Biltmore Homes, Inc. v. CIR

• Decision Date: 27 March 1961
• Docket Number: No. 8246.,8246.
• Citation: 288 F.2d 336
• Parties: BILTMORE HOMES, INC., Charles F. Cooper, Charles F. Cooper and Virginia P. Cooper, Frank B. Cooper, Frank B. Cooper and Jean R. Cooper, James Cooper and Betty D. Cooper, and James Cooper, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

288 F.2d 336 (1961)

BILTMORE HOMES, INC., Charles F. Cooper, Charles F. Cooper and Virginia P. Cooper, Frank B. Cooper, Frank B. Cooper and Jean R. Cooper, James Cooper and Betty D. Cooper, and James Cooper, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8246.

United States Court of Appeals Fourth Circuit.

Argued January 18, 1961.

Decided March 27, 1961.

Charles F. Cooper and E. W. Mullins, Columbia, S. C. (Nelson, Mullins & Grier, Columbia, S. C. on brief), for petitioners.

James P. Turner, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson and A. F. Prescott, Attorneys, Department of Justice, Washington, D. C., on brief), for respondent.

Before SOPER, HAYNSWORTH and BOREMAN, Circuit Judges.

SOPER, Circuit Judge.

The principal question with which we are concerned in these consolidated cases grows out of the activities of three brothers residing in Columbia, South Carolina, in connection with a local housing development under the Federal Housing Administration. The three men, Frank B. Cooper, Charles F. Cooper, and James D. Cooper, formed the Biltmore Homes, Inc. under the laws of South Carolina on September 17, 1946. The capital stock of the corporation, consisting of 5,000 shares with a par value of $1 per share, was subscribed and paid for in equal shares by the three men. The officers of the corporation from its inception to its dissolution on September 1, 1948, were Frank, its president, and James, its vice president, secretary and treasurer. Frank was in charge of the operations of the corporation.

In 1946, Biltmore acquired several tracts of real estate including lots in a subdivision called "Oakhurst" for which it paid $48,950. During the taxable period it made use of this property in a building operation under the Federal Housing Administration.

The three brothers were also actively engaged in a number of other business enterprises for profit, either singly or together, most of which were incorporated. Of especial importance in connection with the Biltmore housing operation were two corporations in the finance and mortgage field, to wit: Perpetual Building and Loan Association of Columbia and the Mutual Savings and Loan Company. Both corporations were organized under the laws of South Carolina. The officers of Perpetual were Charles, president; Frank, vice president; and James, treasurer. Charles was in charge of the operations of Perpetual. He is a lawyer and he appeared for the taxpayers in these cases in the Tax Court and also in this court. James was the president of Mutual and was in charge of its operations. His brothers were shareholders in the corporation. Both Perpetual and Mutual had been held to be exempt from federal income taxes during the taxable years by rulings under the provisions of § 101(4) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 101(4). Because of this fact the brothers conceived the idea that it would be desirable to conduct the Biltmore housing operations in such manner that the profits would find their way into the hands of Perpetual or Mutual or both, and it is their contention in this litigation that they were successful in this endeavor. With this end in view they caused the three corporations — Biltmore, Perpetual and Mutual — to engage in the following transactions.

On March 15, 1947, Biltmore, acting through Frank, its president, entered into an agreement with one Simon Faust, a building contractor, for the construction of ninety-four houses (with extras) on the Oakhurst tract for $5,100 per house. This agreement, together with an estimate of the cost of each house in the sum of $5,352.25 (including landscaping, water connections, FHA fees, insurance, sales expenses and so forth) and the cost of each lot in the sum of $900, or an aggregate cost of $6,252.25 for each house and lot, were filed with the Federal Housing Administration in order to obtain an insured mortgage for 90 per cent of the estimated cost of the project.

In order to pay Faust the agreed sum of $5,100 per house, the agreement provided that Biltmore should give to Perpetual, of which Charles was president, a note and mortgage on FHA forms on each of the lots and the improvements thereon so that FHA insurance could be obtained. Biltmore also agreed to assign irrevocably the proceeds of the loan for the account of Faust to the extent of $5,100 per house. It was, however, expressly provided that Faust should be paid nothing until completion and until after the mortgage in each case had been insured by FHA and all the moneys due by Faust for labor and materials and construction had been paid. James, the president of Mutual, assisted his brother Frank in these transactions with Faust.

It clearly appears from closely following events that the estimate of the cost of the houses filed by Biltmore and Faust was excessive and that Faust was entirely willing to build the houses for much less than $5,100 per house. It was also clear that the brothers had no difficulty in arranging to finance the building operation during the period of construction. On April 1, 1947, only seventeen days after Faust agreed with Biltmore to build the houses for $5,100 each, he entered into an agreement with Mutual to build the same houses for $4,000 each. This agreement was signed on behalf of Mutual by James, its president. It provided that Faust might obtain construction money by giving his note for $376,000 ($4,000 per house)¹ secured by a mortgage on the improvements to be erected and on the supplies placed on Oakhurst and other properties of Biltmore and of Faust and by all amounts due to Faust under the contract. The balance due by Faust at any time was to be all the amounts furnished by Mutual, Biltmore or Perpetual. The last two corporations did not agree to make advances to Faust during the construction of the buildings but the mention of them in this connection in the agreement gives evidence of the close relationship between them in carrying out the building operation.

On April 10, 1947, ten days after the agreement between Faust and Mutual was signed, Biltmore, in accordance with its agreement with Faust, executed and delivered to Perpetual ninety first mortgages on ninety lots and the improvements to be later erected thereon in Oakhurst in the aggregate sum of $472,900. Therein it was agreed that Biltmore was to receive the difference between $5,100 per house to be paid to Faust and the face amount of the first mortgage on each lot and that Perpetual would finance the sales of the properties to veterans and that the veterans would assume the first mortgage and execute second mortgages for the 10 per cent down-payment plus the closing costs and so forth.

Faust built ninety houses on the Oakhurst tract in 1947. It appears, however, that he was paid only $4,000 per house, as provided in his agreement with Mutual and not $5,100 per house as provided in his agreement with Biltmore. Attached to the Mutual agreement in evidence is a schedule of payments made to Faust entitled "Receipts by and for Account of Simon Faust of Proceeds of Note and Mortgage to Mutual Savings and Loan Company". The schedule lists payments in varying amounts from April 1 to October 24, 1947, in the aggregate sum of $359,966.81, that is, approximately $360,000 for ninety houses. The schedule also shows that all of the moneys were paid by (or through) one or the other of the three brothers, most of them by James and Frank, a few by Charles.

All of the houses and lots were sold to veterans in 1947 for a total of $542,051. The veterans assumed the first mortgages given by Biltmore to Perpetual in the sum of $472,900 and gave second mortgages in the sum of $68,713.50 and paid $437.50 cash for each house. The first mortgages were insured by FHA. They were sold by Perpetual for their face value between September 3, 1947 and April 28, 1948. The second mortgages were credited by Perpetual to Biltmore in the sum of $33,838.45, which Biltmore agreed was their reasonable value.

Biltmore reported no net income in its income tax return for 1947 and reported $347.33 for 1948. The Commissioner determined deficiencies for these years in the amount of $101,788.01 and $5,429.08, respectively. The Tax Court, finding increases in the cost of the lots, reduced these figures to $98,453.75 in 1947 and $468.59 in 1948.

The Commissioner also determined that in 1947 and 1948 Biltmore's income was diverted to other corporations (Mutual and Perpetual) in the amount of $90,813.34 and $10,355.59, respectively, for the benefit of Biltmore's three stockholders and charged each of them with one-third of these amounts as dividends. The Tax Court redetermined these dividends in slightly less amounts.

The correctness of the determinations of the Commissioner and the Tax Court as to the tax liabilities of Biltmore and of the three brothers in these respects depends upon the cost incurred in erecting the houses. Biltmore deducted $5,100 per house, or a total of $459,000 as the cost of the ninety houses. The Commissioner determined that the total cost was only $4,000 per house, or $360,000 in all. Under the established rules the determination of a deficiency by the Commissioner is presumptively correct and the determination of factual issues by the Tax Court must be sustained by a reviewing court unless it is clearly erroneous. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346. In the instant cases the weight of the evidence with respect to the cost of the houses shows that the determination was correct. Obviously the three brothers embarked upon the...