Enoch v. Comm'r of Internal Revenue
| Decision Date | 15 March 1972 |
| Docket Number | 1835-67,1834-67,Dockets Nos. 511-67,5216-68. |
| Citation | 57 T.C. 781 |
| Parties | HERBERT ENOCH AND NAOMI ENOCH, ET AL.,1A PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Bruce I. Hochman and Avram Salkin, for the petitioners.
Sheldon M. Sisson, for the respondent.
Herbert Enoch desired to purchase the Gloria Homes, an apartment complex consisting of 423 apartments. Gloria Homes was owned by R.R.R., Inc., a corporation which had only 20 shares of stock issued and outstanding. Ten of these shares were owned by Simons, an individual, and the remaining 10 were owned by Sunrise Mining, a corporation which was 100-percent controlled by Simons. The sales price for Gloria Homes was approximately $1,500,000. Enoch financed the purchase of the apartments in the following manner: (1) He invested in R.R.R. approximately $75,000 of his own capital; (2) he caused R.R.R. to refinance Gloria Homes and thereby raised approximately $500,000; (3) he personally borrowed $255,000 from the Union Bank and then contributed $245,000 of this to R.R.R.‘s capital; (4) he used approximately $680,000 of assets which were already held by R.R.R. After the financial arrangements were completed the above $1,500,000 was placed in an escrow account at Union Bank. The 20 shares of R.R.R., which had earlier been placed in the escrow account, were then disposed of as follows: (1) 1 share was transferred to Enoch for payment of $72,494.23; (2) 19 shares were redeemed by R.R.R. for a payment of. $1,377.390.49. When the transaction was completed Enoch held 1 share of R.R.R. stock which represented 100-percent ownership of the corporation. R.R.R. retained as its sole asset Gloria Homes apartments. Held, that Enoch was at no time under a personal, unconditional obligation to purchase all 20 shares of R.R.R. stock and therefore the redemption of 19 shares of this stock by R.R.R. was not a constructive dividend to Enoch. Held, further, Enoch did not receive a constructive distribution when the assets of R.R.R. were used to repay his personal loan to Union Bank. Held, further, R.R.R. improperly claimed a deduction for its payment of prepayment penalties which were actually the personal obligation of Simons. Held, further, R.R.R. improperly claimed an interest deduction for payment which relieved its sole shareholder of his personal obligation to Union Bank. Held, further, travel expenses incurred by Simons were incurred for his personal benefit and were not properly deductible by R.R.R. Held, further, the deduction of loan and escrow fees relating to the refinancing of Gloria Homes was deductible in part by Enoch and in part by R.R.R. Held, further, that incremental interest payments incurred as a result of the Gloria Homes refinancing were deductible by R.R.R. Held, further, the sale of bonds which were purchased and held as an integral part of R.R.R.‘s business resulted in an ordinary loss. Held, further, that $39,350 paid to Enoch's lawyer for the purchase of his interest in R.R.R. was properly added to Enoch's basis in the stock of the corporation. Held, further, a portion of the amount placed in escrow by Enoch was a loan to R.R.R. and therefore an amount received in liquidation was a repayment of this loan and not an amount realized in a liquidation exchange. Held, further, Enoch improperly claimed a rental loss for the year 1965. Held, further, in the case of amounts distributed in a redemption to which sec. 302(a), I.R.C. 1954, applies, that for the purpose of determining the part of the distribution which is properly chargeable to the capital account, the term ‘capital account’ as defined in sec. 312(e) includes only the amounts received for capital stock. Held, further, part of the underpayment oftaxes for the years 1964 and 1965 was due to negligence or intentional disregard of rules and regulations.
The respondent determined the following deficiencies in, and additions to, the petitioners' income tax for the taxable years 1962, 1963, 1964, and 1965:
Concessions having been made by both parties, the issues remaining for decision are:
(1) Whether Herbert Enoch received a constructive dividend when his alleged personal and unconditional obligation to acquire all 20 shares of R.R.R., Inc., was satisfied by appropriating the assets of the newly acquired corporation.
(2) Whether Enoch received a constructive dividend when assets of R.R.R. were used to repay an alleged personal loan of $255,000 made to Enoch by the Union Bank of Los Angeles.
(3) Whether R.R.R. improperly claimed ordinary and necessary business expense and interest deductions which were either:
(a) personal obligations of Enoch or A. Pollard Simons; or
(b) capital expenditures; or
(c) served no purposive activity of the corporation.
The specific expenses which the respondent has challenged are:
(a) prepayment penalties made to the Bowery Savings Bank and FHA;
(b) interest payments made on the Union Bank loan;
(c) travel expenses incurred by Simons and his associates;
(d) loan and escrow fees relating to the Lytton Savings & Loan Association loan and the Union Bank escrow; and
(e) incremental interest payments caused by refinancing the original Bowery Savings loan.
(4) Whether the loss incurred by R.R.R. from the sale of its U.S. Treasury bonds is a capital or an ordinary loss.
(5) Whether the amount paid for Enoch's attorney's 20-percent interest in R.R.R. is to be added to Enoch's basis in the R.R.R. stock.
(6) Whether the amount realized by Enoch in the final liquidation of R.R.R. was a repayment of a loan.
(7) Whether a rental loss claimed by Enoch for 1965 should have been disallowed.
(8) Whether the effect of the redemption was to substantially reduce R.R.R.‘s earnings and profits account.
(9) Finally, whether part of the underpayment of taxes for the years 1964 and 1965 was due to negligence or intentional disregard of rules and regulations.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
The petitioners, Herbert and Naomi Enoch, are husband and wife, and at the time of filing the petitions herein they were residents of Los Angeles, Calif. Their joint Federal income tax returns for the calendar years 1962, 1963, 1964, and 1965 were filed with the district director of internal revenue for the district of Los Angeles.
Petitioner Naomi Enoch is a party herein only by reason of having filed a joint return with her husband, Herbert Enoch, and the latter will hereinafter be referred to as the petitioner or Enoch.
The petitioner corporation, R.R.R., Inc. (hereinafter referred to as R.R.R.), had its principal place of business in Los Angeles at the time the petitions in these consolidated cases were filed. R.R.R. was a duly organized and existing California corporation which was organized in February 1950. R.R.R.‘s fiscal period was the calendar year, and its books and records were maintained on the accrual basis of accounting. Enoch is liable as a transferee for any deficiencies owning by R.R.R.
At all times herein relevant prior to December 3, 1962, there were 20 shares of R.R.R. stock issued and outstanding. A. Pollard Simons (sometimes hereinafter referred to as Simons) of Dallas, Tex., owned 10 shares. Sunrise Mining Corp. (hereinafter referred to as Sunrise), a corporation which was wholly owned by Simons, owned the remaining 10 shares of R.R.R. These 20 shares were held at the Union Bank of Los Angeles (hereinafter referred to as the Union Bank) in escrow No. 1-1652-CC-SW pursuant to conditions contained in a permit for issuance of stock issued by the California corporations' commissioner.
At all times herein relevant the principal asset of R.R.R. was an apartment complex called Gloria Homes, which was located on Santa Barbara Avenue in Los Angeles. Gloria Homes consisted of 33 multiple-unit buildings totaling 423 apartments located on approximately 17 1/2 acres of land.
Herbert Enoch was born in Munich, Germany, in 1923. Enoch and his family left Germany in 1939. He worked in New Zealand until 1946 at which time he moved to Minneapolis, Minn., and secured employment as a radio repairman until 1951. In 1951 Enoch moved to Los Angeles and continued working as a radio repairman. Enoch became a real estate salesman in 1956 and has remained in Los Angeles in the real estate business since that date.
Enoch desired to purchase Gloria Homes as early as 1961. He traveled to Dallas in 1961 in furtherance of this desire but nothing materialized from the trip.
However, by 1962 Simons had decided to sell Gloria Homes. Enoch was advised by Dale Wilson, the property manager of Gloria Homes, of Simons' desire to sell. At this time the assets of R.R.R. included:
+--------------------------------------------------------------------------+
¦(a)¦The Gloria Homes apartments which had a fair market value ¦
+---+----------------------------------------------------------------------¦
¦ ¦of--------------------------------------------$3,500,000 to $4,000,000¦...To continue reading
Request your trial
-
Read v. Comm'r of Internal Revenue, s. 19001–97
...limited to those circumstances where the obligation of the purchasing shareholder is both primary and unconditional. Enoch v. Commissioner, 57 T.C. 781, 1972 WL 2421 (1972); Priester v. Commissioner, 38 T.C. 316, 1962 WL 1087 (1962). If, on the other hand, the corporation redeems stock whic......
-
Fort Howard Corp. & Subsidiaries v. Comm'r of Internal Revenue
...Commissioner, 69 T.C. 421, 438 (1977); Cagle v. Commissioner, 63 T.C. 86, 97 (1974), affd. 539 F.2d 409 (5th Cir.1976); Enoch v. Commissioner, 57 T.C. 781, 794–795 (1972); Anover Realty Corp. v. Commissioner, 33 T.C. 671, 675 (1960); Longview Hilton Hotel Co. v. Commissioner, 9 T.C. 180, 18......
-
Rasmussen v. Commissioner
...part and revg. in part [Dec. 41,219(M)] T.C. Memo. 1984-264; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972); Enoch v. Commissioner [Dec. 31,493], 57 T.C. 781, 802-803 (1972). All of the petitioners deducted losses in connection with their Agbanc transactions. In addition, all claimed an......
-
Lychuk v. Comm'r of Internal Revenue, 11794–99
...over the life of the debt. See, e.g., Austin Co. v. Commissioner, 71 T.C. 955, 964–965, 1979 WL 3593 (1979); Enoch v. Commissioner, 57 T.C. 781, 794, 1972 WL 2421 (1972); Longview Hilton Hotel Co. v. Commissioner, 9 T.C. 180, 182–183, 1947 WL 34 (1947); Lovejoy v. Commissioner, 18 B.T.A. 11......
-
Tax Court In Brief | Larochelle v. Commissioner | Unreported IRA Distribution And Reliance On Professional
...cause where the taxpayer did not furnish sufficient information to prepare an accurate income tax return. Enoch v. Commissioner, 57 T.C. 781, Nonreceipt of tax information forms, such as a Form W-2, Wage and Tax Statement, or a Form 1099, does not excuse a taxpayer from his or her duty to r......
-
Tax Court In Brief | Larochelle And Larochelle v. Commissioner, T.C. Summary Opinion 2022-12 | July 12, 2022 | Leyden | Dkt. 10416-20S
...cause where the taxpayer did not furnish sufficient information to prepare an accurate income tax return. Enoch v. Commissioner, 57 T.C. 781, Nonreceipt of tax information forms, such as a Form W-2, Wage and Tax Statement, or a Form 1099, does not excuse a taxpayer from his or her duty to r......
-
Tax Court applies sec. 1041 nonrecognition provisions to stock redemption.
...the remaining shareholder if the latter had a "primary and unconditional" obligation to purchase the redeemed shareholder's stock (Enoch, 57 TC 781 In Read, William and Carol Read owned all of the voting and almost all of the nonvoting stock of MMP Corporation. Their divorce judgment ordere......