Saigh v. Comm'r of Internal Revenue
| Decision Date | 25 May 1961 |
| Docket Number | Docket Nos. 63355,63352-63354,63356-63359. |
| Citation | 36 T.C. 395 |
| Parties | ELIZABETH LEWIS SAIGH, TRANSFEREE, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
C. Rudolf Peterson, Esq., William D. Crampton, Esq., and Floyd F. Toomey, Esq., for the petitioners in Docket Nos. 63355 and 63356.
Ray Eder, Esq., for the petitioners in Docket Nos. 63352, 63353, 63354, 63357, 63358, and 63359.
Gilbert Weiss, Esq., for the petitioners in Docket Nos. 63353 and 63354.Douglas L. Barnes, Esq., and Ivan L. Onnel, Esq., for the respondent.
1. Where an individual (agent) acts on behalf of a corporation in the acquisition of another corporation, the acquiring corporation principal) is a ‘shareholder’ for the purposes of section 115(a), I.R.C. 1939, and where the acquired corporation transfers funds to the acquiring corporation under circumstances not indicating an intention to repay or to be repaid, held, the transfer was a dividend to the extent of earnings and profits of the acquired corporation within the meaning of section 115(a).
2. Held, the doctrine of equitable estoppel, election of remedies, and laches, either as evolved in this Court or as applied by the courts of Missouri, are not applicable to the instant facts, and petitioners are liable as transferees.
3. Held, this Court has no authority to grant an offset, counterclaim, or recoupment.
4. Held, the corporation owning the building is entitled to treat the cost of paying off certificates issued to finance the building as part of the cost of that building and to take the depreciation deduction on that basis.
5. Held, the failure to file personal holding company returns was not due to reasonable cause.
6. Held, interest is computed according to the rule set forth in Henry Cappellini, 16 B.T.A. 802.
Respondent determined the following deficiency, interest, and addition to tax of Investment Realty Corporation:
+-----------------------------------------------------------------------------+
¦Year¦Kind ¦Deficiency ¦Interest ¦Addition to tax, sec.291 ¦
¦ ¦ ¦ ¦ ¦(a), I.R.C. 1939 ¦
+----+-----------------+-------------+-----------+----------------------------¦
¦1946¦Personal holding ¦$1,454,088.18¦$380,692.24¦$363,522.05 ¦
¦ ¦company ¦ ¦ ¦ ¦
+----+-----------------+-------------+-----------+----------------------------¦
¦ ¦surtax ¦ ¦ ¦ ¦
+-----------------------------------------------------------------------------+
Based on the above deficiency, respondent determined that petitioners are liable, as transferees of Investment Realty Corporation (transferor), to the extent provided below:
+-----------------------------------------------------------------------------+
¦Docket¦Petitioner ¦Amount ¦
¦No. ¦ ¦ ¦
+------+-----------------------------------------------------------+----------¦
¦63352 ¦Estate of A.L. Watson, Deceased Oscar G. Schaefer, ¦$93,138.45¦
¦ ¦Administrator, Transferee ¦ ¦
+------+-----------------------------------------------------------+----------¦
¦63353 ¦Irma Hannegan, Transferee ¦174,695.23¦
+------+-----------------------------------------------------------+----------¦
¦63354 ¦Robert E. Hannegan Trust, Irma Hannegan and Mercantile ¦73,352.26 ¦
¦ ¦Trust Company, Trustees, Transferee ¦ ¦
+------+-----------------------------------------------------------+----------¦
¦63355 ¦Elizabeth Lewis Saigh, Transferee ¦159,251.35¦
+------+-----------------------------------------------------------+----------¦
¦63356 ¦Fred M. Saigh, Jr., Transferee ¦902,428.67¦
+------+-----------------------------------------------------------+----------¦
¦63357 ¦Sidney Salomon, Jr., Transferee ¦30,161.84 ¦
+------+-----------------------------------------------------------+----------¦
¦63358 ¦Jean Salomon, Transferee ¦90,483.92 ¦
+------+-----------------------------------------------------------+----------¦
¦63359 ¦Estate of R. Vernon Clark, Deceased, St. Louis Union Trust ¦93,138.45 ¦
¦ ¦Company and Wilbur B. Jones, Coexecutors, Transferee ¦ ¦
+-----------------------------------------------------------------------------+
There are numerous concessions made by the parties in the submitted stipulation of facts and on brief. These concessions will be given effect under Rule 50.
The issues are as follows: (1) Whether the transfer by Railway Exchange Building, Inc., of $2,205,000 to Investment Realty Corporation constituted a distribution to Investment Realty Corporation taxable as a dividend to the extent of the available earnings and profits of Railway Exchange Building, Inc.; (2) whether the petitioners are liable as transferees for the deficiency, interest, and addition to tax of Investment Realty Corporation, the transferor corporation; (3) whether petitioners are entitled to offsets against the deficiencies asserted here for taxes paid by petitioners as the result of actions taken by respondent with respect to petitioners for the years 1952 through 1954; (4) the proper amount of the earnings and profits of Railway Exchange Building, Inc., accumulated as of December 31, 1945, and for the year 1946; (5) whether the failure on the part of Investment Realty Corporation to file a personal holding company return for the year 1946 was due to reasonable cause and not due to willful neglect; and (6) what constitutes the proper amount of interest accruing against these petitioners.
The facts stipulated by the parties are adopted as findings herein and are incorporated by this reference. Other facts are taken from the evidence submitted, including the transcript of testimony.
Petitioners, other than the Estate of A. L. Watson, the Robert E. Hannegan Trust, and the Estate of R. Vernon Clark, are individuals residing in or near St. Louis, Missouri. Oscar G. Schaefer is the administrator of the Estate of A. L. Watson. Irma Hannegan and the Mercantile Trust Company, St. Louis, Missouri, are the duly appointed and acting trustees of the Robert E. Hannegan Trust, created under the will of Robert E. Hannegan. The St. Louis Union Trust Company and Wilbur B. Jones are the coexecutors of the Estate of R. Vernon Clark.
Investment Realty Corporation (hereinafter sometimes referred to as Investment) filed Federal income tax returns for the years 1946 through 1950, and for the short year January 1 to July 27, 1951, with the then collector of internal revenue, St. Louis, Missouri.
Investment did not file personal holding company returns for any of the taxable years 1946 through 1948. No personal holding company tax has been paid by or on behalf of Investment for the taxable year 1946.
Investment earned no income of its own in the years 1946 through 1950.
Railway Exchange Building, Inc. (hereinafter referred to as Building Inc.), was incorporated on January 4, 1924, under the laws of the State of Missouri and had its office and principal place of business in St. Louis. Its authorized capital consisted of 20,000 shares of no-par-value common stock. Building Inc. leased city block No. 128, together with the Railway Exchange Building, from the Annuity Realty Company. Its business at all times was the operation of the building.
City block No. 128 is located in the retail shopping area of downtown St. Louis. The Railway Exchange Building located thereon was completed in 1913 on leased land at the cost of $4,159,592.03, together with certain other expenses during construction for maintaining the leases on the underlying land in the amount of $469,133.01. It had 21 stories, the first 7 of which were occupied by the May Department Stores Company.
St. Louis Improvement Company was incorporated under the laws of the State of Missouri on July 9, 1941, with authorized capital stock of 5,000 shares, par value $1 per share. The stock was not issued at the time of incorporation and the company had no assets and conducted no business. On December 13, 1945, the name of the corporation was changed to Investment Realty Corporation. The stock was then issued, 4,998 shares to Fred M. Saigh, Jr. (hereinafter sometimes referred to as Saigh), 1 share to M. Boulicault, and 1 share to Paul Hutchinson.
In connection with another transaction, not here involved, Building Inc. on April 1, 1944, borrowed $2,500,000 from May Building Company. In an agreement of the same date, and later confirmed in a supplemental agreement of June 29, 1946, it was agreed by Building Inc. that—
so long as any part of the aforesaid note shall remain unpaid, it will not declare or pay any dividend, * * * without the consent of Lessee (May Department Stores Company), if the payment of such dividend would reduce its net current assets below the sum of One Hundred Thousand Dollars ($100,000.00). It was also agreed to deliver to the May Department Stores Company a copy of its regular annual balance sheet and operating statement certified by an independent certified public accountant.
Prior to June 1946, the stock of Building Inc. was owned by Claude B. Ricketts and various members of the Orr family (including a trust). Saigh learned, through real estate brokers, that these stockholders were interested in selling their stock for $2,200,000.
On March 14, 1946, formal application was made to the Massachusetts Mutual Life Insurance Company (hereinafter referred to as the insurance company) for a loan of $3 million to Building Inc., the application being signed ‘Railway Exchange Building,...
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