Offutt v. Commissioner
| Decision Date | 08 May 1963 |
| Docket Number | 87007.,Docket No. 87006 |
| Citation | 22 TCM (CCH) 589,1963 TC Memo 126 |
| Parties | George W. Offutt, III, and Jane P. Offutt and Pimmit Development Corporation v. Commissioner. |
| Court | U.S. Tax Court |
James Mullen, Esq., 1001 E. Main St., Richmond, Va., LeRoy R. Cohen, Jr., Esq., Frederick T. Gray, Esq., and Frank A. Hardy, Esq., for the petitioners. W. Ralph Musgrove, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
These proceedings involve income tax deficiencies for 1954, 1955 and 1956 and additions to tax for 1954, as follows:
Addition to Tax
Petitioner Year Deficiency Sec. 294(d)(1)(A)
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Docket No. 87006
George W. Offutt, III and Jane P. Offutt ..... 1954 $ 34,234.65 $3,906.20
1955 514,901.84
1956 328,395.62
Docket No. 87007
Pimmit Development Corporation ............... 7-31-54 $ 33,575.80
7-31-55 74,457.67
7-31-56 3,063.64 ........
There are a number of issues involved (19 are listed in petitioners' brief, and 20 in respondent's), the most important of which relate to various transactions between petitioner, George W. Offutt, III, and an associate, John W. Register, or between them and several wholly or partially owned corporations through which they operated real estate developments known as Pimmit Hills and Manassas Park subdivisions. One of such corporations, Pimmit Development Corporation, is the petitioner in Docket No. 87007. Several of the minor issues raised in the pleadings have been settled by agreement which will be given effect under Rule 50.
A more precise statement of the issues, some of which have been combined, will be set out below with separate findings of fact and opinions.
Some of the facts have been stipulated and are found accordingly.
Petitioners, George W. Offutt, III, and Jane P. Offutt, are husband and wife, now residing at Hobe Sound, Florida. During the years under consideration they maintained, and still maintain, a business office at Bellevue Farm, Warrenton, Virginia, their former home. Their returns for the calendar years 1954, 1955 and 1956 were filed with the district director of internal revenue at Richmond, Virginia.
The petitioner in Docket No. 87007, Pimmit Development Corporation, is a Virginia corporation whose business address is also Bellevue Farm. Its returns for all of the years here involved were also filed with the district director of internal revenue at Richmond, Virginia. The returns were for fiscal years ending July 31.
For a number of years petitioner, George W. Offutt, has been engaged, either individually or through various corporations, in the development of real estate, particularly the subdivision of land and the construction and sale of houses.
In 1950 Offutt's wholly-owned corporation, Offutt Construction Corporation, (Offutt Construction) acquired a tract of land which later was developed as Sections 1 and 2 of Pimmit Hills, a subdivision located in Fairfax, Virginia, near Falls Church.
In developing Pimmit Hills, Offutt first sought, unsuccessfully, to have the water and sewerage service furnished by the City of Falls Church or Fairfax County. Without provision for proper water and sewerage service, the state and county authorities would not give their approval for the project. For the purpose of providing such service, Offutt, in June 1956, organized Pimmit Service Company (Pimmit Service) as a public service company under the laws of the State of Virginia. All of its stock was issued to Offutt.
Offutt Construction built houses in Sections 1 and 2 of Pimmit Hills and also constructed the water and sewerage facilities. It conveyed these facilities to Pimmit Service without any consideration except for Pimmit Service's obligation to maintain the facilities and furnish continuous water and sewerage service to the houses in the subdivision. After completion of Sections 1 and 2, Offutt Construction was dissolved on November 26, 1954, and a liquidating distribution of $76,000 was made to Offutt, its sole stockholder.
In its income tax returns Offutt Construction treated the costs of the water and sewerage facilities, $122,337.26, as a part of the cost of the houses and lots sold.
In the latter part of 1953 or early in 1954, Internal Revenue Service questioned the right of Offutt Construction to deduct the cost of the water and sewerage facilities which it had transferred to Pimmit Service. To settle the dispute, Pimmit Service, in June 1954, paid on behalf of Offutt Construction additional taxes of $36,991.63. Respondent determined in his notice of deficiency to Offutt that this amount was taxable to him individually as a dividend distribution.
About 1950, Offutt became associated with a builder, John W. Register. Together they organized several corporations which they utilized at Pimmit Hills and Manassas Park. A corporation known as O. and R. Construction Company (O. & R. Construction) was formed to build houses in the Pimmit Hills subdivision. Two other corporations, Pimmit Development Corporation (Pimmit Development), the petitioner in Docket No. 87007, and Greenacres, Incorporated, were organized to operate in the Pimmit Hills area. The activities of some of those corporations were financed by loans from Investors Diversified Services (I. D. S.). The Washington area manager of I. D. S., E. M. Bros, became a minority stockholder in some of those corporations.
Pimmit Development was organized August 7, 1953, to purchase and subdivide land and sell building lots. Its stock was issued 40 percent to Offutt, 40 percent to Register and 20 percent to Bros.
In June 1954, Pimmit Development acquired a tract of land in the Pimmit Hills area which it proceeded to develop as Sections 7 and 8 of that subdivision. In April 1955, by prior agreement with the Board of Supervisors of Fairfax County, the water and sewerage facilities for those sections, after their construction by Pimmit Development, were transferred to Pimmit Service without consideration, as were the facilities in Sections 1 and 2. Jefferson Mortgage Corporation, a subsidiary of I. D. S. which had financed some of the Pimmit Hills development and held title to one-half of the houses in Section 7, joined with Pimmit Development in the transfer. Altogether, there were 1,700 or 1,800 houses built in the Pimmit Hills subdivision. The total cost of the facilities was $204,510.22.
In its return for 1955, Pimmit Development treated this amount of $204,510.22 as part of the cost of goods sold. Respondent determined in his notice of deficiency to Pimmit Development that the cost of the facilities was not deductible as cost of goods sold, and further determined, in his notice of deficiency to Offutt, that the transfer of the facilities to Pimmit Service resulted in a dividend distribution to him, its sole stockholder, in the amount of $204,510.22.
In his returns for 1954, 1955 and 1956, Offutt reported compensation from the above-named corporations as follows:
1954 1955 1956
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Pimmit Development ................ $35,072.00 $20,084.00
Pimmit Service .................... 5,072.00 10,168.00 $2,040.00
O. & R. Construction .............. 15,072.00 ......... ........
Greenacres, Incorporated .......... 8,557.33 ......... ........
Opinion
The first of the three issues predicated on the above-stated facts is whether the payment by Pimmit Service of the additional tax of $36,991.63 assessed against Offutt Construction was a dividend constructively received by Offutt.
Respondent's position is that since Offutt Construction and Pimmit Service were both wholly-owned by Offut it was, in essence, the same as if Pimmit Service had declared and paid a cash dividend to Offutt and he in turn had paid the taxes of Offutt Construction. Respondent's theory rests on the long established rule that a distribution of earnings and profits by a corporation to or for the use of a stockholder is taxable to him as a dividend. Old Colony Trust Company v. Commissioner 1 USTC ¶ 408, 279 U. S. 716; Wall v. United States 47-2 USTC ¶ 9395, 164 F. 2d 462 (C. A. 4, 1947); Clark v. Commissioner 36-2 USTC ¶ 9364, 84 F. 2d 725; Lonsdale v. Commissioner 1 USTC ¶ 392, 32 F. 2d 537; Louis H. Zipp Dec. 22,358, 28 T. C. 314; L. L. Silverstein Dec. 24,862, 36 T. C. 438; Garden State Developers, Inc. Dec. 22,952, 30 T. C. 135.
On the facts of record respondent's view of the transaction seems the only acceptable one. We see no other route by which the earnings of Pimmit Service could have reached Offutt Construction than through Offutt. The payment by Pimmit Service of Offutt Construction's taxes was not intended as consideration for the assets which it had transferred to Pimmit Service or as a loan from Pimmit Service.
Offutt contends that Pimmit Service paid the tax because Offutt...
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