Urban Redevelopment Corporation v. CIR, 8334.
| Decision Date | 19 September 1961 |
| Docket Number | No. 8334.,8334. |
| Citation | 294 F.2d 328 |
| Parties | URBAN REDEVELOPMENT CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Fred R. Tansill, Washington, D. C. (Goodwin, Rosenbaum, Meacham & White, Washington, D. C., on brief), for petitioner.
Kenneth E. Levin, Atty. Dept. of Justice, Washington, D. C. , for respondent.
Before SOBELOFF, Chief Judge, and SOPER and BOREMAN, Circuit Judges.
This is a petition for review by the taxpayer of a decision of the Tax Court, reported in 34 T.C. 845, No. 87 (August 15, 1960). The basic facts stated herein appear to be undisputed and were either stipulated by the parties or found by the Tax Court.
Urban Redevelopment Corporation, sometimes hereinafter referred to as Urban or taxpayer, is a New York corporation organized on October 16, 1949. Until July 14, 1953, its principal place of business was in New York City, but on that date its office was moved to Alexandria, Virginia, and it was qualified to do business in Virginia. The corporation filed its tax returns for fiscal years ending on September 30, 1954, and September 30, 1955, with the District Director of Internal Revenue in Richmond, Virginia.
For those years the taxpayer deducted losses incurred during the prior tax years of 1950, 1951 and 1953 to offset otherwise taxable income of $81,802.68 in fiscal 1954 and $36,295.58 in fiscal 1955. The deductions were claimed under Int.Rev.Code of 1939, § 122(b), 26 U.S.C.A. § 122(b), and Int.Rev.Code of 1954, § 172(a) and (g), 26 U.S.C.A. § 172(a, g). Section 172(g) of the Int. Rev.Code of 1954 returns us to Int.Rev. Code of 1939, § 122(b), the governing section for all tax years here involved. That section provides, in pertinent part, that net operating losses incurred after December 31, 1949, may be carried forward for each of the five succeeding taxable years. The Commissioner of Internal Revenue disallowed the deduction, however, and the Tax Court, concurring with the Commissioner, found that the principal purpose for the purchase of taxpayer's stock by its sole stockholder, who will indirectly receive the benefit of a deduction, was avoidance of federal taxation and held that taxpayer was not entitled to the deductions under Int. Rev.Code of 1939, § 129, 26 U.S.C.A. § 129 (Int.Rev.Code of 1954, § 269, 26 U. S.C.A. § 269). These sections provide that if, on or after October 8, 1940, any person or persons acquire control of a corporation and the principal purpose for such acquisition is evasion or avoidance of federal income tax by securing the benefit of a deduction, credit or allowance which such person would not otherwise enjoy, then such deduction, credit or other allowance shall not be allowed.
According to Urban's certificate of incorporation, its principal objects and purposes are generally to buy, sell, lease, construct or otherwise deal in real and personal property. It was empowered to conduct these activities throughout the United States.
Prior to May 20, 1953, one Fred F. Stoneman acquired all of Urban's authorized, issued and outstanding stock, both common and preferred. Between the date of incorporation and May 20, 1953, Stoneman lent various sums to Urban and on the latter date, to evidence the obligations, Urban issued to Stoneman a promissory note, payable on demand, for $5,321.26 with six per cent interest.
Urban incurred net operating losses (before adjustment necessary under Int. Rev.Code of 1939, § 122, to determine the proper net operating loss carry-over) for the years indicated and in the stated amounts as shown below:
Fiscal year ended September 30
1950 .............................. $55,006.15
1951 .............................. 74,815.11
1953 .............................. 378.35
During 1952 the taxpayer was inactive and had neither profit nor loss.
Randolph Rouse, in 1953 and prior thereto as early as 1947, was a land developer and builder in Virginia. He is shown to be the principal stockholder and dominant personality in several construction corporations. Through a mutual acquaintance, Rouse was introduced in 1953 to Allen Thurman, a resident of Arlington, Virginia, and agent for Stoneman in respect to the sale of the latter's stock in Urban. Thurman introduced Rouse to Stoneman and negotiations for the sale of stock in Urban were carried on among the three individuals.
In the course of negotiations, Thurman stated that Urban had among its assets certain plans for the construction of multiple-unit dwelling houses.1 Rouse was shown a letter dated June 20, 1950, from Eugene Greenhut to Urban indicating that certain architectural plans, specifications and other related data for a proposed housing project in Boston, Massachusetts, had been sold to Urban for an adjusted price of $21,000. Greenhut also indicated that he owned "complete preliminary plans, specifications and other related data" for a proposed housing project in Kansas City. He agreed to sell and the taxpayer agreed to buy the Kansas City plans for $30,000. Greenhut had at some time prior to May 20, 1953, been an officer, director and minority stockholder of Urban. Rouse did not verify the existence or value of the plans; neither he nor his agents ever saw the plans, drawings or specifications prior to the time he purchased the Urban stock. He did see certain rough sketches known as "renderings," however. Rouse made no attempt at any time to purchase the aforementioned plans, drawings, specifications and other related data directly from taxpayer.
During negotiations, Thurman told Rouse of taxpayer's operating losses incurred during particular fiscal years and the exact amounts. Rouse sent his certified public accountant to New York to examine the taxpayer's books and the accountant verified the books and the net operating losses "to almost the dollar." Rouse's attorney also verified the legal corporate existence of the taxpayer.
On or about May 20, 1953, Rouse purchased from Stoneman all the Urban preferred and common stock, together with Urban's note payable to Stoneman (covering its indebtedness of $5,321.26 to Stoneman) for the sum of $12,250. During the taxable years ending in 1954 and 1955, Urban, the stock of which was wholly owned by Rouse, engaged in the construction and sale of detached residential property in the area around Arlington County, Virginia. These operations resulted in substantial profits. As the sole stockholder of Urban, Rouse would alone benefit through a reduction of Urban's income taxes resulting from its loss carry-overs.
After Rouse acquired control of Urban, he made some ineffectual efforts to secure possession of the plans, specifications and drawings represented to be assets of the taxpayer. As president of Urban, Rouse wrote a letter to Stoneman on FebRuary 15, 1954, in which he recited the representation by Thurman that certain plans were the property of Urban and would be delivered to Rouse in connection with his purchase of the stock. He requested that Stoneman make the plans available immediately. On March 9, 1954, Rouse wrote to Greenhut reciting the representation by Thurman that the plans and other data were in Greenhut's possession and stating that the plans were then urgently needed. He asked that Greenhut advise him as to whether and when the data could be picked up. Rouse next conferred about the matter with taxpayer's attorney who, on April 5, 1954, wrote to Greenhut and, on behalf of the taxpayer, made formal demand for the property. There was no compliance with the demand nor was there any effort made to follow up or pursue the matter further and the main plans and specifications were never obtained. Only a few miscellaneous files and plats of no real value were recovered.
The Tax Court also found as ultimate facts that Rouse had acquired, after October 8, 1940, control of Urban by a purchase of all of its outstanding stock and that his principal purpose in acquiring this stock was the avoidance of federal income tax by securing the benefit of deductions, namely, for net operating losses incurred by the taxpayer in the years 1950 and 1951 which he, Rouse, would not otherwise have enjoyed.
The taxpayer's main point on appeal is that the Tax Court's finding concerning Rouse's purpose in acquiring the Urban stock is not supported by the evidence. It is contended that the Tax Court clearly erred when it failed to accept Rouse's uncontroverted testimony that his...
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