Regals Realty Co. v. Commissioner of Internal Revenue

• Citation: 127 F.2d 931
• Decision Date: 08 May 1942
• Docket Number: No. 163.,163.
• Parties: REGALS REALTY CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

127 F.2d 931 (1942)

REGALS REALTY CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 163.

Circuit Court of Appeals, Second Circuit.

Argued April 9, 1942.

Decided May 8, 1942.

Chadbourne, Hunt, Jaeckel & Brown, of New York City (Richard P. Jackson, of New York City, of counsel), for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Gerald L. Wallace, and Arthur A. Armstrong, Sp. Assts. to the Atty. Gen., for respondent.

Before L. HAND, SWAN, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

This case raises the issue of whether certain Miami real estate, received upon an exchange, was "to be held * * * for investment," so as to be within the tax-free exchange provisions of the Revenue Act of 1936.¹ The Board of Tax Appeals held that the exchange was taxable because the evidence "demonstrates affirmatively" that the property acquired was not "to be held" for investment. Its opinion is reported at 43 B.T.A. 194, 209.

The taxpayer was organized in 1933 by Leonard Marx, a successful real estate speculator, and two associates, to acquire, from a trustee in bankruptcy, the plot and building known as 2-10 East Flagler Street, in Miami, Florida. The price paid was $750, and the purchase was subject to existing leases, and to liens and encumbrances of more than $200,000. Marx succeeded in attracting enough new capital to make alterations and to clear up back interest and taxes, in arranging for a modification of the mortgage, and in concluding favorable leases. By the end of 1934, the property was operating at a profit. Dividends amounting to $5,000 were paid in both 1935 and 1936. In the early part of 1936, representatives of the Burdine Department Store, which was located on an adjoining plot, began negotiations with Marx for the purchase of the taxpayer's property. No definite offer was made, but Marx reported to a stockholders' meeting that he thought he could get $600,000, or about $420,000 above the mortgage. Because the tax upon such a sale would be high, the stockholders decided not to consummate the proposed deal. Marx' testimony on this point was as follows:

"I explained * * * that if the property was sold we would get $420,000 and under the provisions of the federal tax law we would have to pay that out as our dividends, and we would get that immediately.

"Q. Who would get that immediately? A. The stockholders, and I think out of the $420,000 we would have to pay corporate and individual taxes, and there would be $140,000 left, or something like that; maybe it was $180,000 but it was less than $200,000 anyhow. They said, `Well, there is no sense in the deal for us. What can we buy with $140,000, or, say $150,000 that will give us anything like that income?'"

On being informed of this decision, the Burdine people made another proposal. They offered to give the taxpayer $120,000 in cash and a nearby property, located at 26 East Flagler, and worth $300,000, which they had purchased as an addition to their department but which was not suitable for that purpose because of a difference in floor levels. Under this plan, the transfer of 2-10 East Flagler was to be subject to the mortgage. In making this proposal, Burdine's representatives said that the transfer would come within the provisions of § 112(b)(1), so that only the cash received would be taxable. Mr. Marx asked his bookkeeper to look up § 112(b)(1), which "seemed to be just right." He then reported the offer to a stockholders' meeting, saying that 26 East Flagler Street had a higher traffic count than the property at 2-10, that upon the expiration in 1938 of a lease with S. H. Kress, they could probably get a higher rent for the new property, and that "I thought this was a very adequate investment, to replace the investment that we were making, and this was an excellent proposal, this swap, and I felt that they should think it over very carefully before turning it down." He said that, in his opinion, the company would be taxable only on the cash received.

The offer was accepted on July 2, 1936. On August 10, 1936, the Board of Directors met and adopted resolutions to liquidate the company, by distributing the cash received as a liquidating dividend and by selling 26 East Flagler Street. A stockholders' meeting held the same day approved of this action, adding the requirement that the liquidation should be in accordance with § 115(c) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 868, which made it possible to treat dividends received on liquidation as return of capital, so that gain thus realized would be taxable at the capital gain rate. In 1937 the taxpayer transferred its property to 26 East Flagler Street Corporation, and distributed the stock of this new corporation to its stockholders.

In arguing that the acquisition of the 26 East Flagler property by the taxpayer was a tax-free exchange under the provisions of § 112(b) quoted above, the taxpayer urges that its sole interest was in making a profitable investment. It points to the refusal to sell 2-10 as evidence of its intention not to convert its property into cash, and says that the exchange rather than a sale was decided upon so that the gain would not have to be recognized. The undisputed desire to avoid a tax on the gain, it says, is strong evidence that it did not intend to sell its property, but intended instead to hold it as an investment.

Against this we have a finding by the Board of Tax Appeals that the taxpayer did not intend to hold the property for investment. For that finding, there is ample support in the record. We have already adverted to the August 10, 1936 resolutions of the directors and stockholders, which spoke of effecting a complete liquidation of the company by selling 26 East Flagler Street. While the minutes were prepared after the meeting and by the taxpayer's counsel rather than by the Secretary, we cannot say that the Board should therefore have decided that they did not reflect accurately the events. Marx said that although the minutes used the word "sell," the...