Tobias v. Comm'r of Internal Revenue

• Decision Date: 22 April 1963
• Docket Number: Docket No. 88979.
• Citation: 40 T.C. 84
• Parties: MAX N. TOBIAS AND MILDRED G. TOBIAS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

40 T.C. 84

MAX N. TOBIAS AND MILDRED G. TOBIAS, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 88979.

Tax Court of the United States.

Filed April 22, 1963

[40 T.C. 84]

E. Charles Eichenbaum, and W. S. Miller, Jr., for the petitioners.

J. C. Linge, for the respondent.

Held: 1. Proceeds of a fire insurance policy paid on account of a fire, where the lessee paid the premiums covering machinery and equipment placed upon the property by the lessee, belonged to the lessor where the lease gave the lessor ownership of the machinery and equipment and the proceeds are taxable to the lessor at capital gains rates. Owen Meredith, 12 T.C. 344 (1949), followed.

2. Certain of the proceeds in the amount of $34,740.92 were not proceeds collected by the lessor for his property and this amount represented a constructive dividend to petitioner-lessor from the lessee where petitioner was controlling stockholder of the lessee.

3. Proceeds from the sale of the machinery and equipment after the fire were additional long-term capital gains to petitioner wherein petitioner had a zero basis in the machinery and equipment.

4. Future Realty Corporation was a collapsible corporation within the meaning of section 341, I.R.C. 1954, and the gains realized by petitioner on the sale of his stock in that corporation were taxable as gains from the sale of property which is not a capital asset.

Respondent determined deficiencies in the income tax of petitioners for the years 1954, 1955, and 1956 in the respective amounts of $135,377.43, $26,008.39, and $24,969.66. Most of these deficiencies are in dispute. Petitioners contest the adjustments by appropriate assignments of error and in doing so the following issues are raised:

[40 T.C. 85]

(1) Whether certain machinery and equipment were the property of petitioner when destroyed by fire so that the fire insurance proceeds are taxable as capital gains to petitioners or whether the machinery and equipment were the property of J. T. Gibbons, Inc., a corporation in which petitioner was controlling stockholder, so that the insurance proceeds collected by petitioner constituted a constructive dividend from the corporation to him and was therefore ordinary income.

(2) Whether or not the proceeds from the sale of certain machinery and equipment after the fire represented additional capital gains to petitioners or whether the proceeds from the sale properly belong to J. T. Gibbons, Inc.

(3) Whether or not Future Realty Corp. was a collapsible corporation.

Respondent by affirmative pleading by an ‘Amendment to Answer’ and an ‘Amendment to Amendment to Answer’ pleads in the alternative that if petitioners did not realize ordinary income in 1954 they realized capital gain in 1954 in the amount of $207,706.77 by the receipt of insurance proceeds because of destroyed machinery and equipment; that petitioners realized additional capital gains in 1954, 1955, and 1956 from the sale of machinery and equipment in the amounts of $1,675, $35,086.37, and $25, 187.33, respectively; and that petitioners understated capital gain realized on the sale of Future Realty Corp. stock for 1955 in the amount of $47,346.52, in the event that we should determine that such gain is capital gain rather than ordinary income.

FINDINGS OF FACT

A stipulation of facts and a supplemental stipulation of facts, together with exhibits attached thereto, were filed by the parties and are incorporated herein by this reference.

Petitioners Max N. Tobias and Mildred G. Tobias are husband and wife residing in New Orleans, La. They filed their joint income tax returns with the district director of internal revenue at New Orleans for the calendar years 1954, 1955, and 1956. Hereinafter Max N. Tobias will be referred to as petitioner.

Issue 1

J. T. Gibbons, Inc., hereinafter referred to as Gibbons, is a corporation organized under the laws of the State of Louisiana on February 1, 1949. Petitioner was president of Gibbons. The issued and outstanding common stock of Gibbons was owned as follows:

+----------------------------------------------+
                ¦Name ¦Common ¦
                +-------------------------------------+--------¦
                ¦ ¦stock ¦
                +-------------------------------------+--------¦
                ¦Max N. Tobias (petitioner) ¦254 ¦
                +-------------------------------------+--------¦
                ¦Morris E. Burka (petitioner's nephew)¦245 ¦
                +-------------------------------------+--------¦
                ¦Ralpha H. Fishman ¦1 ¦
                +----------------------------------------------+
                

[40 T.C. 86]

Gibbons acquired the assets of a going business which was located at 2700 Howard Avenue, New Orleans. The land and buildings located there were acquired by petitioner individually on February 1, 1949, for a total consideration of $185,000, which cost was allocated on petitioner's records as follows:

+--------------------------------+
                ¦Machinery and equipment¦$52,578 ¦
                +-----------------------+--------¦
                ¦Building ¦99,222 ¦
                +-----------------------+--------¦
                ¦Land ¦33,200 ¦
                +-----------------------+--------¦
                ¦Total ¦$185,000¦
                +--------------------------------+
                

On February 1, 1949, petitioner leased the buildings to Gibbons for a period of 10 years commencing February 1, 1949, for an annual rental of $22,500. In addition to the cash rental, the lessee agreed to assign to petitioner machinery and equipment that it had acquired in the buildings and the lessee agreed to pay for all repairs and pay for all insurance that was considered necessary to insure adequately all the property, including the buildings and the machinery and equipment located in the buildings.

The lease, inter alia, contained the following provisions:

NET LEASE

THIS AGREEMENT made and entered into this first day of February, 1949 by and between Max N. Tobias, hereinafter called ‘Lessor’ and J. T. Gibbons, Inc., hereinafter called ‘Lessee’ * * *

I

Lessor hereby leases to Lessee the following described property situated in the City of New Orleans to wit:

ONE CERTAIN SQUARE OF GROUND, together with all the buildings and improvements thereon, and all the rights ways, privileges, servitudes, appurtenances and advantages thereunto belonging or in any wise appertaining * * *

Together with all engines, machines and machinery, appurtenances, appliances, tools, implements, equipment and all other property of similar nature located upon or used in connection with the hereinabove described property and/or located and used in connection with the plant and buildings thereon erected wheresoever located; also all tracks, switches, switch tracks, switching privileges, ways, roads, pipes, pipe lines and all similar rights or privileges.

II

This lease is made for a term of ten (10) years commencing on the first day of February, 1949 and ending on the thirty-first (31st) day of January, 1959.

III

The property herein leased constitutes, and shall be leased as a plant, office and place of business for the manufacture, storing, sale and distribution of mixed feeds, hay, grain and similar products.

[40 T.C. 87]

IV

This lease is made for and in consideration of an annual net rental to be paid by Lessee to Lessor of TWENTY-TWO THOUSAND FIVE HUNDRED ($22,500.00) DOLLARS, payable monthly in advance at the rate of ONE THOUSAND EIGHT HUNDRED AND SEVENTY-FIVE ($1,875.00) DOLLARS per month.

As further consideration for this lease, Lessor and Lessee agree as follows:

Lessor and Lessee take cognizance of the fact that under a prior lease between J. T. Gibbons, Inc. (now Louisiana Grain Corporation) (the predecessor of the present J. T. Gibbons, Inc.) and Gibbons Realty Company, certain machinery, appliances and equipment in the leased premises became the property of the Lessee, which said machinery, appliances and equipment were sold by said Lessee to the present J. T. Gibbons, Inc.; that the balance of said machinery, equipment and appliances in said premises were acquired by the said Max N. Tobias by purchase of the realty from Gibbons Realty Company. The parties hereto declare that the ownership of said machinery, equipment and appliances is impossible to determine as between the Lessor and Lessee, and, as further consideration for this lease, the said Lessee does hereby transfer to said Lessor all of its right, title, interest and ownership in and to the said machinery, equipment and appliances which is hereby declared to now form part of the premises herein leased.

V

Lessee assumes to the complete release and discharge of the Lessor the following charges:

(c) The cost of all replacements, repairs and maintenance of the machinery, equipment and appliances, such repairs and maintenance to be done according to the standards by which such machinery, equipment and appliances are usually maintained; all replacements shall be at least of equivalent type and value and such replacements shall become and remain the property of the Lessor. Should Lessee desire to install additional machinery, equipment and appliances, such additions shall also become and remain the property of the Lessor.

(f) Lessee agrees at all times during the term of this lease to keep the buildings and improvements insured to their full insurable replacement value, but not in excess of $200,000.00. Lessee further agrees, during the term of this lease, to keep the machinery, equipment and appliances insured against fire and extended coverage in the sum of $150,000.00 and to insure the Lessor against loss of rental for the period of one year up to the sum of $28,000.00. Lessee further agrees to insure Lessor at its own expense, against any other perils that Lessor may from time to time require.

In consideration of the mutual agreements and undertakings by the said parties, they do now agree to hold each the other harmless for any damage to or destruction of one anothers property caused by the negligence of either party, their agents, servants, or employees, when such damage is attributable to and covered by any of the perils insured against and which could result from human fault, particularly fire; and each of the parties...