Schick v. Comm'r of Internal Revenue

• Decision Date: 11 January 1966
• Docket Number: 3253-63.,3251-63,3318-63,Docket Nos. 3250-63
• Citation: 45 T.C. 368
• Parties: ANNE SCHICK, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

45 T.C. 368

ANNE SCHICK, ET AL.,1 PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 3250-63

3251-63

3318-63

3253-63.

Tax Court of the United States.

Filed January 11, 1966.

Morris A. Kaplan, for the petitioners.

Lionel Savadove, for the respondent.

Respondent determined a deficiency in the income tax of the transferor for its ‘taxable year ended January 31, 1959.’ The transferor's proper ‘taxable year’ was the fiscal year ended October 31, 1959. Held, there is no deficiency for the period November 1, 1958, to January 31, 1959, and we have no jurisdiction over any other period.

FORRESTER, Judge:

Respondent has determined that petitioners are liable as transferees for a deficiency in the income tax of Schick Enterprises, Inc., for its ‘taxable year ended January 31, 1959,‘ in the amount of $7,360.14 and an additional deficiency in the amount of $215.70. Petitioners concede transferee liability but contend that there is no deficiency in the tax of the transferor. The issues are (1) whether the deficiency determined in the tax of the transferor was for a proper taxable period; (2) whether, under section 337,² the gain realized by the transferor upon the sale of a hospital in December 1958 should not be recognized; (3) whether the transferor realized $5,000 income in 1959 with respect to an amount received in 1954 as a rent security deposit; and (4) whether the transferor realized interest income in the amount of $719 during the period December 8, 1958, to January 31, 1959. Issue (4) was raised by respondent in an amended answer as the basis of his claim for an increased deficiency; under section 6214(a), the burden of proof as to this issue is placed upon respondent.³

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The transferor, Schick Enterprises, Inc. (hereinafter referred to as Enterprises), an accrual basis taxpayer, filed a Federal income tax return for the period November 1, 1958, to January 31, 1959, with the district director of internal revenue, Jacksonville, Fla. Enterprises was incorporated under the laws of the State of Florida on October 6, 1954; its dissolution was effective December 29, 1959.

Petitioners Anne Schick and Ben Schick are husband and wife and reside in Miami Beach, Fla. Petitioners Naomi Blumenfeld and Irving Blumenfeld are husband and wife and reside in New Hyde Park, Long Island, N.Y. The Schicks and the Blumenfelds will sometimes be referred to hereinafter as petitioners.

Throughout the existence of Enterprises, petitioners were all of the officers and directors of the corporation. Petitioners also owned all of the capital stock of Enterprises, in the following proportions:

+---------------------------------------------------------------+
                ¦                                      ¦Number of  ¦Percent of  ¦
                +--------------------------------------+-----------+------------¦
                ¦Shareholder                           ¦shares     ¦shares      ¦
                +--------------------------------------+-----------+------------¦
                ¦Ben Schick and Anne Schick            ¦25         ¦50          ¦
                +--------------------------------------+-----------+------------¦
                ¦Irving Blumenfeld and Naomi Blumenfeld¦25         ¦50          ¦
                +---------------------------------------------------------------+
                

The business of Enterprises was the ownership and operation of one parcel of real estate located in Miami, Fla. The property, known as Bel-Aire Hospital, was leased on an oral lease to Edgewater Hospital, Inc. (hereinafter referred to as Edgewater). Edgewater was a Florida corporation, the stock of which was wholly owned by petitioners. Petitioners conducted the business of their corporations in an informal manner.

Sometime prior to November 1958 Irving Blumenfeld, who is and was then a medical doctor, decided that operation of the hospital was consuming too much of his time. As a result of Irving's desire to devote his full time to his medical practice, petitioners, on or before November 15, 1958, informally agreed to sell the hospital and cease business operations. On November 15, 1958, agreements were entered into for Enterprises to sell the property known as Bel-Aire Hospital and for petitioners to sell their stock in Edgewater. On December 8, 1958, Enterprises sold and transferred title to the hospital property to 162 N.E. 49th Street, Inc., a Florida corporation, for the total selling price of $131,255. As part of the consideration for the sale, Enterprises received a purchase-money note and mortgage, dated December 8, 1958, in the amount of $89,327.45. The mortgage provided for interest of 5 1/2 percent, payable quarterly, with the first payment due April 1, 1959. The sale resulted in a net gain to Enterprises, for Federal income tax purposes, of $23,440.55. The interest payments were timely made for at least the first 1 1/2 years. After the sale, Enterprises did not carry on any business activities.

Prior to the period in controversy herein, Enterprises had filed its income tax returns on an accrual basis for fiscal years beginning November 1 and ending the following October 31. On February 24, 1959, Enterprises filed an income tax return for the period November 1, 1958 to January 31, 1959. The word ‘FINAL’ appeared at the top of the first page of the return, and an attached schedule was entitled ‘STATEMENT OF liquidation.’ The latter listed the purchase-money mortgage as the only asset distributed to the petitioners as sole stockholders. Enterprises, however, did not actually distribute the purchase-money note and mortgage to petitioners until December 1, 1959, the statement on the return to the contrary notwithstanding.

In its return for the period November 1, 1958, to January 31, 1959, Enterprises reported gross income of $1,416.11, consisting of $1,250 rental income and $166.11 ‘Expense Reimbursement.’ In his notices of deficiency and transferee liability, respondent determined a deficiency in the income tax of Enterprises ‘for the taxable year ended January 31, 1959.’ The deficiency was founded upon respondent's determinations (1) that rental income had been understated by $5,000 and (2) that the gain from the sale of the hospital on December 8, 1959, should have been included in income. By amendment to his answer, respondent claimed an increased deficiency in the amount of $215.70, based upon his determined that Enterprises realized $719 of interest income between December 8, 1958, and January 31, 1959.

OPINION

The first issue is whether the period November 1, 1958, to January 31, 1959, constituted a proper taxable year of Enterprises. Petitioners, as one of their alternative contentions, urge that, if Enterprises did not complete the distribution of its assets to the petitioners until December 1, 1959, then the proper taxable year of Enterprises was the fiscal year ending October 31, 1959. This question is critical, since the only taxable period of Enterprises for which we have jurisdiction is the period November 1, 1958, to January 31, 1959, the period covered by respondent's determinations. See Columbia River Orchards, Inc., 15 T.C. 253 (1950); Oklahoma Contracting Corporation, 35 B.T.A. 232 (1937); Pittsburgh & West Virginia Railway Co., 32 B.T.A. 66 (1935).⁴ The decisions to the contrary in August Belmont Hotel Co., 18 B.T.A. 643 (1930), and Premier Packing Co., 12 B.T.A. 637 (1928), have not explicitly been overruled; they have not, however, been cited for the proposition in question for many years and must be deemed to have been overruled sub silentio by the more recent decisions.

The parties, by stipulation, introduced into evidence a copy of an assignment of the purchase-money mortgage and accompanying promissory note received by Enterprises on the sale of the hospital. The assignment, dated December 1, 1959, names Enterprises as the assignor and petitioners as the assignees, one undivided one-half interest being assigned to the Blumenfelds and the other to the Schicks. We have found, on the basis of this assignment and the entire record, that the distribution of note and mortgage by Enterprises was not completed prior to December 1, 1959. The evidence relied upon by petitioners ⁵ to prove the distribution had occurred before such date is woefully inadequate. The only witness for petitioners, Irving Blumenfeld, showed himself to be almost completely unfamiliar with the details of the corporate operations. In fact, he testified that around the time the hospital was sold petitioners just followed the advice of their lawyer and accountant. Even if, as petitioners contend, Irving received the entire first year's interest from the purchase money note, this would not, in view of petitioners' informal operations, establish a de facto distribution of the note and mortgage prior to December 1, 1959. Under the circumstances, petitioners have not demonstrated that the substance of the transaction was different from its form. We believe that the note and mortgage were distributed on December 1, 1959, the date indicated by the formal assignment.

Section 441(a) provides, ‘taxable income shall be computed on the basis of the taxpayer's taxable year.’ Section 441(b)(3),⁶ section 1.441-1(b)(iii), Income Tax Regs.,⁷ and section 443(a)(2)⁸ provide that the taxpayer's ‘taxable year’ may be a period of less than 12 months if the taxpayer is in existence during only part of what would otherwise be his taxable year. Section 1.443-1(a)(2), Income Tax Regs., provides, in part, that ‘a dissolving corporation * * * is required to file a return for the short period from * * * (the beginning of its taxable year) to the date it goes out of existence.’

The question of whether a corporation has gone out of existence, so as to make its proper ‘taxable year’ a period of less than 12 months, was considered in United States v. Kingman, 170 F.2d 408 (C.A. 5, 1948), decided under the 1939 Code. There, the corporation, reporting on the calendar year basis, had ceased doing...