Gibson v. Comm'r of Internal Revenue
| Decision Date | 16 December 1987 |
| Docket Number | Docket No. 16867-83 |
| Citation | 89 T.C. 1177,89 T.C. No. 83 |
| Parties | JOSEPH H. GIBSON AND GLORIA I. GIBSON, AND ABC, INCORPORATED, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps (individuals and their wholly owned corporation) sold real estate and a day-care center and nursery school business in 1979 for $175,000, receiving $10,000 of the sales price that year. Ps did not report the sale or the receipt of the $10,000 on their 1979 individual or corporate returns. On their 1980 returns, Ps reported the sale (reporting only the balance of $165,000) as a closed transaction that year. After audit, Ps filed amended 1979 returns, reporting the full sales price of $175,000 and attempting to elect the installment method of reporting their gain.
Mark E. Rizik, for the respondent.
Respondent determined deficiencies in petitioners' respective individual and corporate Federal income tax as follows:
+------------------------------------+
¦Taxpayer ¦Year¦Deficiency¦
+--------------------+----+----------¦
¦Joseph H. Gibson and¦ ¦ ¦
+--------------------+----+----------¦
¦Gloria I. Gibson ¦1979¦$10,524.87¦
+--------------------+----+----------¦
¦ ¦1980¦42.00 ¦
+--------------------+----+----------¦
¦ABC, Inc. ¦1979¦5,965.62 ¦
+--------------------+----+----------¦
¦ ¦1980¦172.72 ¦
+------------------------------------+
After concessions the issues for decision are (1) whether the ‘binding election‘ rule of Pacific National Co. v. Welch, 304 U.S. 191 (1938), precludes petitioners from electing on their amended returns to use the installment method of section 453 1 to report their respective gains from the sale of certain property; and (2) the proper allocation between the corporate taxpayer and the individual taxpayers of the lump-sum purchase price from that sale. The second issue turns upon who was entitled to the portion of the proceeds attributable to improvements made by the corporate lessee to the individual lessors' realty.
Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and exhibits attached thereto are incorporated herein by this reference.
Petitioners in this joint case are Joseph H. Gibson and Gloria I. Gibson and ABC, Incorporated. Petitioners Joseph H. Gibson and Gloria I. Gibson (the Gibsons) are individuals who resided in Detroit, Michigan at the time the petition was filed. Petitioner ABC, Incorporated (ABC or the corporation), was the Gibsons' wholly owned corporation, and at the time the petition was filed had its principal office at the Gibsons' residence in Detroit, Michigan. The Gibsons were the officers of the corporation as well as the sole shareholders. Both the individual petitioners and the corporation filed their tax returns on the calendar year basis and used the cash method of accounting.
On October 10, 1969, the Gibsons purchased the land and building located at 19220-19222 Conant Avenue, Detroit, Michigan, for $18,000. On June 24, 1975, petitioner Joseph H. Gibson purchased the land located at 19228 Conant in Detroit, Michigan for $5,500. These properties collectively will be referred to herein as the Conant property.
In 1972, ABC was formed to operate a day-care center and nursery school located on the Conant property. Pursuant to an informal oral agreement, ABC leased the Conant property from the Gibsons. There was no written lease, and the record does not establish the terms of the oral agreement. Between 1972 and 1979, ABC made substantial permanent improvements to the Conant property, such as repairing a wall and a fence, renovating the kitchen and adding a bathroom. 2 These permanent improvements were designed to bring the property into compliance with local zoning code requirements for a day-care center and nursery school.
On December 23, 1979, the Gibsons executed a land sales contract in ABC's name selling the Conant property and the day-care center and nursery school business to Casanova Hudson (Hudson). 3 The total purchase price was $175,000, calling for $10,000 down in 1979 and the remaining $165,000 to be paid in installments over a two-year period ending in December of 1981. The parties agree that the value of the Conant property (including the improvements) at the time of sale was $81,500. The balance of the purchase price ($93,500) is allocable to the intangible assets (goodwill and going concern value) of the day-care center and nursery school business. 4
Neither the individual petitioners nor the corporate petitioner reported the sale of the Conant property and day-care and nursery school business, or their receipt of the $10,000 from that sale, on their original 1979 Federal income tax returns. Instead, on their 1980 returns petitioners reported the sale on the completed or closed transaction basis, allocating the purchase price between the corporation and the individuals, as follows:
+---------------------------------------------------------+
¦ ¦Gibsons¦ABC ¦Total ¦
+---------------------+-------+------------+--------------¦
¦Purchase price ¦$97,380¦$67,500.00 ¦1 $164,880.00¦
+---------------------+-------+------------+--------------¦
¦Adjusted basis ¦80,000 ¦2 34,133.85¦114,133.85 ¦
+---------------------+-------+------------+--------------¦
¦Net gain (before sec.¦ ¦ ¦ ¦
+---------------------+-------+------------+--------------¦
¦1202 deduction) ¦17,380 ¦33,366.15 ¦50,746.15 ¦
+---------------------------------------------------------+
The record does not explain why petitioners reported a purchase price that was $10,120 less than the actual purchase price.
Margaret W. DeBusschere (Mrs. DeBusschere) and her husband had for many years operated a bookkeeping, accounting, and tax preparation business. Mrs. DeBusschere had no specialized training in accounting or tax law, and had learned the business on the job. Mrs. DeBusschere had performed bookkeeping and accounting services for ABC from the time it was formed in 1972, including the preparation of ABC's Federal corporate income tax returns. She had also prepared the corporate returns for another corporation that Mr. Gibson controlled. Mrs. DeBusschere prepared the original 1979 and 1980 returns for both the Gibsons and the corporation.
Mrs. DeBusschere was vaguely aware that petitioners' sale of the Conant property and the day-care center and nursery school business had occurred before the end of 1979. However, Mr. Gibson told her that the purchaser (Hudson) had not taken possession of the property or taken over the business until 1980, and thus, the sale should not be reported until 1980. Mrs. DeBusschere felt that the question was borderline but did as Mr. Gibson told her and reported the sale on petitioners' 1980 returns. Mrs. DeBusschere did not know the terms of the agreement between petitioners and Hudson. She never saw the purchase contract, nor any other documentation in regard to the sale, and the figures she used in reporting the sale on the 1980 individual and corporate returns were figures given to her by Mr. Gibson. 5 Those figures understated the sales price by $10,120 and overstated the basis by some $71,000.
In 1981, Hudson defaulted on the purchase contract, and petitioners successfully sued to regain possession of the Conant property. At the time of the trial the Gibsons still owned the Conant property (and the improvements) and were trying to sell it; the day- care center and nursery school business had been discontinued; ABC had become inactive, and there was a question as to whether ABC's corporate existence had been terminated.
On June 29, 1982, after respondent had completed his audit of petitioners' 1979 and 1980 taxable years, petitioners filed amended individual and corporate returns for 1979, reporting the sale of the Conant property and the day-care center and nursery school business in that year, and allocating the total purchase price between the individual and corporate taxpayers, as follows:
+----------------------------------------------------------+
¦ ¦Gibsons¦ABC ¦Total ¦
+--------------------------+-------+-----------+-----------¦
¦Purchase price ¦$23,961¦$151,039.00¦$175,000.00¦
+--------------------------+-------+-----------+-----------¦
¦Adjusted basis ¦10,620 ¦26,947.31 ¦37,561.31 ¦
+--------------------------+-------+-----------+-----------¦
¦Net gain (before sec. 1202¦ ¦ ¦ ¦
+--------------------------+-------+-----------+-----------¦
¦deduction) ¦13,341 ¦124,091.69 ¦137,432.69 ¦
+----------------------------------------------------------+
In allocating the total sales price of $175,000 and basis between the individual taxpayers and the corporate taxpayer, these amended returns allocated the land and building to the Gibsons and allocated all of the improvements to the realty and all of the intangible assets (goodwill and going concern value) of the business to the corporation. The allocation of the purchase price is still in dispute in this case, but the parties have...
To continue reading
Request your trial
-
Camara v. Comm'r
...(1964), and Silver Queen Motel v. Commissioner, 55 T.C. 1101 (1971) (involving election of depreciation method))); Gibson v. Commissioner, 89 T.C. 1177, 1184-1192 (1987) (describing the Tax Court's jurisprudence regarding election of the installment method); Wierschem v. Commissioner, 82 T.......
-
Scallen v. C.I.R., 88-2323
...the impermissible method of reporting the gain. Mamula v. Commissioner, 346 F.2d 1016, 1018-19 (9th Cir.1965); Gibson v. Commissioner, 89 T.C. 1177, 1186 (1987); Wierschem v. Commissioner, 82 T.C. 718, 723 (1984); Reaver v. Commissioner, 42 T.C. 72, 81 (1964). Accordingly, since appellants ......
-
Sundance Ranches, Inc. v. Commissioner
...elections were the subject of a variety of cases which have been summarized in a recent opinion in Gibson & ABC, Inc. v. Commissioner Dec. 44,383, 89 T.C. 1177, 1182-1191 (1987). In cases where a sale was reported on a return under a valid method inconsistent with installment reporting, lat......
-
Home Grp., Inc. v. Comm'r of Internal Revenue
...See Klinghamer v. Brodrick (D. Kan. 1956, 56-2 USTC par. 9842, 51 AFTR2d 1785), affd. 242 F.2d 563 (10th Cir. 1957); Gibson & ABC, Inc. v. Commissioner, 89 T.C. 1177 (1987). The section 593 regulation, however, specifically states that the method of computation of reserves is not a binding ......