Harchester Realty Corp. v. Commissioner, Docket No. 78344.
| Decision Date | 21 June 1961 |
| Docket Number | Docket No. 78344. |
| Citation | 20 TCM (CCH) 922,1961 TC Memo 184 |
| Parties | Harchester Realty Corp. v. Commissioner. |
| Court | U.S. Tax Court |
Seymour J. Wilner, Esq., 400 Madison Ave., New York, N. Y., for the petitioner. Robert S. Bevan, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined deficiencies in income tax for the period ending December 31, 1952 and the year 1953 in the amounts of $2,940.89 and $106,171.77, respectively. The years 1954 and 1955 are also involved because of net operating losses sustained in those years which petitioner is entitled to carry back to the years 1952 and 1953. The issues presented for our consideration are: (1) Whether land sold by petitioner in 1952 and 1953 was held primarily for sale to customers in the ordinary course of trade or business; (2) what is the basis of the land sold; (3) whether petitioner may amortize in 1954 and 1955 a mortgage premium paid in 1956; (4) whether damages received by petitioner in 1955 should be taxed as ordinary income; and (5) whether expenses paid in 1954 and 1955 with respect to the real estate sales in 1952 and 1953 are capital losses in 1954 and 1955 if it is held that land was not held primarily for sale to customers in the ordinary course of trade or business.
The stipulated facts are incorporated herein by reference.
Petitioner was incorporated under the laws of New York on November 24, 1952 and filed its Federal income tax returns on a cash basis for the period ending December 31, 1952 and the years 1953, 1954 and 1955 with the director of internal revenue at Hartford, Connecticut. Petitioner's return for 1953 was filed on September 16, 1954 pursuant to extensions granted by the district director.
On October 1, 1949, Leonard Davidow executed an Option Agreement with the executors of the Estate of Ogden Mills Reid, hereinafter referred to as the Reid estate, for the purchase of unimproved land in Harrison, New York, hereinafter referred to as the Harrison property. Under the terms of the Option Agreement and a Contract of Sale which was annexed to and made a part of the Option Agreement, Davidow was granted the right to purchase approximately 200 acres at a price of $1,500 per acre. The time during which Davidow could exercise the option to purchase the property was extended on three occasions by amending the Option Agreement.
In the early part of 1950, the zoning of 130 acres of the Harrison property was changed from residential to commercial. Thereafter, on June 1, 1950, Davidow exercised the option to purchase and made a $30,000 payment. The purchase contract was amended on July 25, 1951 more fully to describe the land being purchased.
The Harrison property was acquired as part of a plan conceived by Davidow to assemble a number of parcels in the area and either to erect thereon buildings for lease or to lease the property on a net rental basis and allow the tenants to construct the building themselves subject to his approval. In furtherance of the plan, Davidow also acquired another parcel of 40 to 46 acres from the Reid estate across the road from the Harrison property. This acquisition was made by the Bansek Realty Corporation, of which Davidow was the president and sole stockholder. At the same time. A. C. Oaks, Inc., another corporation in which Davidow was the sole stockholder, acquired other contiguous land.
On November 13, 1952, Davidow entered into a contract to sell 8.7845 acres of the Harrison property to the Allstate Insurance Company. This parcel is hereinafter referred to as the Allstate property. Davidow had been approached by Stephen Porter, a realtor representing Allstate who wanted to purchase the parcel. Davidow told Porter of his plans to lease the property rather than to sell it. However, after a conference with an officer of Allstate who said it was the policy of his company not to lease, Davidow agreed to sell the desired parcel.
Davidow at that time was trying to secure some type of financing to complete the transaction with respect to the Harrison property and Porter suggested that his father-in-law, Arthur Waterman, might take a mortgage on the property which would enable Davidow to close the title. A plan to finance the purchase was formulated by Davidow and Waterman, but title insurance could not be obtained. It was suggested that Davidow assign his contract with the Reid estate to a corporation formed by the Watermans. Under this plan, the Watermans would own all the corporation's capital stock, have all the officers and directors except one directorship which was to be held by Davidow, and an option to buy the capital stock for $200,000 would be given by the Watermans to Davidow. Pursuant to this plan petitioner was incorporated on November 24, 1952. The authorized stock of 100 sharees of no-par value common was issued on November 26, 1952. Rodney H. Waterman and A. Porter Waterman each acquired 50 shares.
The Board of Directors elected were as follows:
Rodney H. Waterman A. Porter Waterman Stephen L. Porter Leonard H. Davidow
All remained in office until November 28, 1956 when Rodney H. Waterman, A. Porter Waterman and Stephen L. Porter resigned and Benjamin Burstein and Henrietta Ciarmoli were elected directors to serve with Davidow. One directorship was left vacant.
Rodney H. Waterman became president and treasurer of the petitioner and A. Porter Waterman its vice president and secretary. They continued in office until November 28, 1956 when Davidow became president and treasurer and Burstein, vice president and secretary.
Thereafter, Davidow assigned to petitioner his option to acquire the Harrison property and also the contract to sell the Allstate property which petitioner expressly covenanted to perform. The Harrison property was conveyed to petitioner on November 25, 1952 and the $30,000 previously paid by Davidow credited against the purchase price. On November 28, 1952 petitioner conveyed the Allstate property for $100,394.15. The Allstate property had a basis of $40,000. On its Federal income tax return for the period ending December 31, 1952, petitioner reported the profit from the sale of the Allstate property as ordinary income.
The purchase of the Harrison property was financed by borrowing $395,000 from the S. C. R. Co., the stock of which was owned by the Watermans. The indebtedness was secured by two mortgages in the amounts of $335,000 and $60,000 on the Harrison property and also the property previously held by the Bamsek Realty Corporation and A. C. Oaks, Inc. which parcels were required by the Watermans to be conveyed to petitioner.
The $60,000 mortgage was paid immediately from the proceeds of the Allstate sale. The mortgage of $335,000 required quarterly payment of interest at 1 percent per year commencing April 1, 1953.
No rental income was received by petitioner in 1952 and its gross rent receipts in 1953 were $585.
Although the agreement between Davidow and the Watermans contained a provision that the Harrison property could be sold at a price of $7,500 per acre or above, it was intended to be a security measure with respect to the loan to petitioner and the Watermans assured Davidow that they would carry out his plan for the property.
On July 8, 1953, Davidow exercised his option to acquire petitioner's capital stock from the Watermans. The terms of the Option Agreement were modified and Davidow was required to pay $211,500 for the stock.
In the summer of 1953 a real estate broker from New York representing the Standard Vacuum Corporation approached petitioner about a tract contained in the Harrison property. The broker was searching for a site on which to construct a campus-type executive office building, but at that time he would not disclose the identity of his client. The parties did not come to an agreement and it was discovered that the broker was also negotiating for property elsewhere in Westchester County. A zoning change could not be effected as to the other property and the broker returned to petitioner and disclosed that his client was the Standard Vacuum Corporation who would not lease the property but rather wanted to buy it. After further negotiations, petitioner sold 55 acres of the Harrison property to Standard Vacuum's subsidiary Eastan Properties Corporation for $476,225.44. This property, hereinafter sometimes referred to as the Eastan property, had a basis of $85,000. The proceeds from this sale permitted petitioner to meet its mortgage obligation with the S. C. R. Co.
The only dispositions of property by petitioner since 1952 other than the sales to Allstate and Standard Vacuum were to an electric utility for a booster station in 1956, in lieu of condemnation; to the State of New York which condemned 25 acres for an expressway; and to a public utility which condemned an easement for a high power gas line.
A number of companies were moving into the area and petitioner made substantial and continuous efforts to secure tenants for its property. A brochure was distributed by Porter's firm to other brokers in New York and Westchester County. Advertisements were also placed in area newspapers and signs were erected on the property. None of the advertising solicited sales of any part of the property and two offers to purchase parcels were refused. One lease was negotiated with a New York department store in 1954. However, no further attempts to solicit tenants were made in 1954 after it became apparent that the State of New York was going to build an expressway in the vicinity of the Harrison property, whose route at that time had not been definitely determined.
On January 11, 1954, petitioner borrowed $200,000 from the S. C. R. Co., Inc. and gave as evidence of its indebtedness a note for $250,000 payable in full on January 11, 1957. Interest at 5 percent was to be paid quarterly. Petitioner paid the principal sum of $250,000 in full on ...
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