Gerber v. Comm'r of Internal Revenue, Docket No. 60355.

• Decision Date: 18 September 1959
• Docket Number: Docket No. 60355.
• Citation: 32 T.C. 1199
• Parties: ERWIN GERBER AND RUTH B. GERBER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 1199

ERWIN GERBER AND RUTH B. GERBER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 60355.

Tax Court of the United States.

Filed September 18, 1959.

Murray M. Weinstein, Esq., for the petitioners.

John J. Hopkins, Esq., for the respondent.

Assuming that the issue is properly before the Court, petitioners' contention that at least 30 per cent of the gain recognized upon sales of their stock in ‘collapsible’ corporations was attributable to increases in the value of land, wholly apart from apartment houses constructed thereon, is rejected. Sec. 117(m)(3)(B), I.R.C. 1939; held, accordingly, that the gains recognized by petitioners were properly to be considered as gains attributable to property which is not a capital asset.

OPINION.

RAUM, Judge:

Petitioners, husband and wife, filed a joint income tax return for the calendar year 1950 with the collector of internal revenue for the district of New Jersey. The Commissioner determined a deficiency in the amount of $39,051.42, based upon four adjustments, three of which are not contested. The fourth treated a gain of $68,906.38 that was realized upon the sale of stock in three corporations as ordinary income under section 117(m) of the Internal Revenue Code of 1939 rather than as long-term capital gain, as reported in the income tax return.

After the pleadings had been filed, the trial of this case was continued four separate times on petitioners' motions. The second, third, and fourth of those motions were on the ground that there were pending for decision various other cases involving basically the same issues presented in the instant proceeding, and the decisions in those cases might well result in the elimination of any need for trial in the present case. The second motion referred to five specific cases pending in this Court. The third motion referred to four cases pending in the Court of Appeals, and stated as follows:

2. There are presently pending for decision by three different Circuit Courts of Appeal at least four appeals (with the argument date of the appeal set forth in parentheses):

Burge v. Commissioner, Fourth Circuit (Jan. 17, 1958)

Weil v. Commissioner, Second Circuit (week of Feb. 3, 1958)

Glickman v. Commissioner, Second Circuit (week of Feb. 3, 1958)

Abbott v. Commissioner, Third Circuit (March 1958)

The opinions rendered on these appeals, particularly the first three cases above listed, because they involve basically the same issues presented in the instant proceeding, may well result in the elimination of any need for the trial of this proceeding.

The fourth motion referred to the same four cases mentioned in the third motion, noted that two of them had already been argued, and made somewhat similar representations about the possibility of eliminating any need for trial of the instant proceeding.

All four of those cases have been decided adversely to the petitioners therein. Burge v. Commissioner, 253 F.2d 765 (C.A. 4), affirming 28 T.C. 246; Weil v. Commissioner, 252 F.2d 805 (C.A. 2), affirming per curiam 28 T.C. 809; Glickman v. Commissioner, 256 F.2d 108 (C.A. 2), affirming a Memorandum Opinion of this Court; Abbott v. Commissioner, 258 F.2d 537 (C.A. 3), affirming 28 T.C. 795. And every ground outlined in petitioners' pleading herein as to the inapplicability of section 117(m) has been adjudicated adversely to their position in at least one or more of those cases. Moreover, decisions have been rendered in still other cases reaching similar results. Arthur Sorin, 29 T.C. 959, on appeal (C.A. 2); Carl B. Rechner, 30 T.C. 186; Elizabeth M. August, 30 T.C. 969, affirmed 267 F.2d 829 (C.A. 3); Leland D. Payne, 30 T.C. 1044, affirmed 268 F.2d 617 (C.A. 5); Rose Sidney, 30 T.C. 1166, on appeal (C.A. 2); R. A. Bryan, 32 T.C. 104; Max Mintz, 32 T.C. 723; C. D. Spangler, 32 T.C. 782; Lewis S. Jacobson, 32 T.C. 893; Ellsworth J. Sterner, 32 T.C. 1144.

In view of the various adjudications petitioners do not deny that each of the three corporations was ‘collapsible’ within the meaning of section 117(m)(2) (A); they argue instead that the provisions of section 117(m) are nonetheless inapplicable by reason of the limitation in section 117(m)(3)(B) which provides:

(3) LIMITATIONS ON APPLICATION OF SUBSECTION.— In the case of gain realized by a shareholder upon his stock in a collapsible corporation—

(B) this subsection shall not apply to the gain recognized during a taxable year unless more than 70 per centum of such gain is attributable to the property so manufactured, constructed, produced, or purchased; and

No such issue is presented in the pleadings. Under our rules the petitioner must clearly set forth each assignment of error and must allege facts to support each assignment.¹ It is true that paragraph 4 of the petitioner alleges generally that the Commissioner erred in holding that the gain in question was ‘ordinary income under the provisions of 117(m) of the Internal Revenue Code of 1939.’ But paragraph 5, which recites the factual allegations in support of the assignment of error in paragraph 4, contains nothing whatever pertaining to section 117(m)(3)(B), the issue which petitioners now seek to present to the Court. To the contrary, all the allegations in the petition are directed toward issues of the type that were considered and adjudicated contrary to petitioners' position in the cases cited above. However, in view of the fact that the respondent was apparently prepared at the trial to litigate the new issue, and presented evidence in connection therewith, we think he was not prejudiced by the state of the pleadings, and, since he does not press the point, we will treat the issue as being properly before us. We have therefore examined the merits of that issue, but are of the opinion that petitioners have failed to bring themselves within the exception spelled out in section 117(m)(3)(B).

The principal facts relating to that issue have been stipulated. It becomes necessary to make one additional finding, which we hereby make, namely, that more than 70 per cent of the gain realized upon the sale of the stock in each of the three corporations was attributable to the property constructed. The stipulated facts and the evidence leading to the foregoing finding will be discussed briefly.

Erwin Gerber has been a practicing architect for 33 years, specializing in apartment houses. From 1935 to 1944 he was employed by the Federal Housing Administration (FHA) as deputy chief architect and also as chief architect in charge of FHA-insured apartment buildings. He described his present firm as ‘probably the biggest firm of apartment house architects in the country.’

During 1948 petitioners and others organized three corporations for the purpose of constructing 3-story apartment houses in East Orange, New Jersey. Financing was to be obtained on the basis of FHA-insured mortgages, pursuant to section 608 of the National Housing Act. Such apartment houses differed from the so-called garden-type apartment developments that are usually located in the suburbs, and they also differed from the taller, elevator, so-called luxury-type apartment buildings. Each of the three corporations took its name from the address of the particular project in East Orange, namely, Sixty-Six Melmore Gardens, Inc., 444 Prospect Street Corp., and 266 South Harrison Street Corp. Gerber appears to have been the dominant figure in each of these corporations.

266 South Harrison Street Corp. was organized on or about March 4, 1948. Of the 25 shares of common stock issued, 1 share was issued to Gerber, 23 shares to his wife, and 1 share to a relative. On or about April 24, 1948, the corporation acquired land at 266 South Harrison Street, East Orange, New Jersey, at a cost of $22,000. Pursuant to a mortgage insurance commitment issued by FHA on March 22, 1948, the corporation constructed a 102-room apartment house on the land. Petitioners and the other stockholder sold their stock in this corporation on December 31, 1950; the aggregate gain realized on the sale was $40,813.14 of which $39,180.61 (96 per cent) was allocable to petitioners and $1,632.53 (4 per cent) to the other stockholder. Thirty per cent of the aggregate gain realized on the sale of this stock is $12,243.94.

Sixty-Six Melmore Gardens, Inc., was organized by Gerber and 3 business associates on or about March 4, 1948. Each of the 4 organizers owned 25 per cent of the common stock. On June 28, 1948, the corporation acquired land at 66 Melmore Gardens, East Orange, New Jersey, for $9,340. Pursuant to a mortgage insurance commitment issued by FHA on February 23, 1949, the corporation constructed a 135-room apartment house on the land. Gerber and the 3 other stockholders sold their stock on December 31, 1950, realizing an aggregate gain of $38,154.76, or a gain of $9,536.69 to each of them. Thirty per cent of the aggregate gain realized on the sale of stock is $11,446.43.

444 Prospect Street Corp. was organized on or about July 1, 1948. Of the 10 shares of common stock issued, Gerber owned 1 share, his wife owned 8 shares, and the remaining share was owned by a relative. On or about July 8, 1948, the corporation acquired land located at 444 Prospect Street, East Orange, New Jersey, for $11,000. Pursuant to a mortgage insurance commitment issued by FHA on April 7, 1948, the corporation constructed a...