Riss v. Commissioner, Docket No. 3793-62.

CourtUnited States Tax Court
Writing for the CourtDAWSON
Citation23 TCM (CCH) 1899,1964 TC Memo 308
Decision Date25 November 1964
Docket NumberDocket No. 3793-62.
PartiesRobert B. Riss and Georgina Riss v. Commissioner.

23 T.C.M. (CCH) 1899 (1964)

T.C. Memo. 1964-308.

Robert B. Riss and Georgina Riss
v.
Commissioner.

Docket No. 3793-62.

United States Tax Court.

Filed November 25, 1964.


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

DAWSON, Judge:

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.

Findings of Fact

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)

23 TCM (CCH) 1900
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...

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