Comtel Corp. v. Comm'r of Internal Revenue, Docket Nos. 225-63— 255-63
| Citation | 45 T.C. 294 |
| Decision Date | 23 December 1965 |
| Docket Number | 314-63.,Docket Nos. 225-63— 255-63 |
| Parties | COMTEL CORPORATION, ET AL.,1 PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
George G. Tyler and David G. Ormsby, for the petitioners in all docket numbers, except docket No. 314-63.
Jesse G. Silverman, for the petitioner in docket No. 314-63.
Leo A. Burgoyne, for the respondent.
1. Held, that certain transactions between petitioner Comtel Corp. and Zeckendorf Hotels Corp., which in form purported to be, first a purchase by Comtel from Zeckendorf of most of the capital stock of Commodore Hotel, Inc., for a price of more than $8 million in cash, and then a sale back to Zeckendorf of this same stock about 7 months later at a profit of over $872,000— were, in substance and reality as distinguished from form, merely steps in a previously planned financing arrangement for the benefit of the Zeckendorf Corp., under which: (1) The cash of more than $8 million was temporarily made available by Comtel to Zeckendorf as a loan, for the latter's use in acquiring all of the Commodore shares from public shareholders preliminary to a merger of the Zeckendorf Hotels and Commodore Hotel corporations; (2) under which Comtel thereafter held said Commodore shares as security, during the 6-month period of such loan; and (3) under which Zeckendorf promptly recovered complete beneficial ownership of said Commodore shares, by repaying to Comtel all the $8 million cash loan, plus additional preagreed amounts that yielded Comtel the undisputed profit of over $872,000 which is here involved.
2. Held, further, that said undisputed gain or profit of over $872,000 constitutes taxable ordinary income to Comtel, in the nature of interest on money loaned and compensation for financing services rendered; and that the nonrecognition of gain or loss provisions of section 337(a) of the 1954 Code are not here applicable.
3. Held, further, that by reason of the above holdings respecting the Comtel Corp. and in accordance with a preliminary agreement of the parties, each of the petitioners in the 31 transferee cases consolidated in this proceeding, is liable as a transferee of assets of Comtel Corp. for payment of the deficiency in the income tax of said corporation, to the extend indicated in the notice of transferee liability issued to the particular petitioner, plus interest as provided by law.
This proceeding involved 32 separate but related cases, which were consolidated for trial before this Court. In the first of these (Comtel Corp., docket No. 225-63), the respondent determined a deficiency of $215,621.33 in the income tax of petitioner Comtel, a dissolved corporation, for its fractional taxable year covering the period from February 1, 1958, to September 30, 1958. In each of the other 31 consolidated cases, the respondent determined that the particular petitioner is liable as a transferee of assets of said Comtel Corp., for all or part of the above-mentioned deficiency, together with interest thereon.
All parties have now agreed, in substance: That the petitioners in the 31 last-mentioned transferee cases will abide the result of the Comtel case (docket No. 225-63); and that if it is decided in said principal case that there is a deficiency in the income tax of Comtel for the fractional taxable year involved, then—
As regards petitioner Tri-Continental Financial Corporation (Docket No. 226-63) and petitioner Zeckendorf Hotels Corporation (Docket No. 314-63), each of these is liable as a transferee of assets of Comtel Corporation for payment of the full amount of such deficiency plus interest as provided by law;
And as regards the respective petitioners in all the other transferee cases (Docket Nos. 227-63 through 225-63), each of these is liable as a transferee of assets of Comtel Corporation for payment of such deficiency to the extent indicated in the notice of transferee liability issued to the particular petitioner, plus interest as provided by law.
The basic issue to be here decided is whether petitioner Comtel Corp. is entitled to exclude from its taxable income, under the nonrecognition of gain or loss provisions of section 337(a) of the 1954 Code, an undisputed gain or profit of $872,028.79 which it realized from certain transactions with Zeckendorf Hotels Corp., during the approximately 7-month period of its only active corporate existence. Decision of this issue will depend on the answer to one or both of the following questions:
(1) What was the true legal nature of said transactions with the Zeckendorf Corp. from which Comtel realized the large gain or profit here involved?
Stated more specifically: Did said transactions constitute: A purchase by Comtel from Zeckendorf of most of the shares of a third corporation's capital stock which Zeckendorf had been engaged in acquiring for its own purposes; and then, a very profitable resale of these same shares back to Zeckendorf about 7 months later, immediately following Comtel's adoption of a plan to complete liquidation? (Under such analysis of the transactions, the large profit involved might qualify for nonrecognition under section 337(a), as being a gain from sale of property by a liquidating corporation.)
Or on the other hand, did said transactions constitute (in substance and reality, as distinguished from their form) merely steps in a previously planned financing arrangement for the benefit of the Zeckendorf Corp.: (a) Under which certain New York financial organizations arranged for more than $8 million in cash to be made available to Zeckendorf for its use in meeting an existing legal commitment to purchase the above-mentioned shares of the third corporation's stock; (b) under which the Comtel Corp., was newly created to perform certain functions pertaining to said financing arrangement, including the assembling and delivery to Zeckendorf of the loan funds, and the holding of said third corporation's shares as collateral security; and (c) under which Zeckendorf, within a few months thereafter recovered possession of said collateral by paying Comtel not only the entire principal of the loan, but also additional previously agreed sums which respondent contends were in the nature of interest on the money loaned and compensation for financial services rendered? (Under this analysis of the transactions, the large undisputed profit represented by such additional sums would be ordinary income, as to which the nonrecognition provisions of section 337(a) would have no application.)
(2) In the alternative: Was Comtel a ‘collapsible corporation,‘ as defined in section 341(b) of the 1954 Code, so that all the gain or profit here involved is taxable at ordinary income tax rates, free from any application of the nonrecognition provisions of section 337(a)?
Most of the facts have been stipulated. The stipulation of facts and all exhibits identified therein are incorporated herein by reference; subject however to an understanding between the parties to the effect that descriptive words used in said stipulation, such as ‘purchase,’ ‘sale,’ ‘option,‘ and other words of that general class, are not to be deemed conclusive as to the true character of the transactions to which they relate.
Petitioner Comtel Corp. (hereinafter called Comtel) is a New York corporation which was organized on February 4, 1958. About 7 months later on September 4, 1958, it adopted a plan of complete liquidation, authorizing the dissolution of the corporation and a prorata distribution of its assets to its stockholders on or before December 31, 1958— all of which was given effect. On October 23, 1958, a certificate of its dissolution was duly filed with the secretary of state of the State of New York. However, under New York law, Comtel's existence is continued for the purpose of prosecuting suits and of settling and winding up its affairs. Its Federal income tax return for its fractional taxable year ended September 30, 1958 (which is the taxable period here involved, and also the only period of its active existence), was filed with the district director of internal revenue for the Upper Manhattan District of New York.
The circumstances under which Comtel was created, and the facts regarding its realization of the undisputed gain or profit of approximately $872,000 here
involved, are as follows: Facts re Zeckendorf Corporation's Initial Steps To Purchase All Shares of Commodore Hotel Stock
In the fall of 1957 and for some years prior thereto, a New York corporation named Commodore Hotel, Inc., operated the Hotel Commodore in the city of New York, under a lease from a subsidiary of the New York Central Railroad Co. This operation was attractive from an investor's viewpoint. The hotel was well located. The remaining term of the lease extended to December 31, 1967. The lessee corporation's gross operating revenues for the calendar year 1957 approximated $4 million; and its net income after taxes was approximately $700,000. Also its assets as of December 31, 1957, included in addition to its lease and physical properties, cash of approximately $855,000, and investments in marketable securities which had a value of approximately $3 million. The lessee corporation's own outstanding shares of capital stock were publicly held, and were listed and traded on the American Stock Exchange.
On October 9, 1957, Zeckendorf Hotels Corp. (then named 9113 Corp., and hereinafter called Zeckendorf), was an operator of various hotels; and also, it was a wholly owned subsidiary of Webb & Knapp, Inc. As of said date, it (Zeckendorf) undertook to acquire all the issued and outstanding shares of stock of said Commodore Hotel, Inc. (then consisting of about 483,132 shares of common stock), by making a written offer to all the stockholders to purchase their shares at the price of $18 per share, subject to certain specified conditions....
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