Thomas v. Commissioner, Docket No. 11998-77

• Decision Date: 28 July 1981
• Docket Number: 831-78,1140-78.,Docket No. 11998-77,12000-77,157-78,11999-77
• Citation: 42 TCM (CCH) 496,1981 TC Memo 387
• Parties: Calvin A. Thomas, Transferee of Metro "400" Inc., et al. v. Commissioner.
• Court: U.S. Tax Court

42 TCM (CCH) 496

1981 TC Memo 387

T.C. Memo. 1981-387.

Calvin A. Thomas, Transferee of Metro "400" Inc., et al.¹ v. Commissioner.

Docket Nos. 11998-77, 11999-77, 12000-77, 157-78, 831-78, 1140-78.

United States Tax Court.

Filed July 28, 1981.

James R. Harper, Fulton National Bank Bldg., Atlanta, Ga., for the petitioners. Maurice W. Gerard, for the respondent.

Memorandum Findings of Fact and Opinion

IRWIN, Judge:

Respondent has determined that petitioners are liable under section 6902² for the corporate income tax of Metro "400" Inc. as follows:

                ______________________________________________________________________________________________
                                                                                     Taxable
                  Docket No.                   Petitioner                           Year Ended      Amount
                ______________________________________________________________________________________________
                   11998-77    Calvin A. Thomas, Transferee .....................  June 30, 1973   $281,528
                   11999-78    Goodwyn Cates, Transferee ........................  June 30, 1973    281,528
                   12000-77    Charles O. Cates, Jr., Transferee ................  June 30, 1973    281,528
                ______________________________________________________________________________________________
                

Respondent has also determined deficiencies in and additions to petitioners' Federal income taxes as follows:

                _____________________________________________________________________________________________________
                                                                           Taxable                Addition to Tax
                  Docket No.                 Petitioners                     Year    Deficiency    Sec. 6653(a)
                _____________________________________________________________________________________________________
                    157-78    Goodwyn Cates and Wynelle J. Cates ..........  1973    $229,505.64    $11,475.28
                                                                             1974         174.98         —
                                                                             1975         489.54         —
                    831-78    Calvin A. Thomas and Joan Thomas ............  1973      71,691.57         —
                   1140-78    Charles O. Cates, Jr. and Estate of Billie
                                B. Cates, Deceased, Charles O. Cates, Jr
                                Administrator .............................  1973     108,587.49      5,429.37
                _____________________________________________________________________________________________________
                

After concessions by respondent, the issues remaining for decision are:

(1) whether Metro "400" Inc. was a collapsible corporation as defined by section 341 and thus not entitled to the non-recognition of gain, provided by section 337, on the sale of its only asset;

(2) if Metro "400" Inc. was a collapsible corporation whether all of Metro "400" Inc.'s shareholders elected to be subject to the provisions of subchapter S, as required by section 1372(a);

(3) if Metro "400" Inc. is not an electing small business corporation and is required to recognize gain from the sale of its sole asset, whether petitioners Calvin A. Thomas, Goodwyn Cates, and Charles O. Cates, Jr., are liable as transferees for the corporate income tax due from Metro "400" Inc.;

(4) the nature of the gain realized and recognized by petitioners Goodwyn Cates and Charles O. Cates, Jr. from their sale of options for stock³ of Metro "400" Inc.;

(5) whether petitioner Goodwyn Cates received a contract right for a commission upon the liquidation of Cates Realty Company, Inc. in 1973 or whether he constructively received commission income upon the sale of land by Metro "400" Inc. in 1973;

(6) whether petitioner Goodwyn Cates is entitled to auto depreciation expenses in excess of the amounts allowed by respondent for 1973, 1974, and 1975;

(7) whether petitioner Goodwyn Cates is entitled to deductions for condominium expenses and depreciation for 1973;

(8) whether petitioner Goodwyn Cates is liable for the section 6653(a) addition to tax for 1973 (9) whether petitioner Calvin A. Thomas is entitled to a deduction for interest expenses in excess of the amount allowed by respondent for 1973;

(10) whether petitioner Calvin A. Thomas received unreported income of $1,760 in 1973;

(11) whether petitioner Charles O. Cates, Jr., received unreported income of $5,704.66 in 1973;

(12) whether petitioner Charles O. Cates, Jr., is entitled to auto and truck depreciation expense in excess of the amount allowed by respondent for 1973;

(13) whether petitioner Charles O. Cates, Jr., is liable for the section 6653(a) addition to tax for 1973.

Findings of Facts

Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioners Calvin A. Thomas and Joan Thomas filed their 1973 joint Federal income tax return with the Internal Revenue Service Center in Chamblee, Georgia. They resided in Alpharetta, Georgia, when their petitions were filed herein.

Petitioners Goodwyn Cates and Wynelle J. Cates filed their 1973, 1974, and 1975 joint Federal income tax returns with the Internal Revenue Service Center in Chamblee, Georgia. They resided in Atlanta, Georgia, when their petitions were filed herein.

Petitioners Charles O. Cates, Jr., and Billie B. Cates filed their 1973 joint Federal income tax return with the Internal Revenue Service Center in Chamblee, Georgia. They resided in Atlanta, Georgia, when their petitions were filed herein. Billie B. Cates died in August 1978 and petitioner Charles O. Cates, Jr., was appointed administrator of her estates.

Metro "400" Inc. filed its corporate income tax return, Form 1120S, for the taxable year ended June 30, 1973, with the Internal Revenue Service Center in Chamblee, Georgia. Metro "400" Inc.'s principal place of business was Atlanta, Georgia.

Joan Thomas and Wynelle J. Cates are petitioners herein solely because of the filing of joint returns with their spouses. The Estate of Billie B. Cates is a petitioner herein solely because Billie B. Cates filed a joint return with her spouse. Accordingly, any references hereinafter to petitioners shall be to Calvin A. Thomas, Goodwyn Cates, and Charles O. Cates, Jr., collectively.

Issues (1) — (5)

The principal disputes in these consolidated cases revolve around the purchase and resale of 258.477 acres of unimproved real estate by Metro "400", Inc., a corporation formed and utilized solely for that purpose by the petitioners.

Sometime in early 1972 petitioner Calvin A. Thomas (hereinafter sometimes referred to as Calvin) was informed by a friend who worked at Income Properties, Inc. (a real estate company) that 258.477 acres of land located near Alpharetta, Georgia, was for sale. Alpharetta is a small community in Fulton County, Georgia, approximately 12 to 15 miles from Atlanta. The land is located on the highest elevation in north Fulton County and, with the exception of its east side, was abutted by roads, including State Highway 400 (a major expressway). The land was zoned solely for agricultural use. Calvin, a resident of Alpharetta, lived approximately one block from the land and was familiar with the area. Calvin recognized that the land represented an excellent opportunity for profit.

Calvin contacted petitioner Charles O. Cates, Jr. (hereinafter sometimes referred to as Charles) concerning acquisition of this acreage.⁴ Charles also felt that the land represented a terrific opportunity for profit. Charles discussed the opportunity with his brother, petitioner Goodwyn Cates (hereinafter sometimes referred to as Goodwyn), an elected member of the Board of County Commissioners of Fulton County, Georgia. One of the responsibilities of a County Commissioner was to vote on resolutions concerning approval of petitions requesting zoning changes. The petitioners agreed that the land should be acquired and rezoned for apartments, if possible. Charles and Goodwyn were both involved in the real estate business and each owned his own real estate company. Charles' real estate company dealt primarily in residential resales. The nature of the activities of Goodwyn's real estate company is not in the record.

On May 23, 1972, Calvin signed a contract through Income Properties, Inc. (as broker) to purchase the land from its owners, R. Randall Rollins, Gary W. Rollins, Henry B. Tippie, Earl F. Geiger, and W. Falk, III. The agreed price was $6,600 per acre, or a total price of $1,705,948.20.

The terms of the contract were as follows: Calvin was to pay $20,000 earnest money (later refunded) May 23, 1972, make a 20 percent cash payment at closing, assume an existing mortgage of $199,005.82 and pay the balance with a note secured by a deed. The note was payable in 10 equal installments on principal plus 7 percent interest per annum on the unpaid balance. The first payment on the note was due 1 year from closing. Calvin retained the right to pay the entire loan off at any time after the end of the calendar year in which the sale was closed.⁵

Petitioners retained an experienced attorney, J. Ralph McClelland, Jr. (hereinafter sometimes referred to as McClelland) to advise them. McClelland advised petitioners to form a corporation to hold the land.

On July 28, 1972, Metro "400" Inc. (hereinafter referred to as Metro) was incorporated under the laws of the State of Georgia. The Articles of Incorporation provided that the corporation was organized for "buying, selling, exchanging, developing, investing in, and otherwise dealing generally, either as principal or as agent for others, in any and all types and kinds of property, real, personal or mixed." Ten thousand shares of no par value common stock were authorized, but Metro was not to commence business until not less than $500 had been received for the issuance of shares. The board of directors was comprised of three members: McClelland, Freeman D. Mitchell, and Wayne Jernigan.⁶ Calvin transferred the option to...