Murray v. Comm'r of Internal Revenue

• Decision Date: 31 March 1954
• Docket Number: Docket No. 37486.
• Citation: 21 T.C. 1049
• Parties: E.J. MURRAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

21 T.C. 1049

E.J. MURRAY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 37486.

Tax Court of the United States.

Promulgated March 31, 1954.

Frederick H. Torp, Esq., for the petitioner.

G.N. Cromwell, Esq., for the respondent.

1. petitioner mortgaged a piece of business property in 1932 as security for a loan of $64,000. The mortgages foreclosed and transferred the property to third parties in 1936. In 1937, petitioner instituted suit in an Oregon court claiming a right to redeem the property from the third parties, and in 1942, the Oregon Supreme Court held that the petitioner had an equity of redemption and that the third parties were mortgagees in possession, holding the property for the benefit of the petitioner. After an accounting, it was determined in 1947 that petitioner was entitled to credit toward redemption of $57,512.64 which represented the net balance of rents received from the property by the mortgagees, offset by interest and expenses of maintaining the property during the years since 1937 when they were in possession. Held, the petitioner received ordinary

income in the amount of $57,512.64 in the year 1947.

2. Held, further, the petitioner is entitled to deduct, in the year 1947, (a) income taxes paid to the State of Oregon, and (b) one-half the attorneys' fees and court costs incurred in obtaining possession of his property.

3. Held, further, petitioner is also entitled to deduct depreciation on his property for the years he was not in possession.

This proceeding involves deficiencies for the years 1946 and 1947 in amounts of $1,967.95 and $36,656.04, respectively. The case has been submitted on stipulated facts. The deficiency for 1946 arises over differences between the Commissioner and the petitioner concerning the appropriate adjusted basis on which to determine the long-term capital gain on securities sold in 1946. This matter has been settled by the parties. The deficiency for 1947 arises over differences between the Commissioner and the petitioner on the tax treatment to be accorded an involved and long-litigated real estate transaction which is fully described below.

FINDINGS OF FACT.

The petitioner, E.J. Murray, resided in Klamath Falls, Oregon, at substantially all times material to this action. He filed his individual income tax returns for 1946 and 1947 with the collector of internal revenue for the district of Oregon, reporting the following:

+------------------------------------+
                ¦Tax year  ¦Net income  ¦Income tax  ¦
                +----------+------------+------------¦
                ¦1946      ¦$5,480.85   ¦$1,040.27   ¦
                +----------+------------+------------¦
                ¦1947      ¦549.56      ¦9.41        ¦
                +------------------------------------+
                

During all years material, petitioner kept his books and records and filed his income tax returns on the cash basis.

Issue I— Year 1946

In 1946 petitioner sold 33 shares of the capital stock of the Central Hotel Company, an Oregon corporation, for $28,071.33. This stock was acquired by petitioner on September 7, 1920, and, at the time of sale, it had an adjusted basis of $5,000. Petitioner realized a capital gain of $23,071.33 from the sale of this stock.

Issue II— Year 1947

In 1928, petitioner and his wife, Rebecca J. Murray, purchased as tenants by the entirety certain unimproved real estate situated in Klamath Falls, Oregon. To finance construction of a building on the property (the property and its improvements being hereinafter referred to as the Murray Building), petitioner and his wife borrowed $64,000 from the Pacific Savings & Loan Association, Tacoma, Washington, giving in return a first mortgage on the property.

On August 20, 1932, there was a balance of approximately $57,000 due on the loan. On that date, petitioner and his wife conveyed the Murray Building to the Conger Corporation, an Oregon Corporation, by deed warranting against all encumbrances ‘existing mortgage, liens and taxes.‘ The Conger Corporation was organized on August 5, 1932, the sole stockholders being W. A. Wiley, G. Q. D'Albini and Marie D'Albini, wife of G. Q. D'Albini. Wiley and D'Albini were petitioner's attorneys and petitioner was indebted to them for professional services theretofore rendered. The transaction was handled in the following manner: Wiley and D'Albini borrowed $5,000 from a bank and deposited it to the credit of the Conger Corporation in purported payment for its stock. The Conger Corporation then issued its check for $5,000 to petitioner as purported consideration for the deed of the property to the corporation, whereupon petitioner returned the money to the lending bank in liquidation of the bank's loan to Wiley and D'Albini, whose notes were returned to them. Petitioner also paid a $10 charge for the use of the money.

In May 1934 the Pacific Savings & Loan Association brought suit to foreclose its first mortgage on the Murray Building and on March 23, 1935, the property was sold pursuant to a decree of foreclosure for the unpaid balance of $56,984.78, the mortgagee being the purchaser.

On March 21, 1936, the Conger Corporation, which appeared as the record owner of the Murray Building, gave notice of intention to redeem the property.

On March 23, 1936, which was the last day of the statutory redemption and delivered a bargain and sale deed to the Murray Building to Mary L. Moore, Merle S. West, Charles J. Martin and Thomas B. Watters, hereinafter referred to as the Watters Group. The same day the Watters Group exercised their purported right of redemption by redeeming the property, and paid to the sheriff of Klamath County the sum of $63,711.60, entered into possession, and thereafter claimed to be the owners in fee of the property, free from any claim of the petitioner.

At the time of the conveyance of the Murray Building to the Watters Group, the property was subject to liens for Federal income tax in the amount of $3,148.60 assessed against petitioner and Rebecca J. Murray. In November 1936 the Watters Group advised the deputy collector in charge of collection of such tax to sell the property at public sale and that the Watters Group would buy it at such sale, thereby better perfecting their title.

In April 1937 the United States collector of internal revenue at Portland, Oregon, proceeded to sell the Murray Building to collect the tax, and it was bid in by the Watters Group for $16,500, who were forced to that price by competitive bids although the tax liens amounted only to $3,148.60.

On March 22, 1938, petitioner and his wife, Rebecca J. Murray, filed suit in the Circuit Court of Oregon for the County of Klamath entitled ‘E. J. Murray and Rebecca J. Murray, Plaintiffs, v. W. E. Wiley, G. Q. D'Albini, Marie N. D'Albini, Mary L. Moore, Merle S. West, Emma West, Charles J. Martin, Lynna Martin, Thomas B. Watters, Evelyn Watters, and J. W. Maloney as Collector of Internal Revenue for the United States of America, Defendants,‘ wherein it was prayed that the court (a) decree that the plaintiffs were the beneficial owners of all right, title, and interest in and to the Murray Building; (b) decree that the defendants, other than J. W. Maloney, were trustees holding the premises for the sole and exclusive benefit of the plaintiffs; (c) direct the defendants as trustees to convey the property to plaintiffs; and (d) require the defendants to render an accounting with respect to the operation of the Murray Building. On motion, defendant, J. W. Maloney was dismissed for lack of jurisdiction of the court. Rebecca J. Murray died on August 8, 1938, prior to any hearing, and petitioner succeeded to her right, title, and interest in the Murray Building as surviving tenant by the entirety.

On December 18, 1940, the Circuit Court of Oregon for the County of Klamath, by written opinion, held for defendants, whereupon the plaintiff, E. J. Murray, took an appeal to the Supreme Court of Oregon.

On June 30, 1942, the Supreme Court of Oregon in Murray v. Wiley, 169 Ore. 381, 127 P.2d 112, reversed the lower court and held:

(a) That petitioner's conveyance of the Murray Building to the Conger Corporation was made to secure his indebtedness to his attorneys, Wiley and D'Albini, and that the Conger Corporation was the alter ego of Wiley and D'Albini, who were in the position of second mortgagees.

(b) The Conger Corporation held the property as a mortgagee in possession and its purported assignment of that statutory right of redemption affected property belonging to the petitioner and not to Wiley and D'Albini.

(c) The Watters Group, which received a conveyance from the Conger Corporation together with an assignment of the right of redemption, were the assignees of rights which in equity belonged to the petitioner and upon exercising the statutory right of redemption became mortgagees in possession, having the right to foreclose against petitioner but being subject to his right to redeem upon payment of the sums found to be due them.

(d) The petitioner was the beneficial owner of the property subject to the liens of the various defendants who were mortgagees in possession.

The supreme court ordered the proceeding remanded for an accounting, directing that the defendants were entitled to:

1. Credit of $63,711.60 paid in redeeming the property, plus interest at 6 per cent per annum from the date of payment.

2. Credit of the amount of the Federal tax lien against the property with interest at 6 per cent per annum and to receive from the collector the balance of funds in his hands over the amount needed to satisfy such lien.

3. Reasonable fees for the legal services performed by Wiley and D'Albini prior to and owing on August 20, 1932, less offsets for certain cash realized by Wiley and D'Albini on their sale to the Watters Group. Defendants Wiley and D'Albini were also entitled to a lien subsequent to that of the Watters Group for any excess of the attorneys' fees remaining unpaid after crediting such cash offsets.

Upon full accounting being had,...