Dibsy v. Commissioner
| Decision Date | 04 October 1995 |
| Docket Number | Docket No. 16466-93. |
| Citation | 70 T.C.M. 918 |
| Parties | Julius and Hanan Dibsy v. Commissioner. |
| Court | U.S. Tax Court |
Julius Dibsy, pro se. Roy Wulf, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in petitioners' 1989 Federal income tax of $34,079 and additions to tax under sections 66541 and 6662(a) in the amounts of $191 and $6,816, respectively. The issues for our consideration are: (1) Whether petitioners are entitled to defer, as a like-kind exchange, the income realized on the sale of their liquor store; (2) whether petitioners are liable for the addition to tax for failure to make estimated income tax payments; and (3) whether petitioners are liable for the addition to tax for substantial understatement of income tax.
Petitioners, at all pertinent times, were married, and they resided in Westminster, California, at the time their petition in this case was filed. Julius and Hanan Dibsy (petitioners) have been in the business of owning and operating liquor stores. On January 17, 1986, petitioners purchased a liquor store in Huntington Beach, California, from William D. Hanshaw (Hanshaw). Petitioners changed the name of the store from "Hoovs Hut Liquor #4" to "Sunshine Liquor". Petitioners paid $210,000 for the noninventory assets of Sunshine Liquor.
During 1988, petitioners entered into discussions with Hanshaw about obtaining a store with a larger volume of sales. Petitioners learned that Hanshaw might sell "Bayshore Liquor", a liquor store located in Seal Beach, California. Consequently, petitioners immediately listed Sunshine Liquor for sale. On or about March 23, 1988, they entered into an agreement to sell the noninventory assets of Sunshine Liquor to Sathit and Supin Sathavoran. On March 31, 1988, petitioners agreed to purchase Bayshore Liquor from Hanshaw, and they gave him $10,000 in "earnest money". On or about August 16, 1988, the Sathavorans notified petitioners that they would not purchase Sunshine Liquor.
Petitioners requested that Hanshaw release them from the purchase of Bayshore Liquor. Hanshaw refused to return the $10,000 "earnest money" and also refused to purchase Sunshine Liquor from petitioners. However, Hanshaw allowed petitioners to defer payment of a portion of the purchase price for Bayshore Liquor by petitioners' issuing a note to Hanshaw in the amount of $150,000 plus interest, which was secured by the assets of Sunshine Liquor.
On October 5, 1988, petitioners purchased Bayshore Liquor from Hanshaw for $434,593.82. Petitioners financed the purchase as follows:
Seller ...................... $ 50,861.94
Demand note ................. 75,000.00
Note to Hanshaw1 ............ 150,000.00
Credits through escrow ...... 1,863.81
Check ....................... 156,868.07
___________
Total ................... 434,593.82
1 The note was due in 1 year, or upon the earlier
sale of Sunshine Liquor
On March 31, 1989, petitioners sold Sunshine Liquor to Mr. and Mrs. Nam Kyun and Sun Cha Shin for $286,423.63. This price was allocated as follows:
Inventory ................... $ 39,827.71
Other store assets .......... 242,500.00
Lease deposit adjustment .... 3,800.00
Other ....................... 295.92
___________
Total ................... 286,423.63
Petitioners then disbursed the funds from the sale as follows:
Payment of note to W. Hanshaw ............................................ $ 46,641.16
Interest on above note to Hanshaw1 ....................................... 108.83
Payment of note to W. Hanshaw ............................................ 158,850.00
Interest on above note to Hanshaw ........................................ 900.15
Note to petitioners from purchasers ...................................... 43,150.00
Inventory service ........................................................ 249.14
Escrow and closing costs ................................................. 1,639.55
Creditors' claims paid ................................................... 8,843.38
State Board of Equalization .............................................. 19,483.57
Payoffs of preexisting loans ............................................. 6,557.85
___________
Total ................................................................ 286,423.63
1 We assume that "W. Hanshaw" and "Hanshaw" are both one and the same person discussed elsewhere
In connection with Sunshine Liquor, petitioners claimed a total of $100,547 as depreciation and amortization expenses during 1986, 1987, and 1988. Their basis in the noninventory of Sunshine Liquor was $109,453 on March 31, 1989. The selling price of these assets was $242,500.
From October 5, 1988, until March 31, 1989, petitioners operated both Sunshine Liquor and Bayshore Liquor, and they were entitled to any profits earned by either store. The parties agree that if section 1031 does not apply to the disposition of Sunshine Liquor, then petitioners must recognize a long-term capital gain of $133,047 on the transaction.
OPINIONRespondent concluded that the purchase of one liquor store and subsequent sale of another by petitioners were two separate taxable events. Accordingly, respondent determined that petitioners should have reported a long-term capital gain from the sale of Sunshine Liquor. Petitioners agree that, in form, a separate sale and purchase occurred. They contend, however, that in substance and when considered together, the transactions resulted in a section 1031 like-kind exchange. Petitioners' failure to include the capital gain as income is justified if section 1031 is applicable.
Section 1001(c) generally requires that the entire amount of gain or loss on the sale or exchange of property shall be recognized. Section 1031(a)(1), however, provides for the nonrecognition of such gain or loss when "property held for productive use in a trade or business or for investment * * * is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."
The parties disagree on whether petitioner "exchanged" Sunshine Liquor for Bayshore Liquor.2 Petitioners bear the burden of establishing that respondent's determination is erroneous. Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933).
Essentially, section 1031 assumes that new property received in an exchange is "`substantially a continuation of the old investment'". Commissioner v. P.G. Lake, Inc. [58-1 USTC ¶ 9428], 356 U.S. 260, 268 (1958) (quoting section 39.112(a)-1), Income Tax Regs. (), and analyzing a tax-free exchange under section 112(b)(1) of the 1939 Code, a predecessor of section 1031). In an exchange of like-kind property, "the taxpayer's economic situation after the exchange is fundamentally the same as it was before the transaction occurred." Koch v. Commissioner [Dec. 35,480], 71 T.C. 54, 63 (1978). The U.S. Court of Appeals for the Fourth Circuit in Coastal Terminals, Inc. v. United States [63-2 USTC ¶ 9623], 320 F.2d 333, 337 (4th Cir. 1963), stated:
The purpose of Section 1031(a), as shown by its legislative history, is to defer recognition of gain or loss when a direct exchange of property between the taxpayer and another party takes place; a sale for cash does not qualify as a nontaxable exchange even though the cash is immediately reinvested in like property.
See also Magneson v. Commissioner [85-1 USTC ¶ 9205], 753 F.2d 1490, 1494 (9th Cir. 1985), affg. [Dec. 40,557] 81 T.C. 767 (1983);3 Starker v. United States [79-2 USTC ¶ 9541], 602 F.2d 1341, 1352 (9th Cir. 1979). In Barker v. Commissioner [Dec. 37,002], 74 T.C. 555, 561 (1980), this Court noted:
The "exchange" requirement poses an analytical problem because it runs headlong into the familiar tax law maxim that the substance of a transaction controls over form. In a sense, the substance of a transaction in which the taxpayer sells property and immediately reinvests the proceeds in like-kind property is not much different from the substance of a transaction in which two parcels are exchanged without cash. Bell Lines, Inc. v. United States [73-2 USTC ¶ 9524], 480 F.2d 710, 711 (4th Cir. 1973). Yet, if the exchange requirement is to have any significance at all, the perhaps formalistic difference between the two types of transactions must, at least on occasion, engender different results. Accord, Starker v. United States [79-2 USTC ¶ 9541], 602 F.2d, 1341, 1352 (9th Cir. 1979).
Courts have afforded some latitude in structuring exchange transactions. See, e.g., Magneson v. Commissioner, supra (); Starker v. United States, supra at 1354-1355 ();4 Alderson v. Commissioner [63-2 USTC ¶ 9499], 317 F.2d 790, 793 (9th Cir. 1963), revg. [Dec. 25,492] 38 T.C. 215 (1962) (); Barker v. Commissioner, supra at 562 (); Biggs v. Commissioner [Dec. 35,035], 69 T.C. 905, 913-914 (1978); affd. [81-1 USTC ¶ 9114] 632 F.2d 1171 (5th Cir. 1980) (); 124 Front Street, Inc. v. Commissioner [Dec. 33,448], 65 T.C. 6, 17-18 (1975) (); Coupe v. Commissioner [Dec. 29,610], 52 T.C. 394, 405, 409 ...
To continue reading
Request your trial