Ginsburg v. Commissioner
| Citation | 1974 TC Memo 191,33 TCM (CCH) 814 |
| Decision Date | 29 July 1974 |
| Docket Number | Docket No. 5693-72 — 5698-72. |
| Parties | Sam B. Ginsburg, et al. v. Commissioner. |
| Court | United States Tax Court |
Sherwin C. Peltin, 633 W. Wisconsin Ave., Milwaukee, Wis., for the petitioners. John L. Pedrick, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that Michael Rosen, Sam B. Ginsburg, and Theodore Silberman were liable as transferees in the respective amounts of $129,389.72, $129,462.72, and $64,731.35 for a deficiency in the income tax liability of Highway 67 Development, Inc., for its taxable year ended May 26, 1969, in the amount of $165,284.34.
Respondent determined deficiencies in the income tax liability of Sam B. Ginsburg in the amounts of $7,894.42 and $38,025.68 for the calendar years 1968 and 1969, and in the income tax liabilities of Theodore Silberman and Dorothy Silberman in the amounts of $2,054.82 and $13,309.18 for the calendar years 1968 and 1969, and in the income tax liabilities of Michael Rosen and Gail Rosen in the amounts of $4,319.43 and $27,759.76 for the calendar years 1968 and 1969, respectively.
These petitioners in an alternative allegation in their petitions claim overpayments in the following amounts for the years indicated:
Docket
No. Petitioner 1968 1969
5693-72 Sam B. Ginsburg ......... $7,583.38 $29,223.68
5697-72 Theodore Silberman
and Dorothy Silberman .. 1,980.13 6,152.06
5698-72 Michael Rosen and
Gail Rosen ............. 2,215.10 3,378.60
Some of the issues raised by the pleadings have been disposed of by the parties, leaving for our decision the following:
(1) Whether Highway 67 Development, Inc., held a piece of property which it sold in December 1968 primarily for sale to customers in the ordinary course of its trade or business so as to bring it within the definition of collapsible corporation contained in section 341(b), I.R.C. 1954,2 thereby causing the provisions of section 337(a) to be inapplicable to the sale because of the limitation as to the applicability of that section contained in section 337(c) (1) (A).
(2) If we hold that Highway 67 Development, Inc., is taxable upon the gain on the sale of the property, for which tax Sam B. Ginsburg, Michael Rosen, and Theodore Silberman are liable as transferees, should the amount these transferees reported as capital gains on the distributions they received from the corporation in 1968 and 1969 be reduced by the amount of their transferee liability in determining their income taxes for these years?
(3) Whether Michael Rosen sustained a loss from the worthlessness of stock of the Antoine Silver Mines, Ltd., in the calendar year 1969.
Some of the facts have been stipulated and are found accordingly.
At the time of the filing of his petitions in this case, Sam B. Ginsburg (Ginsburg) was a resident of Milwaukee, Wisconsin. He filed his Federal income tax returns for the calendar years 1968 and 1969 with the district director of internal revenue in Milwaukee, Wisconsin.
Theodore and Dorothy Silberman, husband and wife, were residents of Milwaukee, Wisconsin at the time they filed their petition in this case, and Theodore Silberman (Silberman) was a resident of Milwaukee, Wisconsin at the time he filed his petition as transferee in this case. The Silbermans filed their joint Federal income tax returns for the calendar years 1968 and 1969 with the district director of internal revenue in Milwaukee, Wisconsin.
Michael and Gail Rosen, husband and wife, were residents of Bayside, Wisconsin at the time they filed their petition in this case, and Michael Rosen (Rosen) was a resident of Bayside, Wisconsin at the time he filed his petition as transferee in this case. The Rosens filed their joint Federal income tax returns for the calendar years 1968 and 1969 with the district director of internal revenue in Milwaukee, Wisconsin.
Highway 67 Development, Inc. (Highway 67) was a Wisconsin corporation, incorporated on May 31, 1968. It had its principal office in Milwaukee, Wisconsin, and filed Federal corporate income tax returns for the period May 13, 1968, through July 31, 1968, and the period August 1, 1968, through May 26, 1969, with the district director of internal revenue in Milwaukee, Wisconsin.
Highway 67 was incorporated for the purpose of holding as an investment certain real estate which Rosen and Silberman had contracted to purchase after negotiations and under conditions hereinafter described. It was incorporated at the insistence of Ginsburg who it was agreed would participate in the purchase of the property. It had issued and outstanding during its entire existence 1,000 shares of stock which were issued at $1 per share. Initially, 400 shares were issued to Rosen, 400 to Ginsburg, and 200 to Silberman. On July 19, there was transmitted by counsel for Highway 67 to the district director of internal revenue in Milwaukee, Wisconsin an election under section 1372 by Highway 67 to be taxed as a small business corporation under subchapter S, to which was attached the consent of the three stockholders of the corporation dated July 11, 1968. The three stockholders were the directors of the corporation and its officers, Ginsburg being president, Silberman, vice president and Rosen, secretary. This transmittal was pursuant to a resolution adopted by Highway 67 at the initial meeting of its board of directors on May 31, 1968, which resolution was adopted after a discussion recorded in the minutes as follows:
The Directors then discussed whether the Corporation should elect to be taxed under subchapter S of the Internal Revenue Code. Although the Corporation is not expected to engage in any operations other than holding, as a passive investor, certain investment real estate, it may, at some future date, enter into an active business. While the election would have no significant effect under the present circumstances, change to an active business might create such changed circumstances as would make an election advantageous. Thus, an election would be without current impact, and could be deferred indefinitely. However, such election might be viewed as extra precaution in case some active business is commenced. It was noted that the Directors were all of the shareholders of the corporation. The Directors determined that an election to file for such taxable status should be made and that the consent of each shareholder should be executed.
On August 19, 1968, stock certificate No. 2 for 400 shares issued to Rosen was replaced by stock certificate No. 4 issued for 1 share to Alan Marcuvitz (Marcuvitz), and certificate No. 5 for 399 shares issued to Rosen.
Rosen and Silberman in 1965 had acquired property known as the Stevens Farm which they proceeded to develop through a limited partnership, Heritage Heights Development Co. This property was developed in three sections known as the Heritage Heights Subdivision, Heritage Heights Addition No. 1, and Heritage Heights Addition No. 2. The property was subdivided and homes built on the property by another company. Heritage Heights Development Co. (hereinafter Development) was originally composed of Rosen, Silberman, and another individual not in any way connected with this case as general partners and three limited partners. In 1968 Ginsburg joined Rosen and Silberman in the place of the third general partner.
Rosen had for some time been engaged in the real estate business, primarily as a developer, although he was also a broker and engaged in other phases of the real estate business. Silberman had been engaged for some period of time in the real estate business and was a real estate broker. Ginsburg was an industrialist engaged primarily in the beverage bottling business. Although Rosen had over the years had interests in a number of partnerships other than Development and in some corporations engaged in real estate development, Development was the only business interest in which Rosen and Silberman had been jointly involved and was the only business in which Ginsburg had been involved with either of them. Neither Rosen, Silberman, nor Ginsburg were engaged in the business of purchasing undeveloped land for resale in an undeveloped state.
Stanley J. Potrykus, a professional engineer and land surveyor with Metropolitan Survey Service, was engaged to do the engineering work for Heritage Heights, including sewer, water, road design, and platting. The original plan called for a sewer system which would serve the Heritage Heights subdivision only. The City of Oconomowoc, however, adopted the suggestion of the Board of Public Works and requested that Development install facilities adequate to serve other nearby areas which might eventually be developed as well. Accordingly, at an additional cost of about $8,999.20 paid by the city, Development installed a larger main and a larger sewer lift station which would be able to serve 60 additional acres. Included in the area which would be served was a part of a farm of approximately 152 acres across State Highway 67 from Heritage Heights which belonged to Mr. and Mrs. Gilbert Dopp and a part of another tract known as the Whitman subdivision to the north of the Dopp farm.
In 1966, Silberman called Rosen's attention to the potential for increase in value of the Dopp farm which was across Highway 67 from Heritage Heights and they had the land surveyed in order to obtain a legal description. The Dopp farm contained two residences, one occupied by the Dopps and the other rented by them to a family named Ruder for $65 per month. It also contained dairy barns and silos. About 30 percent of the land was being farmed and the rest was fallow. Dopp participated in the soil bank program of the United States Department of Agriculture's Agricultural Stabilization and Conservation Service (hereinafter ASCS) from which he received compensatory...
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