Glickman v. Commissioner of Internal Revenue

• Decision Date: 05 June 1958
• Docket Number: No. 291-293,Dockets 24889-24891.,291-293
• Citation: 256 F.2d 108
• Parties: Arthur GLICKMAN; Herman Glickman and Ruth Glickman; and Aaron Glickmand and Freda Glickman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

256 F.2d 108 (1958)

Arthur GLICKMAN; Herman Glickman and Ruth Glickman; and Aaron Glickmand and Freda Glickman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 291-293, Dockets 24889-24891.

United States Court of Appeals Second Circuit.

Argued May 12, 1958.

Decided June 5, 1958.

Milton Young and Robert Anthoine of New York, N. Y., for petitioners.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Harry Baum and Thomas N. Chambers, Attorneys, Department of Justice, Washington, D. C., for respondent.

Alger B. Chapman, George Berlstein of New York, and E. Randolph Dale of Washington, D. C., Chapman, Walsh & O'Connell, New York City, of counsel, amici curiae.

Before CLARK, Chief Judge, and SWAN and LUMBARD, Circuit Judges.

SWAN, Circuit Judge.

This petition involves deficiencies in income taxes for the calendar year 1950 of three taxpayers, Arthur, Herman and Aaron Glickman. The three cases were consolidated in the Tax Court proceedings and its decisions have been appealed to this court by a single petition.¹

The issue presented is whether gains realized by each of the taxpayers in 1950 are properly taxable as capital gains, as they claim, or as ordinary income, as the Tax Court held in reliance upon § 117(m) of the Internal Revenue Code of 1939, as amended by § 212 of the Revenue Act of 1950, 26 U.S.C.A. § 117(m), which relates to "collapsible corporations." The findings of fact and opinion of the Tax Court are reported in T.C.Memo.1957-124.

The facts may be summarized as follows: In February 1949 the taxpayers organized a New York corporation (for brevity hereafter referred to as Mott) for the purpose of constructing an apartment project to be financed by a mortgage loan insured by the Federal Housing Administration (F. H. A.) pursuant to § 608 of the National Housing Act, 12 U.S.C.A. § 1743. Mott acquired vacant land in Far Rockaway, New York, at a cost of $59,000. F. H. A. issued a commitment to insure a mortgage loan to Mott, as intended mortgagee, not to exceed in amount $1,066,500. for the construction of a 126 family apartment project to be known as Bayswater Gardens. Mott obtained the money from the Manhattan Company, and the apartment project was constructed for $55,400 less than the insured mortgage loan. From the time of Mott's incorporation until the taxpayers sold their shares as hereafter mentioned, the taxpayers were the only common stockholders and the only officers and directors of Mott. In January 1950 the directors resolved to write up the value of the corporate property, so as to create a capital surplus on its books, and on January 13 Mott distributed $55,000. in cash to its common stockholders. In the distribution Arthur and Aaron received $13,750 each, and Herman $27,500. The cost basis of their stock was $500 each for Arthur and Aaron, and $1,000. for Herman. All three sold their common shares on August 1, 1950, pursuant to their May 10th contract to sell, at a price which gave Arthur and Aaron $23,411.70 each, and Herman $46,823.39. Mott was not liquidated and its present shareholders operate the project pursuant to F. H. A. regulations and the terms of the mortgage between Mott and the Manhattan Company.

In reaching its decision that the gains realized by the taxpayers, from the cash distribution by Mott and from the sale of their stock should be taxed as ordinary income pursuant to § 117(m), the Tax Court relied upon two of its own prior decisions, Burge v. Commissioner, 28 T.C. 246, and Weil v. Commissioner, 25 T.C. 809. It considered the Glickman cases indistinguishable from Burge in all material respects. Burge was subsequently affirmed by the Fourth Circuit, 253 F.2d 765, Judge Parker writing for the court. We are in entire agreement with Judge Parker's opinion. The Weil decision was affirmed by the Second Circuit in 252 F.2d 805. These two cases obviate the necessity of lengthy discussion of the petitioners' various contentions which assert that the Tax Court erred in holding Mott to be a "collapsible corporation," as defined in § 117(m).²

One of the petitioners' contentions, Point VI of their brief, is that Mott was not a collapsible corporation "because it was not a temporary corporation used to convert ordinary income into capital gain." In support of this contention they refer to the legislative history of the section. It is true that in the discussion of the evils which the statute was intended to prevent, there is frequent mention of cases where liquidation of the corporation occurred; but, as stated by Judge Parker 253 F.2d 769, "it is clear from the committee reports that it was not intended that the legislation be limited to such cases and the act as passed is not so limited." We agree. The statute expressly refutes the idea that the corporate life must be cut short; it taxes "Gain from the sale or exchange (whether in liquidation or otherwise) of stock * * *". Italics added.

In Point IV of their brief the petitioners argue that § 117(m) does not apply to the cash distribution received by them on January 13, 1950. A similar contention was made and overruled in the Burge case. It will suffice to say that we are in agreement with the reasons given by the Tax Court and by Judge Parker for rejecting it.

The Tax Court found that the taxpayers' intention to make the cash distribution was formed about January 1, 1950. The petitioners contend that this was too late. They argue that the requisite "view" must exist when the corporation is formed or at least when construction is begun. We agree with Judge Parker's statement in Burge: "It is not necessary that the `view' exist when the corporation is formed. It is sufficient that it exist when the corporation is `availed of' * * *". Since the corporation may at any time during its corporate life be "availed of" for the proscribed purpose, subject, of course, to the limitations imposed by § 117(m) (3), it seems surprising that the Regulations have adopted a narrower interpretation of the statute, and require the requisite view to exist "during the construction * * *" or to be "attributable" to "circumstances which reasonably could be anticipated by the time of such * * * construction." We are disposed to disagree with so narrow an interpretation, but whether the Regulation is valid need not be determined now. The Tax Court assumed it to be valid, and this assumption, if wrong, was unduly favorable to the petitioners. The court then found that "construction was not completed until some time after the middle of January 1950."

This finding the petitioners say is erroneous because construction was "substantially" completed by December 7, 1949 when the municipal authorities issued their final certificate of occupancy. But we agree that under the correct interpretation of the statute "construction" should be defined technically to mean all construction required to perform the contract completely.³ Concededly something remained to be done after January 1 to complete the...