Concord Village, Inc. v. Comm'r of Internal Revenue, Docket No. 2778-70.

• Decision Date: 28 October 1975
• Docket Number: Docket No. 2778-70.
• Citation: 65 T.C. 142
• Parties: CONCORD VILLAGE, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

65 T.C. 142

CONCORD VILLAGE, INC., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2778-70.

United States Tax Court

Filed October 28, 1975.

[65 T.C. 143]

William Lee McLane, for the petitioner.

Dennis C. DeBerry, for the respondent.

Petitioner is a nonstock, not-for-profit, housing cooperative corporation organized and operated for the benefit of its members. It is subject to Federal Housing Administration (FHA) regulations. When a member of petitioner sells his membership (i.e., his proprietary interest), he must forfeit to petitioner any part of the selling price which exceeds an FHA-specified ‘transfer value.’ Held, for forfeitures are gain to it and includable in its gross income under 61(a). General American Investors Co., 19 T.C. 581 (1952), affd. 211 F.2d 522 (2d Cir. 1954), affd. 348 U.S. 434 (1955).

FHA regulations require petitioner to establish and maintain a replacement reserve and a general operating reserve, both of which are funded from monthly carrying charges. No amounts accumulated therein may be distributed back to petitioner's members until minimum accumulations set by regulatory agreement with the FHA are satisfied. In each of the years in issue, accumulations in of said reserves exceeded the minimum requirements, but no funds were distributed back to petitioner's members. Petitioner also accumulated funds in a painting reserve as recommended but not required by the FHA. Held, petitioner must include in gross income all the funds accumulated in the painting reserve, Park Place, Inc., 57 T.C. 767 (1972), followed, and such funds are not contributions to capital. Held, further, that all amounts accumulated in the replacement reserve are contributions to capital excludable from petitioner's gross income under sec.118. Held, further: That petitioner must include in gross income all amounts accumulated in the general operating reserve, Park Place, Inc., supra, followed as to amounts accumulated beyond minimum FHA requirements; Park Place, Inc., supra, distinguished as to amounts accumulated to satisfy FHA requirements but petitioner was neither a custodian nor a trustee of such funds. Ford Dealers Advertising Fund, Inc., 55 T.C. 761 (1971), distinguished. Commissioner v. Glenshaw Glass Co., 348 U.S.426 (1955). Said funds are not contributions to capital.

FORRESTER, Judge:

Respondent has determined deficiencies in petitioner's income tax as follows:

+---------------------------+
                ¦TYE Oct. 31— ¦Amount ¦
                +-----------------+---------¦
                ¦ ¦ ¦
                +-----------------+---------¦
                ¦1965 ¦$3,170.00¦
                +-----------------+---------¦
                ¦1966 ¦6,888.00 ¦
                +-----------------+---------¦
                ¦1967 ¦9,243.00 ¦
                +-----------------+---------¦
                ¦1968 ¦35,527.30¦
                +---------------------------+
                

Concessions having been made, two issues that involve the taxable years 1966, 1967, and 1968 remain for our decision: (1) Whether a portion of the monthly carrying charges collected by petitioner, a cooperative housing corporation within the meaning of section 216,¹ from its member-occupants and not spent, but accumulated in certain reserve accounts as required or recommended by Federal Housing Administration regulations, is includable in petitioner's gross income; (2) whether amounts

[65 T.C. 144]

forfeited to petitioner by members on certain sales of memberships are includable in petitioner's gross income.

FINDINGS OF FACT

All of the facts have been stipulated and are so found.

Petitioner Concord Village, Inc. (sometimes hereinafter referred to as Concord), is a not-for-profit corporation formed under the laws of Arizona having its principal office at Tempe, Ariz. Petitioner filed its corporate income tax returns (Form 1120) for the years involved with the District Director of Internal Revenue, Phoenix, Ariz.

In the early 1960's a building contractor corresponded with the Foundation for Cooperative Housing (foundation) seeking an agreement to erect a cooperative housing development. The foundation is organized and operated for the purpose of promoting housing cooperatives, and is exempt from Federal income tax under section 501(c)(3).

An application was submitted to the local Federal Housing Administration (FHA) insuring office to form a cooperative housing development under section 221(d) (3), title II, National Housing Act (hereinafter NHA sec. 221(d)(3)), 12 U.S.C. sec. 1715 1(d)(3). NHA sec. 221(d)(3) housing cooperatives, including Concord, provide dwellings for families displaced from urban renewal areas or as a result of governmental action, and for families with moderate and low incomes. The FHA determined the project to be feasible.

Concord is a nonstock cooperative housing corporation organized and operated exclusively for the benefit of its members as a low-cost housing development. There are no commercial establishments on Concord's land. Petitioner was incorporated without any assets and with the trustees of the foundation acting as its board of directors.

The construction of Concord was initiated through F. C. Housing Co., Inc. (Housing), sponsored by the trustees of the foundation. Land and necessary rezoning had already been obtained at the building contractor's own expense. Construction financing commitments were made with an Arizona bank.

The FHA, pursuant to NHA sec. 221(d)(3), provided Concord with mortgage insurance enabling Concord to obtain a mortgage loan at 3 3/8-percent interest to be repaid over 50 years. Concord and the FHA executed a regulatory agreement which provided

[65 T.C. 145]

the terms and conditions governing the mortgage insurance. Petitioner operates as any other housing cooperative with one important exception in that, by agreement, ultimate authority to regulate Concord resides in the FHA.

The FHA may foreclose petitioner's mortgage, assume management of the cooperative, or institute legal proceedings should petitioner break any of the terms of the regulatory agreement. Petitioner has complied with the guidelines and regulations applicable to NHA sec. 221(d)(3) cooperatives imposed by the FHA.

Housing began a program to presell the cooperative units, insuring that the marketing procedures complied with all FHA standards and requirements. Even though petitioner was incorporated, its charter, bylaws, all contracts, brochures, and insurance policies required FHA approval. All of the accounting procedures utilized by Concord were required, suggested, or approved by the FHA.

Simultaneously, the building contractor began construction of the recreational facilities, including a clubhouse, a pool, and several model units to aid the sales program. Petitioner is comprised of six sections, each containing one, two, three, and four bedroom dwelling units. Each section was constructed and financed separately. When Housing had presold 90 percent of the units in any one of the six proposed sections of petitioner, an initial closing took place.

Concord then bought the land involved from the building contractor and made mortgage arrangements for the section through the FHA and the Government National Mortgage Association or the Federal National Mortgage Association. After the initial closing, the building contractor constructed the dwelling units in each section.

In order to purchase and reside in any of petitioner's dwelling units, one must become a member of Concord. A prospective member had to meet FHA-established maximum income limitations. A prospective member would apply by submitting a ‘credit application form,‘ executing a subscription agreement, and paying a fee of $50.² In executing a subscription agreement each prospective member would ratify Concord's charter and bylaws which incorporate the regulatory agreement by specific

[65 T.C. 146]

reference. The $50 fee would be deposited in a special subscription account; the credit application and subscription agreement would be submitted to the FHA for approval.

While a section was being completed, units or portions were occupied, which generated subscription agreement fees, occupancy agreement fees, and monthly carrying charges that in turn were held in trust for petitioner.

The occupancy agreement fee was normally $230 and was paid by a member upon execution of an occupancy agreement shortly before occupying his dwelling. The subscription agreement fee together with the occupancy agreement fee were intended to be the member's downpayment on his proprietary interest in petitioner.

The occupancy agreement was the member's contract with Concord governing the parties' correlative rights and duties. The term of this agreement was 3 years, and it was automatically renewed unless the member elected to terminate at least 4 months prior to the expiration of the agreement.

When the units in each section were completed and occupied and FHA approval obtained, a final closing took place at which time Concord obtained title to that section of the cooperative and controlled the activities of that section. At the completion of the entire project, Concord owned all of the units and controlled their activities. Although petitioner's articles of incorporation state that it shall have 384 members, all of one class, petitioner in fact constructed only 373 dwelling units and therefore has only 373 members.

Petitioner's members elect their own board of directors to conduct corporate activities. Concord's board meets monthly. It sets Concord's general policy within the framework of the bylaws and the regulatory agreement, and has several subcommittees. Concord's officers are elected by the board from among its members.

During the period between the initial and final closing of each section of petitioner, interim financing was made available through a local bank to Housing to provide the funds necessary to meet all of petitioner's financial obligations. When each final closing took place, Housing elected pursuant to FHA regulations to place in the replacement reserve any excess over expenses, of the interim financing funds, of occupancy agreement fees, and of

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