Mitchell v. C. I. R., 102572 FEDTAX, 2545-69

Docket Nº:2545-69, 2599-69, 2600-69, 4351-69, 4352-69, 4353-69, 4381-69, 4382-69, 1550-70, 1551-70.
Opinion Judge:RAUM, Judge:
Party Name:JESSIE B. MITCHELL, ET AL.,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Leonard A. Marcussen, for the petitioners. Eugene H. Ciranni and David L. Gibson, for the respondent.
Case Date:October 25, 1972
Court:United States Tax Court
 
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31 T.C.M. (CCH) 1077 (1972)

T.C. Memo. 1972-219

JESSIE B. MITCHELL, ET AL.,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 2545-69, 2599-69, 2600-69, 4351-69, 4352-69, 4353-69, 4381-69, 4382-69, 1550-70, 1551-70.

United States Tax Court

October 25, 1972

Leonard A. Marcussen, for the petitioners.

Eugene H. Ciranni and David L. Gibson, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

The Commissioner determined deficiencies in petitioners' income tax as follows:

Petitioner Year Deficiency

Jessie B. Mitchell Docket No. 2545-69 1965 $19,493.30

John R. Mitchell, deceased, by his surviving spouse and

representative, Bonnie Mitchell, and Bonnie Mitchell

Docket No. 2599-69 1965 11,392.26

Harry C. Allen and Velma N. Allen

Docket No. 2600-69 1965 9,590.12

Donovan J. McCune Docket No. 1150-70 1965 22,345.05

Dorothy M. Dicken Docket No. 1551-70 1965 11,206.06

The Commissioner also determined a deficiency ($104,683.24) and an addition to tax ($26,170.81) for 1965 against the Elton Corporation, in respect of which he further determined that petitioners, as transferees of the assets of the Elton Corporation, were accordingly liable in the following amounts to the extent of the value of the property received by them:

Transferee

Petitioner Liability

Jessie B. Mitchell Docket No. 4353-69 $77,779.17

John R. Mitchell, deceased, by his surviving spouse and

representative, Bonnie Mitchell, and Bonnie Mitchell

Docket No. 4382-69 58,334.38

Harry C. Allen and Velma N. Allen Docket No. 4381-69 58,334.38

Donovan J. McCune Docket No. 4352-69 77,779.17

Dorothy M. Dicken Docket No. 4351-69 38,889.59

The primary issue for decision is whether the Elton Corporation complied with the provisions of section 337, I.R.C. 1954, and thereby did not itself recognize any gain as a consequence of the sale of a tract of land, which comprised the principal part of its assets, or cause petitioners in their individual capacities to recognize dividend income in respect of certain distributions to them. Cf. section 331, I.R.C. 1954. FINDINGS OF FACT The parties have stipulated certain facts, which, together with the accompanying exhibits, are incorporated herein by this reference. All of the petitioners herein (as well as John R. Mitchell, deceased) were closely related or associated by blood, marriage or friendship and each held either individually or jointly stock interests in the Elton Corporation. Petitioners Jessie B. Mitchell, Donovan J. McCune and Dorothy M. Dicken each filed individual Federal income tax returns for the calendar year 1965 with the district director of internal revenue at San Francisco, California. Petitioners Harry C. Allen and Velma N. Allen are husband and wife, and they filed a joint Federal income tax return for 1965 with the district director of internal revenue at San Francisco, California. Petitioner Bonnie Mitchell and her husband, John R. Mitchell, also filed a joint Federal income tax return for 1965 with the district director of internal revenue at San Francisco, California. John R. Mitchell died on May 14, 1968, and Bonnie Mitchell is his representative herein. All of the petitioners resided in the State of California at the time of the filing of their respective petitions herein. On November 28, 1955, petitioners[2] purchased 77.97 acres of undeveloped land located east of, and adjacent to the City of Petaluma, California (sometimes referred to hereinafter as the ‘ City’ ), as tenants-in-common with the following individual interests and cost bases:

Undivided Interest Basis

Jessie B. Mitchell 4/16 $17,632.93

Bonnie Million (later Mitchell) 3/16 16,974.66

Harry C. and Velma N. Allen 3/16 16,974.66

Donovan J. McCune 4/16 22,632.90

Dorothy M. Dicken 2/16 11,316.45

Total Cost Basis $85,531.60

As already noted above, and at the time of the purchase of the 77.97 acres of land (referred to hereinafter generally as the ‘ Petaluma Gardens property’ or the ‘ property’ ), all of the petitioners were closely related to each other by blood, marriage or friendship. In the spring of 1956, after the purchase of the property, petitioner Bonnie Mitchell (then Bonnie Million) married John R. Mitchell (‘ Mitchell’ ), who was not involved in the initial purchase of the Petaluma Gardens property. Mitchell was a general building contractor and he had experience in real estate transactions over a number of years. On March 7, 1962, several of the petitioners, acting as incorporators and designating themselves the first directors, caused the Elton ‘ Corporation (‘ Elton’ or the ‘ corporation’ ) to be organized under the laws of the State of California for the purpose of subdividing and developing the Petaluma Gardens property. The Articles of Incorporation for Elton, which were filed with the Secretary of State of California also on March 7, 1962, authorized 200 shares of $100 par value common stock, and provided in respect of the business of the corporation as follows: The specific business in which the corporation is primarily to engage is the purchase, development and improvement of unimproved real property for resale. The first meeting of Elton's board of directors was held on April 29, 1962, at the home of Bonnie and John R. Mitchell. At the meeting the directors elected Mitchell, who was otherwise the predominant moving force in all the transactions described herein, as president of the corporation, and petitioner Jessie B. Mitchell as Elton's secretary. The minutes of the meeting, which were prepared by an attorney who had advised petitioners and Mitchell in respect of the incorporation of Elton, disclosed that the directors adopted by-laws for the corporation and designated the office of the Petaluma Travel Agency, which was owned and operated by Jessie B. Mitchell, to serve also as Elton's principal office. Pursuant to the adopted by-laws, the annual meetings of Elton's stockholders were to be held at the office of Jessie B. Mitchell's travel agency, and the quarterly meetings of the board of directors at the home of John R. and Bonnie Mitchell. In addition to the above meeting of Elton's directors on April 29, 1962, the board of directors also met in a special meeting on the same date and adopted several resolutions relating to the issuance of shares and the corporation's proposed acquisition of the Petaluma Gardens property. Pursuant to these resolutions Elton filed an application with the Division of Corporations of the State of California (‘ Division of Corporations') seeking permission to issue and sell 16 of its 200 shares of authorized $100 par value stock to petitioners and Mitchell, and to execute a promissory note and deed of trust in the amount of $320,000 for the Petaluma Gardens property. The application disclosed that the $320,000 promissory note and deed of trust were to be subordinated to a subsequent note and deed of trust in respect of a $100,000 loan to be obtained by Elton in order to finance the first phases of development and improvement of the Petaluma Gardens property. In May and June, 1962, Elton thereupon duly issued for cash the 16 shares of stock to the persons designated in the application filed with the Division of Corporations, as follows:

Number of Shares Price

Jessie B. Mitchell 4 $ 400

John R. and Bonnie Mitchell 3 300

Harry C. and Velma N. Allen 3 300

Donovan J. McCune 4 400

Dorothy M. Dicken 2 200

$1,600

The stock certificates thus issued were placed in escrow with the attorney who had advised petitioners and Mitchell in respect of Elton's incorporation. The record does not disclose what became of the stock certificates thereafter. On May 28, 1962, petitioners conveyed the Petaluma Gardens property by grant deed to Elton. The deed, however, was not acknowledged or recorded until the following year, as described hereinafter. Beginning in 1962, Elton engaged in various activities in preparation for the development and subdivision of the Petaluma Gardens property. The $1,600 in cash paid by petitioners and Mitchell for their Elton stock was deposited, along with an additional $50, the source of which is undisclosed by the record, to the corporation's account at the Bank of America, Vallejo, California, Branch and disbursed for corporate purposes. This account was subsequently closed in early 1963. Around February 13, 1963, Mitchell suffered a serious heart attack for which he was hospitalized. Although his health was not good thereafter, upon his recovery he once again undertook several activities directed toward Elton's development of the Petaluma Gardens property. In March and April, 1963, the petitioners acknowledged the grant deed by which they conveyed the Petaluma Gardens property to Elton on May 28, 1962, and the deed was subsequently recorded on April 24, 1963. In consideration for the Petaluma Gardens property Elton delivered its interest-bearing promissory note, dated April 2, 1963, in the amount of $320,000 payable to petitioners and Mitchell. The corporation secured the note by execution of a deed of trust on the property naming the payees of the note as beneficiaries. Although Mitchell was not himself one of the original purchasers of the Petaluma Gardens property, through an inadvertency of the title insurance...

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