Levine v. Comm'r of Internal Revenue (In re Estate of Levine) , Docket No. 782-76.

• Citation: 72 T.C. 780
• Decision Date: 06 August 1979
• Docket Number: Docket No. 782-76.
• Parties: ESTATE of AARON LEVINE, DECEASED, HARVEY LEVINE, EXECUTOR, et al., and ANNA LEVINE, SURVIVING WIFE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

72 T.C. 780

ESTATE of AARON LEVINE, DECEASED, HARVEY LEVINE, EXECUTOR, et al., and ANNA LEVINE, SURVIVING WIFE, PETITIONERS
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 782-76.

United States Tax Court

Filed August 6, 1979.

Decedent exchanged like kind property on July 1, 1968, which he held as a tenant in common with his son. Said exchange resulted in the receipt of boot which decedent failed to include in taxable income. Held, the amount received as boot was properly includable in decedent's taxable income since the exchange of properties occurred during the taxable year of decedent's partnership which ended on Dec. 31, 1968, within decedent's taxable year ended on July 31, 1969. Held, further, decedent realized gain upon the transfer of real estate, encumbered beyond its adjusted basis, to a trust for the benefit of his grandchildren, pursuant to sec. 1001(a), I.R.C. 1954. Crane v. Commissioner, 331 U.S. 1 (1947), followed.

[72 T.C. 780]

Martin Rosen and Barry L. Gardiner, for the petitioners.

Rudolph J. Korbel and Joan Ronder Domike, for the respondent.

FORRESTER, Judge:

For their taxable years ended July 31, 1969 and 1970, respondent has determined deficiencies in petitioners' Federal income taxes in the respective amounts of $19,718.49 and $175,244.03. He has also determined a section 6651(a) ¹ addition to tax in the amount of $2,353.11 for the year 1969.

[72 T.C. 781]

Concessions having been made, the following issues remain for our decision:

(1) Whether decedent realized capital gain during the taxable year ended July 31, 1969, upon the receipt of boot in an otherwise valid section 1031 exchange which occurred in taxable year 1968; and

(2) Whether decedent realized capital gain upon the transfer of certain real property, with outstanding encumbrances that exceeded its adjusted basis, to a trust which assumed the obligations.

FINDINGS OF FACT

All of the facts have been fully stipulated and are so found. Those necessary to an understanding of the case follow.

Aaron Levine (hereinafter decedent) and Anna Levine,² as husband and wife, filed joint Federal income tax returns for the years in issue with the District Director in Andover, Mass. The executor of decedent's estate, Harvey Levine (hereinafter petitioner or Harvey), resided in Woodmere, N. Y., at the time the petition herein was filed.

Decedent and Harvey managed various commercial real estate properties in which they held an interest. They owned, as tenants in common, a commercial building located at 187 Broadway, New York, N. Y. As the lessors and property managers, they provided the tenants with necessary services. The property's books and records were maintained on a calendar year basis at decedent's office in New York. No partnership returns were ever filed with respect to this property; nevertheless, the income or loss from the property was reported, pro rata, on the fiscal year-end return of decedent and the calendar year-end return of petitioner.

Decedent and Harvey also owned, as tenants in common, a building at 183 Broadway, New York, N. Y. As with the 187 Broadway property, they performed various management services in conjunction with their ownership of the 183 Broadway property. On July 1, 1968, decedent and Harvey exchanged the property at 187 Broadway for the like kind property at 183 Broadway. As a result of this transaction, decedent received

[72 T.C. 782]

additional consideration of $60,000 which he failed to include as gain realized from the 1968 exchange, either on his return for the year ended July 31, 1968, or his return for the year ended July 31, 1969.

In addition to the above properties, decedent owned income-producing property at 20-24 Vesey Street, New York, N. Y. This property was originally purchased on November 1, 1944, by decedent's wholly owned corporation. On August 22, 1957, the corporation, in conjunction with its dissolution, made a liquidating distribution of the property to decedent.

On March 17, 1966, decedent obtained from the Bowery Savings Bank a mortgage consolidation of $500,000, representing the consolidation of numerous earlier mortgages made with respect to the subject property. The mortgage history giving rise to such consolidation is as follows:

SCHEDULE OF MORTGAGE HISTORY: 20-24 VESEY STREET

(1) On October 27, 1944, a purchase money mortgage was executed for $148,000.00 in favor of Mutual Life Insurance Company of New York.

(2) On August 9, 1950, a mortgage loan for $120,108.97 was received from the Seamen's Bank for Savings and was consolidated with the $129,891.03 balance of the above purchase money mortgage into a new $250,000.00 mortgage.

(3) On July 30, 1953 a mortgage loan for $100,000.00 was received from James John Trading Corp.

(4) On August 10, 1955 a mortgage loan for an additional $100,000.00 was received from James John Trading Corp.

(5) On June 17, 1958, a mortgage loan for $214,955.77 was received from Bowery Savings Bank and was consolidated (with the $235,044.23 combined balance of the consolidated mortgage referred to in paragraph (2) hereof and the two mortgages described in paragraphs (3) and (4) of this Schedule) into a new mortgage loan of $450,000.00.

(6) On May 17, 1963 a mortgage loan for $120,000.00 was received from The Morris Morgenstern Foundation.

(7) On March 17, 1966, a mortgage loan of $37,001.77 was received from Bowery Savings Bank and was consolidated (with the $462,998.23 balance of the consolidated mortgage referred to in paragraph (5) of this Schedule and the mortgage referred to in paragraph (6) of this Schedule) into a new mortgage loan of $500,000.00, which became a standing mortgage.

Decedent obtained, on November 21, 1968, an additional mortgage on the Vesey Street property from the Commercial Trading Co. in the amount of $300,000. All of the nonrecourse mortgages were secured by the underlying Vesey Street property

[72 T.C. 783]

which had an appraised value, as of January 1, 1970, of $925,000.

On or about January 1, 1970, decedent transferred, inter alia, the Vesey Street property to a trust dated December 1, 1969, created by decedent, as a sole grantor, for the benefit of his three grandchildren. At the time of this transfer, there existed outstanding mortgages and liabilities on such property, all of which were assumed by the trust.

Pursuant to this transfer, decedent timely filed Form 709, U.S. Gift Tax Return, and reported the transfer as follows:

+-----------------------------------------------------------------------------+
                ¦20-24 Vesey Street, city, county and State of New ¦¦¦$925,000.00¦
                ¦York—appraisal value ¦¦¦ ¦
                +---------------------------------------------------------------+++-----------¦
                ¦ ¦¦¦ ¦
                +-----------------------------------------------------------------------------+
                

Mortgages:
                Bowery Savings Bank $500,000.00
                Interest accrued 12/1/69 to 12/31/69 2,291.67
                Commercial Trading1 280,000.00
                Interest accrued 12/1/69 to 12/31/69 3,616.67
                

 $785,908.34
                

Expenses incurred by donor in 1969 and assumed and paid by donee:
                Improvements $117,716.53
                Supplies 387.83
                Repairs 1,253.93
                Paint 63.60
                Electricity 1,827.56
                Steam 3,324.13
                Total expenses 124,573.58

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