (or taxable) income on the consolidated returns filed by Management and Homes for their taxable years 1953 and 1954. In computing depreciation on the Project for its taxable years ended June 30, 1953 through 1957, Homes used a cost basis of $998,402.05, that being Management's cost for the Project.
At all times here material Homes owned the Project, and Management performed all the requisite management services. Management's activities were confined almost exclusively to the construction and management of the Project.
On or about July 27, 1956, Homes redeemed and retired all its outstanding preferred stock for $28,000. Management reported on its June 30, 1957, return a gain of $4,529 ($28,000 received less $23,471 cost basis) on the redemption.
On or about October 31, 1956, Management sold all of the outstanding common stock of Homes to an unrelated party, Housing Service Corp. (hereinafter sometimes referred to as Housing), for $25,000. Management reported on its June 30, 1957, return a gain of $23,250 ($25,000 received less $1,750 cost basis) on the sale.
Within a few days after Housing purchased the Homes common stock from Management, Housing liquidated Homes and received its assets (principally, the Project) subject to its liabilities, including the outstanding balance of $733,516.87 on the Project construction loan.
After the sale of the Homes common stock, Management became completely inactive and was dissolved on March 27, 1958.
The following schedule reflects the taxable or net income (or loss) of Management and Homes, after elimination of all intercompany transactions and after giving effect to respondent's adjustments agreed to in connection with his audit of the 1953 and 1954 consolidated income tax returns, for each of the taxable years ended June 30, 1953 through 1957:
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