Sandy Estate Co. v. Comm'r of Internal Revenue
| Decision Date | 31 December 1964 |
| Docket Number | Docket No. 1447-63. |
| Parties | SANDY ESTATE COMPANY (FORMERLY SADIK, INC.), A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
43 T.C. 361
SANDY ESTATE COMPANY (FORMERLY SADIK, INC.), A CORPORATION, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 1447-63.
Tax Court of the United States.
Filed December 31, 1964.
[43 T.C. 362]
George H. Koster, for the petitioner.
John O. Hargrove, for the respondent.
Held, petitioner was not availed of during the taxable years for the purpose of avoiding the income tax in respect of its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. Sec. 532(a), I.R.C. 1954.
The Commissioner determined deficiencies in tax against petitioner as follows:
+------------------------------------------------------------+
¦Fiscal year ended March 31—¦Income ¦Accumulated ¦
+---------------------------+--------+-----------------------¦
¦ ¦tax ¦earnings (sec. 531) tax¦
+---------------------------+--------+-----------------------¦
¦ ¦ ¦ ¦
+---------------------------+--------+-----------------------¦
¦1958 ¦$624.00 ¦$30,328.13 ¦
+---------------------------+--------+-----------------------¦
¦1959 ¦8,584.54¦28,431.80 ¦
+---------------------------+--------+-----------------------¦
¦1960 ¦4,987.71¦35,491.06 ¦
+---------------------------+--------+-----------------------¦
¦ ¦ ¦ ¦
+------------------------------------------------------------+
The only matter presently in issue is whether petitioner was availed of during the foregoing tax years for the purpose of avoiding the income tax in respect of its sole stockholder by permitting earnings and profits to accumulate instead of being divided or distributed. The correctness of other adjustments has not been presented for decision.
A stipulation of facts filed by the parties is incorporated herein by reference.
Petitioner was organized in 1933 as a Nevada corporation to operate properties in the San Francisco area transferred to it by George H. Sandy, its sole stockholder and president until the time of his death on September 9, 1960. Since the date of its incorporation petitioner has been in the business of owning, operating, and managing apartment houses, and in addition, beginning in 1944, in the business of making loans secured by real estate mortgages. Its original name, Sadik, Inc., was changed to Sandy Estate Co. on December 6, 1960. Its principal offices are in San Francisco, Calif., and it filed its income tax returns for the fiscal years March 31, 1958, 1959, and 1960. with the district director of internal revenue at San Francisco.
After Sandy's death all of his stock in the corporation went, by will, to two trusts and to a tax-exempt foundation. His sisters and nieces have incomes for life from part of his estate, and upon the death of all of the life beneficiaries, all of the shares of the corporation go to the foundation.
Petitioner's original capital was $1,000, which was increased by July 31, 1943, to $750,000 through the issuance from time to time of additional stock to Sandy for cash. Its capital was finally increased to $900,000 on November 30, 1944, upon the issuance of a stock dividend.
Petitioner's principal sources of income have been: (1) Rents from its apartment houses; (2) interest on mortgage loans (beginning in
[43 T.C. 363]
1944); (3) interest on U.S. Government bonds (beginning in 1948); and (4) gains upon sales of some of petitioner's apartment houses.
For a number of years petitioner's officers consisted of George H. Sandy, Jack G. Horovitz, and Raymond B. Haizlip, an attorney. They were also directors. Sandy dominated the corporation and made or approved all important decisions relating to its affairs. Both Sandy and Horovitz devoted full time and Haizlip about half time to the corporation's business. Horovitz died on August 1, 1957.
Sandy examined every building the corporation considered buying, signed all agreements, and presided over meetings of the board of directors. No substantial repairs or improvements were made without his consent. He dealt with plumbers, contractors, and purveyors of equipment, and selected managers of the apartment buildings.
Horovitz was the corporation's principal outside representative. He inspected the apartment buildings, maintained contact with the managers, obtained estimates from repairmen and builders, and dealt with and obtained bids from carpethouses. Horovitz also made appraisals.
Upon Horovitz's death in August 1957, an attempt was made to replace him with another man, but the arrangement did not work out and he was released after a brief period. During the latter part of 1958 and early 1959, Sandy had suffered a heart attack and was unable to go to his office. The need to fill the void left by Horovitz became urgent, and in July 1959 Chester R. MacPhee became associated with the corporation as vice president and a director. Upon Sandy's death, MacPhee became president in September 1960.
In addition to the foregoing officers, the only other employees consisted of a full-time bookkeeper, a part-time clerk, and one manager for each of the apartment houses, 12 in number during the taxable years.
The salaries of the officers during the taxable years as shown on petitioner's returns were as follows:1
+--------------------------------------------+
¦ ¦Fiscal 1958¦Fiscal 1959¦Fiscal 1960¦
+--------+-----------+-----------+-----------¦
¦ ¦ ¦ ¦ ¦
+--------+-----------+-----------+-----------¦
¦Sandy ¦$34,999.99 ¦$45,000 ¦$25,000.01 ¦
+--------+-----------+-----------+-----------¦
¦Horovitz¦4,400.00 ¦ ¦ ¦
+--------+-----------+-----------+-----------¦
¦MacPhee ¦ ¦ ¦15,800.00 ¦
+--------------------------------------------+
The annual salaries of Sandy and MacPhee as of March 31, 1960, were $45,000 and $25,100, respectively. The salaries of the bookkeeper and part-time clerk were then $7,200 and $2,400, respectively, and the salaries of all 12 apartment managers were in the aggregate amount of $17,640.
[43 T.C. 364]
In respect of the apartment house phase of petitioner's business, the principal employees or officers made sure that all of the rents were collected from the resident managers and deposited in the bank, that buildings were inspected frequently, and that repairs were made when needed. They carefully watched the list of slow-paying tenants, reviewed the cost of gas and electricity, and made comparisons with rents in the areas in which the apartment buildings were located so that its rents could be kept in line. Petitioner's officers on occasion made appraisals of apartment houses that were offered for sale to it.
A schedule of ‘Acquisitions and Dispositions of Apartment Buildings' by petitioner from 1934 to 1963 is as follows:
+--------------------------------------------------+
¦ ¦Number ¦Total buildings¦
+--------------------+-------------+---------------¦
¦Year ended March 31—¦ ¦owned ¦
+--------------------+-------------+---------------¦
¦ ¦ ¦ ¦(end of ¦
+--------------------+--------+----+---------------¦
¦ ¦Acquired¦Sold¦year) ¦
+--------------------+--------+----+---------------¦
¦1934 ¦5 ¦ ¦5 ¦
+--------------------+--------+----+---------------¦
¦1935 ¦5 ¦2 ¦8 ¦
+--------------------+--------+----+---------------¦
¦1936 ¦5 ¦3 ¦10 ¦
+--------------------+--------+----+---------------¦
¦1937 ¦9 ¦9 ¦10 ¦
+--------------------+--------+----+---------------¦
¦1938 ¦4 ¦ ¦14 ¦
+--------------------+--------+----+---------------¦
¦1939 ¦1 ¦5 ¦10 ¦
+--------------------+--------+----+---------------¦
¦1940 ¦5 ¦3 ¦12 ¦
+--------------------+--------+----+---------------¦
¦1941 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1942 ¦ ¦1 ¦11 ¦
+--------------------+--------+----+---------------¦
¦1943 ¦ ¦ ¦11 ¦
+--------------------+--------+----+---------------¦
¦1944 ¦ ¦ ¦11 ¦
+--------------------+--------+----+---------------¦
¦1945 ¦2 ¦2 ¦11 ¦
+--------------------+--------+----+---------------¦
¦1946 ¦4 ¦ ¦15 ¦
+--------------------+--------+----+---------------¦
¦1947 ¦ ¦1 ¦14 ¦
+--------------------+--------+----+---------------¦
¦1948 ¦ ¦3 ¦11 ¦
+--------------------+--------+----+---------------¦
¦1949 ¦ ¦2 ¦9 ¦
+--------------------+--------+----+---------------¦
¦1950 ¦ ¦ ¦9 ¦
+--------------------+--------+----+---------------¦
¦1951 ¦1 ¦ ¦10 ¦
+--------------------+--------+----+---------------¦
¦1952 ¦1 ¦ ¦11 ¦
+--------------------+--------+----+---------------¦
¦1953 ¦ ¦ ¦11 ¦
+--------------------+--------+----+---------------¦
¦1954 ¦ ¦ ¦11 ¦
+--------------------+--------+----+---------------¦
¦1955 ¦1 ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1956 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1957 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1958 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1959 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1960 ¦ ¦ ¦12 ¦
+--------------------+--------+----+---------------¦
¦1961 ¦ ¦2 ¦10 ¦
+--------------------+--------+----+---------------¦
¦1962 ¦ ¦2 ¦1 8 ¦
+--------------------+--------+----+---------------¦
¦1963 ¦ ¦1 ¦7 ¦
+--------------------------------------------------+
Of the 12 buildings owned during the tax years, 10 had been built during the years 1927-30, 1 in 1922, and 1 in 1913. They were mostly 6-story buildings, of concrete, class ‘C’ construction, and contained from 24 to 56 apartments. In the aggregate they contained 455 apartments. The cost of petitioner's buildings, furniture and fixtures, and land, as shown in its balance sheet as of March 31, 1960, was as follows:
+------------------------------------+
¦Buildings ¦$1,281,631.63¦
+----------------------+-------------¦
¦Furniture and fixtures¦274,693.92 ¦
+----------------------+-------------¦
¦Land ¦176,667.60 ¦
+------------------------------------+
The buildings were in need of rehabilitation. The corporation recognized such need and had determined at least as early as the first
[43 T.C. 365]
of the taxable years to enter into a program of rehabilitation and renovation. Except for one of...
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