Lanier v. Commissioner
| Decision Date | 07 January 1998 |
| Docket Number | Docket No. 9171-93.,Docket No. 9146-93. |
| Citation | 75 T.C.M. 1537 |
| Parties | Eugene D. Lanier, Inc. v. Commissioner. Eugene D. and Erie P. Lanier v. Commissioner. |
| Court | U.S. Tax Court |
Elmo J. Laborde, Jr., Lafayette, La., for the petitioners. Emile L. Hebert III and Linda J. Bourquin, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In these consolidated cases, respondent determined deficiencies in, and additions to, the Federal income taxes of petitioners Eugene D. Lanier, Inc. (the Corporation) and Eugene D. and Erie P. Lanier (the Laniers) for taxable year 1987 in the following amounts:
Docket No. 9146-93
Addition to Tax
Tax Year Deficiency Sec. 6661(a)
1987 ........................................... $63,128 $22,734
Docket No. 9171-93
Addition to Tax
Tax Year Deficiency Sec. 6661(a)
1987 ........................................... $88,370 $22,093
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, the issues remaining for decision are as follows: (1) Whether the fair market value (FMV) of certain real property sold to the Laniers by their wholly owned Corporation exceeded its purchase price; and (2) whether the Laniers received a constructive dividend in the amount of $13,000 as a result of the Corporation's transfer of that sum to their son's election campaign committee.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. The Corporation was domiciled in Youngsville, Louisiana, at the time it filed its petition. The Laniers were married and resided in Youngsville, Louisiana, when they filed their petition.
Beginning in 1969, the Corporation was a franchised Toyota automobile dealership d/b/a Acadian Toyota. The Corporation leased property located at 3203 Johnston Street in Lafayette, Louisiana, from 1969 to 1978. In August 1978, the Corporation acquired the property and improvements located at 5001 Johnston Street, Section 64, T10S-R4E, in Lafayette (the Property), for $566,034 and moved to that address. Beginning in 1979, the Corporation was also a franchised Volvo automobile dealership d/b/a Acadian Toyota-Volvo.
During the taxable year 1987, the Laniers were the Corporation's sole shareholders. G. Talbott Robertson (Robertson), a certified public accountant, informed the Laniers in late 1986 that a "precipitous" decline in real estate values in Lafayette presented the potential opportunity to transfer ownership of the Property from the Corporation to the Laniers without incurring a large tax cost. To that end, Robertson encouraged the Laniers to seek an appraisal of the Property.
The Corporation hired Warren G. Monies (Monies) to appraise the Property. On February 16, 1987, Monies issued an appraisal report which estimated the FMV of the Property to be $424,085 as of that date. Mr. Lanier said that at the time he "thought it [the appraisal] was low."
After receiving Monies' appraisal, the Laniers instructed their attorney to use the selling price of $425,000 in a Credit Sale executed on March 31, 1987, by which the Property was transferred to the Laniers. The Laniers assumed the mortgage on the Property (which had a balance of approximately $293,000), paid $55,000 in cash, and executed a promissory note in favor of the Corporation in the principal amount of $77,000.
The Corporation reported the disposition of the Property on its 1987 Form 1120, U.S. Corporation Income Tax Return, as being a sale for an amount equal to its adjusted basis in the Property as of March 31, 1987, or $423,468. Accordingly, the Corporation did not report any gain or loss on the transaction. Likewise, the Laniers did not report any income on their joint 1987 Form 1040, U.S. Individual Income Tax Return, as a result of their purchase of the Property.
The Corporation's earnings and profits for taxable year 1987 were $62,581. The Corporation had accumulated earnings and profits as of January 1, 1987, totaling $622,124.
From March 31 to September 28, 1987, the Property was owned by the Laniers, but the premises were leased to the Corporation at a rate of $10,000 per month. The Corporation continued to own and operate its franchised Toyota and Volvo automobile dealerships until September 28, 1987. On that date, the Corporation ceased being a franchised Toyota and Volvo automobile dealership d/b/a Acadian Toyota-Volvo and sold its assets to Harvey, Inc. (Harvey). Also on that date, the Laniers and Harvey entered into a 10-year lease for the Property with an option in favor of Harvey for an additional 10 years. The payments called for under the lease were $15,000 per month for the 10-year term commencing September 28, 1987, and $10,000 per month during the option term if the lease were renewed. Such payments in part reflected the sale of the dealership's assets to Harvey.
As of the sale date, the Property was a rectangular corner parcel with frontage on 3 streets, namely Johnston Street (U.S. Highway 167), Gerald Drive (formerly Whittington Terrace Boulevard) and Empire Drive. The Property was legally described as follows:
that certain tract of land, together with all improvements thereon, situated in Section 64, Township 10 South, Range 4 East, Ward 8, Lafayette Parish, Louisiana, having a front on U.S. Highway 167, Johnston Street, of 283.9 feet with a rear line of 286 feet, a depth on the Northeast line of 316.8 feet and a depth on the Southwest line of 310.6 feet. This parcel contains approximately 2.05 acres, or 89,389 square feet. * * *
The Property included a large metal-framed sales and service building consisting of approximately 13,495 square feet for the building area and 3,499 square feet for the attached canopies. This main building contained the sales and accounting offices, parts department, storage and service bay areas, and restrooms. The Property also included a smaller woodframed, galvanized metal-clad building (housing the paint and body shop) consisting of approximately 2,510 square feet, as well as a 68,699 square-foot asphalt-paved lot for new and used car display, storage, and customer parking. In addition, the Property contained two underground storage tanks. One was a double-walled tank for gasoline storage and the other was a single-walled tank for waste oil. Storage tanks were essential to the operation of an automobile dealership with a service area.
The main building was constructed in 1978; in 1987 it had an effective age of 10 years and an estimated remaining economic life of 35 to 40 years. The paint and body shop building had been moved to the site from a previous dealership; by 1987, it had been refurbished and expanded and is considered to have the same approximate age characteristics as the main building.
As of March 31, 1987, the zoning classification for the Property was Zone BG-General Business. This classification permitted a wide range of commercial uses. The flood zone designation of the Property was FEMA Flood Hazard Zone C, the area of minimal inundation.
Johnston Street is the principal northeast-southwest traffic artery for the City of Lafayette. The Property is located in the southwestern section of Lafayette, approximately one-half mile northeast of the intersection of Johnston Street and Ambassador Caffery Parkway. At the time of sale, the Johnston Street corridor in which the Property is situated was a primary commercial corridor in Lafayette.
Of all the metropolitan centers in Louisiana, Lafayette was the hardest hit by the deep recession in the oil and gas industry during the 1980's, losing roughly 22 percent of its jobs between 1983 and early 1987. The recession was severest during 1985 through 1987, with the lowest point occurring during the first quarter of 1987.
In 1985, 1986, and 1987, at least several prominently located vacant land tracts were available for sale and/or development in the vicinity of the Property. However, none of those parcels were sold during this period. Moreover, the market value for all classes of improved commercial real estate had steadily declined, and there was an excess inventory of commercial office, retail, and industrial buildings. Sales of such properties by repossessing lenders were common in 1987. The availability of financing for new development was minimal at this time, and development reached a virtual standstill.
On March 31, 1987, if the Property had been vacant land, the highest and best use of the Property would have been to hold it for future commercial development. As then improved, however, the highest and best use of the Property was as an automobile dealership.
Vance E. Lanier (Vance) is the Laniers' son. He was an officer of the Corporation in 1987. Vance was also a candidate for Representative for District 43 of the Louisiana House of Representatives in the election held on October 24, 1987. Vance E. Lanier, Inc., d/b/a the Committee to Elect Vance Lanier (the Committee), was duly incorporated under the laws of Louisiana. Vance was the chairman of the Committee and Robertson was its treasurer.
The Committee was organized primarily for the purpose of accepting contributions and making expenditures to effect Vance's election to public office. Robertson insisted upon the corporate form of the Committee due to the limited liability from creditors that such a structure afforded. The Committee...
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