Sproul Realty Co. v. Comm'r of Internal Revenue, Docket No. 90563.
| Decision Date | 13 September 1962 |
| Docket Number | Docket No. 90563. |
| Citation | 38 T.C. 844 |
| Parties | SPROUL REALTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Fred L. Rosenbloom, Esq., for the petitioner.
Edward L. Newberger, Esq., for the respondent.
In 1954, S corporation was formed for the purpose of developing and constructing a shopping center. S purchased a tract of land and obtained commercial zoning for such land, hired an architect to prepare plans for the shopping center, found tenants to sign leases for the planned buildings, and unsuccessfully attempted to obtain permanent mortgage financing for the project. In 1956, before physical construction of the shopping center had begun and before S had realized any taxable income from the shopping center, S agreed to sell its entire interest in the shopping center to K. of C. corporation and S adopted a plan of complete liquidation. Upon completion of construction of the shopping center in 1957, K. of C. paid S the agreed consideration and S distributed its assets to its shareholders. Held, (1) S is a collapsible corporation as defined in section 341(b), I.R.C. 1954, and is thereby not entitled to nonrecognition of its gain on the sale of the shopping center under the provisions of section 337(a) and (c), I.R.C. 1954; (2) the gain S realized on the sale of the shopping center is taxable as long-term capital gain.
The Commissioner determined a deficiency in petitioner's income tax for the fiscal period July 1 to September 25, 1957, in the amount of $87,717.68. At issue is the applicability of the nonrecognition provisions of section 337(a) of the 1954 Code to petitioner's sale of certain corporate property pursuant to a plan of complete liquidation. The Commissioner has determined that the nonrecognition provisions do not apply based on the limitation in section 337(c) excluding collapsible corporations as defined in section 341(b). If the Commissioner is upheld in this regard, a further question is whether the gain realized by petitioner on the sale of the assets involved constitutes ordinary income or long-term capital gain.
The facts stipulated by the parties are incorporated herein by this reference.
Petitioner, a Pennsylvania corporation now in liquidation, with its principal office at Grant Avenue and Blue Grass Road, Philadelphia, Pennsylvania, filed its corporate income tax return for the period July 1, 1957, to September 25, 1957, with the district director of internal revenue, Philadelphia, Pennsylvania.
Early in 1954 a group of persons headed by Michael Lubin owned a one-half interest in 7 acres of unimproved real estate at the corner of State and Sproul Roads, Springfield Township, Delaware County, Pennsylvania. This land, hereinafter referred to as the Lubin tract, was commercially zoned and on it Lubin and his associates planned to develop a shopping center. The Lubin group and a man named Powell, who owned the other one-half interest in the land, had purchased the Lubin tract in 1952 for a total price of $187,500.
Penn Fruit Company, Inc., a corporation operating a chain of grocery supermarkets in the Philadelphia area, was interested in obtaining a store in the area of State and Sproul Roads, and early in 1954 its officers approached Lubin to explore the possibility of negotiating for a lease on a store to be erected on the Lubin tract. Because of restrictions imposed by other leases already negotiated, Lubin was unable to lease a store to Penn Fruit on the Lubin tract.
However, at that time Lubin had an option to acquire 14 1/2 acres of ground, then zoned for residential use, adjoining the Lubin tract on both sides. Lubin suggested that Penn Fruit might acquire a store on this adjoining ground if it would join with him and his associates in purchasing this ground, in having the zoning changed, and thereafter in developing it.
Hanna Realty Company, a Pennsylvania corporation wholly owned by five individuals who also own or control approximately 40 percent of the stock of Penn Fruit Company, is and since the late 1930's has been used as a real estate affiliate of Penn Fruit Company. These five individuals were the principal stockholders of Penn Fruit Company prior to the time it became a ‘public company’ in about 1952 or 1953, and they thereafter continued to dominate its affairs. Hanna Realty purchases ground required by Penn Fruit either for the erection of supermarkets, the extension of existing facilities, or for protection against competition, and additionally builds supermarkets and leases them to Penn Fruit. During the years 1955 and 1956, Hanna Realty owned and leased 12 stores occupied by Penn Fruit. From time to time Hanna Realty sold land which it had acquired for Penn Fruit when such land no longer served Penn Fruit's purposes and, in some instances, when Hanna Realty was unable to finance certain stores for Penn Fruit and found it necessary to sell the land to a financial institution or insurance company which is turn leased it back to Penn Fruit.
Petitioner was formed by Hanna Realty and Lubin and his associates for the specific purpose of purchasing and developing the 14 1/2-acre land parcel contiguous to the Lubin tract. Petitioner was incorporated under Pennsylvania law on June 23, 1954. Its authorized purposes, as stated in its articles of incorporation, were as follows:
To buy, sell, exchange, lease and otherwise acquire, hold, own, maintain, manage, develop, improve, alter, mortgage, let, rent, convey, deal in and otherwise turn to account real estate of every class and description.
To build, construct, purchase or otherwise acquire, repair, maintain, operate, manage, sell, convey and otherwise turn to account homes, office buildings, apartment houses, buildings, structures and real estate of every class and description.
The shareholders of petitioner were as follows:
+-----------------------------------------------------------------------------+
¦ ¦Number ¦Percent of ¦
+----------------------------------------------------+-----------+------------¦
¦ ¦of shares ¦ownership ¦
+----------------------------------------------------+-----------+------------¦
¦Hanna Realty Company ¦318 3/4 ¦42.5 ¦
+----------------------------------------------------+-----------+------------¦
¦David Cohen (legal counsel for Hanna Realty Company)¦63 3/4 ¦8.5 ¦
+----------------------------------------------------+-----------+------------¦
¦Lewis Posner, representing an investors' syndicate ¦367 1/2 ¦49.0 ¦
+-----------------------------------------------------------------------------+
The actual owners of the 367 1/2 shares held in the name of Lewis Posner were as follows:
+-----------------------------------------------------+
¦ ¦Percentage of 367 1/2 ¦
+-----------------------------+-----------------------¦
¦ ¦Sproul shares ¦
+-----------------------------+-----------------------¦
¦Lewis Posner ¦13 ¦
+-----------------------------+-----------------------¦
¦Michael Lubin ¦35 ¦
+-----------------------------+-----------------------¦
¦E. Fred Kemner ¦13 ¦
+-----------------------------+-----------------------¦
¦Elsie and Edward Goldsborough¦13 ¦
+-----------------------------+-----------------------¦
¦Hilda and Myer Harsfield ¦13 ¦
+-----------------------------+-----------------------¦
¦Lillian I. Laveson ¦13 ¦
+-----------------------------------------------------+
The objective of the Hanna Realty Company and its counsel, David Cohen, in organizing and participating in petitioner's activities was to obtain a Penn Fruit store in the State and Sproul Roads area. The purpose of the Lubin group was to develop a shopping center in conjunction with the adjoining 7-acre tract in which it already had an interest.
On June 30, 1954, petitioner entered into an agreement to acquire the 14 1/2-acre tract of land which was contiguous to the Lubin tract at State and Sproul Roads. Settlement under this agreement was held on October 6, 1954. Title to the 14 1/2-acre tract was held in the name of Murray A. Pierson as a strawparty until January 16, 1956, when title was formally transferred into the name of petitioner. The total cost of the land was $179,190.39.
During the year 1955, petitioner through its representatives exerted continuous efforts to have the land rezoned as a shopping center district. The land was so rezoned by the Springfield Township commissioners on December 28, 1955, on the condition that a shopping center be developed on the land within 18 months or the land would automatically revert to a residential district.
In the latter part of 1955, when it appeared that the land would be rezoned for shopping center use, petitioner began looking for tenants. Hanna Realty was particularly interested in finding a good department store tenant which it believed was essential to ‘anchor’ the development. Also toward the end of 1955, petitioner made preliminary attempts to obtain permanent financing for the shopping center project.
Among the department stores approached as potential tenants was E. J. Korvette, Inc., with whom discussions were held over a 4-month period beginning in August or September 1955. An oral agreement between petitioner and Korvette was reached early in January 1956.
On January 9, 1956, petitioner obtained a commitment from Penn Fruit for lease of a supermarket to be constructed on the property by petitioner. Under the terms of this commitment, as later amended, the lease was to run for an initial term of 25 years at a basic net rental of $42,000 per year, with the...
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