Huber Homes, Inc. v. Comm'r of Internal Revenue
| Decision Date | 06 January 1971 |
| Docket Number | Docket No. 4765-68. |
| Citation | 55 T.C. 598 |
| Parties | HUBER HOMES, INC., PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
George G. Grubb and David W. Matthews, for the petitioner.
Robert A. Roberts, for the respondent.
Huber Homes was engaged principally in the construction and sale of single-family houses. Huber Investment, its wholly owned subsidiary, was engaged principally in the real estate rental business. In 1965 Huber Homes transferred to Huber Investment at cost 52 unsold houses and lots for the purpose of converting them to rental properties. At the time of the transfer, the fair market value of the houses and lots exceeded their cost. Since that time, Huber Investment has retained the 52 houses and lots and has operated them as rental units. The Commissioner determined that as the result of the transfer, Huber Homes realized a profit to the extent of the difference between the cost of the houses and their fair market value at the time of the transfer, and that in order clearly to reflect income, it was necessary to ‘allocate’ that profit to Huber Homes under the authority of sec. 482, I.R.C. 1954. Held, there was no income to ‘distribute, apportion, or allocate’ within the meaning of sec. 482, and the Commissioner's determination is not authorized by that section.
The Commissioner determined deficiencies in the income tax of petitioner for the taxable year ended March 31, 1963, and the taxable period beginning March 29, 1965, and ending August 31, 1965, in the respective amounts of $25,973.15 and $79,311.41.
After concessions by both parties, the issue presented is whether the Commissioner properly ‘allocated’ income to the petitioner, under the terms of section 482, I.R.C. 1954, in respect of its transfer of 52 houses to its wholly owned subsidiary at cost.
The facts stipulated by the parties are incorporated herein by this reference.
Huber Homes, Inc. (sometimes referred to as Huber Homes or petitioner), is an Ohio corporation, formed on April 28, 1958. It filed a U.S. Corporation Income Tax Return for its taxable year ended March 31, 1963, and the taxable period ended August 31, 1965, with the district director of internal revenue, Cincinnati, Ohio. At the time it filed its petition herein Huber Homes maintained its principal place of business at Dayton, Ohio.
From its incorporation through August 31, 1965, Charles H. Huber (Huber) owned all of the outstanding stock of petitioner. He was also chairman of its board of directors and its chief executive officer at all times involved herein. It was the successor to a Huber family enterprise that was concerned with the construction and sale of houses.
During the period from April 28, 1958, through August 31, 1965, petitioner was engaged principally in the construction and sale of single-family houses in developments. These developments were located in the metropolitan areas of Dayton, Ohio, Cincinnati, Ohio, Columbus, Ohio, and Fort Lauderdale, Fla.
Huber Heights, located a few miles outside of Dayton, Ohio, is one of the developments. At the time of the formation of Huber Homes, approximately 700 houses had already been completed in Huber Heights. Huber Homes built approximately 3,700 more houses in that area during the period from April 28, 1958, through August 31, 1965, of which approximately 3,300 were sold to the general public. The remaining houses built during that period, about 400 in number, were acquired by Huber Investment Corp., hereinafter described.
Huber Investment Corp. (Huber Investment) is an Ohio corporation, organized on April 10, 1959. From the date of incorporation through August 31, 1965, all of its outstanding stock was owned by petitioner. At all times involved herein Huber was the chairman of its board of directors and its chief executive officer.
Huber Investment was formed for the purpose of acquiring and holding property not directly connected with petitioner's business of building and selling single-family houses. From its incorporation until August 31, 1965, Huber Investment was engaged principally in the real estate rental business. It owned approximately 400 rental houses in Huber Heights, approximately 100 houses in Indianapolis, Ind., and an unspecified number of houses in Columbus, Ohio, Cincinnati, Ohio, and Fort Lauderdale, Fla. The majority of the houses owned by Huber Investment on August 31, 1965, were acquired from petitioner. Huber Investment itself never built any houses.
After forming Huber Investment, with only comparatively minor exceptions, petitioner did not own, manage, or maintain any rental houses in Huber Heights. From its incorporation through the year in issue, Huber Investment sold only one of its Huber Heights homes, a single-family residence which was first rented to petitioner for use as an office and later sold to a realtor.
Petitioner and Huber Investment were operated as two separate and autonomous companies, and the books, records, and bank accounts of each were separately maintained. Each company had its own payroll and its own employees. Huber Investment's employees performed all the activities of a landlord with respect to the houses which it owned. Petitioner's employees never performed any of such activities with respect to Huber Investment's properties.
Petitioner developed the land in Huber Heights in sections, ranging in size from approximately 50 to 200 houses. As soon as a new section was opened for development, petitioner's sales department was permitted to sell the houses which were to be built there through the use of furnished and landscaped model homes. On the average, approximately 70 percent of the houses in a section were sold by the time all the houses in that section had been completed. In the late summer and fall of each year, however, petitioner would begin construction of houses beyond its immediate needs and in anticipation of sales during the following winter and spring, since it found it impractical to start construction between the beginning of November and the middle of the following April.
Based upon previous sales and upon the then current market conditions, Charles Huber, plus the sales manager, production manager, and other officers of petitioner determined, at a meeting held sometime in August, 1964, that 148 houses could be built and sold in Huber Heights from the fall of 1964 through the spring of 1965 when construction could start again. Thus, petitioner started construction on 148 houses in the late summer and early fall of 1964.
The prices at which the foregoing 148 houses and lots were offered to the public were set by petitioner on the basis of direct labor and material costs, land and land development costs, overhead, and profit. The base prices at which the houses were offered to the public varied according to the model of the particular house, ranging from $12,995 to $19,995. After the prices were established, they were made known to the public by advertising, through brochures, and in the sales office. It was petitioner's established policy never to offer any house to the public at a price below its published price.
During the period from the commencement of construction of the 148 aforementioned houses through the period in question, ending August 31, 1965, petitioner employed four full-time salesmen, working 7 days a week, to solicit the sales of these houses. The salesmen were instructed to sell every house they could, and they were compensated on a salary plus commission basis.
Of the 148 houses started in the late summer and early fall of 1964, petitioner succeeded in selling only 95 to the public. Four more houses were acquired by Huber Investment during its taxable year ended March 28, 1965. Despite petitioner's sales effort from the fall of 1964 until the early summer of 1965, the 49 houses which remained out of the original 148 could not be sold at the prices asked due to the then existing market conditions. Three other houses, constructed by petitioner at other times, were also unsold as of the early summer of 1965; one was a new style, model Q, which had been built as a model home, and two were houses started prior to the construction of the aforementioned 148 houses. Thus, a total of 52 houses were unsold as of this time.
Petitioner transferred 38 of the 52 unsold houses and lots to Huber Investment by journal entry on July 1, 1965, approximately 8 1/2 to 9 1/2 months after construction on the 38 houses had begun, and approximately 2 1/2 to 6 months after the 38 houses had been finished. It transferred another 13 of the 52 houses and lots to Huber Investment by journal entry on August 1, 1965, approximately 9 1/2 to 10 1/2 months after construction on the 13 houses had begun, and approximately 3 1/2 to 7 months after the 13 houses had been finished. Finally, it transferred the model Q house and lot to Huber Investment by journal entry on August 31, 1965.
Title to the 52 houses and lots was formally transferred by petitioner to Huber Investment by deeds during August 1965.
Huber Investment acquired the aforementioned 52 houses at petitioner's actual cost of $723,003.25. On petitioner's books and records there was an ‘Account Receivable’ from its subsidiary, Huber Investment, and the debt on that intercompany open account was increased in the aggregate amount of $723,003.25 to reflect the transfer of the 52 houses at cost. During the taxable period ending August 31, 1965, the monthly balance of petitioner's ‘Account Receivable’ from Huber Investment, as reflected on petitioner's books and records, was as follows:
+---------------------------+
¦Mar. 31, 1965 ¦$546,301.42 ¦
+--------------+------------¦
¦Apr. 30, 1965 ¦546,301.42 ¦
+--------------+------------¦
¦May 31, 1965 ¦544,248.13 ¦
+--------------+------------¦
¦June 30, 1965 ¦544,248.13 ¦
+--------------+------------¦
¦July 31, 1965 ¦1,067,411.96¦
+--------------+------------¦
¦Aug. 31, 1965...To continue reading
Request your trial
-
G. D. Searle & Co. v. Comm'r of Revenue
...(7th Cir. 1969), affg. 48 T.C. 773 (1967). See also Ciba-Geigy Corp. v. Commissioner, 85 T.C. 172, 221 (1985); Huber Homes, Inc. v. Commissioner, 55 T.C. 598, 605-606 (1971). Respondent's determinations under section 482 must be sustained absent an abuse of discretion. Wisconsin Big Boy Cor......
-
Ross Glove Co. v. Comm'r of Internal Revenue , Docket Nos. 7486-70
...2, 1970), affirming 52 T.C. 240 (1969); Kerry Investment Co., 58 T.C. 479 (1972),on appeal (C.A. 9, Oct. 27, 1972); Huber Homes, Inc., 55 T.C. 598 (1971). However, in this case, there is a dispute as to who has the burden of proof with respect to the adjustments made by the respondent for t......
-
R.T. French Co. v. Comm'r of Internal Revenue
...is generally whether the transaction in question would have been similarly effected by parties dealing at arm's length. See Huber Homes, Inc., 55 T.C. 598, 605, 606; L. E. Shunk Latex Products, Inc., 18 T.C. 940, 956; secs. 1.481-1(a)(6), 1.482-1(b)(1) and 1.482-2(d)(1)(i), Income Tax Regs.......
-
Brittingham v. Comm'r of Internal Revenue
...of controlled and uncontrolled taxpayers and prevents the artificial shifting of income between related businesses. Huber Homes, Inc., 55 T.C. 598, 605 (1971); see Baldwin-Lima-Hamilton Corp. v. United States, 435 F.2d 182, 185 (7th Cir. 1970); Kerry Investment Co., 58 T.C. 479, 484 (1972),......