Slappey Drive Indus. Park v. U.S.
| Decision Date | 19 October 1977 |
| Docket Number | Nos. 75-1885,s. 75-1885 |
| Citation | 561 F.2d 572 |
| Parties | 77-2 USTC P 9696 SLAPPEY DRIVE INDUSTRIAL PARK, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. John W. CROUCH and First State Bank & Trust Co., Executor of the Will ofKatherine S. H. Crouch, Deceased, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. Emily Jean HALEY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. LAKE PARK, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Spencer C. WALDEN, Jr. and Cornelia H. Walden, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. SHERWOOD ACRES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. FOREST ESTATES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. CAIRO DEVELOPERS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Loretta Haley McKNIGHT, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. William T. HALEY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. LAKE PARK ADDITIONS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. PECAN HAVEN, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. thru 75-1896. |
| Court | U.S. Court of Appeals — Fifth Circuit |
H. H. Perry, Jr., Albany, Ga., for plaintiff-appellant.
Ronald T. Knight, U. S. Atty., John D. Carey, Asst. U. S. Atty., Macon, Ga., Scott P. Crampton, Asst. Atty. Gen., Jeffrey S. Blum, Atty., U. S. Dept. of Justice, Tax Div., Washington, D. C., Gilbert E. Andrews, Acting Chief, App. Section, Leonard J. Henzke, U. S. Dept. of Justice, Washington, D. C., for defendant-appellee.
Appeals from the United States District Court for the Middle District of Georgia.
Before TUTTLE, GOLDBERG and RONEY, Circuit Judges.
This tax refund suit involves seven closely held real estate development corporations that Spencer C. Walden, Jr. organized and manages. The first issue, the one most extensively debated by the parties, is whether certain purported debts that the corporations owed their shareholders should be treated for tax purposes as contributions to capital. The second issue is whether one of the seven corporations was formed primarily for tax-avoidance purposes, thus precluding it from claiming the corporate surtax exemption. The final question is whether three parcels of land were held by two of the corporations primarily for sale to customers in the ordinary course of business, precluding capital gains treatment. The district court, Cairo Developers, Inc. v. United States, D. C., 381 F.Supp. 431, resolved each issue in the government's favor. We affirm.
Spencer C. Walden, Jr. is a successful real estate developer in Albany, Georgia, a city of some 100,000 located less than 50 miles southeast of Plains. Acting primarily through the partnership of Walden & Kirkland, Walden has developed numerous residential subdivisions and various commercial properties. This case concerns a subset of his activities.
Among the properties Walden has developed are several tracts originally owned by his father-in-law, J. T. Haley, and Haley's
descendants. 1 With Walden directing organizational efforts, members of the Haley family formed six corporations over a fifteen year period. Those corporations were Pecan Haven, Inc. (Pecan Haven), Lake Park, Inc. (Lake Park), Sherwood Acres, Inc. (Sherwood), Lake Park Additions, Inc. (Additions), Forest Estates, Inc. (Forest Estates) and Slappey Drive Industrial Park, Inc. (Slappey). Each of these is a party to this case. The other corporate party is Cairo Developers, Inc. (Cairo Developers), which Walden formed in conjunction with two individuals not members of the J. T. Haley family.
Walden was the moving force behind each of these corporations. He was president of each enterprise, and his partnership, Walden & Kirkland, handled their development work. All but Slappey were to develop residential subdivisions; Slappey's project was an industrial park.
On this appeal the government asserts that Additions was formed primarily for tax-avoidance purposes and that Sherwood and Additions held certain property for sale rather than for investment. The government further contends that purported debts that each corporation owed its shareholders should receive equity treatment. The debts arose from eight transfers of land (ostensibly credit sales) and three transfers of money (ostensibly loans) that the shareholders made to the corporations. We develop the facts relevant to these contentions by discussing the corporations in the order of their incorporation, 2 referring to the contested transfers by alphabetical labels.
Pecan Haven. Pecan Haven was formed in June 1947. The shareholders were Walden (1 share), his wife Cornelia Haley Walden (59 shares) and her twin sister Loretta Haley (60 shares). They paid $12,000 for their shares. Pecan Haven developed several tracts obtained from Loretta and Cornelia and later developed a tract purchased from their father J. T. Haley.
Transfer A occurred July 26, 1960. Spencer Walden transferred 69.435 acres to the corporation in exchange for its $65,000 five-year 3% installment notes. Appellants assert that the corporation's book net worth at that time was $83,000 and that its "true" net worth, taking into account the appreciated value of its real estate holdings, was $476,000. The corporation failed to make Lake Park. J. T. Haley's three children Joel T. Haley, Jr., Cornelia and Loretta organized Lake Park in November 1950 intending to develop lands they held jointly. They took equal shares of the corporation's stock, for which they paid a total of $28,000. The corporate books reflected the contributions as $9,000 paid-in capital and.$19,000 paid-in surplus. The corporation immediately acquired land from its shareholders that it developed.
timely payments of principal or interest, and $20,000 remains outstanding. 3
Transfer B occurred September 7, 1954. The shareholders transferred 100 acres to the corporation in exchange for $10,000 cash and a $40,000 demand note bearing 4% interest. Appellants contend that at the time of the transfer the corporation's net worth was $50,000 and that its "true" net worth was $78,000. Lake Park made irregular principal payments and retired the note in 1959. The corporation did not pay interest as provided in the note, making only a single $2,500 interest payment in 1956.
Sherwood. The Lake Park shareholders Joel, Cornelia and Loretta formed Sherwood in September 1954. Each took one-third of the new corporation's stock, for which they paid a total of $21,000. The next day they made transfer C, conveying to the corporation 48 acres in which each owned a one-third undivided interest. In exchange the corporation paid $6,000 cash and an $18,000 demand note bearing 4% interest. The corporation made irregular principal payments and a single interest payment, retiring the debt in 1960.
By the time of the second contested Sherwood transaction, Joel had died, leaving to his wife Katherine and his two children equal portions of his stock and the remaining property owned in conjunction with the other shareholders. This new lineup of shareholders made transfer D in January 1960. In exchange for 126.48 acres, the corporation issued five-year 3% notes to each shareholder totalling $189,720.02. 4 Appellants assert that at that time the corporation had a book net worth of $62,000 and a "true" net worth of $206,000. Sherwood made irregular principal and interest payments, and a $32,000 balance remains outstanding. 5
Transfer E occurred in December 1964 when Sherwood's shareholders conveyed an additional 84.252 acres to the corporation. In exchange they received five-year 5% notes totalling $126,000. Appellants contend that the corporation had a $117,000 book net worth and a $240,000 "true" net worth. In September 1965 the corporation retired the notes held by Katherine and her two children. The corporation has made no payments on the notes held by Loretta and Cornelia. The corporation made an interest payment to Katherine and her children in 1965 and made annual interest payments to Loretta and Cornelia from 1967 through 1971.
On July 7, 1965, Sherwood sold .99 acres of the tract it had received in 1954 from its shareholders. The land was part of 3.71 acres that the corporation had not divided into residential lots and which were identified on the recorded plat as "reserved for business" and described in the corporate books as a "land reserve." Texaco, the purchaser, had initiated negotiations for the sale; Sherwood had not solicited buyers. Texaco used the land for a gas station. 6 Sherwood originally reported the profit on Additions. In June 1959 Loretta, Cornelia and Katherine formed Additions, each taking one-third of its shares and contributing a total of $36,900 paid-in capital. Katherine's two children did not participate. The shareholders and Katherine's children immediately made transfer F, conveying 268.8 acres to the corporation in exchange for five-year 3% notes totalling $368,200. 8 The corporation made no principal or interest payments until 1964. From 1964 until 1969 it made annual interest payments. It has made a single principal payment, for $5,000 in 1965.
the Texaco sale as ordinary income but now seeks capital gains treatment. 7
Transaction G occurred August 2, 1961. Loretta advanced the corporation $61,250, taking in return its one-year 5% note. The corporation made its first payment on the note in 1964 and retired the note in 1965.
After conducting a topographical survey of the land it had received from its shareholders in 1959, Additions discovered that nearly three acres could not be incorporated into the planned residential subdivision because of drainage problems. The corporation...
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