McDonald v. Comm'r of Internal Revenue

• Decision Date: 20 September 1961
• Docket Number: Docket Nos. 76938-76943.
• Parties: BERTHA GASSIE MCDONALD, TRANSFEREE, ET AL.,1 PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

36 T.C. 1108

BERTHA GASSIE MCDONALD, TRANSFEREE, ET AL.,1 PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 76938-76943.

Tax Court of the United States.

Filed September 20, 1961.

Byron R. Kantrow, Esq., for the petitioners.

S. George Voss, Esq., for the respondent.

Corporation was liquidated and was entitled to nonrecognition of gain or loss under section 337(a), 1954 Code. It, however, was required to pay Louisiana State income taxes in a substantial amount arising out of and allocable to gains from the sale of real estate, with respect to which it was entitled to nonrecognition of gains under the Federal income tax laws. Respondent disallowed the deduction of Louisiana State income taxes. Respondent contends such taxes are allocable to a class of income wholly exempt from the taxes imposed by subtitle A of the Code and, therefore, nondeductible because of the provisions of section 265, Held, that the Louisiana State income taxes in question are not allocable to a class of income wholly exempt from the taxes imposed by subtitle A, and, therefore, are deductible.

OPINION.

FISHER, Judge:

Respondent determined a deficiency of $13,863.66 in income taxes against petitioners as transferees of assets of The Oaks, Incorporated, In Liquidation (hereinafter referred to as the corporation).

The sole practical issue before us is whether certain State income taxes arising out of and allocable to gains from the sale of real estate, with respect to which the corporation was entitled to nonrecognition of gains under the Federal income tax laws, were applicable to a class of income wholly exempt from the taxes imposed by subtitle A of the Code of 1954.

All of the facts are stipulated and are incorporated herein by reference.

Petitioners, Bertha Gassie McDonald, Charles G. McDonald, Robert A. Warren, Connie E. Bobbitt, Ida Lee Key, and Sue Warren Whitehead, filed their 1956 individual income tax returns with the director of internal revenue at New Orleans, Louisiana. Notices of liability were mailed to each of the petitioner's on June 30, 1958.

The deficiency of $13,863.66 of income taxes, as determined by the respondent, is the petitioner's alleged liability as the transferees of assets of the corporation, the address of which was 232 South Jefferson Street, Port Allen, Louisiana, for the alleged deficiency of income tax in the amount of $13,863.66 due from The Oaks, Incorporated, In Liquidation, for the taxable year January 1, 1956, to October 18, 1956. On September 26, 1958, the deficiency of $13,863.66 was assessed against the corporation, which said assessment, together with interest, is wholly outstanding and unpaid.

The shareholders of the corporation were as follows: Sue Warren Whitehead, Robert A. Warren, Connie E. Bobbitt, Ida Lee Key, Bertha Gassie McDonald, and Charles G. McDonald. Each of these shareholders as transferees have filed petitions to this Court contesting the deficiency determined by the respondent.

The corporation was incorporated under the laws of the State of Louisiana on November 20, 1924. To the date of liquidation it was engaged in the business of developing, renting, and selling real estate. It filed its final corporate income tax return for the period January 1, 1956, to October 18, 1956, on November 30, 1956, with the district director of internal revenue, New Orleans, Louisiana.

On December 17, 1955, at a special meeting of the stockholders, a plan of complete liquidation was adopted. Unanimous consent of the stockholders was filed October 11, 1956.

On October 18, 1956, all of the assets of the corporation were distributed proratably among the shareholders in exchange for their outstanding shares of capital stock. The assets of the corporation were distributed in accordance with the schedule entitled ‘The Oaks, Incorporated, In Liquidation, Distribution of the Assets in Exchange For Stock of Shareholders Per Act of Liquidation and Settlement’ attached to the corporation's final return. The fair market value set forth in this schedule was determined by an appraisal made by a local realtor, and represents the true fair market value of said assets.

On October 12, 1956, in one transaction, the corporation sold 882 acres of land, known as Oaks Plantation, to Port Properties, Incorporated, for $926,100. Port Properties, Incorporated, was in no way related to the corporation, nor to the petitioners herein. The gain on the sale amounted to $852,998.50 and was reported by the corporation as a non-recognized gain under section 337(a) of the Code of 1954.

On its final return the corporation deducted $35,664, representing State income taxes due on its income for the period January 1, 1956, to October 18, 1956. Of this amount $34,119.94 is attributable to the non-recognized gain on the sale of land to Port Properties, Incorporated, described above. The respondent determined that the corporation is not entitled to a deduction for State income taxes of $34,119.94 attributable to the non-recognized gain on the sale of land to Port Properties, Incorporated. The...