Knott v. Comm'r of Internal Revenue , Docket Nos. 4010—73
| Decision Date | 18 January 1977 |
| Docket Number | Docket Nos. 4010—73,4011—73. |
| Parties | HENRY J. KNOTT AND MARION I. KNOTT, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTSEVERN RIVER CONSTRUCTION COMPANY AND SUBSIDIARY COMPANIES, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Corporation S is wholly owned by petitioner Knott and his wife. During 1968 and 1969, S and its controlled subsidiaries H and N sold real estate to the Henry J. and Marion I. Knott Foundation, a charitable organization. The property was sold for substantially less than fair market value. Legal and financial advisers recommended that the transactions not be recorded as charitable contributions in the form of bargain sales since available tax benefits were minimal, and claiming tax benefits might jeopardize the foundation's exempt status. Held, the real estate sales were charitable contributions in the form of bargain sales. Held, further, S and its subsidiaries, in computing their accumulated taxable income, may reduce their taxable income to the extent the fair market value of the real estate exceeded the amount realized. Theodore W. Hirsh, Jacques T. Schlenger, and Harry D. Shapiro, for the petitioners.
Andre P. Fogarasi, for the respondent.
Respondent determined deficiencies in petitioners' income taxes and additions to tax under section 6653(a)1 as follows:
We must decide whether four real estate sales made for less than adequate consideration by Severn River Construction Co. (hereinafter Severn), and its subsidiaries to the Henry J. and Marion I. Knott Foundation, Inc. (hereinafter the foundation), a charitable organization, should should be characterized as charitable contributions in the form of bargain sales or whether the real estate sales should be characterized as constructive dividends to Henry J. and Marion I. Knott, Severn's sole shareholders, followed by constructive charitable contributions to the foundation. All other issues were settled prior to trial or conceded on brief.2.
Some of the facts have been stipulated and are found accordingly. Henry J. Knott and Marion I. Knott (the Knotts), husband and wife, resided in Baltimore, Md., when they timely filed their joint income tax returns for 1968 and 1969 with the Internal Revenue Service Center, Philadelphia, Pa., and when they filed their petition with this Court.
Severn and its subsidiaries, all Maryland corporations with their principal places of business in Baltimore, Md., filed consolidated corporate income tax returns for fiscal years ending August 31, 1968, and August 31, 1969, with the Internal Revenue Service Center, Philadelphia, Pa.
These cases involve transactions between petitioners Henry J. and Marion I. Knott, petitioners Severn River Construction Co. and its subsidiary corporations, and the Henry J. and Marion I. Knott Foundation, Inc.
Henry J. and Marion I. Knott, Severn's sole shareholders, have an impressive interest in charities, charitable giving, and charitable activities, and hold a strong and sincere belief that it is the duty of individuals and organizations to encourage charitable work. During the period 1960 to 1970, Mr. Knott served on the committees and boards of the following charitable and civic organizations:
Additionally, the Knotts have made extensive charitable gifts, frequently in excess of the deduction allowable under section 170. On one occasion, Mr. Knott made a gift in excess of several million dollars to a local university and hospital for which no deduction was taken. Consistent with their charitable attitude, the Knotts never allow their name to be publicly connected with their gifts.
Severn, formed by the Knotts in 1950, was organized to develop, conduct, and operate a construction and real estate business in Maryland. During the tax years in question, Severn's officers were petitioners Henry J. and Marion I. Knott, president and treasurer, respectively; the Knotts' son-in-law, John Riehi III, vice president; C. Edward Jones, an attorney who advised the Knotts on various legal matters, vice president; and Katherine A. Dohony, secretary. Henry J. Knott served as president of Severn without receiving any compensation.
For taxable years ending August 31, 1968, and August 31, 1969, Severn owned all the outstanding stock of Kent Forest, Inc., Glenlo Corp., and Northbrook Apartments, Inc. (hereinafter Northbrook). Additionally, during the tax years in question, Severn owned 82 percent of the outstanding stock of Glen Village, Inc., with the remaining 18 percent owned by petitioner Henry J. Knott. As of September 1, 1967, Severn owned 1,908 of 2,247 shares of stock of Hillsworth Corp. (hereinafter Hillsworth), with the remaining shares held equally by John Riehl III, and Robert C. Voelkel, Jr., the Knotts' sons-in-law, and Earl T. Schultz, Sr., a longtime employee of Severn. By March 1968, Riehl's, Voelkel's, and Schultz's interests in Hillsworth were redeemed, leaving Severn the sole shareholder of Hillsworth for the remainder of the tax years in question. As with Severn, Hillsworth and Northbrook were formed under Maryland law for the purpose of developing, conducting, and operating a general construction and real estate...
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