Vandenberge v. Comm'r of Internal Revenue, Docket Nos. 1606

• Decision Date: 21 February 1944
• Docket Number: Docket Nos. 1606,1608,1607,1609.
• Citation: 3 T.C. 321
• Parties: J. V. VANDENBERGE, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.D. E. BLACKBURN, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.W. F. WALLACE, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.TEXAS AUTO COMPANY, PETITIONER, v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

3 T.C. 321

J. V. VANDENBERGE, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.D. E. BLACKBURN, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.W. F. WALLACE, TRANSFEREE OF TEXAS AUTO COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.TEXAS AUTO COMPANY, PETITIONER,

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT.

Docket Nos. 1606

1607

1608

1609.

Tax Court of the United States.

Promulgated February 21, 1944.

1. The basis for depreciation and gain or loss on property used in the transferor's business was cost. Transferor was not entitled to add to such cost the face value of six unsecured promissory notes which the owner of such property at the time it was sold to the transferor owed to a bank and which the bank agreed to cancel under certain conditions if the seller would convey the property to transferor. No showing is made that these notes had any value at the time they were canceled or that transferor ever paid anything on them to the bank or in any way assumed any liability in connection therewith.

2. The Commissioner has not determined any deficiencies in individual income tax against the transferees for 1939; we have acquired no jurisdiction over their individual income tax liabilities and have no power to direct that their liability as transferees be offset by overpayments in their individual income taxes. J. V. Vandenberge, Jr., Esq., for the petitioners.

Loyal E. Keir, Esq., for the respondent.

OPINION.

BLACK, Judge:

These proceedings have been consolidated. The Commissioner has determined deficiencies in income and excess profits taxes against Texas Auto Co. for the taxable years 1938 and 1939 in the following amounts:

+-----------------------------------+
                ¦Taxable year¦Income tax¦Excess     ¦
                +------------+----------+-----------¦
                ¦            ¦          ¦profits tax¦
                +------------+----------+-----------¦
                ¦1938        ¦$175.00   ¦$50.27     ¦
                +------------+----------+-----------¦
                ¦1939        ¦2,622.71  ¦2,032.34   ¦
                +------------+----------+-----------¦
                ¦Total       ¦2,797.71  ¦2,082.61   ¦
                +-----------------------------------+
                

The Commissioner has also determined that J. V. Vandenberge, D. E. Blackburn, and W. F. Wallace are liable as transferees of Texas Auto Co. and that each is liable for the full amount of the deficiencies determined.

Each of the petitioners assigns the following errors:

1. In computing the tax liability of the transferor corporation, Texas Auto Company, for the year 1938, the Commissioner erroneously declined to allow depreciation on a building owned by the corporation at a reasonable rate and based upon the cost thereof in December, 1922, when acquired, which depreciation was claimed in the amount of $1400.00.

2. In determining the tax liability of the transferor corporation, Texas Auto Company, for the year 1939, in computing the gain realized from the sale in July, 1939, of certain improved real estate owned by the corporation, the Commissioner erroneously held that the cost thereof in December, 1922, when acquired for a lump price, was $20,000.00, with $11,111.11 apportioned to the cost of the building thereon situated and $8,888.89 to the cost of the land, whereas the total cost of said realty was $44,567.16, of which amount at least $25,000.00 represented the cost of the building and the remainder the cost of the land.

As an alternative ground of error, each of the petitioners, Vandenberge, Blackburn, and Wallace, as transferees, assigns the following error:

3. In 1939, subsequent to the above mentioned sale by the corporation, a liquidating dividend was declared in the amount of $19,500.00, of which this petitioner received $6,500.00, and which was duly reported by this petitioner in his individual return for the year 1939 as income for said year and upon which taxes were duly paid, and if the Commissioner's action be correct in the respects hereinabove complained of then such return is erroneous and petitioner is entitled to a proportionate refund or credit on his individual return and tax for said year as against the transferee liability asserted by the Commissioner.

Vandenberge, Blackburn, and Wallace concede that they are liable as transferees for the full amount of the deficiencies in case the Court should sustain the Commissioner in his determination of the deficiencies against Texas Auto Co., but claim the offsets set up in their alternative assignment of error above.

The facts have all been stipulated and we adopt these facts as our findings of fact. For the purpose of this opinion we summarize them as follows:

Texas Auto Co., sometimes hereinafter referred to as the Auto Co., was created in 1917 under the name of Mayfield Auto Co., the name being changed to Texas Auto Co. in 1924.

On December 23, 1922, the Mayfield Auto Co. acquired by deed from J. C. Blacknall Co. certain improved real estate for a recited consideration of $10 ‘and other valuable consideration,‘ and ‘subject to all existing indebtedness thereon.‘ At the time of this conveyance, J. C. Blacknall was operating his business under his individual name and through the medium of three associate companies, including J. C. Blacknall Co., all of which were owned or controlled by him. Clark Pease owned 45 percent of the stock of Mayfield Auto Co., subsequently acquiring the remainder thereof, and likewise owned 315 shares out of 345 shares outstanding of the stock of City National Bank of Corpus Christi, being president thereof. The J. C. Blacknall Co. owed E. J. Hulick a $10,000 note secured by a first lien against the real estate so conveyed, and likewise owed Clark Pease a note for $10,000 secured by a second lien against this realty, both of which notes were subsequently paid by Texas Auto Co., successor to Mayfield Auto Co. The note to Pease was paid December 19, 1925, by the issuance of stock, and the note to Hulick was paid December 10, 1937, in cash. Blacknall and his associate companies, including J. C. Blacknall Co., were also indebted to City National Bank of Corpus Christi, Texas, sometimes hereinafter referred to as the bank, in the amount of $24,567.16, evidenced by six unsecured notes. It was orally agreed between Blacknall and his associate companies, on the one hand, and the bank and Pease, on the other, that, if Blacknall should have the realty in question conveyed to Mayfield Auto Co., he and his associate companies would be released and discharged from any and all direct or indirect liabilities to the bank or Pease, including the six notes above mentioned. On December 30, 1922, a written instrument was executed by Blacknall, J. C. Blacknall Co., the bank, and Pease under which it was agreed that, in the absence of bankruptcy proceedings against Blacknall and his companies, the bank and Pease would release them from all direct or indirect liabilities held by the bank or Pease dated prior to December 15, 1922. In September 1924 the six notes referred to were surrendered to Blacknall without his giving further consideration therefor. On its Federal income tax return for 1922 the bank charged off an indebtedness of approximately $25,000 against Blacknall and his companies, including the six notes referred to, and no subsequent recoveries thereon have been had by the bank.

The real estate so acquired By Mayfield Auto Co. from J. C. Blacknall Co. was set up in the ensuing year for depreciation purposes at $45,000, $20,000 allocated to the land and $25,000 to the improvements. Depreciation on the building was subsequently claimed and allowed for income tax purposes for the years 1923 to 1937, inclusive, for an aggregate of $16,417.30. Depreciation in the amount of $1,400 for the year 1938 was claimed, but disallowed by the respondent. The real estate so conveyed by J. C. Blacknall Co. to Mayfield Auto Co. was sold by Auto Co. in July 1939.

In making determination of the deficiencies in question, the respondent allowed an original cost of only $20,000 represented by the Hulick and Pease secured notes above referred to which were paid by the Auto Co. after it acquired the property, declining to allow the asserted additional cost of approximately $25,000 represented by the six unsecured notes above referred to which were charged off by the bank in 1922 and deducted from its income tax return. Respondent apportioned the allowed cost of $20,000 in the ratio of 20/45 for the land and 25/45 for the building. In computing gain from the 1939 sale for $36,000, respondent allocated $26,000 for the land and $10,000 for the building, resulting in the determination of a net gain of $27,111.11 or $17,111.11 in excess of that reported by Texas Auto Co. Petitioners do not dispute respondent's computation of the gain if respondent's determination of the basis is sustained.

The claim of petitioners Vandenberge, Blackburn, and Wallace to an offset in the event the deficiencies be sustained is grounded upon the fact that in 1939 Auto Co. paid a liquidating dividend of $19,500 from the sale of said realty, of which each received $6,500. Each of them reported and paid individual income tax for that year with respect thereto in varying brackets. Should the deficiencies be determined against Auto Co., they contend that the dividend upon which their individual taxes were thus paid would be thereby decreased to the extent of the deficiency, plus interest, and that the amount of the tax paid by each with respect to such reported but unrealized income should be allowed as an offset against their joint liability as transferees. On this point it is stipulated:

* * * in the event the court should determine that the petitioners transferees are entitled to offsets as defined in paragraph 12 above, that the amounts of the offsets, excluding interest, shall be as follows:

+--------------------+
                ¦Vandenberge ¦$359.94¦
                +------------+-------¦
                ¦Blackburn   ¦174.48 ¦
                +------------+-------¦
                ¦Wallace     ¦146.40 ¦

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