Molbreak v. Comm'r of Internal Revenue
| Decision Date | 26 December 1973 |
| Docket Number | 8248-71.,Docket Nos. 8226-71 |
| Citation | 61 T.C. 382 |
| Parties | VERNON MOLBREAK AND JEAN D. MOLBREAK, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Vernon Molbreak, for the petitioners.
Robert F. Brunn, for the respondent.
Petitioners and another individual, Leonard Schmock (in docket No. 8233-71), formed Westshore, Inc., a real estate corporation which executed a 99-year lease agreement in August 1960 for 6 acres of land, including an option at any time during the continuance of said lease to purchase the fee for $200,000. Petitioners were directors and the controlling stockholders of the corporation. On Apr. 6, 1967, one of the petitioners requested the State of Wisconsin Dane County Probate Court to permit Westshore, Inc., to exercise the option with respect to 1.3 acres of the 6 acres covered by the leasehold; and on Apr. 21, 1967, the request was denied. On Apr. 27, 1967, Westshore, Inc., entered into a plan to liquidate under sec. 333, I.R.C. 1954, and on Apr. 28, petitioners and Schmock received in liquidation the remaining 92-year leasehold with the option to buy. Petitioners exercised the option on May 15, 1967, and 4 days later sold the aforesaid 1.3 acres. Petitioners reported the profits thereon in their income tax returns for 1967 as long-term capital gain under sec. 1222. Held: Since the exercise of the option on May 15, 1967, constituted a purchase of legal title to the fee and did not result in a qualifying sec. 1031 exchange of a leasehold for the fee, petitioners are not entitled to tack the holding period of their Westshore, Inc., stock onto their holding period of the fee. Accordingly, petitioners realized a short-term capital gain on the sale of part of the property on May 19, 1967.
Respondent determined deficiencies in the income taxes of the petitioners as follows:
The sole issue presented for our consideration is whether the petitioners held the parcel of real estate which they sold on May 19, 1967, for more than 6 months within the meaning of section 1223 of the Internal Revenue Code of 1954 2 so that they are entitled to treat the profit on the sale of a portion of the real estate as long-term capital gain.
All the facts, together with the exhibits, have been stipulated and are so found. The Molbreak and Schmidt cases were submitted fully stipulated but, due to the problem of securing timely stipulations of fact from the petitioners in these cases, separate but substantially identical stipulations of fact were filed in the consolidated proceedings. The parties have agreed on the following statements in the stipulations:
Vernon Molbreak and Jean D. Molbreak, during the taxable year 1967 and at the time of the filing of their petition herein, resided in Madison, Wis.
Harvey E. Schmidt and Adeline Schmidt, during the taxable years 1967 and 1968 and at the time of the filing of their petition herein, resided in Madison, Wis.
Vernon Molbreak, Jean D. Molbreak, Harvey E. Schmidt, and Adeline Schmidt filed their returns for the taxable years involved with the district director of internal revenue, Milwaukee, Wis.
Jean D. Molbreak and Adeline Schmidt are involved herein only because they filed joint Federal income tax returns with their husbands; and hereinafter petitioners will refer to Vernon Molbreak and Harvey E. Schmidt.
Petitioner Vernon Molbreak is an attorney.
Molbreak, Harvey Schmidt, and Leonard Schmock, all of Madison, Wis., formed a real estate corporation, Westshore, Inc., a Wisconsin corporation, with its principal place of business at 4010 University Avenue, Madison, Wis. Westshore, Inc., was formed to enter into a lease of 6 acres of real property. The lease contemplated was entered into on August 19, 1960. The lessor was Mariam Leuk, a.k.a. Mariam L. Luek, hereinafter called Luek.
The lease agreement between Luek and Westshore, Inc., lessee, reads, in pertinent part:
CLAUSE 3-Term— To have and to hold the above described premises unto the Lessee for the period of ninety-nine (99) years commencing on the 15th day of September, 1960, and ending on the 14th day of September, 2059.
CLAUSE 4-Rental— Lessee hereby covenants and agrees to pay to Lessor as rent for the aforesaid premises the sum of Eight Thousand Dollars ($8,000.00) per annum, in coin of the realm and at such office of the Lessor or her agent as the Lessor may from time to time designate. Each years rental shall be payable on September 15th.
CLAUSE 5-Taxes and Assessments— In addition to the rental hereinbefore provided to be paid, Lessee further covenants and agrees to bear, pay and discharge all taxes, assessments, rates, charges, and all levies general and special, ordinary and extraordinary of any name, nature and kind whatsoever, which may be fixed, charged, levied, assessed, or otherwise imposed upon said premises or upon any or all building or improvements thereon, but said Lessee shall not be required to pay income taxes or any inheritance or succession taxes which may at any time during the term of this Lease be required to be paid upon any gift, devise, deed, mortgage, descent or other alienation of any part of or all of said leased premises and property except as hereinafter provided in the event of purchase by the Lessee. Lessor and Lessee shall prorate all taxes, assessments and utilities for the current year.
CLAUSE 10-Option to Purchase— Lessee is hereby granted the option at any time during the continuance of this Lease of purchasing the fee of the aforesaid premises for the sum of Two Hundred Thousand Dollars ($200,000.00), together with that sum which would reimburse Lessor for income taxes assessed against her as a result of this sale. Lessee is hereby granted a further option to purchase the demised premises for the sum of Two Hundred Thousand Dollars ($200,000.00), payable in equal annual installments over a period of fifteen (15) years with interest at the rate of four percent (4%) per annum computed on the unpaid balance. Under this option there shall be no reimbursement for income taxes payable by the Lessor as a result of said sale.
Sale of the premises in parcels less than the whole shall be arranged by mutual consent of the parties only.
CLAUSE 12-Repair and Maintenance of Buildings— Lessee agrees to keep the said buildings now in existence and any new buildings to be erected in good condition and repair, reasonable wear and tear excepted.
The aforesaid lease agreement did not contain a subordination clause. Westshore, Inc., found it difficult to develop the subject of the lease without such a clause which would subordinate the interest of Luek or her interest under the option to purchase. On January 20, 1964, Luek entered into an agreement with Westshore, Inc., under which she agreed to subordinate her interest in the real property to any mortgage placed thereon by Westshore, Inc., in consideration of $1.
Luek passed away November 12, 1964. The inventory of the Luek estate in the Dane County Probate Court of the State of Wisconsin listed the value of the 6 acres subject to the August 19, 1960, lease as $120,000.
Luek bequeathed her interest in the real property to a trustee, William E. Sieker, an attorney in Madison, Wis. Sieker, hereinafter referred to as trustee, was directed to collect the rents under the lease of August 19, 1960, and to enforce the provisions of said lease whenever it became necessary. The trustee was directed to distribute the rents to various named persons during their natural lives. The will of Luek bequeathed the remainder interest under the aforesaid lease ‘outright, absolutely, and in fee simple’ to the board of trustees for the Shriners Hospital for Crippled Children, St. Louis, Mo.
The trustee on March 17, 1967, petitioned the Dane County Probate Court of the State of Wisconsin and represented that Westshore, Inc., had tendered to the trustee an offer to purchase a portion (1.3 acres or the westerly 125 feet) of the property that was the subject matter of the aforesaid lease. This offer on Westshore, Inc.‘s part related to the 125 feet of the premises known as Blackhawk Cabins and was in the amount of $46,000 cash. The trustee's petition recited that said $46,000 in cash was arrived at by taking the square-foot area of the westerly 125 feet of the premises subject to the aforementioned lease to the whole area of the premises subject to the lease.
The trustee's petition further represented that the offer to purchase on the part of Westshore, Inc., contained a request that the trustee consent and agree to continue said lease between the Mariam Luek estate and Westshore, Inc., under the same terms and conditions except that the ‘lessees shall be Vernon Molbreak, Leonard Schmock and Harvey E. Schmidt substituted for Westshore, Inc.’ This offer to purchase further requested that the annual lease rental be reduced as the percentage of land remaining bore to the total rental. This offer upon the part of Westshore, Inc., also requested the trustee to consent to the liquidation of Westshore, Inc., and to the substitution of Molbreak, Schmock, and Schmidt for the lessee, Westshore, Inc.
The trustee on March 17, 1967, did request the court to approve the sale of the westerly 125 feet of the premises for the sum of $46,000. The trustee further requested the court to continue the lease between the Mariam Luek trust estate and Westshore, Inc., in the names of Molbreak, Schmock, and Schmidt under the same terms and conditions of the original lease dated August 19, 1960, and at a reduced rental rate computed as the percentage of the land retained bears to the total...
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