Willow Terrace Dev. Co. v. Comm'r of Internal Revenue Respondent, Docket No. 89852.
| Decision Date | 28 June 1963 |
| Docket Number | Docket No. 89852. |
| Citation | 40 T.C. 689 |
| Parties | WILLOW TERRACE DEVELOPMENT CO., INC., POST OAK MANOR BUILDING CO., INC., PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert H. McCanne and W. Carloss Morris Jr., for the petitioners.
Robert I. White, for the respondent.
Building Co., engaged in selling new houses, accepted 151 houses as trade-ins and gave to purchasers of new houses trade-in allowances equal to their equities in the houses traded in. Building Co. treated the trade-in allowances as a part of the downpayment on the new houses. Building Co. found it necessary to construct water and sewerage systems at a cost of $157,187.49 to service the improved lots in its subdivision. To meet FHA requirements, Building Co. conveyed the utilities systems to an operating company which, in turn, executed trust deeds giving the lot owners an equitable interest in the systems and outlining the powers and duties of the operating company. Late in 1959, after all the new houses in the subdivision had been sold by Building Co. and after the subdivision had been annexed by the City of Houston, the utilities systems were sold to the city for $215,000. Held, the fair market value of the trade-in houses was at least equal to the total of the encumbrances on such houses plus the equities of the owners, and consequently the full amount of the trade-in allowances granted by Building Co. are includable in its sales income for the years before us. Held, further, the cost of the water and sewerage systems is includable in the basis of the new houses sold by Building Co. in the fiscal years 1956, 1957, and 1958 under the authority of Estate of M. A. Collins, 31 T.C. 238.
The respondent determined deficiencies in the petitioners' income tax as follows:
+--------------------------------+
¦Fiscal year ¦ ¦
+-------------------+------------¦
¦ended April 30— ¦Deficiency ¦
+-------------------+------------¦
¦1955 ¦$9,971.63 ¦
+-------------------+------------¦
¦1956 ¦99,739.78 ¦
+-------------------+------------¦
¦1957 ¦114,663.30 ¦
+-------------------+------------¦
¦1958 ¦33,869.41 ¦
+--------------------------------+
The issues are (1) whether the cost of water and sewer facilities constructed by petitioners to service their real estate subdivision is includable in the basis of the lots in the subdivision, or, in the alternative, whether the transfer of the water and sewer facilities by Post Oak Manor Building Co., Inc., to the Post Oak Manor Water Co., Inc., constituted a sale in which a loss was incurred by the building company; and (2) whether petitioners may deduct as part of the cost of new houses sold by them certain allowances made for trade-in-houses, or, in the alternative, whether the transfer of the trade-in houses to a related corporation was, in effect, a sale of such houses in which the petitioners incurred a loss.
Some of the facts were stipulated and they are so found.
Willow Terrace Development Co., Inc. (hereinafter called Development Co.), a Texas corporation, was organized on May 5, 1954. The outstanding stock of the corporation was held as follows from the date of incorporation until May 8, 1958:
+-----------------------------------+
¦ ¦Percentage of ¦
+---------------+-------------------¦
¦Name of owner ¦outstanding stock ¦
+---------------+-------------------¦
¦Latimer Murfee ¦52 ¦
+---------------+-------------------¦
¦Dan McCrary ¦8 ¦
+---------------+-------------------¦
¦W. W. McMillan ¦40 ¦
+-----------------------------------+
Post Oak Manor Building Co., Inc. (hereinafter called Building Co.), a Texas corporation, was organized on June 8, 1954. At all times here relevant all of the outstanding stock of the corporation was owned by Development Co.
A consolidated corporate income tax return was filed by Development Co. and Building Co. for each of the fiscal years ended April 30, 1955, 1956, 1957, and 1958, with the district director of internal revenue at Austin, Tex. Development Co. and Building Co. will sometimes hereinafter be called petitioners.
Post Oak Manor Water Co., Inc. (hereinafter called Water Co.), a Texas corporation, was organized on June 7, 1954. Terwil Corp., a Texas corporation, was organized on July 18, 1955. The outstanding stock of both Water Co. and Terwil Corp. was held, from the dates of incorporation until May 8, 1958, as follows:
+-----------------------------------+
¦ ¦Percentage of ¦
+---------------+-------------------¦
¦Name of owner ¦outstanding stock ¦
+---------------+-------------------¦
¦Latimer Murfee ¦52 ¦
+---------------+-------------------¦
¦Dan McCrary ¦8 ¦
+---------------+-------------------¦
¦W. W. McMillan ¦40 ¦
+-----------------------------------+
W. W. McMillan, for several years prior to 1950, had been in the business of subdividing real estate and constructing properties (principally residences) to sell, mostly in the vicinity of Houston, Tex. During the early 1950's he continued in said business and was also in the poultry business in Houston, Tex. McMillan was president of Development Co., Building Co., Water Co., and Terwil Corp. during the fiscal years here relevant.
Latimer Murfee was an attorney in Houston, Tex., during the period here relevant. Dan McCrary, for about 8 years prior to 1954, was an officer of a real estate mortgage and financing company that operated in Texas and Louisiana.
On June 17, 1954, Development Co. purchased 130.648 acres of land located approximately 2 miles south of the city limits of Houston as they existed during June 1954. On the same date the Development Co. conveyed the tract of land to Building Co. subject to certain outstanding indebtedness, in the total amount of $391,944.
Building Co. subdivided part of the 130.648-acre tract of land into 432 lots and designated streets and easements for water and sewer lines for public use in the subdivision. The subdivision was known as Post Oak Manor and was platted in five separate parcels, as follows:
+------------------------------------------+
¦Plat filed ¦Parcel No.¦Acreage¦Number of¦
+-------------+----------+-------+---------¦
¦ ¦ ¦ ¦lots ¦
+-------------+----------+-------+---------¦
¦July 21, 1954¦1 ¦16.96 ¦60 ¦
+-------------+----------+-------+---------¦
¦June 6, 1955 ¦2 ¦21.14 ¦86 ¦
+-------------+----------+-------+---------¦
¦May 30, 1955 ¦3 ¦20.73 ¦92 ¦
+-------------+----------+-------+---------¦
¦Jan. 5, 1956 ¦4 ¦21.81 ¦104 ¦
+-------------+----------+-------+---------¦
¦Aug. 30, 1956¦5 ¦19.86 ¦90 ¦
+-------------+----------+-------+---------¦
¦Total ¦ ¦100.50 ¦432 ¦
+------------------------------------------+
All houses in Post Oak Manor were constructed and sold by Building Co. and the construction was in accordance with Federal Housing Administration specifications and requirements so that the FHA would issue commitments for loan insurance guarantees enabling Building Co. to sell the houses with mortgages under guarantees by the FHA or the Veterans' Administration.
The FHA, as a condition for issuing loan commitments on the subdivision, required that a satisfactory water system, sewerage system, and garbage pickup service be made available to the houses in the subdivision. In all subdivision developments constructed after 1950 in which community water or sewer systems were to be utilized the FHA required the use of the trust deed procedure. The FHA required that the private owner of the systems convey title to the site and the plant improvements as well as the utility lines in the streets and/or easements to an approved trustee even though the private owner continued the active management and control of the system. If the private owner abandoned the plant, changed the rate structure materially, or failed to provide satisfactory service, the trustee was given the right in the trust deed to take over the operation of the system for the property owners, and in that event the private owner of the system had no further right, title, or interest in the system. FHA prescribed the content of the forms to be used in this trust deed procedure.
After Building Co. found it would be made to obtain water and sewerage services from the city of Houston, and after determining it would be more economical to build its own systems rather than obtain the services from a neighboring subdivision developer, Building Co. constructed a water well, a water pumping plant, and a sewage disposal plant on sites located within the 130.648-acre tract for the use of all the Post Oak Manor subdivision. The water system designed for Post Oak Manor followed the design generally used by the city of Houston. The cost to Building Co. of these systems was as follows:
+-----------------------------------------------------------------------------+
¦Section¦Date ¦Portion completed ¦Number of ¦Cost ¦
+-------+---------+------------------------------------+-----------+----------¦
¦ ¦completed¦ ¦connections¦ ¦
+-------+---------+------------------------------------+-----------+----------¦
¦1 ¦Feb. 8, ¦Water well and plant, and sewage ¦ ¦$48,885.31¦
¦ ¦1955 ¦treatment plant. ¦ ¦ ¦
+-------+---------+------------------------------------+-----------+----------¦
¦1 ¦Feb. 8, ¦Water distribution system and ¦60 ¦28,293.75 ¦
¦ ¦1955 ¦sanitary sewer system. ¦ ¦ ¦
+-------+---------+------------------------------------+-----------+----------¦
¦2...To continue reading
Request your trial
-
Norwest Corp. v. Comm'r of Internal Revenue
...on a line of cases that includes Estate of Collins v. Commissioner, 31 T.C. 238, 1958 WL 914 (1958), and Willow Terrace Dev. Co. v. Commissioner, 40 T.C. 689, 1963 WL 1540 (1963), affd. 345 F.2d 933 (5th Cir.1965) (the developer line of cases), petitioner argues that it is entitled under se......
-
Herzog Bldg. Corp. v. Comm'r of Internal Revenue, Docket No. 92607.
...and control’ of the facility constructed. Willow Terrace Development Co. v. Commissioner, 345 F.2d 933 (C.A. 5, 1965), affirming 40 T.C. 689 (1963); Commissioner v. Offutt, 336 F.2d 483 (1964), affirming a Memorandum Opinion of this Court; Estate of M.A. Collins, 31 T.C. 238 (1956). On the ......
-
Bryce's Mountain Resort, Inc. v. Commissioner, Docket No. 26382-82.
...of full ownership and control, the cost of the system cannot be added to the basis of lots sold, Willow Terrace Development Co. v. Commissioner Dec. 26,207, 40 T. C. 689 (1963), affd. 65-2 USTC ¶ 9449 345 F. 2d 933 (5th Cir. 1965), but must be capitalized and depreciated over its useful The......
-
Ferrell v. Commissioner
...realizable for them. Willow Terrace Development Co. v. Commissioner 65-2 USTC ¶ 9449, 345 F.2d 933, 936 (5th Cir. 1965), affg. Dec. 26,207 40 T.C. 689 (1963), cert. denied 382 U.S. 938 (1965); Strasser v. Commissioner Dec. 43,535(M), T.C. Memo. 1986-579; Serdar v. Commissioner Dec. 43,430(M......