Epstein v. Comm'r of Internal Revenue

• Decision Date: 24 December 1969
• Docket Number: 1819-64,549-64,1824-64.,Docket Nos. 548-64
• Citation: 53 T.C. 459
• Parties: HARRY L. EPSTEIN AND ESTELLE EPSTEIN, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

53 T.C. 459

HARRY L. EPSTEIN AND ESTELLE EPSTEIN, ET AL.,1 PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 548-64

549-64

1819-64

1824-64.

Tax Court of the United States.

Filed December 24, 1969

John Blyer Callahan and Herbert Morse, for the petitioners.

Harry Morton Asch and Martin Schainbaum, for the respondent.

By separate declarations of trust made and executed on Sept. 20, 1960, petitioners Harry Epstein and Robert Levitas, the two controlling stockholders of United Management Corp. each created two trusts for the benefit of their children. On that same date, United Management Corp. sold two of its rental properties to the newly created trusts. Held:

1. The fair market value of the properties sold by United Management Corp. to the trusts exceeded the fair market value of the consideration received by it from such trusts.

2. The difference between the fair market values of the properties sold and consideration received constituted a constructive distribution of property to petitioners Harry Epstein and Robert Levitas.

3. Harry Epstein's one-half allocable share of such distribution, as ultimately received by the two trusts he created, constituted a taxable gift from him to each of such trusts.

4. Estelle Epstein, who consented on her husband's 1960 gift tax return to have one-half of his gifts considered as having been made by her, is liable for an addition to tax pursuant to sec. 6651(a) by reason of her failure to file a gift tax return for 1960.

HOYT, Judge:

Respondent determined deficiencies in petitioners' income and gift taxes and additions to tax under section 6651(a)² for the taxable year 1960 as follows:

+-------------------------------------------------------------------------+
                ¦Docket ¦Petitioners                          ¦Tax   ¦Deficiency¦Additions¦
                +-------+-------------------------------------+------+----------+---------¦
                ¦No.    ¦                                     ¦      ¦          ¦to tax   ¦
                +-------+-------------------------------------+------+----------+---------¦
                ¦548-64 ¦Harry L. Epstein and Estelle Epstein ¦Income¦$32,477.40¦         ¦
                +-------+-------------------------------------+------+----------+---------¦
                ¦549-64 ¦Robert B. Levitas and Leah A. Levitas¦Income¦29,845.27 ¦         ¦
                +-------+-------------------------------------+------+----------+---------¦
                ¦1819-64¦Estelle Epstein                      ¦Gift  ¦3,598.74  ¦$899.68  ¦
                +-------+-------------------------------------+------+----------+---------¦
                ¦1824-64¦Harry L. Epstein                     ¦Gift  ¦3,598.74  ¦         ¦
                +-------------------------------------------------------------------------+
                

After various concessions by the parties, the following issues remain for our decision:

(1) Whether the fair market value of the property sold by the United Management Corp. exceeded the fair market value of the consideration received by it from the trusts created by the two controlling stockholders of the corporation for their children.

(2) If so, whether the difference between the fair market values of the properties sold and consideration received would constitute a constructive distribution of property to the two controlling stockholders of the corporation.

(3) If one of the controlling stockholders was the recipient of a constructive distribution of property, whether the ultimate receipt of such property by the trusts should be treated as a taxable gift from such stockholder to each of such trusts to the extent that no consideration was paid therefor.

(4) Whether Estelle Epstein, who consented on her husband's 1960 gift tax return to have one-half of his gifts considered as having been made by her, is liable for an addition to tax pursuant to section 6651(a) by reason of her failure to file a gift tax return for 1960.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and exhibits thereto are incorporated herein by this reference.

Harry L. Epstein and Estelle Epstein, the petitioners in docket No. 548-64, are husband and wife. At the time of the filing of the petition herein, they reside in Shorewood, Wis. They filed a joint Federal income tax return for the taxable year 1960 with the district director of internal revenue at Milwaukee, Wis.

Robert B. Levitas and Leah A. Levitas, the petitioners in docket No. 549-64, are husband and wife. At the time of the filing of the petition herein, they resided in Portola Valley, Calif. They filed a joint Federal income tax return for the taxable year 1960 with the district director of internal revenue at San Francisco, Calif.

Harry L. Epstein, the petitioner in docket No. 1824-64, filed a gift tax return for the taxable year 1960 with the district director of internal revenue at Milwaukee, Wis.

Estelle Epstein, the petitioner in docket No. 1819-64, consented on her husband's gift tax return to have one-half of his gifts considered as having been made by her. She did not file a gift tax return for the taxable year 1960. Of the total amount reported on Harry Epstein's 1960 gift tax return, $1,000 ($500 allocable to Harry and $500 to Estelle) is attributable to gifts of future interests.

During all the time periods involved in these cases, Harry Epstein and Robert Levitas were the controlling stockholders of United Management Corp.

United Management Corp. is engaged in the corporate management services and rental real estate businesses. It elected pursuant to subchapter S of the Internal Revenue Code to be taxed as a small business corporation during its fiscal year ending July 31, 1961, and all time periods involved herein. The balance sheet of United Management Corp. for its fiscal year ending July 30, 1961, shows that its accumulated earned surplus as of August 1, 1960, was $103,108.99, and its accumulated earned surplus on July 31, 1961, was $103,102.99.

During its fiscal year ending July 31, 1961, and all time periods with which we are concerned, the officers and directors of United Management Corp. were Harry Epstein (president), Robert Levitas (vice president), and Irene Casten (secretary). The stockholders were Harry Epstein (126 shares), Robert Levitas (125) shares, and Irene Casten (1 share). The stated value of the capital stock in United Management Corp. owned by Harry Epstein and Robert Levitas, on September 20, 1960, was $252.

Prior to September 20, 1960, United Management Corp. was the owner of improved real property located at both 1110 North 7th Street, San Jose, Calif. (hereinafter referred to as the San Jose property), and 800-840 Tennessee Street, San Francisco, Calif. (hereinafter referred to as the San Francisco property).

The San Francisco property was acquired at sometime in 1952 at an approximate cost of $225,000. At the time of this acquisition a mortgage was put on the property, such mortgage bearing an interest rate of 4 1/2 percent. The San Francisco property consists of a level lot having dimensions of 188 feet on 19th Street, 201 feet 9 inches on Tennessee Street, and 201 feet 9 inches on Minnesota Street for a total lot area of 37,929 square feet. The property is improved with a two-story building, 50 years of age or older, which, as of September 20, 1960, was in excellent condition and maintenance. The building has a concrete foundation, a first floor built of concrete, and a second floor built of wood. The ceiling height of the ground floor is 18 feet and the ceiling height of the second floor is 20 feet. The ground floor of the building, having brick sidewalls and exposed timber ceiling, is unfinished. The second floor, with an approximate area of 37,000 square feet, had, as of September 20, 1960, an area of 7,274 square feet of finished office space. An additional amount of the unfinished area of the second floor, roughly 2,800 square feet, has since been converted to office space, with appropriate improvements costing approximately $100,000. The property is adjoined on the Minnesota Street side by a railroad spur, approximately 200 feet in length, and has six loading bays on the Minnesota Street side and four loading bays on the Tennessee Street side. The building has two freight elevators, one hydraulic and the other electric.

The San Francisco property is in an area which is zoned for heavy industrial use. There are many other multistoried buildings located in this heavy industrial zone.

As of September 20, 1960, the first floor of the building was used for the distribution of liquor and for the storage of products. The second floor was used partially for the manufacture of paper boxes and, as mentioned above, partially for office space.

While the first floor of the building is quite adequate in meeting any storage or manufacturing demands made upon it, the second floor fails, in certain functional aspects, to meet such demands. The second floor operation is partially obsolescent due to a poor elevator situation (only two of them) combined with the excessive ceiling height of the first floor (18 feet). This results in increased labor costs. With the advent of industrial parks, in cheaper land areas, and the construction of one-level buildings, the demand in San Francisco and other major cities for second floor space for a storage or manufacturing operation has been greatly curtailed. The one-level type of operation eliminates some of the functional deficiencies inherent in a two-level operation with the resultant benefit of much lower labor costs.

While the second floor of this building is not functionally obsolete as office space, the building is not located in an office rental area and could not yield as much rental income as is normally received in such an area.

The assessed value of the San Francisco property for real property tax purposes as of the year 1965 was $73,510, $22,510 being allocable to the land and $51,000 being allocable to the building. In the San Francisco area the assessed valuation of real estate usually equals 25 percent of the amount the...