Posey v. United States
| Decision Date | 28 September 1971 |
| Docket Number | No. 71-1952 Summary Calendar.,71-1952 Summary Calendar. |
| Citation | 449 F.2d 228 |
| Parties | Ernest L. POSEY and Kathleen V. Posey, husband and wife, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Amos E. Jackson, Palm Beach, Fla., Walter E. Travers, Stuart, Fla., and Jackson & Jackson, Palm Beach, Fla., for plaintiffs-appellants.
Donald B. Craven, Atty., Tax. Div., Dept. of Justice, Washington, D. C., John L. Briggs, U. S. Atty., Orlando, Fla., Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Paul M. Ginsburg, Gordon S. Gilman, Attys., Fred B. Ugast, Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee.
Before WISDOM, COLEMAN, and SIMPSON, Circuit Judges.
This appeal involves the refund of federal income taxes for the taxable year 1961 in the amount of $47,473.23, together with interest thereon, and is taken from the order of the District Court filed February 16, 1971, granting the Government's motion for partial judgment as to Count One of the appellants' complaint filed on August 15, 1969. The original complaint of the appellants contained two counts, the second of which was dismissed with prejudice by the District Court on May 29, 1971, leaving only Count One in contention on this appeal. We perceive no alternative to affirming the judgment of the District Court.
Kathleen V. and Ernest L. Posey, are now residents of the State of Florida. Prior to 1961 they were residents of Virginia Beach, Virginia. For the calendar year 1961, the appellants filed their Federal Income Tax Return with the Director of Internal Revenue, Richmond, Virginia.
Ernest L. Posey was the sole shareholder of two corporations, the Sheridan Corporation and the Paragon Corporation, each of which was incorporated in Virginia. The Sheridan Corporation was organized on May 18, 1937, and had 5,000 shares of common stock outstanding. Its principal asset was an apartment building called the Washington Manor Apartments. The Paragon Corporation was organized on August 9, 1930, and had 141 shares of common stock outstanding. Its principal assets were an apartment building called the Pineview Apartments and a fourteen acre citrus grove in Florida.
Because of appellant's age and the increasing burden on him as to the managerial responsibilities associated with the two corporations, he decided that the time had come to liquidate the corporations and dispose of the apartments.
Before planning for the liquidation of the corporations, Mr. Posey consulted with an employee of the Internal Revenue Service and with a Certified Public Accountant as to the proper method for handling the liquidation so as to legally avoid liability for any income tax on the depreciable property received from the corporations until such property was actually sold.
At the Norfolk, Virginia, office of the District Director of Internal Revenue, he was directed to an employee of the Internal Revenue Service who discussed the tax problem relative to liquidation of the corporations. According to the appellant, this representative of the Internal Revenue Service gave him Form 966 to be filed on liquidation of the corporations within one calendar month, and further explained that Posey could report on the capital gains on the apartments after they were received by him in liquidation and sold by him individually. Further, that he could report the gain on the installment basis over the period of collections, if he did not receive over 29% in the first year.
In consultation with the accountant appellant was advised to liquidate the corporations within one calendar month, file Form 966, then if the properties were sold during the year to bring in all the records about the properties prior to April 15, 1962, for the final preparation of his return. Also, the accountant advised Posey that he would only have to report as capital gain that pro-rata share of the installment collected in 1961 on the sale of the properties which represented gain, as long as he did not collect more than 29% during the first year of the sale.
During the taxable year 1961, appellant liquidated both corporations.
On March 24, 1961, the shareholders of Sheridan Corporation adopted a resolution of liquidation. Within thirty days of the adoption of that resolution, the corporation filed with the District Director of Internal Revenue Treasury Form 966, "Return of Information under Section 6043". In connection with liquidation of Sheridan Corporation, appellant did not file Treasury Form 964, "Election of Shareholder under Section 333 of the Internal Revenue Code of 1954". The same day that the plan of liquidation was adopted by the shareholders, Sheridan Corporation distributed all of its assets to its sole shareholder, the appellant.
On May 12, 1961, the shareholders of Paragon Corporation adopted a resolution to liquidate. As in the case of Sheridan Corporation, within thirty days of the adoption of the resolution to liquidate, the corporation filed with the District Director Treasury Form 966. Once again, no Form 964 was filed by appellant. The same day the plan of liquidation was adopted by its shareholders, Paragon Corporation distributed all of its assets in liquidation to its sole shareholder, the appellant.
As a result of the liquidation of these corporations, appellant received individual ownership of the two apartment buildings. He sold one of the buildings on May 1, 1961, and the other on July 23, 1962. As a result of these sales, the appellant received certain amounts as down payments on the purchase price, with the balances to be paid in monthly installments over a period of twenty years.
On appellant's income tax return for taxable year 1961 he did not report the gain realized on the liquidation of either of the corporations pursuant to § 331 of the 1954 Code. Instead, he reported the disposal of each apartment as an installment sale on the 1961 and 1962 tax returns. Subsequent thereto, the Commissioner of Internal Revenue determined that since no Form 964 election had been filed by appellant with respect to liquidation of either Sheridan Corporation or Paragon Corporation, he was not entitled to the non-recognition of gain benefits of § 333 of the Internal Revenue Code, and hence the gain realized by him on liquidation of each of those corporations was taxable pursuant to § 331 of the 1954 Code. The Commissioner determined that appellants should have included as capital gains in the tax return of 1961 those amounts received on liquidation of the two corporations which were in excess of the adjusted basis for the stock in each corporation. Accordingly, on June 18, 1965, the Commissioner assessed the income tax deficiencies here in dispute. The assessment was paid in full and appellant filed a timely claim for refund. On November 14, 1968, the claim was disallowed, whereupon appellant filed his complaint in this case. The District Court sustained the Government's motion for partial summary judgment, having concluded that appellant was not entitled to the benefits of the one month liquidation provisions contained in § 333 of the 1954 Code. This appeal followed.
Generally, the amounts distributed to shareholders in complete liquidation of a corporation are treated as full payment in exchange for the shareholder's stock, normally resulting in capital gains treatment to the shareholders for the amounts received in excess of the adjusted basis of their stock. 26 U.S.C., §§ 331(a) (1) and 1001(a), Internal Revenue Code of 1954; Federal Tax Regulation §§ 1-331-1(a) and (b). However, the one month liquidation provisions of § 333 offers to qualifying shareholders the chance to defer at least part of any tax until such time as they dispose of the distributable property received from liquidation of the corporation.
Section 333 provides a special rule, in the case of certain specifically described complete liquidations of domestic corporations occurring within some one calendar month. The effect of such section is in general to postpone the recognition of that portion of a qualified electing shareholder\'s gain on the liquidation which would otherwise be recognized and which is attributable to appreciation in the value of certain corporate assets unrealized by the corporation at the time such assets are distributed in complete liquidations. Federal Tax Regulation 1-333-1.
In order for the special tax treatment of § 333 to be applicable to a given transaction resulting in the liquidation of a corporation, there must be present in such transaction the qualified liquidation of a domestic corporation by qualified electing shareholders in accordance with the statutory conditions imposed by 26 U.S.C., § 333, Internal Revenue Code of 1954.
According to § 333 of the Internal Revenue Code of 1954, a qualified liquidation occurs under such section if the following conditions are met.
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