Wofford v. Comm'r of Internal Revenue

• Decision Date: 30 November 1945
• Docket Number: Docket No. 2650.
• Citation: 5 T.C. 1152
• Parties: TATEM WOFFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 1152

TATEM WOFFORD, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 2650.

Tax Court of the United States.

Promulgated November 30, 1945.

1. Where a state court made an adjudication of ownership of property on the basis of an admission of such ownership by all parties to the suit, the Tax Court is not bound to accept such adjudication as conclusive.

2. A hotel building and private residence and other property operated as a business enterprise held to be the property of a corporation and not property owned by its stockholders in their individual capacity; and, upon the basis of such conclusion, it is further held, (a) that the distribution of the property, which constituted all of its assets, among the stockholders, under the direction of a court of equity, was a distribution in liquidation of the corporation; (b) that cash funds and other assets distributed in the liquidation can not be considered as capital or income received by the stockholders in years prior to the year of distribution; (c) that an assignment by a stockholder of a portion of his interest in the assets, executed and delivered after he had recovered the entire basis of his stock, was an assignment of income to be received in the liquidation, and did not affect his liability for tax on the income assigned; and (d) that a stockholder who paid a pro rata share of the corporation's accounts payable and of the taxes on its real estate, was not entitled to any deduction for business expenses or taxes paid.

3. Understatement of gains from distribution, made in reliance upon assignment of an interest in the distribution to taxpayer's wife, held not to warrant the imposition of a penalty for negligence. Douglas D. Felix, Esq., for the petitioner.

Bernard D. Hathcock, Esq., for the respondent.

The respondent determined a deficiency in income tax for the fiscal year ended June 30, 1938, in the amount of $6,056.68, and added a penalty for negligence in the amount of $302.83.

The issues presented for decision are: (1) Whether the distribution of property held in the name of the Wofford Hotel Corporation, including hotel and residence buildings and the furnishings therein, made by a master pursuant to a decree of a state court in a suit between the stockholders of that corporation, was a distribution in liquidation of the corporation, and, if so, the amount of gain realized by the petitioner form such distribution; (2) whether the petitioner is entitled to a deduction of $1,037.82 as an expense paid in connection with the operation of the hotel and renting of the residence; (3) whether the petitioner is entitled to deduct $3,084.81 expended in payment of real estate taxes imposed on the hotel and residence buildings, and $256.80 expended for documentary stamps on deeds of the master conveying the hotel and residence properties to purchasers thereof; (4) whether the petitioner is entitled to deduct $8,163.67 for attorney fees and other legal expenses paid in defending the above mentioned suit in the state court; and (5) whether the petitioner is subject to a penalty of 5 percent for negligence.

The petition contains an allegation of error by the respondent in including the sum of $1,232.21 in the petitioner's income as interest received on certain promissory notes, but the petitioner now concedes that the respondent's action was proper.

The petitioner claims an overpayment of tax in the amount of $769.69.

FINDINGS OF FACT.

Tatem Wofford, the petitioner herein, and his wife, Patricia Wofford, were residents of Miami Beach, Florida during the fiscal year ended June 30, 1938, and prior thereto. The petitioner made a separate income tax return for that year on the cash basis, which he filed with the collector for the District of Florida.

On November 16, 1932, upon the death of Ora Wofford, their mother, the petitioner and his brother John B. Wofford, as devisees and legatees under her will, acquired, in equal shares, all of the outstanding stock of the Wofford Hotel Corporation, consisting of 2,000 common shares, and a large private residence and the furnishings therein, situated in Miami Beach, Florida. The principal asset of the Wofford Hotel Corporation at that date consisted of real estate situated in Miami Beach, which was improved by a large hotel building thereon known as ‘The Wofford,‘ together with the furniture, fixtures, and equipment used therein in operating the hotel business. The hotel property, as of November 16, 1932, had a fair market value of $175,000 and was subject to a mortgage indebtedness of $150,000; and the residence property, as of that date, had a fair market value of $16,500 and was subject to a mortgage indebtedness of $6,000. The 2,000 shares of stock and the interest of Ora Wofford in the residence and its contents were valued at $25,000 and $10,500, respectively, as of November 16, 1932, by the appraisers of the County Judge's Court of Dade County, Florida, in which her will was probated, and were returned in an inventory filed in that court at those values. The 2,000 shares of stock had a fair market value of $25,000 on November 16, 1932.

On November 4, 1936, as a result of the action of the petitioner in taking possession of the hotel and residence in 1934 and excluding John B. Wofford from further participation in the management of the hotel business, John B. Wofford and his wife, Olive Wofford, filed a suit in the Circuit Court of the Eleventh Judicial Circuit of Dade County, Florida, against the petitioner, his wife Patricia Wofford, and the Wofford Hotel Corporation, in which they sought a decree declaring the corporation to be a trustee of the hotel property and the Wofford residence, then held in its name, and the furnishings of both, and directing a sale of all the property and division of the proceeds among John B. Wofford and the petitioner and their respective wives, as the beneficial owners thereof. They also sought an accounting by the petitioner for profits derived by him from operation of the hotel and renting of the residence. A special master, after a hearing, filed a report on May 22, 1937, in which he stated, among other matters, those set forth in the paragraphs numbered (1) to (7), following:

(1) In June 1923, after constructing the hotel, Ora Wofford organized the Wofford Hotel Corporation, and by deed and bill of sale conveyed the hotel and all the furnishings and equipment to it in exchange for 2,000 shares of its common stock. At the same time the corporation executed a trust deed on the property to secure a bond issue of $250,000. The bonds were issued and sold by the trustee and the proceeds were used to discharge then existing encumbrances on the property. The bonds were reissued in the amount of $240,000 under a new deed of trust in 1928. On January 15, 1934, the corporation, by Tatem, as president, and John, as secretary, executed a supplemental trust deed to extend the time of payment and reduce the interest rate on the then outstanding bonds, aggregating $136,000, and therein pledged, as additional security for payment of the bonds, the Wofford residence, which was conveyed to the corporation by the petitioner and John. All outstanding bonds were paid prior to June 6, 1936, and on that date the trust deed was satisfied of record.

(2) Upon the death of Ora Wofford, Tatem and John, as legatees under her will, each acquired and held 1,000 of the outstanding 2,000 shares of the stock of the Wofford Hotel Corporation and jointly acquired and held the residence property, their title and interest in both the stock of the corporation being equal. After the death of Ora Wofford, Tatem assigned 1 share of the stock to his wife, Patricia Wofford, and John assigned 20 shares to his wife, Olive Wofford; and, at the date of the filing of the suit, the stock was held as follows: Tatem Wofford, 999 shares; Patricia Wofford, 1 share; John B. Wofford, 980 shares; Olive Wofford, 20 shares.

(3) By an agreement dated July 3, 1934, between Tatem and John, ‘as officers and stockholders‘ of the corporation, and ‘as executors of the Estate of Ora Wofford,‘ it was agreed that their salaries should be $7,500 each for the season 1934-1935, and such salaries have been drawn by them from the corporate funds since the date of the agreement.

(4) The plaintiff (John), in his complaint, charges that Ora Wofford died seized and possessed of the residence and that John and Tatem acquired the property equally under her will; that they conveyed the property to the corporation for the sole purpose of additionally securing the bond issue; ‘that it was agreed that the property would be released on the payment of $10,000 of the amount due, which was done, and that therefore the residence property should no longer be subject to the lien of the mortgage, but should be reconveyed to the individual owners; that the bond issue has been fully paid, that Tatem arbitrarily refuses in order to financially embarrass the plaintiff; that Tatem has assumed management of the residence property and rented same and refuses to sell unless the funds go into the corporation.‘ The defendant (Tatem), in his answer, admits that the residence was conveyed to the corporation, but states that it was at the special request of John; that it was not to better secure the bond issue, but to consolidate their inheritance from Ora Wofford through equal ownership of the corporation; and that since the transfer the corporation has paid taxes and encumbrances on the property to the amount of $7,000 or $8,000.

(5) The plaintiff (John), in his complaint, charges that the corporation is in equity a trustee of and for the hotel property and holds it in trust for the plaintiffs and the defendants; that the trust should be terminated and the hotel property sold and the proceeds divided among the parties; that the corporation has reached a condition of stalemate and deadlock and can not continue to function as such; that it...