Morris v. Comm'r of Internal Revenue , Docket Nos. 2752-66
| Decision Date | 02 October 1972 |
| Docket Number | 6497-67.,Docket Nos. 2752-66,6478-67— 6480-67 |
| Citation | 59 T.C. 21 |
| Parties | EDNA MORRIS, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Arnold Y. Kapiloff and Myles A. Cane, for the petitioners.
John J. O'Toole, for the respondent.
1. A corporation acquiring property from a bankrupt subject to an indebtedness secured by a first lien on the property may include such indebtedness in its basis for depreciation notwithstanding that the transaction was arranged by its principal stockholder who, as a part of the same plan, acquired the indebtedness from a third party. However, other indebtedness secured by a subordinated lien on the property acquired by the stockholder without consideration was worthless and is not includable as a part of the basis.
2. Payments received on account of notes acquired at a discount and secured by a first lien on property having a fair market value in excess of the balance due on the notes must be allocated as between principal and interest or premium.
3. Upon the liquidation under sec. 333, I.R.C. 1954, of the corporation receiving payment on such indebtedness, the individual shareholders received a taxable dividend to the extent of the earnings and profits resulting from the interest or premium received on account of the payment of the notes.
These proceedings involve deficiencies in income taxes asserted against the petitioners, as follows:
After giving effect to various stipulations and concessions by the parties, the issues remaining for decision are as follows:
(1) In docket No. 6480-67, the basis of certain property in the hands of Gateway Motor Inn, Inc., for purposes of depreciation under section 167; 2
(2) In docket Nos. 2752-66 and 6497-67, whether payments made to Palpar, Inc., on account of certain notes may be treated as a return of capital;
(3) In docket Nos. 6478-67 and 6479-67, whether Edna Morris and Sidney Cohn realized a taxable dividend as a result of the liquidation of Palpar, Inc., under section 333.
The cases were consolidated for trial, briefing, and decision. Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Sidney Cohn (hereinafter referred to as Cohn) and Stella E. Cohn, husband and wife during 1961, timely filed with the district director of internal revenue, Newark, N.J., a joint individual Federal income tax return on a cash basis for the calendar year 1961. During 1961, Cohn and Stella E. Cohn resided at 45 Edgewood Street, Tenafly, N.J. On December 31, 1966, Cohn and Stella E. Cohn were divorced. At the time Cohn and Stella E. Cohn filed their petitions in this case, Cohn resided at 2 Dorchester Road, Englewood Cliffs, N.J., and Stella E. Cohn resided at Horizon Towers South, Horizon Road, Fort Lee, N.J.
Cohn was admitted as a member of the New Jersey Bar in 1927, was 66 years old on October 12, 1969, and has been actively engaged on a full-time basis in the practice of law in New Jersey since 1927 specializing in the real estate and real estate finance fields. Stella E. Cohn is retired and has not been gainfully employed for more than 30 years.
Edna Morris (hereinafter referred to as Morris) timely filed with the district director of internal revenue, Newark, N.J., an individual Federal income tax return on a cash basis for the calendar year 1961. Cohn and Morris were married on December 31, 1966. Morris was 55 years old on July 4, 1969. At the time Morris filed her petition in this case, she resided at 2 Dorchester Road, Englewood Cliffs, N.J.
Gateway Motor Inn, Inc. (hereinafter referred to as Gateway), is a New Jersey corporation organized on January 27, 1961. Gateway timely filed U.S. corporate income tax returns on an accrual basis with the district director of internal revenue, Newark, N.J., for its taxable years February 1, 1961, through January 31, 1962; February 1, 1962, through January 31, 1963; and February 1, 1963, through January 31, 1964. The principal office of Gateway is located at 105 State Highway S-3, Secaucus, N.J. 07094. Gateway maintained such principal office at the time it filed its petition in this case.
Palpar, Inc. (hereinafter referred to as Palpar), was a New Jersey corporation organized on November 19, 1958, with its principal office located at 232 Broad Avenue, Palisades Park, N.J. Palpar timely filed with the district director of internal revenue, Newark, N.J., U.S. corporate income tax returns on a cash basis for the taxable periods November 1, 1958, through October 31, 1959; November 1, 1959, through October 31, 1960; and for the period November 1, 1960, through May 3, 1961, filed its return on June 24, 1963. On May 3, 1961, Palpar was dissolved under New Jersey law and liquidated pursuant to section 333.
Lincoln Enterprises, Inc. (hereinafter referred to as Lincoln), was a New Jersey corporation organized in 1958 by Salvatore Vitiello (hereinafter referred to as Vitiello) for the purpose of promoting, constructing, owning, and operating a motel (hereinafter referred to as the motel) to be located on real estate to be leased by Lincoln at 105 State Highway S-3, Secaucus, N.J. 07094. Vitiello was the beneficial owner of all of the outstanding stock of Lincoln.
On May 9, 1958, Lincoln, as lessee, executed an agreement of lease (hereinafter referred to as the lease) with Eugene and Olive E. Mori and Joan G. and James W. Phillips (hereinafter referred to as the lessor), as lessor, for a term of 75 years with respect to a parcel of unimproved real estate (hereinafter referred to as the leasehold) located at 105 State Highway S-3, Secaucus, N.J. 07094. The lease, among other things, contemplated Lincoln immediately would construct and operate the motel on the leasehold.
The lease required Lincoln prior to commencing construction of the motel to produce for lessor a mortgage commitment in an amount which together with the amount of equity capital of Lincoln equaled at least the amount of a firm bid for the construction of the motel. The lease also provided that the lessor shall have the option to reenter the leased premises and terminate the lease if lessee shall default in the payment of rent or any other sum due under the lease or in the full, faithful, and punctual performance of any other covenant, agreement, provision, or condition on the part of lessee to be performed, or if any execution or attachment shall be issued against the lessee or any of lessee's property. In addition, the lease further provided that if a petition shall be filed, and the lessee shall thereafter be adjudicated bankrupt; or if such petition shall be approved by the court and a receiver or trustee for any portion or all of lessee's property shall be appointed, unless the rental herein reserved is then current and future payments are promptly paid when due, the lease shall, ipso facto, be terminated.
Vitiello thereupon contacted Michael Pollotta (hereinafter referred to as Pollotta) for the purpose of engaging him to act as general contractor to construct the motel. Pollotta had been engaged in the building contracting business for approximately 23 years. Pollotta and members of his family organized Mike-Pol Construction Co., Inc. (hereinafter referred to as Mike-Pol), a New Jersey corporation, in 1958 for the purpose of constructing the motel for Lincoln.
On August 27, 1958, Mike-Pol and Lincoln executed a contract for the construction by Mike-Pol of the motel for Lincoln for the sum of $305,000. Mike-Pol obtained security for the payment of the contract price in the form of an assignment of the lease and a pledge of the stock of Lincoln.
On August 27, 1958, as collateral security for the performance by Lincoln of its obligations to Mike-Pol under the contract, Lincoln assigned its rights in the lease to Mike-Pol. At the same time, by agreement the stockholders of Lincoln deposited the certificates representing all the outstanding stock of Lincoln and the officers and directors of Lincoln deposited their undated blank resignations in escrow with Cohn, as escrow agent.
Lincoln attempted to obtain permanent mortgage financing to pay for the construction of the motel but was not successful. In the absence of such financing, the lessor waived a provision of the lease requiring Lincoln, prior to commencing construction of the motel, to obtain equity capital and a mortgage commitment in an amount equal to the amount of a firm bid for the construction of the motel.
Lincoln was obligated to pay Mike-Pol $85,000 on August 29, 1958, as the first installment under the construction contract. Lincoln failed to make this payment. By letter dated September 18, 1958, Mike-Pol advised Lincoln that Mike-Pol would not resume work on the motel until it received such payment. Mike-Pol and Lincoln thereupon executed an amendment to the construction contract increasing the amount due by the sum of...
To continue reading
Request your trial
-
Bolger v. Comm'r of Internal Revenue
...that circumstance does not exist. See Crane v. Commissioner, 331 U.S. at 12, fn. 37; Parker v. Delaney, 186 F.2d at 458; compare Edna Morris, 59 T.C. 21 (1972). The combination of the benefits of accelerated depreciation and the Crane doctrine produces a bitter pill for respondent to swallo......
-
Brountas v. Comm'r of Internal Revenue
...v. Commissioner, 47 T.C. 340, 351-354 (1966); Blackstone Theatre Co. v. Commissioner, 12 T.C. 801, 804 (1949), with Morris v. Commissioner, 59 T.C. 21, 33-34 (1972); see 1 W. McKee, (W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, par. 7.04) supra at 7-14—-7-15 (1977......
-
Franklin's Estate v. C. I. R.
...design of the parties yield no equity to the purchaser. Cf. Decon Corp., 65 T.C. 829 (1976); David F. Bolger, 59 T.C. 760 (1973); Edna Morris, 59 T.C. 21 (1972). In the transaction before us and during the taxable years in question the purchase price payments by Associates have not been sho......
-
Tufts v. Comm'r of Internal Revenue , Docket Nos. 1386-76
...v. Commissioner, 47 T.C. 340, 351-354 (1966); Blackstone Theatre Co. v. Commissioner, 12 T.C. 801, 804 (1949), with Morris v. Commissioner, 59 T.C. 21, 33-34 (1972); see 1 W. McKee, supra at ...