Bolker v. Comm'r of Internal Revenue

• Citation: 81 T.C. No. 48,81 T.C. 782
• Decision Date: 20 October 1983
• Docket Number: 8379–78.1,Docket Nos. 7100–77
• Parties: JOSEPH R. BOLKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

81 T.C. 782

81 T.C. No. 48

JOSEPH R. BOLKER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 7100–77

8379–78.1

United States Tax Court

Filed October 20, 1983.

Petitioner and his wife were equal shareholders of a corporation owning undeveloped land. In May 1969, after the corporation granted an option to a bank to purchase the land, the bank decided to exercise the option but failed to execute the sale. From April 1970 until September 1970, petitioner and the bank exchanged various offers and counter offers regarding the sale and exchange of the corporate property. After petitioner's divorce in September 1970, he became sole shareholder in the corporation and upon the advice of his attorneys, he decided to remove the property from the corporation via a liquidation under sec. 333, I.R.C. 1954. Petitioner initially intended to develop the property but could not obtain proper financing and therefore, in December 1971 he resumed negotiations with the bank and agreed to an exchange of the corporate property. On March 8, 1972, the corporation adopted a plan for complete liquidation under sec. 333. On March 13, 1972, the corporation deeded the property to petitioner, and petitioner and the bank agreed upon the terms of the exchange. On June 6, 1972, the exchange took place as scheduled. Held, the exchange was made by petitioner, not the corporation. Held, further, the exchange qualifies for nonrecognition treatment under sec. 1031(a), because the property exchanged was held by petitioner for investment purposes. Magneson v. Commissioner, 81 T.C. —— (Oct. 20, 1983) followed. Douglas W. Argue and Gilbert Dreyfuss, for the petitioner.

Arthur A. Oshiro, for the respondent.

WILBUR, Judge:

Respondent has determined the following deficiencies in petitioners' Federal income taxes:

+---------------------------------------------------------------------------+
                ¦Docket No.  ¦Petitioner                  ¦Taxable year ended  ¦Deficiency  ¦
                +------------+----------------------------+--------------------+------------¦
                ¦            ¦                            ¦                    ¦            ¦
                +------------+----------------------------+--------------------+------------¦
                ¦7100-77     ¦Joseph R. Bolker            ¦12/31/72            ¦$1,714,973  ¦
                +------------+----------------------------+--------------------+------------¦
                ¦7100-77     ¦Joseph R. Bolker            ¦12/31/73            ¦9,747       ¦
                +------------+----------------------------+--------------------+------------¦
                ¦8379-78     ¦Joseph R. Bolker, transferee¦3/28/72             ¦896.919     ¦
                +---------------------------------------------------------------------------+
                

These consolidated cases present the following issues for our decision:

(1) Whether petitioner's exchange of the Montebello property should be imputed to petitioner's wholly-owned corporation; and

(2) Whether the exchange of the Montebello property qualifies for nonrecognition treatment under section 1031.²

FINDINGS OF FACT

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

Joseph R. Bolker (hereinafter referred to as petitioner or Joseph) resided in Los Angeles, California at the time he filed his petitions in these consolidated cases.

During the period from 1956–1967, Joseph built 4,000 to 5,000 single family residential homes in the southern California area. Petitioner conducted his business primarily through numerous corporate entities which he created to acquire title to the land, to develop the sites either as improvement contractors or building contractors, to sell the finished units, and to maintain the tracts. None of the real estate development Joseph engaged in prior to 1972 was carried on in his own name. All of these corporate activities were consolidated, however, under the trade name “Brighton-Bilt Homes.”

In 1960, Joseph, through his corporations, acquired approximately 170 acres of land located in Montebello, California. Title to 53 acres (hereinafter referred to as the Montebello property) of the 170 acres was acquired by Crosby Estates, Inc., (Crosby), a corporation at the time owned 50 percent by Joseph and 50 percent by Joseph's wife, Janice A. Bolker. Crosby had been incorporated under the laws of California on December 2, 1954.

Original plans called for the construction of single-family homes on all of the Montebello property except 14 acres which would be used to build apartments. By 1961, Joseph had decided to pursue a course of building apartments on all 53 acres. However, despite numerous efforts from 1961 through 1967, Joseph was unsuccessful in having the land rezoned to accommodate multi-family housing.

On April 26, 1967, Joseph's wife, Janice A. Bolker, filed a complaint for divorce against the petitioner in the Superior Court of the State of California for the County of Los Angeles. One of the main issues in the divorce proceeding was the division of the community property, of which the Crosby stock, and thereby the Montebello acreage, was a major asset. During the pendency of the divorce action, petitioner's corporations were, due to a restraining order issued by the Superior Court, allowed only to complete existing projects and were barred from further developing any of the community property.

On May 27, 1969, Crosby granted an option to Southern California Savings and Loan Association (SCS) to purchase the Montebello property for $2,030,000. ³ SCS timely notified Crosby that it was exercising the option and placed a $100,000 deposit into escrow. SCS failed, however, to deposit the balance of the purchase price into escrow by the closing date. Accordingly, on September 12, 1969 Crosby notified SCS that it considered the contract breached and that under the terms of the agreement it demanded that the $100,000 deposit be paid over in satisfaction of the seller's claim for damages.

There was no further contact between Crosby' Joseph or their representatives and SCS until April 1970, at which time Mr. Kenneth Childs, president of SCS, was called to testify at the Bolkers' divorce hearing. Childs told the court that SCS might still be interested in acquiring the the Montebello property under certain conditions for $2,030,000. The Bolkers had previously stipulated that for purposes of the divorce proceedings the value of the property was $1,750,000. The presiding judge thereupon called counsel into chambers and said that an opportunity to sell the property should not be overlooked and strongly suggested that the possibility be explored with SCS.

A meeting was held that same day between Richard Dreyfus (hereafter Richard), general counsel for SCS, and Glenn Watson and Gilbert Dreyfuss (hereafter Gilbert) two of petitioner's attorneys.⁴ Richard informed them that SCS indeed believed the property to be worth $2,030,000, but that SCS was not interested in the property for its owm investment but rather for one of SCS's clients, Frank Arciero. Joseph's lawyers inquired whether SCS might be willing to enter into a joint venture arrangement. Richard responded that since Arciero had originally brought the situation to SCS's attention, SCS could not consider a venture with any other builder unless Arciero was no longer interested in the property and would sign a release from liability.

Also discussed at that meeting was Joseph's potential lawsuit against SCS for breach of the May 27, 1969, option agreement. Richard felt that the outcome of such a suit would depend in large part upon the appraisal value of the property. He expressed SCS's view that it had a viable defense of frustration of purpose due to SCS's inability to come to terms with Arciero which Joseph was aware was a condition precedent to SCS's willingness to purchase the property. As a result of this meeting, Watson reported back to the divorce court that although SCS was not ready at that time to enter into an unconditional transaction, SCS was expressing interest and the matter would be discussed further.

On April 2, 1970, Richard informed Watson that Arciero was indeed still interested in the property, but that Childs had agreed that SCS would be willing to purchase the Montebello property without waiting to reach a joint venture agreement with Arciero. SCS decided it was worth the risk of being able to work out a deal with Arciero subsequent to a commitment to acquire the property upon an evaluation that the land was worth $2,030,000 and that SCS would always be able to locate another interested builder.

On April 8, 1970, Watson again suggested the possibility of a joint venture to Richard. Richard repeated his earlier position that SCS could not enter into a joint venture with Joseph until Arciero indicated he was no longer interested.

During a meeting on April 10, 1970, Joseph's attorneys suggested another version of a joint venture arrangement for the development of the property. The proposal called for Joseph to contribute one-half of the land value and to construct the improvements, while SCS would contribute the other half of the land value and would finance all construction and development costs. Childs responded that Arciero insisted on being involved in any deal. Joseph's lawyers thereupon suggested Arciero be responsible for the planning, supervision and sale of the development (in return for a management fee) and also do the actual construction work on the “R-1” portion of the property.

On April 15, 1970, Richard advised Watson that Arciero did not want to be restricted to building only on the “R-1” portion of the property and also that Arciero wanted a share of the profit. Taking these demands into account, SCS could only afford to become involved if more interest were charged or if SCS's share of profits was substantially increased over the 50 percent previously agreed upon. Watson responded later in the day that it appeared no venture could be worked out on mutually satisfactory...