Kent Homes, Inc. v. Comm'r of Internal Revenue
| Decision Date | 25 February 1971 |
| Docket Number | Docket Nos. 4456— 68— 4459— 68. |
| Citation | 55 T.C. 820 |
| Parties | KENT HOMES, INC., ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Barney J. Heeney, Jr., and Howard A Spies, for the petitioners.
Edward G. Lavery, for the respondent.
Proceedings by the United States to condemn the equity of the corporate taxpayer in Wherry project property were commenced on Dec. 18, 1957, and $83,000 was deposited with the U.S. District Court as an estimate of the value of the equity. The property was encumbered by a mortgage securing a note of the corporation. The condemnation was contested both as to the interest in the property subject to the taking and the amount of the compensation to which the corporation was entitled. Possession was transferred to the United States effective Jan. 1, 1958. Thereafter, the United States made payments on the mortgage note. The note and mortgage were assumed by the United States in March 1958 but the corporation was not then released from further liability as mortgagor. The $83,000 deposit was withdrawn by the corporation in March 1958. In August 1961, commissioners of the District Court determined that the value of the corporation's equity was in excess of the $83,000 previously deposited. In December 1961, the United States made another deposit sufficient to cover the additional value of the corporation's equity, together with accumulated interest thereon. Because the deposit included funds with respect to property of another taxpayer which had been condemned, the corporation did not receive payment of its share until May 1962. In September 1962, the District Court remanded the determination of the commissioners and in the same month or in October 1962 the corporation was formally released from any further liability on the note and mortgage. In fiscal year 1963, the corporation included in its income the gain and interest represented by its share of the December 1961 deposit. At no time did the corporation report the gain attributable to the assumption of the mortgage note. However, a timely deficiency was asserted against the corporation for its fiscal year 1958 with respect to such gain, which the corporation paid. In a suit for refund of that payment, in which the corporation asserted that such gain was not taxable in fiscal 1958 (and that fiscal 1963 was the proper year), the U.S. District Court rendered a decision, which has become final, that such gain was not taxable in fiscal 1958, stating in its opinion that the gain was properly taxable in the corporation's fiscal year 1959. The corporation made a valid subchapter S election for its fiscal year 1963 so that its taxable income for that year is includable in that incomes of the individual petitioners. Held, that, under the circumstances of this case, the gain attributable to the assumption of the mortgage is taxable to the corporation in its fiscal year 1959. Further held, that the corporation maintained an inconsistent position, which the District Court adopted in the 1958 refund suit, so that the provisions of secs. 1311-1315, I.R.C. 1954, are applicable and the deficiency against it for fiscal year 1959 is not barred by sec. 6501, I.R.C. 1954. Further held, that the individual petitioners have abandoned the issue as to the includability of the gain and interest income represented by the December 1961 deposit in the income of the corporation for fiscal year 1963 and it is not properly before this Court.
Respondent determined the following deficiencies in petitioner's income taxes: 2
Overpayments in income taxes are claimed by individual petitioners as follows:
+-------------------------------------------------------+
¦Taxpayer ¦Year ¦Amount ¦
+---------------------------------------+------+--------¦
¦Alton K. Blosser and Ester Blosser ¦1963 ¦$2,164 ¦
+---------------------------------------+------+--------¦
¦Alton K. Blosser, Jr., and Ruth Blosser¦1963 ¦1,476 ¦
+---------------------------------------+------+--------¦
¦Marshall E. Blosser and Mary C. Blosser¦1963 ¦1,405 ¦
+---------------------------------------+------+--------¦
¦Max L. DeFrance and Bonnie J. DeFrance ¦1963 ¦1,505 ¦
+-------------------------------------------------------+
The initial issue for determination is whether Kent Homes, Inc., (hereinafter sometimes referred to as the corporation), realized gain in the amount of $314,118.14 in its taxable year ended January 31, 1963 (includable in the income of the individual petitioners by virtue of a subchapter S election), as a result of the condemnation of a Wherry military housing project. Alternative issues are:
(1) Whether the corporation realized gain in the amount of $279,921.23 from the condemnation in its taxable year ended January 31, 1959.
(2) If gain was realized in fiscal 1959, whether, notwithstanding the fact that the statute of limitations provided by section 65013 has expired, an adjustment in that year is authorized under sections 1311- 1315, inclusive.
(3) Whether the gain and interest income arising from a deposit made by the United States on December 18, 1961, was properly reportable for income tax purposes in the corporation's taxable year ended January 31, 1963, and therefore includable in the income of the individual petitioners by virtue of a subchapter S election.
Some of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioner Kent Homes, Inc., is a Kansas corporation whose principal place of business was located at Topeka, Kans., at the time it filed its petition in this case. It timely filed Federal income tax returns on the accrual basis for the taxable years ended January 31, 1958, and January 31, 1959, with the district director of internal revenue at Wichita, Kans. The return for fiscal 1959 was filed on April 13, 1959. The corporation validly elected to be taxed as a small business corporation under subchapter S of the Internal Revenue Code of 1954 for the taxable year beginning after January 31, 1962, to wit, February 1, 1962, to January 31, 1963, and filed a Federal Small Business Corporation Return of Income for that period with the district director of internal revenue at Wichita, Kans.
Petitioners Alton K. Blosser and Esther Blosser, husband and wife, had their legal residence in Raytown, Mo., at the time they filed their petition in this case. They timely filed a joint Federal income tax return for the taxable year 1963, as did the other individual petitioners.
Petitioners Marshall E. Blosser and Mary C. Blosser, husband and wife, and petitioners Alton K. Blosser, Jr., and Ruth Blosser, also husband and wife, had their legal residences in Topeka, Kans., at the time they filed their respective petitions in this case.
Petitioners Max L. DeFrance and Bonnie J. DeFrance, husband and wife, had their legal residence in Leavenworth Kans., at the time they filed their petition in this case.
At all relevant times after October 16, 1961, the stock of Kent Homes, Inc., was owned as follows:
+----------------------------------------+
¦Stockholders ¦Number of shares ¦
+---------------------+------------------¦
¦Alton K. Blosser ¦392 ¦
+---------------------+------------------¦
¦Alton K. Blosser, Jr.¦336 ¦
+---------------------+------------------¦
¦Marshall E. Blosser ¦336 ¦
+---------------------+------------------¦
¦Bonnie J. DeFrance ¦336 ¦
+----------------------------------------+
In 1951, under the Wherry Military Housing Act, the corporation and others constructed and operated single-dwelling rental houses located at Fort Leavenworth, Kans., for military personnel assigned to the installation there. The houses were built upon land leased by the corporation from the Secretary of the Army for a 75-year term. To finance its portion of the construction, the corporation gave a note secured by a mortgage on the houses to the Prudential Investment Co. Such note and mortgage were subsequently assigned to the New York Life Insurance Co. (hereinafter sometimes referred to as N.Y.L.I.C. or the mortgagee). The note was insured by the Federal Housing Administration (FHA).
On December 18, 1957, the U.S. Department of the Army commenced condemnation proceedings in the U.S. District Court for the District of Kansas against the equity of the corporation in the Wherry project under the terms of the Capehart Act, 42 U.S.C. sec. 1594a(b). On the same day, the Department of the Army deposited a U.S. Treasury check in the amount of $137,000 with the District Court. Of this amount, $83,000 represented the Department's estimate of the fair market value of the corporation's equity in the Wherry project.
Effective January 1, 1958, the District Court ordered possession of the Wherry project transferred to the Department of the Army. After that date, the United States made the payments on the mortgage note. On February 14, 1958, the corporation made application to the district Court for withdrawal of the $83,000. On March 19, 1958, the $83,000 was paid to the corporation.
An agreement (hereinafter called the three-party agreement) was negotiated among the Department of the Army, the Federal Housing Administration, and the New York Life Insurance Co. The agreement provided that the Department of the Army assumed the obligation of the corporation's note and mortgage. A provision releasing Kent Homes, Inc., from all further liability and obligation under said mortgage and the note secured thereby was deleted by drawing lines through the provision. In the same agreement, the mortgagee waived its claim to the condemnation proceeds. The agreement became effective in March 1958, when it was signed and acknowledged by the parties to it. As for the $83,000 deposit, the parties have stipulated that it...
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