Riss v. Commissioner
| Decision Date | 25 November 1964 |
| Docket Number | Docket No. 3793-62. |
| Citation | 23 TCM (CCH) 1899,1964 TC Memo 308 |
| Parties | Robert B. Riss and Georgina Riss v. Commissioner. |
| Court | U.S. Tax Court |
Robert L. Jackson, City National Bank Bldg., Kansas City, Mo., for the petitioners. Allan B. Muchin, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in petitioners' income taxes:
Year Deficiency
1957 ................. $160,948.60
1958 ................. 396.52
1959 ................. 5,512.73
1960 ................. 4,308.90
Petitioners did not contest the correctness of certain adjustments at the trial of this case. Consequently, we consider such issues abandoned. This leaves as the principal remaining issue the question of whether gain from the sale of stock in the Astor-Broadway Holding Corporation was properly reported by petitioners as an installment sale under the provisions of section 453, Internal Revenue Code of 1954. An ancillary issue, raised in the alternative by petitioners, concerns the fair market value in 1957 of an installment note in the face amount of $1,100,000 received by the Riss family pursuant to the sale.
Some of the facts are stipulated and are found accordingly.
Robert B. Riss (hereinafter called petitioner) and Georgina Riss are husband and wife residing at 2435 Drury Lane, Shawnee Mission, Kansas. They filed their joint Federal income tax returns for the years 1957, 1958, 1959, and 1960 with the district director of internal revenue at Wichita, Kansas. They used the cash method of accounting.
Petitioner is president of Riss & Company, Inc., an interstate motor carrier. He is an officer and director in a number of other firms and owns substantial real estate properties as well.
The Astor-Broadway Holding Corporation (hereinafter sometimes called Astor) was formed by David Rapoport and Harris J. Klein, real estate investors of many years' experience in the New York City area, who owned all the outstanding shares of stock in such corporation. Their purpose in forming Astor was to acquire and develop certain properties then owned by John A. Wanamaker, Inc., a department store corporation with its principal operations in New York City.
Those interests included the two buildings at 770 and 780 Broadway that housed the Wanamaker Department Store prior to May 1955, and a storage warehouse at 426 Lafayette Street. Title was held by the A. T. Stewart Realty Company, a wholly-owned subsidiary of Wanamakers. In order to acquire financial backing, Rapoport and Klein presented the venture to petitioner and his father, Richard R. Riss, Sr. On April 21, 1955, petitioner and his father entered into a partnership agreement with Klein and Rapoport for the purpose of operating the Astor-Broadway Corporation.
On May 2, 1955, the Risses purchased one-half of Astor's 200 outstanding shares of common stock. That same day Astor entered into an agreement with the A. T. Stewart Realty Company for the purchase of the real estate and leasehold interests. The property included (1) the fee simple in the land and warehouse located at 426 Lafayette Street and (2) a leasehold interest in each of two buildings located at 770 Broadway (the "South" building) and 780 Broadway (the "North" building).
The sales price paid by Astor was $5,806,451.60, of which $1,056,451.60 was paid in cash. Mortgages totaling $4,750,000 were given to the sellers as follows: $825,000 first mortgage on the warehouse and the remaining $3,925,000 on the leaseholds of the North and South buildings.
Immediately after the purchase, the leaseholds on the North and South buildings and the right to operate the warehouse were transferred to the Klein-Rapoport-Riss partnership. This partnership operated the buildings, maintaining books and records and reporting their operation as a partnership for income tax purposes.
The warehouse was rented to various tenants and immediately began to show a profit.
The North building was deemed worthless by Rapoport and was demolished on his authority. The vacant lot was then temporarily rented to a parking lot operator. By an agreement dated October 1, 1956, this leasehold was released from the mortgage held by A. T. Stewart Realty Company.
The partners decided that the South building could be converted into a profitable office building if extensive remodeling was done. To finance these improvements the partnership sought additional financing. A second mortgage was placed on the warehouse in the amount of $385,000. At the insistence of creditors the assets of the partnership were returned to Astor and the Klein-Rapoport-Riss operating partnership was dissolved. From its inception on April 21, 1955, to its dissolution on July 11, 1956, the partnership sustained losses of $1,058,992.81. The losses were reported in the Federal income tax returns of the partnership for both 1955 and 1956.
As a result of these operating deficits, petitioner and his father each owed the partnership $127,248.20. In reacquiring the assets of the partnership Astor also acquired the obligations of the partners to make up these deficits in capital. The amounts were recorded on Astor's books as accounts receivable. Both petitioner and his father were thus obligated to the corporation in the sum of $127,248.20 each.
On July 11, 1956, when the partnership was terminated, petitioner's sister, Louise V. Riss, acquired a one-third interest in the investment then held by her father and petitioner. Thereafter, the Risses each owned an undivided one-third of 100 shares of Astor stock, or 33 1/3 shares each, or one-sixth of the total authorized and outstanding stock.
Because differences of opinion arose as to how the properties should be managed, the Risses decided to withdraw from the venture late in 1956. On January 18, 1957, the Risses entered into an agreement for the sale of their stock to Astor, receiving the following consideration:
Cash down payment .............. $ 424,000.00
Installment note ............... 1,100,000.00
Cancellation of indebtedness ... 254,496.40
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Total sales price .......... $1,778,496.40
The sales agreement provided, in part, that the consideration for the stock included:
* * * $254,496.40 by Astor, releasing Riss (sic) from their obligation to pay Astor the sum of $254,496.40 as it appears on the books of Astor, and by Astor's executing and delivering to Riss a general release in the usual form of all claims, if any, of Astor against Riss.
Pursuant to this agreement, Astor executed a general release. In addition, Rapoport and Klein executed such releases individually. The transaction was recorded on the books of Astor and the $254,496.40 was cancelled in 1957.
The Risses received the following consideration in partial payment for their stock in 1957:
Cash down payment ..................................... $424,000.00
Cash — seven monthly payments on the note ............. 58,333.31
Cancellation of indebtedness .......................... 254,496.40
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$736,829.71
The installment note was secured by a third mortgage of $500,000 on the warehouse and by the individual guaranties of Rapoport and Klein of $250,000 each. Finally, as an undertaking of Astor, this note was a general obligation secured by the assets of the corporation. It provided for monthly payments of $8,333.33 beginning June 1, 1957. It bore interest at 6 percent and was to run for 11 years.
The Risses reported the following gain in their income tax return for 1957:
Total sales price .................... $1,778,496.40
Less sales expenses .................. 6,443.43
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Net sales price ...................... $1,772,052.97
Less adjusted basis of stock ......... 26,650.00
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