Simpson v. C.I.R., 052476 FEDTAX, 4120-72

Docket Nº:4120-72.
Opinion Judge:DRENNEN, Judge:
Party Name:C. A. SIMPSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Lee H. Henkel, Jr., and L. A. Weisensee, for the petitioner. Maurice W. Gerard, for the respondent.
Case Date:May 24, 1976
Court:United States Tax Court
 
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35 T.C.M. (CCH) 710

C. A. SIMPSON, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 4120-72.

United States Tax Court

May 24, 1976

Legal title to apartment house property was held by a corporation of which petitioner was sole stockholder. Corporation sold the property for cash, assumption of mortgage, and a purchase money note. The Corporation was immediately liquidated under sec. 337, I.R.C. 1954, and the cash and note were distributed to petitioner. Held, the corporation was a viable entity and cannot be ignored for tax purposes. It was the seller of the real estate. Held, further: The fair market value of the purchase money note received by petitioner on liquidation must be included in the amount petitioner received for her stock upon liquidation and she did not meet the requirements of sec. 453(b)(2)(A)(ii), I.R.C. 1954, for reporting her gain on the installment method. The note was not an ‘ (evidence) of indebtedness of the purchaser’ of her stock.

Lee H. Henkel, Jr., and L. A. Weisensee, for the petitioner.

Maurice W. Gerard, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DRENNEN, Judge:

Respondent determined a deficiency in petitioner's income tax for 1967 in the amount of $40,321.44. At issue is the amount of gain petitioner must report for tax purposes for 1967 incident to the sale in that year by her wholly owned corporation of an apartment house, followed by the liquidation of the corporation. Petitioner reported as long-term capital gain on the installment method the amount of cash she received in 1967. Respondent determined that the sale was made by the corporation, that the proceeds of the sale distributed to petitioner in complete liquidation of the corporation, including the face amount of the purchaser's purchase money note, were taxable to petitioner in 1967 as long-term capital gain from liquidation, and that since the amount received by petitioner in 1967 exceeded 30 percent of the liquidation proceeds, petitioner could not report the gain on the installment method under section 453, I.R.C. 1954.[1] Resolution of the issue depends on whether the corporation can be ignored and the transaction treated as a sale of the apartment house directly from petitioner to the purchaser so the purchase money note can qualify as an evidence of indebtedness of the purchaser under section 453(b)(2)(A)(ii).

A subsidiary issue will be considered, being petitioner's basis in the stock of the corporation or the apartment house property for purposes of computing gain.[2]

FINDINGS OF FACT

Petitioner, Mrs. C. A. Simpson, is a single individual who at all times material herein resided in Atlanta, Ga. Petitioner filed her individual income tax return for the taxable year ended December 31, 1967, with the Internal Revenue Service Center, Chamblee, Ga.

Monteleone Apartments, Inc. (sometimes hereinafter referred to as Monteleone) was incorporated under the laws of Georgia in March 1963. From its inception until its dissolution, petitioner was the president and sole shareholder of Monteleone.

Sometime prior to 1963, petitioner decided to undertake the construction and operation of an apartment building, intending thereby to provide herself with a secure source of income. Accordingly, in 1963, real estate was acquired in the name of Monteleone Apartments, Inc., and construction commenced thereon. The project took approximately a year to complete. In order to finance construction of the apartment building, Monteleone obtained from the Citizens Bank of Alpharetta a $270,000 construction loan which was subsequently paid off and replaced by a ‘ permanent’ loan from the Liberty Life Insurance Co., Greenville, S.C.[2] In addition, petitioner expended a substantial amount of her personal funds in the construction of the apartment building. [3]

Petitioner was actively involved in overseeing the various facets of the construction phase. Upon completion of the apartment building, petitioner moved into one of the rental units and supervised the day-to-day operation of the apartment building in addition to collecting rents and performing much of the repair and maintenance work. As characterized by petitioner, the management of the apartments was essentially ‘ * * * a one-woman operation.’

Petitioner and Monteleone maintained one checking account with the Bank of Georgia which served both as petitioner's personal checking account and as Monteleone's corporate checking account; petitioner did not segregate items of Monteleone receipts or expenses from those incurred in her individual capacity. All rental payments which petitioner collected from tenants were deposited into this single account, and Monteleone's expenses (i.e., gas, electricity water, insurance, taxes, etc.), were paid by checks drawn on the account. No books and records were kept for Monteleone other than the Bank of Georgia account checkbook, deposit slips, and actual checks, all of which material petitioner turned over to a certified public accounting firm (hereinafter referred to as petitioner's accountants) for the preparation of Monteleone's corporate income tax returns filed for each of its fiscal years 1964 though 1968, inclusive, as well as petitioner's individual returns, including that filed for 1967, the year in issue.

Monteleone's U.S. Corporation Income Tax Return filed for its initial taxable year (May 27, 1963 to March 31, 1964) indicates total gross income of $6,126.34, composed entirely of rental income. The total $12,777.42 of deductions claimed was comprised of: Taxes ($1,359.02); interest (to the Citizens Bank of Alpharetta and the Liberty Life Insurance Co. in the respective amounts of $5,661.46 and $224.91); depreciation (on apartments and swimming pool in the respective amounts of $1,768.39 and $143.12); and other miscellaneous deductions ($3,620.52). Attached to the return is the following balance sheet for Monteleone:

Beginning of End of
Assets Taxable Year Taxable Year
Cash $ 0 $ 19,409.44
Fixed Assets:
Buildings $ 0 $282,942.87
Retaining Wall 0 12,552.00
Swimming Pool 0 5,725.00
Landscaping 0 87.87
$ 0 $301,307.74
Less: Depreciation Reserve 0 0 1,911.51 299,396.23
Real Estate 21,100.00 25,189.50
Other Assets:
Cost of Securing Loan $ 0 $ 2,688.75
Organization Expense 0 214.96
Escrow Account 0 1,215.30 4,119.01
Deferred Items:
Prepaid Insurance 0 765.42
TOTALS $21,100.00 $348,879.60
Liabilities
Accounts Payable $ 0 $ 14,525.48
Notes Payable 12,100.00 12,100.00
Mortgages Payable 0 270,000.00
Other Liabilities:
Due to Officer[4] $ 0 $ 47,188.68
Deposits 0 0 2,167.50 49,356.18
Accruals:
Taxes 0 549.02
Capital Stock 9,000.00 9,000.00
Surplus 0 (6,651.08)
TOTALS $21,100.00 $348,879.60
For its taxable years thereafter, Monteleone filed corporate income tax returns and paid taxes as reported thereon as follows:
FYE
Mar. 31, Tax Paid
1965 $3,368.51
1966 2,938.49
1967 2,802.87
1968 1,313.31
As reported in each of the respective returns, Monteleone's gross income consisted of the following amounts of rental and nonrental income:
FYE Rental
Mar. 31, income Nonrental
1965 $60,100.41
1966 62,964.00 $ 5.00
1967 66,955.84 832.25
1968 32,560.65 1,900.17
All of Monteleone's U.S. Corporation Income Tax Returns filed for the fiscal years 1964 through 1968 inclusive, were prepared by petitioner's accountants and signed by petitioner as president of Monteleone. Shortly after the completion of the apartment building, petitioner was approached by individuals interested in purchasing the property; petitioner declined their initial offers. Sometime prior to September 1967, petitioner discussed with her accountant the possibility of a sale of the apartment property and indicated to him that any such sale should be arranged so that the sale proceeds would be received in installments sufficient to pay the tax resulting therefrom but that the tax would not be payable all at once. It was petitioner's understanding that the ensuing course of action was designed to accomplish these expressed purposes. On September 20, 1967, a specially called meeting of the stockholders and directors of Monteleone was held, minutes of which meeting provide in pertinent part: Present were Mrs. C. A. Simpson, owner of all of the capital stock, and Robert L. Bowling, Secretary and Treasurer of the corporation, each of whom consented to the time, place and purpose of the meeting, waiving notice thereof by their signature appearing on these minutes. Mrs. Simpson explained that the purpose was to consider the discontinuance of the business by sale of the assets, paying the debts, transferring the remaining assets to the stockholder, and surrender of the corporate charter. The following plan of liquidation was adopted unanimously: WHEREAS, it is deemed expedient to discontinue operations, the directors and officers are hereby authorized to: (1) Begin negotiations immediately to convert all possible assets into cash by sale thereof at the best price obtainable in their judgment; (2) Pay all liabilities known to exist; (3) File necessary forms to notify Internal Revenue Service of this plan of liquidation including Form 966, 1096, 1099, a certified copy of this plan, final income tax returns, etc., and to file the necessary forms with the State of Georgia, Income Tax Unit. (4) To retain $1,000.00 as a reserve for unknown liabilities and to pay all other net assets to the...

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