Murry v. C. I. R.
| Decision Date | 31 August 1979 |
| Docket Number | Nos. 76-4415,76-4416,s. 76-4415 |
| Citation | 601 F.2d 892 |
| Parties | 79-2 USTC P 9565 Kenneth A. MURRY and Helen J. Murry, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. LAKESIDE GARDEN DEVELOPERS, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Gilbert E. Andrews, Act. Chief, Appellate Section, U. S. Dept. of Justice, M. Carr Ferguson, Asst. Atty. Gen., Stuart E. Seigel, Chief Counsel, I. R. S., Gary R. Allen, Jeffrey S. Blum, Attys., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellant.
Robert O. Rogers, Palm Beach, Fla., for petitioners-appellees.
Eileen Trautman, Melvin N. Greenberg, Miami, Fla., for The Florida Builders & Developers Council, etc.
Appeals from the Decisions of The United States Tax Court.
Before TUTTLE, TJOFLAT and HILL, Circuit Judges.
We affirm the decision appealed from on the basis of the memorandum opinion of the Tax Court, which we attach as an appendix. In view of the comments offered by our brother in dissent, we wish to highlight the following aspects of the Tax Court's opinion.
The issue we are called upon to decide is a very narrow one. We have no doubts that, as an initial matter, the Commissioner has the power to look behind the form of a transaction to determine its true substance. Yet the Commissioner does not ask us to decide whether the transfer of title to the recreational facilities from the corporation to its stockholders at an artificially low price constituted a "bargain sale." Nor are we asked to consider whether the "excessive" rentals paid under the leases ought to be considered dividends, attributable to the corporation in the year in which they are paid. Instead, we are asked to embark upon a new course altogether, giving the Commissioner the authority to restructure a transaction into the transaction the Commissioner would deem more appropriate. Such authority in government would be wholly unprecedented.
The Commissioner contends that he should be allowed to capitalize the "excessive" portion of the rents paid under the recreational facilities leases and treat it as part of the purchase price of the condominiums.
In short, the Commissioner's position is that, when a taxpayer or related taxpayers, have entered into actual transactions, the Commissioner should be authorized to rule that the taxpayer ought not have made those particular transactions but should have entered into different transactions so that more immediately taxable income would result. Under this view, when the Commissioner determines that the taxpayer has, in a bona fide transaction, minimized the tax consequences, Section 61 of the Internal Revenue Code authorizes the Commissioner to create the sort of transaction which would have maximized the taxable consequences and, having done so, to treat the taxpayer as if he had, indeed, entered into the transaction the Commissioner prefers.
In urging us to approve this approach, the Commissioner has been unable to point to Any precedent supporting his position. The Commissioner's reliance on Section 61 of the Internal Revenue Code is misplaced, since the rents are paid to the stockholders and not the corporation. Furthermore, the Commissioner's reliance on Section 482 of the Code simply begs the question because the Commissioner has not established that he has the authority, in the first instance, to capitalize the value of the rents.
In the present case the parties have entered into a valid sale and leaseback of the recreational facilities. We cannot allow the Commissioner to disregard completely what has actually occurred between the parties. A transaction must be given its effect in accordance with what actually occurred and not in accordance with what might have occurred. Frank Lyon Co. v. United States, 435 U.S. 561, 98 S.Ct. 1291, 55 L.Ed.2d 707 (1978). In view of the total dearth of authority supporting the Commissioner's position, we reject his attempt to restructure this particular transaction in the manner he seeks.
Nothing held here limits any authority of the Commissioner to pierce the apparent and to discover the real transaction, imposing taxes upon reality in lieu of sham. As mentioned, however, the Commissioner in this case has studiously avoided asking us to pass upon the exercise of any such authority in the treatment of the "bargain sale" of the recreational facilities from the corporation to its sole stockholders or the actual payment of dividends disguised as rentals.
These comments are consistent with and mere highlights derived from the memorandum opinion of the tax court, appendix.
APPENDIX
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in the income tax of petitioners in the following amounts:
As a result of the agreement by the parties, the sole issue to be considered for decision at this time is whether Lakeside Garden Developers, Inc., realized additional income under section 61 2 from the sale of condominium residential units represented by the obligation, which the purchasers of those units were required to assume, to pay rentals under a 99-year lease for so-called recreational facilities which had been erected by Lakeside Garden Developers, Inc., and transferred to its stockholders. Depending upon the decision of the Court with respect to that issue, a further hearing may be necessary to determine the nature and amount of such income and the extent to which taxable to the shareholders of Lakeside Garden Developers, Inc.
Some of the facts have been stipulated. Such stipulations and the exhibits attached thereto are incorporated herein by this reference.
During the taxable years in question, Kenneth A. Murry and Helen J. Murry were husband and wife having their principal place of residence at 2200 Lake Drive, Delray Beach, Florida. They filed a joint individual Federal income tax return, Form 1040, for each of the calendar years 1966, 1967 and 1968, with the Southeast Service Center of the Internal Revenue Service at Chamblee, Georgia.
During the taxable years in question, Lakeside Garden Developers, Inc., hereinafter called Lakeside, was a corporation having its principal place of business at 7340 South Military Trail, Lake Worth, Florida. For each of the fiscal years ending June 30, 1966, through June 30, 1969, it filed a United States corporation income tax return, Form 1120, with the Southeast Service Center of the Internal Revenue Service at Chamblee, Georgia.
Mr. Kenneth A. Murry had extensive experience in the construction industry. He entered into an agreement with Mr. Elias Breath and Mr. Harry W. Topal, who were to contribute the necessary capital to organize a corporation and to build and to sell condominium apartments. Pursuant to such agreement, on April 22, 1965, they caused Lakeside to be incorporated. Pursuant to the articles of incorporation, there were authorized 100 shares of common stock, of which 45 shares were issued to Kenneth A. Murry, 45 shares were issued to Elias Breath, and 10 shares were issued to Harry W. Topal. In January 1966, Harry W. Topal died and 5 of his shares were purchased by Mr. Murry and the other 5 shares were purchased by Mr. Breath, whereupon each became the owner of 50 shares of the 100 authorized and outstanding shares of Lakeside.
On May 22, 1965, Mr. Murry entered into a contract to acquire a parcel of land on which Lakeside was to construct the apartments. After a mortgage commitment was obtained, Lakeside took title to the land. The development plan contemplated the construction of 11 apartment buildings, to be sold as condominiums, clustered around a common recreational facility. It was further contemplated that the recreation facility would be held by the stockholders of Lakeside and leased to the condominiums The first condominium apartment building was nearing completion in January 1966. At a special meeting of its board of directors held on January 19, 1966, Lakeside was authorized to convey to Mr. Murry and Mr. Breath the specific real property on which the recreational facilities were being constructed. On January 27, 1966, Lakeside conveyed such property for a stated consideration of $6,000, receiving two notes in the amount of $3,000, one of which was executed by Mr. Murry and the other by Mr. Breath. At the same time, Mr. Murry and Mr. Breath each gave a note to Lakeside for one-half of the cost of the improvements on said properties, amounting to a total of $62,213.61, dated November 14, 1966.
under a 99-year lease, with all maintenance and other expenses incident thereto to be paid as a part of the condominium expenses. In other words, the owners of the recreation facilities would lease such facilities to the condominium owners under a 99-year net lease at a specified rent. The complex was to be known as "Lakeside Point Gardens."
On January 27, 1966, Lakeside also submitted a declaration of condominium for the first condominium building which was nearing completion. Simultaneously, Mr. Murry and Mr. Breath, individually, entered into a 99-year lease with the condominium owners association for this building whereby that association acquired a nonexclusive right to use the recreational facilities in exchange for a stated rental. The condominium owners association was comprised of the owners of all the units in...
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