Vandenberge v. Commissioner of Internal Revenue, 11075.

• Citation: 147 F.2d 167
• Decision Date: 12 February 1945
• Docket Number: No. 11075.,11075.
• Parties: VANDENBERGE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

147 F.2d 167 (1945)

VANDENBERGE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11075.

Circuit Court of Appeals, Fifth Circuit.

February 12, 1945.

J. V. Vandenberge, Jr., of Victoria, Tex., for petitioners.

Harold C. Wilkenfeld, Sewall Key, Helen R. Carloss, and Eugene E. Beyer, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, and B. D. Daniels, Sp. Atty., Bur. of Int. Revenue, both of Washington, D. C., for respondent.

Before SIBLEY, HOLMES, and WALLER, Circuit Judges.

HOLMES, Circuit Judge.

This case, involving income and excess profits taxes for the years 1938 and 1939, presents two questions arising from the sale of improved real estate owned by the Texas Auto Company and the subsequent liquidation of the company by the transfer of its assets to its shareholders: (1) What was the unadjusted basis of the property for determining gain or loss under Section 113 (a) of the Revenue Act of 1938, 26 U.S. C.A. Int.Rev.Acts, page 1048? (2) Were the transferees of the company entitled to offset individual income tax overpayments against their tax liabilities as transferees?

In 1922 the Texas Auto Company purchased certain improved real estate. As consideration for the transfer the company paid notes aggregating $20,000 that were secured by liens on the property, and in addition secured the cancellation and return to the seller of unsecured notes aggregating $24,567.16, liabilities of the seller and his business associates, held by the City National Bank of Corpus Christi, Texas. No consideration was paid to the bank for the surrender of these notes, and in its tax returns for 1922 it charged off the amount thereof; no part of the loss has since been recouped by the bank.

The company, ascribing an acquisition cost of $45,000 to the property, allocated $25,000 to the cost of the improvements for depreciation purposes. On this basis it claimed and was allowed depreciation aggregating $16,417.30 in its tax returns for the years 1923 to 1937, inclusive. It claimed depreciation in the sum of $1400 in 1938, and in 1939 it sold the property for $36,000. Both the depreciation deduction claimed in 1938 and the gain reported on the sale in 1939 were computed by the taxpayer on the theory that the six notes which were cancelled and returned increased the acquisition cost of the property by the aggregate of their face value. The Commissioner ruled that the amount of the notes should not be recognized as a part of the cost of the property; that the unadjusted basis of the property in the hands of the taxpayer was $20,000 rather than $44,567.16; that, using the allocation percentage adopted by the taxpayer, the land cost $8,888.89 and the improvements cost...