BIG" D" DEVELOPMENT CORPORATION v. Commissioner, Docket No. 4758-68.
| Decision Date | 21 June 1971 |
| Docket Number | Docket No. 4758-68. |
| Parties | Big "D" Development Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Fritz Lyne, 1400 Adolphus Tower, Dallas, Tex., and Ira Lee Allen, for the petitioner. Richard K. Seltzer, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $143,701.35 in petitioner's income tax for the fiscal year ending October 31, 1964. The question before the Court is whether a sale of land by petitioner in 1964 qualifies for installment method of reporting income under section 453(b).1
All of the facts were stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.
The Big "D" Corporation (hereinafter referred to as petitioner) is a Texas corporation presently having its principal place of business in Houston, Texas. At the time of filing its petition herein, petitioner's principal place of business was located in Dallas, Texas.
Petitioner was incorporated in 1955 and has kept its books and reported its income on a cash basis, utilizing a fiscal year ended October 31. Petitioner timely filed its Federal corporation income tax return for the 1964 fiscal year with the district director of internal revenue, Dallas, Texas.
During 1964, petitioner's president was D. A. Childre who, together with his brother H. Thad Childre, owned sufficient units of a voting trust so as to control the election of petitioner's directors. Also D. A. Childre owned 24.5 percent and H. Thad Childre owned 34.6 percent of petitioner's stock in 1964. Petitioner, in turn, controlled a voting trust and owned sufficient shares of common stock in Great Southwest Life Insurance Company (hereinafter referred to as Great Southwest), also a Texas corporation, to give it voting control of Great Southwest. During times relevant hereto, all, or almost all, of petitioner's directors and shareholders were directors of Great Southwest. H. Thad Childre was chairman of the board and D. A. Childre was president of Great Southwest during 1964.
Prior to 1964 petitioner had acquired land along the North Central Expressway near its intersection with Blackburn and Haskell Streets in the city of Dallas. The property was referred to as the Block 4/975 land, and had an adjusted tax basis to petitioner of $414,631.02 on October 23, 1964. By general warranty deed dated October 23, 1964, and delivered at a closing on October 29, 1964, petitioner conveyed the Block 4/975 land to Great Southwest for a total price of $967,518 resulting in a net long term capital gain to petitioner of $552,886.98. The transaction was approved in a corporate resolution, dated October 29, 1964, passed by the board of directors of petitioner and in a corporate resolution, also dated October 29, 1964, passed by the board of directors of Great Southwest at their respective meetings held on that day. By those resolutions, each board of directors agreed that the total value of the Block 4/975 land was $967,518, based upon an appraisal, and that the effective date of the sale was October 23, 1964.
Great Southwest purchased the Block 4/975 land subject to a first lien note the principal amount of which on October 1, 1964, was $374,213.95 and upon which, as of October 23, 1964, there was accrued interest in the amount of $1,434.51. A check for $3,145.15 was issued by Great Southwest to Southwest Title and Abstract Company in payment of the full amount of the closing costs. In exchange for the Block 4/975 land, Great Southwest executed a bond payable to the petitioner and dated October 23, 1964. The bond (hereinafter referred to as the Great Southwest bond) was in the face amount of $591,175.55 which was determined by subtracting from the agreed purchase price of $967,518, the closing costs paid by Great Southwest and chargeable to the petitioner in the amount of $2,128.50, and the first lien on the property in the amount of $374,213.95.
The terms of the Great Southwest bond provided it was payable on or before 5 years from its effective date, and that it would bear interest at the rate of 5½ percent per year. Amounts not exceeding a total of $150,000, out of specified percentages of premium income from various types of policies written by Great Southwest were to be placed in a sinking fund. Principal and interest were to be paid from the sinking fund. However no payments were to be made into the sinking fund if the capital and unrestricted surplus of Great Southwest would thereby be reduced below $687,900. Neither the unpaid principal nor the interest due under the bond would be a liability of Great Southwest or a claim against any of its assets except the sinking fund. Finally the bond retained for Great Southwest the right at its option, to make a payment of all or any part of the principal or interest at any time out of any funds of the company without penalty or loss rights under the bond. The Great Southwest bond was non-negotiable, completely conditional and practically worthless.
The total capital and surplus amount fixed under the Great Southwest bond was subject to adjustment in case of merger of Great Southwest. Effective December 31, 1964, Great Southwest and Texas Reserve Life Insurance Company merged and Great Southwest was the surviving corporation. In accord with the terms of the bond, the minimum total capital and surplus amount fixed under the bond before payments could be made into the sinking fund was adjusted upward from $687,900.00 to $1,497,699.33. At no time during the periods ended December 31, 1964, through December 31, 1968, was the combined capital and surplus of Great Southwest as much as $1,497,699.33.
At the conclusion of its fiscal year ending September 30, 1964, Great Southwest held a general obligation bond of the petitioner (hereinafter referred to as the Big "D" bond). The Big "D" bond was in the principal amount of $700,000 all of which was outstanding on September 30, 1964. The bond was due June 1, 1969, and it provided for interest at the rate of 5½ percent per year.
Payment of the Great Southwest bond was effected by entries on the books of petitioner reducing the principal and interest owing on the Big "D" bond held by Great Southwest as follows:
------------------------------------------------------------------------
Date Total Payment Interest Principal
------------------------------------------------------------------------
June 1, 1965 ............. $ 89,416.58 $ 8,908.12 $ 80,508.46
June 1, 1966 ............. 91,951.73 38,776.44 53,175.29
June 1, 1967 ............. 38,500.00 25,162.05 13,337.95
June 23, 1967 ............ 58,002.00 ....... 58,002.00
June 1, 1968 ............. 93,500.00 24,317.25 69,182.75
July 12, 1968 ............ 318,954.56 1,985.46 316,969.10
___________ __________ ___________
$690,324.87 $99,149.32 $591,175.55
=========== ========== ===========
-----------------------------------------------------------------------
In its Federal corporate income tax return for fiscal year ending October 31, 1964, petitioner made a timely election to report the gain realized from the sale of the Block 4/975 property on the installment method. Respondent, in a statutory notice dated July 9, 1968, included the entire amount of the gain in petitioner's fiscal year 1964 income for the stated reason "* * * that this gain is not reportable using the installment method of reporting."
OpinionWe are to determine whether the transfer on October 23, 1964, by petitioner, Big "D" Development Corporation, of real estate in Dallas, Texas, known as the Block 4/975 property, to the Great Southwest Life Insurance Company qualifies under section 4532 for reporting under the installment method. Respondent contends that the entire gain realized on the transaction must be included in petitioner's income for its fiscal year ended October 31, 1964, because, it is alleged, petitioner transferred the land in return for immediate part cancellation of a substantial portion of its indebtedness to Great Southwest.
Prior to dealing with the issue thus framed, a preliminary matter must be disposed of. Petitioner in its reply brief contends that respondent in his opening statement before this Court and in his brief has raised a new issue which, not having been pleaded, cannot be entertained by this Court, or which, at least, shifts the burden of proof to the respondent. We cannot agree.
Respondent in the statutory notice said:
As can be seen the determination made by respondent is very broadly based. At the hearing where this case was submitted to the Court, respondent, in his opening statement, adduced several alternative theories supporting the determination in the statutory notice. In his opening brief respondent discarded all theories but the one set out above; that the transaction resulted in the immediate cancellation of a substantial indebtedness owing to the vendee, and petitioner thus received all that was owing it under the agreement of sale.
It is readily apparent that respondent merely narrowed the issue after taking a broad position in the statutory notice. The specific reason for the purported deficiency, as finally asserted in respondent's opening brief and in his remarks before the Court, is consistent with and inherent in the determination set out in the notice of deficiency. Proceeding from the...
To continue reading
Request your trial