Condor Int'l, Inc. v. Comm'r of Internal Revenue

• Decision Date: 26 February 1992
• Docket Number: Docket Nos. 37194-87,39983-87.
• Citation: 98 T.C. 203,98 T.C. No. 16
• Parties: CONDOR INTERNATIONAL, INC., N.K.A. APPLIED RESOURCES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentJAMES E. WELSH AND NANCY S. WELSH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

98 T.C. 203

98 T.C. No. 16

CONDOR INTERNATIONAL, INC., N.K.A. APPLIED RESOURCES, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, RespondentJAMES E. WELSH AND NANCY S. WELSH, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 37194-87

39983-87.

United States Tax Court

Filed February 26, 1992.

During 1984, C was an investment company incorporated under the laws of Delaware. C's principal place of business was located in the United States Virgin Islands (USVI). C never engaged in a trade or business, owned equipment or rented office space in the USVI. C maintained a mailing address in the USVI and a certificate of deposit and checking account in a USVI bank. C's records were located at its director's office in the USVI. Annual meetings of the shareholders and the director were held in the USVI. With the exception of interest on the certificate of deposit, C's entire income was from United States sources. Claiming it was an inhabitant of the USVI, C filed an income tax return for taxable year ending May 31, 1984, with the USVI Bureau of Internal Revenue (BIR) under the Revised Organic Act of the Virgin Islands, ch. 558, sec. 28(a), 68 Stat. 497, 508 (1954). C did not file a Federal income tax return for such taxable year with the IRS. C reported income from United States sources for such taxable year exceeding $4 million, but it paid no taxes to the BIR on such income. R determined deficiencies in and additions to C's Federal income tax for such taxable year.

We owned all of the stock of C and 75-80 percent of the stock of A. The shareholders of A located a buyer for the A stock and negotiated the sale of the A stock with the buyer. C received the consideration for the sale of A stock and reported the gain on its income tax return for taxable year ending May 31, 1984, filed with the BIR, contending that C was the owner of the A stock at the time of the sale. We did not report or pay any tax on such gain from the sale of the A stock.

HELD: C is an inhabitant of the USVI.

HELD FURTHER: Under secs. 1275(b) and 1277(c)(2) of the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085, C was required to file a Federal income tax return with the IRS for taxable year ending May 31, 1984, and, because C failed to do so, the period of limitations is not a bar to the assessment of Federal income tax against C by the IRS.

HELD FURTHER: Secs. 1275(b) and 1277(c)(2) of TRA 1986 neither create a retroactive tax, nor violate the due process clause of the Fifth Amendment.

HELD FURTHER: C failed to prove that it is not a personal holding company under sec. 541.

HELD FURTHER: C failed to prove that it is not subject to the alternative minimum tax under sec. 56.

HELD FURTHER: Ws must report tax from the gain on the sale of the A stock.

HELD FURTHER: Ws are not entitled to a deduction for their share of a partnership distributive loss.

HELD FURTHER: C and Ws are liable for additions to tax under sec. 6651(a)(1).

HELD FURTHER: C and Ws are liable for additions to tax under secs. 6653(a)(1) and (2).

HELD FURTHER: C and Ws are liable for additions to tax under sec. 6661(a).

HELD FURTHER: C is not liable for an addition to tax under sec. 6655. William A. Seligmann, for petitioners. *

James M. Kamman and Alice Harbutte, for respondent.

WELLS, JUDGE:

In the instant consolidated proceedings (the instant case) respondent determined the following deficiencies in and additions to petitioners' Federal income tax:

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                ¦Condor International, Inc.  ¦
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                ¦   ¦   ¦   ¦   ¦   ¦   ¦    ¦
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 Additions to tax
                Sec. Sec. Sec. Sec. Sec
                Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2) 6655 6661(a)  
                1984   $1,462,800.62 $365,720.16  $73,144.03   1            $78,218.87 $365,720.16
                

* Briefs amici curiae were filed for E.C. Development Corp., Falstone, Inc., Pinetta & Hong Kong, LTD., and Taconic Plastics, LTD. by Michael Savage, attorney; St. Christine, Inc. and Jebadabe International, Inc. by William Bruce Voss, attorney; and by Arthur P. Generaux, Jr., who has entered appearances for taxpayers in 67 other cases in the project.

Sec. 882(a) Imposition of Tax

(1) In General. -- A foreign corporation engaged in trade or business within the Virgin Islands during the taxable year shall be taxable as provided in section 11, 55, 59A or 1201(a) on its taxable income which is effectively connected with the conduct of a trade or business within the Virgin Islands.

(A) IN GENERAL. -- The amendment made by section 1275(b) shall apply with respect to --

(i) any taxable year beginning after December 31, 1986, and

(ii) any pre-1987 open year.

* * * *

(C) PRE-1987 OPEN YEAR. -- For purposes of this paragraph, the term “pre-1987 open year” means any taxable year beginning before January 1, 1987, if on the date of the enactment of this Act the assessment of a deficiency of income tax for such taxable year is not barred by any law or rule of law.

(D) EXCEPTION. -- In the case of any pre-1987 open year, the amendment made by section 1275(b) shall not apply to any domestic corporation if --

(i) during the fiscal year which ended May 31, 1986, such corporation was actively engaged directly or through a subsidiary in the conduct of a trade or business in the Virgin Islands and such trade or business consists of business related to marine activities, and

(ii) such corporation was incorporated on March 31, 1983, in Delaware.

(E) EXCEPTION FOR CERTAIN TRANSACTIONS. --

(i) IN GENERAL. -- In the case of any pre-1987 open year, the amendment made by section 1275(b) shall not apply to any income derived from transactions described in clause (ii) by 1 or more corporations which were formed in Delaware on or about March 6, 1981, and which have owned 1 or more office buildings in St. Thomas, United States Virgin Islands, for at least 5 years before the date of the enactment of this Act.

(ii) DESCRIPTION OF TRANSACTIONS. -- The transactions described in this clause are --

(I) the redemptions of limited partnership interests for cash and property described in an agreement (as amended) dated March 12, 1981,

(II) the subsequent disposition of the properties distributed in such redemptions, and

(III) interest earned before January 1, 1987, on bank deposits of proceeds received from such redemptions to the extent such deposits are located in the United States Virgin Islands.

(iii) LIMITATION. -- The aggregate reduction in tax by reason of this subparagraph shall not exceed $8,312,000. If the taxes which would be payable as the result of the application of the amendment made by section 1275(b) to pre-1987 open years exceeds the limitation of the preceding sentence, such excess shall be treated as attributable to income received in taxable years in reverse chronological order.

Tax Court, 1992.

Condor Intern., Inc. v. C.I.R.98 T.C. No. 16, 98 T.C. 203, Tax Ct. Rep. (CCH) 48,032, Tax Ct. Rep. Dec. (RIA) 98.16

1 50 percent of the interest due on the deficiency.

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                ¦James E. Welsh and Nancy S. Welch  ¦
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                ¦     ¦     ¦     ¦     ¦     ¦     ¦
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 Additions to tax
                Sec. Sec. Sec. Sec
                Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2) 6661(a)  
                1983   $808,659     $201,461     $41,096      1            $202,165
                

Unless otherwise noted, all section references are to the Internal Revenue Code, in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

After concessions and stipulations between the parties, the issues remaining for our decision in the instant case are: (1) Whether petitioner, Condor International, Inc. N.K.A. Applied Resources, Inc. (Condor) was an inhabitant of the United States Virgin Islands (USVI) within the meaning of section 28(a) of the Revised Organic Act of the Virgin Islands during the taxable year ending May 31, 1984; (2) whether the period of limitations with respect to Condor's taxable year ending May 31, 1984, expired prior to the issuance of the notice of deficiency to Condor by respondent for such taxable year; (3) whether sections 1275(b) and 1277(c)(2) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, create a retroactive tax or violate the Due Process Clause of the Fifth Amendment; (4) whether Condor is a personal holding company; (5) whether Condor is subject to the alternative minimum tax; (6) whether Condor must report the gain on a sale of certain stock or whether the individual petitioners James E. Welsh and Nancy S. Welsh (the Welshes) must report the gain on such sale; (7) whether the Welshes are entitled to deduct their share of a distributive loss from executive CoachCraft Limousine Division limited partnership; and (8) whether petitioners are liable for the additions to tax determined by respondent.

FINDINGS OF FACT

Some of the facts have been stipulated for trial pursuant to Rule 91. The stipulations and accompanying exhibits are incorporated in this Opinion by this reference.

PETITIONERS

Condor was incorporated under the name Condor International, Inc. but is now known as Applied Resources, Inc. At the time its petition was filed, Condor's principal place of business was located in California. The parties have stipulated that venue for the purpose of appeal of the instant case lies with the Court of Appeals for the Ninth Circuit.

The Welshes are husband and wife. At the time their petition was filed they resided in Rolling Hills, California.

CONDOR INTERNATIONAL. INC.

The Welshes organized Condor under the laws of Delaware on August 18, 1981, with a $1,000.00 cash contribution for 1000 shares of stock. During all relevant periods, the Welshes, together with their children, were the beneficial owners of 100 percent of Condor's issued and outstanding stock. The Welshes intended to make the USVI Condor's principal place of business.

Prior to the organization of...