Lake Forest, Inc. v. Commissioner, Docket No. 77061

• Decision Date: 13 February 1963
• Docket Number: Docket No. 77061,81891.
• Parties: Lake Forest, Inc. v. Commissioner.
• Court: U.S. Tax Court

22 T.C.M. (CCH) 156 (1963)

T. C. Memo. 1963-39

Lake Forest, Inc. v. Commissioner.

Docket Nos. 77061, 81891.

United States Tax Court.

Filed February 13, 1963.

Wallace C. Murchison, Esq., Carolina Power & Light Bldg., Wilmington, N. C., for the petitioner. Richard C. Forman, Esq., for the respondent.

Supplemental Memorandum Findings of Fact and Opinion

TRAIN, Judge:

In 1961 we held petitioner exempt from Federal income taxation as a "social welfare" organization under sections 101(8) of the 1939 Code and 501(c)(4) of the 1954 Code. Dec. 24,902, 36 T. C. 510. Petitioner's alternate contention, that it was exempt as a "like organization" under sections 101(10) of the 1939 Code and 501(c)(12) of the 1954 Code, was not reached by this Court.

The mandate of the Court of Appeals for the Fourth Circuit reversed that decision and remanded for proceedings consistent with its opinion, reported at 62-2 USTC ¶ 9602, 305 F. 2d 814 (1962). In the course of that opinion the Court of Appeals held petitioner not exempt as a social welfare organization and stated "the argument for exemption of Lake Forest, Inc., as a `like organization' * * * is altogether meritless." Id. at 820. We were directed to determine "the other issues presented by the petition of Lake Forest, Inc., and not reached by the Tax Court." Idem.

The issues to be decided under that mandate are:

(1) Whether the statute of limitations bars assessment of deficiencies for petitioner's taxable years 1948 through 1950;¹ (2) Whether petitioner may deduct depreciation on certain buildings and equipment;

(3) Whether the principal payments made to petitioner by its members under their mutual ownership contracts were capital contributions or income to petitioner;

(4) Whether the book credits allocated by petitioner to its members for petitioner's taxable years 1955 and 1956 were properly excluded from gross income;

(5) Whether the additional North Carolina income taxes and interest which would be owed for any year in issue for which a deficiency is determined in this proceeding are deductible for such year; and

(6) Whether petitioner was exempt from taxation for the year of April 1, 1947, to March 31, 1948, and if not, whether it sustained a net operating loss in such year which it may carry forward to subsequent years in issue.

Findings of Fact

Our findings of fact are set forth in Dec. 24,902 36 T. C. at 511-534. We will here make only those additional findings relevant to our decision in this proceeding. As in our earlier opinion, the Federal Public Housing Authority and its successor, the Public Housing Administration, will be referred to hereinafter as "PHA."

Petitioner filed timely Form 990 exempt organization information returns for its taxable years 1948 through 1950. On September 18, 1952, petitioner filed Form 1120 corporate income tax returns for the period April 1, 1947 — June 30, 1948, and for its taxable years 1949 and 1950. Waivers of the statute of limitations for petitioner's taxable years 1948 through 1950 were first executed on June 20, 1955. The deficiency notice for those years was mailed on July 7, 1958, within the then currently effective extension of the waiver periods.

Petitioner paid real estate taxes on the land, dwellings, and other buildings in the project. Petitioner paid personal property taxes on the heaters, stoves, and refrigerators, among other things in those buildings. Petitioner's members did not pay such taxes on those items.

A departing member who left before the end of petitioner's fiscal year did not accumulate book credits for that part of the year for which he was a member. If petitioner purchased the departing member's interest in petitioner and thereafter transferred it to a successor member, the successor accumulated book credits only for that part of the year during which the successor was a member. The book credits thus forfeited by the departing member were allocated to the remaining members.

The purchase and sales contract between petitioner and the PHA provided for the interim period April 1, 1947 — March 31, 1948, in relevant part as follows:

Article IV Interim Period. On April 1, 1947, and for the interim period between such date and either date of delivery of the conveyance documents or the termination of the Contract as herein provided prior to the delivery of such documents, the Corporation shall assume custody and possession of the project and undertake the administration, management, operation, and maintenance of the Project.

* * *

(d) Disposition of Revenue: The Corporation covenants that during the interim period all revenue from the Project in excess of amounts required to pay FPHA approved operation expense shall be deposited with the FPHA. Such deposits shall be made quarterly. At the time of the delivery of the conveyance documents, the FPHA shall apply such deposits against the payment of interest on the Purchase Price for the interim period at the rate of three and one-half per centum per annum (3½%). The balance of such deposits, if any, shall then be applied to the credit of the Corporation on the unpaid balance of the Purchase Price. In no event shall such balance be credited against the portion of the Purchase Price required to be paid by the Corporation upon delivery of the conveyance documents. If for any reason this Contract is terminated prior to delivery of the conveyance documents, then in such event the amounts deposited with the FPHA pursuant to this section shall be retained by the FPHA as rental for the Project during the interim period.

(e) Non-Accrual of Property Rights: The purposes of the foregoing provisions of this Article are to enable the Corporation to obtain administration and management experience while developing its membership and perfecting its organization. Nothing in any of the foregoing provisions shall be construed as accruing or permitting or causing to accrue to the Corporation or to any of its members, any title, interest, equity, right or privilege in the Project.

(f) Termination of Contract: If at any time during the interim period the FPHA shall determine that the Corporation for any reason cannot adequately administer, manage, operate or maintain the Project, then in such event the FPHA may terminate this Contract upon ten days written notice to the Corporation. The FPHA determination in this respect shall be final and binding on the Corporation.

During the period April 1, 1947 — March 31, 1948, petitioner sustained a net operating loss of $5,540.09.

Opinion

Issue (1) — Statute of Limitations

If the exempt organization information returns (Forms 990) filed by petitioner are returns for statute of limitations² purposes, then assessments of deficiencies for petitioner's taxable years 1948 through 1950 are barred. However, the statute has not run if the Form 1120's petitioner filed for those years in 1952 are the operative returns.

Petitioner maintains that the Form 990's it filed contain sufficient data to compute income taxes and are therefore returns for statute of limitations purposes. Alternatively, petitioner contends those Form 990's are to be treated as returns for such purposes under section 302(b) of the Revenue Act of 1950.³

Respondent views the Form 990's as inherently insufficient and maintains that section 302(b) of the Revenue Act of 1950 is inapplicable because exemption is denied here for reasons other than that petitioner was carrying on a trade or business for profit.

We agree with respondent as to both the nature of Form 990's and the effect of section 302(b) of the Revenue Act of 1950.

In Automobile Club of Michigan v. Commissioner 57-1 USTC ¶ 9593, 353 U. S. 180, 187-188 (1957), the Supreme Court met in the following manner the problem of Form 990's as returns for statute of limitations purposes:

It is also argued that the Form 990 returns filed by the petitioner in compliance with § 54(f) of the 1939 Code, as amended, constituted the filing of returns for the purposes of § 275(a). But the Form 990 returns are merely information returns in furtherance of a congressional program to secure information useful in a determination whether legislation should be enacted to subject to taxation certain tax-exempt corporations competing with taxable corporations.18 Those returns lack the data necessary for the computation and assessment of deficiencies and are not therefore tax returns within the contemplation of § 275(a). Cf. Commissioner v. Lane-Wells Co. 44-1 USTC ¶ 9195, 321 U. S. 219.

18 H. R. Rep. No. 871, 78th Cong., 1st Sess. 24-25; S. Rep. No. 627, 78th Cong., 1st Sess. 21.

The Supreme Court's view of Congress' purpose in requiring many types of tax-exempt organizations to file information returns is well-supported by the cited committee reports.

When Congress intended to add to the functions of Form 990's that of serving as returns for statute of limitations purposes, it did so and indicated the limited circumstances in which this additional function would be present. See section 302(b), Revenue Act of 1950, supra; section 6501(g)(2) of the 1954 Code.⁴

On the basis of the cited committee reports and subsequent legislation⁵ we conclude that the Supreme Court statement as to the limited purposes of Form 990's was an alternate holding or at least persuasive dictum. We hold that, except where Congress has provided otherwise,⁶ returns filed under section 54(f) of the 1939 Code are inherently insufficient to constitute returns under section 275(a) of the 1939 Code. Perpetual Building & Loan Association of Columbia Dec. 24,282, 34 T. C. 694, 716 (1960), affd. sub nom. Cooper's Estate v. Commissioner 61-2 USTC ¶ 9548, 291 F. 2d 831 (C. A. 4, 1961). See Southern Maryland Agricultural Fair Association Dec. 10,816, 40 B. T. A. 549, 553 (1939).

We also agree with respondent that petitioner's alternative reliance upon section 302(b) of the Revenue Act of 1950 is misplaced. By its terms, that provision applies only if petitione...