Regals Realty Company v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 96360.

• Decision Date: 31 December 1940
• Docket Number: Docket No. 96360.
• Citation: 43 BTA 194
• Parties: REGALS REALTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

43 B.T.A. 194 (1940)

REGALS REALTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 96360.

Board of Tax Appeals.

Promulgated December 31, 1940.

Richard P. Jackson, Esq., and Leland T. Atherton, Esq., for the petitioner.

Z. N. Diamond, Esq., for the respondent.

This proceeding was brought for a redetermination of deficiencies in petitioner's income and excess profits taxes for the year 1936 in the amounts of $64,076.74 and $26,923.49, respectively. At the hearing respondent claimed an increased deficiency and a motion was granted to amend the pleadings to conform to the proof.

The case involves the tax consequences of transactions in Florida real estate. The questions are (1) whether one of the transactions was within the limited recognition provisions of section 112 (b) and (c) of the Revenue Act of 1936; (2) whether the amount of a mortgage on the property should be treated as "other property" within the meaning of that term as used in section 112 (c) (1); and (3) what was the proper cost basis to petitioner of the property it transferred. By the petition the constitutionality of section 14 of the Revenue Act of 1936 is challenged. On briefs petitioner does not discuss or urge this issue and we shall consider it as now abandoned.

FINDINGS OF FACT.

Petitioner, a corporation organized under the laws of Florida on April 15, 1933, has its chief place of business at No. 20 West Forty-third Street, New York, New York. Its certificate of incorporation provides that its authorized capital stock is to be 50 shares of no par value; that the number of its directors shall be three; and that the amount of capital with which it will begin business is $500.

On March 15, 1933, in New York City the trustee in bankruptcy of the Cigar Store Realty Holdings, Inc., a subsidiary of the United Cigar Stores, offered for sale certain property, including property located on the southeast corner of Flagler Street and Miami Avenue, Miami, Florida, (known as 2-10 East Flagler Street and the Biscayne Hotel property (hereinafter sometimes referred to as 2-10). The property was improved by a three-story brick and steel building and was surrounded by the Burdine Department Store (hereinafter referred to as Burdine). 2-10 was offered for sale by the trustee in bankruptcy, subject to liens, encumbrances, and leases thereon. At the date of the sale there was a delinquent mortgage on the property held by the Metropolitan Life Insurance Co. in the principal amount of $178,250, bearing interest at 7 percent per annum. Unpaid taxes were also outstanding. The United Cigar Store lease had four years yet to run. At the trustees' sale Leonard Marx, bidding in the name of petitioner, bought the property on a competitive bid of $750. The sale was confirmed by the referee in bankruptcy on March 22, 1933. Initially, petitioner was referred to as the "Regalf Realty Company", but the change to the present name was effected before the delivery of the deed.

Pursuant to the sale and confirmation, a deed dated March 24, 1933, transferring the property from the trustee in bankruptcy to petitioner was delivered to petitioner on April 19, 1933. Petitioner was organized only a short time before the deed was delivered. The closing statement for the sale was executed by the purchaser as follows:

Regals Realty Company By Leonard Marx Vice President.

The deed was recorded on June 8, 1933, in Dade County, Florida, in Deed Book 1526 at page 510.

Marx had been in Miami in 1931 to look around and familiarize himself with the town. He did not, however, become interested in 2-10 until 1932. Marx looked over the leases on the properties that were advertised in the United Cigar Stores sale and discussed them. He went over the occupancy records, the rentals, and street maps. He did not examine the appraisal reports of the appraisers in bankruptcy because he was not interested in them and he did not ascertain the assessed value of the property for tax purposes. He ascertained the rentals from the leases on the property and knew they were not sufficient to make it a paying property.

At the time of the trustees' sale, in addition to Marx, Milton M. Silverman and Eugene S. Mindlin were interested in the transaction. Silverman was employed by the Marx Realty & Improvement Co. in New York, which was controlled by Marx at all times. At the time of the transaction Silverman had not seen the property and did not know the figure at which it had been appraised in the bankruptcy proceeding. He did not know what liens were on it, the leases or the rents or whether the lessees would agree to higher rental. He knew that Marx' customary practice was to organize corporations to take and hold properties to be acquired and was satisfied to have the property held and owned by a corporation.

On April 15, 1933, Marx transferred a subscription of stock in petitioner to each of the following:

Relmar Holding Co. (Marx' interest) Milton M. Silverman & Sons, Inc. (Silverman's interest) Eugene S. Mindlin.

No shares of petitioner's stock were in fact issued until March 27, 1934. It had no bank account prior to that date. Funds were advanced to it by Joseph E. Marx Co.

On April 17, 1933, these assignee subscribers held the first meeting of petitioner and adopted minutes reciting the presence of the assignee subscribers and concluding:

That the undersigned, being all the incorporators named in the certificate of incorporation of Regals Realty Co., and all the subscribers to the capital stock thereof, do hereby waive all notice of the first meeting of the incorporators and subscribers to the capital stock of the said corporation, and do hereby agree and consent that the 17th day of April, 1933, at 10 o'clock in the forenoon, be and the same is hereby fixed as the time, and the New York office of the corporation at No. 347 Madison Avenue, in the Borough of Manhattan, City of New York, as the place for holding the same; that all such business may be transacted thereat as may lawfully come before such meeting.

Dated 17th day of April, 1933.

Signed LEONARD MARX MILTON M. SILVERMAN E. S. MINDLIN.

Under date of April 21, 1933, a letter requesting the transfer of fire and tornado insurance policies to petitioner, with the proper endorsements and the forwarding thereof to the Metropolitan Life Insurance Co. was signed "Regals Realty Co., Inc., E. S. Mindlin." Mindlin was then petitioner's secretary. Pursuant thereto the insurance policies on the property were transferred to the name of petitioner. The owner endorsement on the mortgagee clause was in the name of petitioner.

On October 14, 1933, a contract of employment was entered into with an architect named Bruce, for the remodeling of part of the property. The agreement was executed:

Owner Regals Realty Co., Inc. Leonard Marx President.

On October 18, 1933, a contract for alterations on the property was entered into with Henry Hunt, Inc., and was executed in the name of petitioner. The alterations and repairs were completed in January 1934.

On October 23, 1933, a contract was entered into with the Keyes Co. of Miami for the management of the property and was:

Agreed to by Regals Realty Co. by Leonard Marx.

The Keyes Co. immediately following its appointment to manage the property, made efforts to secure new tenants. On October 31, 1933, it transmitted to petitioner two leases drawn between petitioner and certain proposed lessees. By letter dated November 6, 1933, petitioner acknowledged receipt of the leases and stated:

As soon as we have anything closed in New York for any of the stores, we will wire you immediately. Unless and until you hear from us, you can go ahead with any deal which you have in mind.

Very truly yours, REGALS REALTY CO. INC.

At the time of the acquisition of the property in April 1933 by petitioner the property was not on a paying basis and Marx and his associates knew that fact. The lease to United was at a rental not sufficient to pay even the interest on the mortgage. In order to forestall any thought in the minds of the officers of the Metropolitan Life Insurance Co. that petitioner was endeavoring to "milk the property," it gave its rent collector in Miami instructions to pay all income directly to the insurance company.

The corner store was leased to the United Cigar Stores Co. on a low percentage lease. One of Marx's chief efforts in the period following the acquisition of the property was directed to securing a modification of the United lease. The modification or cancellation of the United lease was regarded as necessary for putting the property on a paying basis. Marx did not know at the time the property was acquired whether it would be possible to secure a modification but felt that this could be done because he had obtained a modification of a United Cigar Store lease on property in Auburn, New York, in 1932.

The United lease was junior to the Metropolitan mortgage and in July 1933 petitioner regarded foreclosure as a necessity because of the United lease. At that time it regarded the situation with respect to the property as so uncertain that it was inadvisable to discuss permanent leases with the tenants. On the same date, petitioner instructed its Miami attorney to delay the progress of the foreclosure action as best he could. Similar instructions were given in August 1933.

Meanwhile, following the acquisition of title, Marx went to see a representative of the Metropolitan Life Insurance Co. in April 1933, with a plan to make extensive alterations in the property and to pay up arrears in taxes. He was advised that the interest due on the mortgage would have to be paid immediately; that the taxes would have to be taken care of; and that the company would not reduce its interest rate or change the mortgage.

Marx was of the opinion that "to attempt to comply with their requirements would mean an investment on our part of over $40,000, in a building...