Brudno v. Commissioner of Internal Revenue

• Decision Date: 29 November 1943
• Docket Number: No. 9492.,9492.
• Citation: 138 F.2d 779
• Parties: BRUDNO et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

138 F.2d 779 (1943)

BRUDNO et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9492.

Circuit Court of Appeals, Sixth Circuit.

November 29, 1943.

Irwin N. Loeser, of Cleveland, Ohio (Ezra Brudno and Irwin N. Loeser, both of Cleveland, Ohio, on the brief), for petitioners.

Irving Axelrod, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Samuel H. Levy, and Irving I. Axelrod, all of Washington, D. C., on the brief), for respondent.

Before SIMONS, MARTIN, and McALLISTER, Circuit Judges.

McALLISTER, Circuit Judge.

Petitioners, husband and wife, were owners of several apartment buildings. About 1929, they owed approximately $70,000 to various banks. The debt was unsecured and, upon demands from the creditors, petitioners borrowed $78,000 from the mother of Mrs. Brudno. Thereafter, they required additional funds from her and, in order to procure them, offered security in the form of a mortgage, which was not acceptable. It was finally agreed that petitioners would form a corporation, exchanging their real estate properties, consisting of the apartment buildings, for stock, and that the stock would be hypothecated as security for the loan. This was done. It may be observed that a mortgage and an additional incorporation were involved as to two of the apartment buildings; but these transactions do not affect determination of the issue here and, accordingly, reference will be made only to the effect of the matters above recited, inasmuch as they are controlling.

All the stock of the corporation was owned by petitioners. In 1937, they borrowed sufficient money to repay the loan; the corporation was then dissolved; and title to the apartment buildings transferred back to petitioners.

From 1934 to 1937, inclusive, the buildings were carried on the tax roll of Cuyahoga County, Ohio, in the name of the corporation; and during this period, corporation income and excess profits tax returns were filed on behalf of the corporation. The returns reported all gross income and deductions arising from the operation of the apartment buildings; and the corporation also paid franchise taxes to the State of Ohio. During this period, petitioners did not report in their individual or joint tax returns, any of the gross income or deductions on account of the apartment buildings. It was always understood that upon repayment of the above-mentioned loan, the corporation would be dissolved, and the property returned to petitioner.

In 1938, petitioners paid the real estate taxes on the apartment properties for 1937, which became a lien thereon during that year. During 1937, the title to the properties was in the name of the corporation and was not transferred back to petitioners until the corporation was dissolved in 1938. The Commissioner denied petitioners a deduction on their personal income taxes for payment of the 1937 real estate taxes on the corporate property, which they paid in 1938, on the ground that taxes are deductible only by the person upon whom they are imposed. Art. 23(c)-1, Treasury Regulations 101, promulgated under the Revenue Act of 1938.

On appeal, it is the contention of petitioners that the corporate entity should be disregarded and that they should be given credit on their personal income tax returns for the amount paid. Their argument is posited upon the ground that they owned all of the stock of the corporation; that the purpose of the incorporation was solely to give security for the debts which they owed personally; and that they were, in fact, the owners of the apartment buildings at the time the real estate taxes became due, and should be considered the persons upon whom the real estate taxes were imposed.

To sustain the decision of the Board, counsel for the Government mainly rely upon Moline Properties, Inc., v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L. Ed. 1499. There, an owner of real estate organized a corporation in...