Leisure Time Enters., Inc. v. Comm'r of Internal Revenue
| Decision Date | 26 August 1971 |
| Docket Number | Docket No. 1119-69. |
| Citation | 56 T.C. 1180 |
| Parties | LEISURE TIME ENTERPRISES, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Elliott K. Braverman, for the petitioner.
E. L. Newberger, for the respondent.
In 1962 Shassian, a residential building and developer, agreed to have facilities for a swim club constructed and to lease and then sell them to a community group organized for the purpose of operating the swim club. On May 16, 1962, Shassian organized L corporation and became its sole shareholder. Five days later L entered into a contract with the community group for the lease and sale of the swim club facilities. Construction of the facilities continued through June of 1962. The facilities were sold on July 13, 1965, at a gain of $61,761.66. L was liquidated soon thereafter. Held, by reason of sec. 337(c)(1)(a), I.R.C. 1954, gain realized by L, a ‘collapsible corporation’ under sec. 341(b), I.R.C. 1954, cannot escape recognition under sec. 337(a)— regardless of the applicability of sec. 341(d)(3) to gain realized by its sole shareholder, Shassian.
The Commissioner determined a deficiency of $18,066.81 in petitioner's income tax for the taxable year ended April 30, 1966. The only issue presented for decision is whether gain realized by petitioner on the sale of its property pursuant to a plan of complete liquidation qualified for nonrecognition under the provisions of section 337, I.R.C. 1954. The resolution of that question depends upon the applicability of section 337(c)(1)(a) which excludes from the coverage of section 337 ‘any sale or exchange * * * made by a collapsible corporation (as defined in section 341(b)).’ The facts have been stipulated.
Petitioner Leisure Time Enterprises, Inc. was incorporated on May 16, 1962. During the taxable year ended April 30, 1966, its address was 3205 Silverside Road, Wilmington, Del. Petitioner filed its Federal corporate income tax return for the taxable year ended April 30, 1966, with the district director of internal revenue at Wilmington, Del.
At all times petitioner's sole transferee of petitioner's assets. At the time the petition herein was filed, Shassian was accepting mail for petitioner at 2601 Carpenter Road, Wilmington, Del.
Shassian was a builder engaged primarily in the construction of residential properties through controlled corporations. In 1962 he held a controlling interest in Wilmot Homes, Inc. (Wilmot), a Delaware corporation engaged in the development of residential housing, and during that year Wilmot built homes in developments known as Colonial Woods, Tarleton, Woodbine, and Devonshire.
In 1962 Shassian determined that a swim club should be built on acreage near the foregoing developments. Thereupon, the residents of the communities organized Silverside Swim Club (Silverside or the Swim Club), a nonprofit corporation. Silverside and Shassian agreed that once built, the club's facilities would be leased to Silverside for a period of 5 years and then sold to the Swim Club.
After entering into the foregoing agreement Shassian had Wilmot begin construction of facilities for the club on land in the area. The land was not at that time owned by Shassian but was owned by Louise Brown and Paul Weinberg, who were relatives of Shassian, and by Mark E. Rubinstein.
On May 16, 1962, Shassian incorporated petitioner and became its sole stockholder. On the same date all of the construction costs of the swim club ‘accumulated’ up to that time were transferred to petitioner's books and reflected as assets. A corresponding sum was credited on petitioner's books to accounts payable to Wilmot Homes, Inc.
On May 21, 1962, petitioner entered into a contract with Silverside which provided that the swim club facilities would be leased to Silverside for 5 years at a rental of $25,000 per year and that at the end of the 5-year period, the facilities would be sold to the Swim Club for $250,000.
On or about May 21, 1962, petitioner entered into a lease-purchase agreement with Brown, Weinberg, and Rubinstein for (a) the lease of approximately 11 acres in the area of the swimming pool for a term of 5 years at a rental of $10,000 per year and (b) the purchase of such land for $100,000, settlement to take place at the expiration of the lease. The rental of $10,000 per year was for the lease of the land and was not to be credited toward the $100,000 purchase price.
Additional work on the bath houses, fencing, toilets, landscaping, and the like continued through June of 1962. Such construction work was performed by Wilmot on behalf of petitioner.
Silverside was unable to pay any part of the rental called for by the lease. During the term of the lease it made two payments, one of $8,000 in 1963 and one of $18,000 in 1964, which were applied against the sale price of the swim club facilities. In 1965 petitioner and Silverside negotiated new terms for the sale of the club. On June 10, 1965, petitioner's board of directors approved the sale of the swim club to Silverside for $272,000.
On July 12, 1965, petitioner purchased the leased premises from Brown, Weinberg, and Rubinstein for the agreed price of $100,000. Settlement between petitioner and Silverside with respect to the sale of the swim club occurred 1 day later, on July 13, 1965.
On July 23, 1965, petitioner's board of directors approved a resolution to dissolve the corporation. Petitioner was liquidated soon thereafter. The only activity engaged in by petitioner during its existence related to the swim club, and petitioner realized no income from the time of its incorporation until the facilities were sold.
The parties have stipulated that ‘there was a $61,761.66 gain realized from the liquidation of the petitioner.’ Although they have not made it entirely clear, it appears that such gain was realized by petitioner on the sale of the swim club facilities and was then distributed to Shassian, its sole stockholder.
In his notice of deficiency the Commissioner determined that petitioner was a collapsible corporation ‘under the provisions of section 341’ and that therefore the gain realized by petitioner was not eligible for nonrecognition under section 337. The Commissioner further determined that the $61,761.66 gain was derived from the sale of property which was not a capital asset and was therefore includable in petitioner's gross income for the taxable year ending April 30, 1966, as ordinary income.
Section 337, I.R.C. 1954, provides that a corporation which adopts a plan of complete liquidation and within the next 12 months distributes all of its assets in complete liquidation shall recognize no gain or loss from the sale or exchange of its property within the 12-month liquidating period.1 Section 337(c)(1)(a) excludes from the coverage of this section any sale or exchange ‘made by a collapsible corporation (as defined in section 341(b)).’ The controversy in this case is confined to the question whether section 337(c)(1) (a) precludes petitioner from qualifying for nonrecognition under section 337. 2
The Commissioner has determined that petitioner is a ‘collapsible corporation’ as that term is defined by section 341(b)3 and that by reason of section 337(c)(1)(a) the gain which it realized cannot escape recognition under section 337(a). Petitioner's principal contention is that the definition in section 341(b) must be read together with the 3-year limitation provided by section 341(d)(3) and that, by virtue of such limitation, section 337(c)(1)(a) is inapplicable to petitioner.
Petitioner has not conceded that it is a collapsible corporation under section 341(b)— wholly apart from the possible applicability of subsection (d)(3). However, it has not strongly urged otherwise. Indeed the only argument it has offered with respect to the applicability of section 341(b) is confined to the following two sentences:
Petitioner does not believe that the stipulated facts demonstrate that it was a ‘collapsible corporation’ within the definition of Section 341(b), Internal Revenue Code of 1954. Sale of its property was one of only (sic) several possibilities (and not necessarily its major objective from the outset).
By this suggestion petitioner apparently makes reference to the statutorily required ‘view’ under section 341(b). The record however is wholly inadequate to support a finding that the requisite ‘view’ was absent here. In view of the fact that the burden of proof is upon petitioner, we conclude that— apart from the applicability of section 341(d)(3)— petitioner is a collapsible corporation under section 341(b). Cf. Sproul Realty Co., 38 T.C. 844, 856-857; Guy A. VanHeusden, 44 T.C. 491, 499, affirmed 369 F.2d 119 (C.A. 5).
Petitioner's primary argument is that section 341(b) must be read together with section 341(d)(3) which limits the applicability of section 341:
SEC. 341. COLLAPSIBLE CORPORATIONS.
(d) LIMITATIONS ON APPLICATION OF SECTION.— In the case of gain realized by a shareholder with respect to his stock in a collapsible corporation, this section shall not apply—
(3) to gain realized after the expiration of 3 years following the completion of such manufacture, construction, production, or purchase.
Petitioner emphasizes that by virtue of subsection (d)(3), gain realized by a stockholder of a collapsible corporation may escape ordinary-income treatment under section 341(a)— even though the corporation is defined as a ‘collapsible corporation’ by subsection (b). Petitioner urges that a similar result should follow under section 337(c)(1)(a): that if section 341(d)(3) is applicable, a corporation should not be denied the benefits of section 337, even though it is defined as ‘collapsible’ by section 341(b).
Petitioner contends that the gain realized by Shassian is described by subsection (d)(3) and urges, on the basis of the foregoing reasoning, that it is therefore not governed by section 337(c)(1)(a).4 We disagree and hold that...
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Mitchell v. Commissioner
...which denies application of the section to "collapsible corporations", as defined in section 341, I.R.C. 1954. See Leisure Time Enterprises, Inc. Dec. 30,954, 56 T.C. 1180. Since the Commissioner chose not to raise the issue of Elton's "collapsibility" in his statutory notice of deficiency,......