Mintz v. Comm'r of Internal Revenue, Docket Nos. 53982-53984.

• Decision Date: 17 June 1959
• Docket Number: Docket Nos. 53982-53984.
• Citation: 32 T.C. 723
• Parties: MAX MINTZ AND HILDA MINTZ, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LOUIS MINTZ AND MAYBELLE MINTZ, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MORRIS MINTZ AND EVELYN MINTZ, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 723

MAX MINTZ AND HILDA MINTZ, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LOUIS MINTZ AND MAYBELLE MINTZ, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MORRIS MINTZ AND EVELYN MINTZ, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 53982-53984.

Tax Court of the United States.

Filed June 17, 1959.

Lawrence J. Podell, Esq., for the petitioners.

Martin D. Cohen, Esq., and William F. Chapman, Esq., for the respondent.

Held, that Kingsway Developments, Inc., was a collapsible corporation within the definition of section 117(m) of the 1939 Code, and therefore, that gains realized by petitioners upon a distribution from Kingsway and sale of their Kingsway stock were gains attributable to property which is not a capital asset.

Respondent determined deficiencies in petitioners' income taxes for the taxable year ended December 31, 1950, as follows:

+----------------------------------------------+
                ¦Docket No.¦Petitioners             ¦Deficiency¦
                +----------+------------------------+----------¦
                ¦53982     ¦Max and Hilda Mintz     ¦$24,201.54¦
                +----------+------------------------+----------¦
                ¦53983     ¦Louis and Maybelle Mintz¦24,433.70 ¦
                +----------+------------------------+----------¦
                ¦53984     ¦Morris and Evelyn Mintz ¦5,122.26  ¦
                +----------------------------------------------+
                

The sole question is whether the gains realized by petitioners upon a cash distribution from Kingsway Developments, Inc., and upon the sale of Kingsway stock are taxable to them as ordinary income under section 117(m) of the Internal Revenue Code of 1939.

FINDINGS OF FACT.

Certain facts and joint exhibits have been stipulated and are included herein by reference.

Petitioners Max and Hilda Mintz, Louis and Maybelle Mintz, and Morris and Evely Mintz, husbands and wives respectively, residing in Brooklyn, New York, filed joint income tax returns with the collector of internal revenue for the first district of New York. Max, Louis, and Morris are brothers; they will hereinafter sometimes be referred to as petitioners.

For many years prior to 1948 Louis was engaged in the construction business, primarily as a builder of 1- and 2-family houses. Prior to 1946 he owned a 50 per cent interest in a construction firm; the other 50 per cent was owned by Monroe Markowitz, his brother-in-law. Markowitz was primarily engaged in the textile business and the active management of the construction business was left to Louis. Louis' business association with Markowitz began in 1943 or 1944. Except for a controversy in connection with their first transaction, which arose when Markowitz sought to examine the books kept by Louis, their relationship ran smoothly until 1949. Markowitz had come to regard Louis as an expert in the acquisition, development, and management of real estate.

Max had been associated in the construction business with Louis since the late 1930's, and acquired a one-third interest therein upon his release from the Army in 1946 or 1947. Morris acquired a 10 per cent interest when he was taken into the business as a salesman in 1947 or 1948. Thereafter Louis, Max, and Markowitz each owned 30 per cent of the construction business and Morris owned 10 per cent.

In addition to building 1- and 2-family houses Louis held a real estate broker's license and had, over a period of years as far back as 1935, acquired numerous investment properties, mainly buildings and mortgages, which he continued to hold through the time of the trial of these cases. Louis usually acted as his own broker. One investment property was owned together with Max and numerous others were owned with Markowitz. Louis considered his investment activities to be separate and distinct from his 1- and 2-family building operations. By 1948 a number of these investment properties had appreciated substantially in value. Rather than incur a capital gains tax upon their disposition, Louis preferred to continue holding the properties for income-producing ability to be in jeopardy.

Between March and September 1948, petitioners and Markowitz acquired 3 parcels of land, aggregating 43,207 square feet, identified respectively as Tax Lots Nos. 45 and 24, Block 4649, and Tax Lot No. 70, Block 4650, on the Tax Map of the Borough of Brooklyn, City of New York. The original purpose of acquiring these parcels (hereinafter sometimes referred to as the Kingsway tract) was to construct 1- and 2-family houses. At no time prior to September 2, 1948, did petitioners or Markowitz intend to build an apartment house on the acquired properties. Louis had never built an apartment house prior to those involved in the present cases.

Tax Lots Nos. 45 and 24 were contiguous and comprised the block front on the north side of Kings Highway between East 94th and East 95th Streets, Brooklyn; Tax Lot No. 70 was separated from the other 2 lots by East 95th Street and was located on the northeast corner of Kings Highway and East 95th Street.

On March 24, 1948, petitioners and Markowitz caused Marphil Realty Corporation (hereinafter referred to as Marphil) to enter into a contract to purchase Tax Lot No. 45; and on April 9, 1948, they similarly caused Marphil to enter into a contract to purchase Tax Lot No. 24. The lots were acquired from tax lien traders who bought the tax liens on the lots, made contracts to sell them, and then foreclosed the liens prior to transfer of title. On July 6, 1948, after foreclosure, the vendors deeded the lots to Marphil free and clear of all encumbrances at cost of $13,800 for Tax Lot No. 45 and $14,250 for Tax Lot No. 24.

Louis Mintz, on behalf of petitioners and Markowitz, acquired the tax lien on Tax Lot No. 70 at a tax lien sale on September 2, 1948, and began suit to foreclose the lien. Although the separate cost of acquiring Tax Lot No. 70 has not been stipulated, the aggregate cost of the Kingsway tract was $44,567.96 and was apportioned among petitioners and Markowitz as follows: Louis— 30 per cent; Max— 30 per cent; Markowitz— 30 per cent; Morris— 10 per cent. Marphil and Louis acted merely as nominees for petitioners and Markowitz in the acquisition of the Kingsway tract; the ownership of the land was in fact divided among petitioners and Markowitz according to the percentages noted above. The City of New York assessed each of the 3 lots at $20,000, or a total of $60,000, on the tax bills for the fiscal years ending June 30, 1949, and June 30, 1950.

Subsequent to September 2, 1948, petitioners and Markowitz abandoned their intention to build 1- and 2-family houses on the Kingsway tract and decided to apply to the Federal Housing Administration (FHA) for mortgage insurance with a view to construction of an apartment house project. Under section 608 of the National Housing Act, 12 U.S.C. section 1743, FHA was authorized to insure mortgages meeting certain statutory requirements and to promulgate rules and regulations to implement the mortgage insurance program. Petitioners and Markowitz had been aware of the existence of section 608 but the construction of a ‘Section 608 project’ in another neighborhood pointed out the suitability of the Kingsway tract for a similar development. On the advice of these persons, Louis contacted Thomas C. Grady, a mortgage broker and specialist in FHA matters, with respect to securing the desired FHA mortgage approval. Grady canvassed the proposed site and reported that because of its satisfactory location there would be no difficulty obtaining approval.

On October 22, 1948, petitioners and Markowitz commenced negotiations with FHA by causing their architects, Proskauer & Lama, to file an application with FHA for approval of the Kingsway tract as a site for a federally insured housing project. FHA issued a site approval on November 12, 1948. At that time petitioners hoped that they would ‘Mortgage out,‘ that is, that mortgage loan proceeds might exceed the cost of constructing the project.

Title to the parcel known as Tax Lot No. 70 was acquired in the name of Louis Mintz under judgment of foreclosure on November 29, 1948.

On or about January 4, 1949, Louis and Markowitz, as cosponsors on behalf of Kingsway Developments, Inc. (hereinafter referred to as Kingsway), a corporation which they contemplated forming to construct the project, applied to the Federal Housing Commissioner for mortgage insurance in the amount of $1,125,000 in connection with the proposed construction of a 6-story, 126-family, 456-room apartment house project on the Kingsway tract at an average monthly rental of $29.21 per room. The loan of $1,25,00 was to be made by the Lincoln Savings Bank of Brooklyn (hereinafter referred to as Lincoln). It was estimated in the application that Kingsway's ‘total estimated requirements' for putting up the project would be $1,25,000. Included in the estimates were a 5 per cent ‘builder's fee’ of $49,386 and a 5 per cent ‘architect's fee’ of $51,855. Petitioners did not intend to pay these fees in full; instead, it was anticipated that Proskauer & Lama would receive a substantially smaller fee and that petitioners would supervise the building themselves, thereby saving the cost of independent foreman and dispensing with the supervision of an architect. Grady had informed petitioners that architect's and builder's fees could be included in estimated construction cost even though such fees were never in fact to be paid, or not to be paid in the amount estimated. Petitioners estimated that Kingsway would supply $125,000 of estimated costs in the form of land (the Kingsway tract) valued at $86,444 (43,207 square feet at $2 per square foot) and ‘other equity’ of $38,586 which in fact represented that portion of estimated fees which Kingsway did not intend to pay.

On February 8, 1949, Lincoln issued a letter of commitment in which it tentatively authorized a fully insured FHA building and permanent loan of $1,125,000 to Kingsway.

Kingsway was organized as a New York...