Wilson v. Comm'r of Internal Revenue
| Decision Date | 21 February 1956 |
| Docket Number | 49003.,Docket Nos. 49001 |
| Citation | 25 T.C. 1058 |
| Parties | THOMAS WILSON AND MARY W. WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTEDWARD N. RICHARDS AND HELENE H. RICHARDS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. In 1948 petitioners formed a corporation for the purpose of constructing a multiple-unit housing project. Construction was financed by an F.H.A.-insured mortgage loan, and the amount of such loan substantially exceeded costs of construction. More than 6 months after the formation of the corporation, petitioners caused the corporation to redeem and retire part of their stock in proportion to their holdings, a a part of the cash used for the redemption being out of borrowed fund. Held, the gain to petitioners is taxable at capital gains rates pursuant to the provisions of section 115(d), 1939 Code.
2. Held, deficiency for the year 1948 in Docket No. 49003 is barred by the statute of limitations.
3. Respondent determined in his deficiency notice that the proceeds of certain sales and redemptions of stock were ordinary income to petitioners under section 22(a), 1939 Code. At the hearing, for the first time, he indicated that he was relying on section 117(m) to support his determination. Held, respondent's reliance on section 117(m) requires proof of new matter, and as to such new matter respondent has the burden of proof. Held, further, respondent has failed to prove that more than 70 per cent of the gain to petitioners was attributable to the property constructed by the corporations herein. Stanley Worth, Esq., and Edward S. Smith, Esq., for the petitioners.
Robert A. Bridges, Esq., for the respondent.
The respondent determined deficiencies in the income taxes of petitioners and additions thereto under section 294(d), 1939 Code, for the years and in amounts as follows:
The parties have made certain stipulations and concessions to which effect will be given on the Rule 50 computation. He issues remaining for our decision are:
1. Whether certain corporate distributions to petitioners in 1948 in pro rata redemption of part of their stock were taxable to them as capital gains, as reported by petitioners, or as ordinary income, as determined by respondent;
2. Whether the deficiency of petitioners Edward N. and Helen H. Richards for the year 1948 is barred by the statute of limitations; and
3. Whether gains realized by petitioners in 1950 from sales of stock and from distributions in redemption of stock are taxable to them as capital gains, as reported by petitioners, or ordinary income, as determined by respondent.
Most of the facts have been stipulated and are found as stipulated.
Petitioners Thomas Wilson and Mary W. Wilson, husband and wife, and petitioners Edward N. Richards and Helene H. Richards, husband and wife, reside in Raleigh, North Carolina. For the taxable years 1948-1951 the Wilsons and the Richards filed their respective joint returns with the collector of internal revenue for the district of North Carolina.
During the taxable years involved Richards and Wilson were engaged in the contracting business involving primarily the building of houses and apartment units as members of several joint ventures. They were also officers and stockholders in various corporations, some of which were engaged in the construction business.
Edward N. Richards, at the time of the hearing, was 44 years of age and had been engaged in the construction business for 22 years. He specialized in construction engineering in college and is highly skilled in the construction business. Thomas Wilson was 55 years of age at the time of the hearing. After leaving college he was in the business of developing and selling real estate until 1934. In 1935 he became a valuator for the Federal Housing Administration (sometimes hereinafter referred to as F.H.A.), and in 1937 he became chief valuator for the F.H.A. in North Carolina, which position he retained until 1943, when he returned to the private real estate and building business.
Brookwood, Inc. (sometimes hereinafter referred to as Brookwood), is a North Carolina corporation organized January 5, 1948, to build for rent single and duplex houses in the vicinity of Winston-Salem, North Carolina. On January 8, 1948, the outstanding capital stock of the corporation was held as follows:
+----------------------------------+
¦ ¦Common ¦Preferred ¦
+-------------+--------+-----------¦
¦J.W. York ¦3 ¦62 1/2 ¦
+-------------+--------+-----------¦
¦E.N. Richards¦6 ¦125 ¦
+-------------+--------+-----------¦
¦Thomas Wilson¦3 ¦62 1/2 ¦
+----------------------------------+
The common stock, having no par value, was issued to the above persons for cash at $25 per share. The preferred stock, having a par value of $100, was acquired as follows: J. W. York, E. N. Richards, and Thomas Wilson held a one-fourth, one-half, and one-fourth interest, respectively, in the title to certain land which they acquired for a total cost of $50,000, and which was subject to indebtedness of $50,000. This land was transferred to Brookwood, subject to the $50,000 indebtedness, which Brookwood assumed, in exchange for the issuance of the aforesaid preferred stock to J. W. York, E. N. Richards, and Thomas Wilson in proportion to their respective interests in the land. The basis of the common stock in the hands of the shareholders was $25 per share, and the basis of the preferred stock, being a substituted basis, was zero.
Construction of the Brookwood project progressed rapidly due in large measures to the availability of an efficient labor force and to favorable weather conditions. The demand for housing was such at the time that as each unit was completed it was rented immediately. The net effect was to cut expected construction and overhead costs substantially.
Pursuant to a resolution of the board of directors of Brookwood, at a meeting held October 27, 1948, the following plan was put into effect: The outstanding preferred stock was retired at par, Wilson receiving $6,250 for his stock and Richards $12,500 for his; the 12 shares of no-par-value common stock were exchanged for 175,000 shares of $1-par-value common stock, whereby Wilson received 43,750 shares and Richards 87,500; and 75,000 of the new shares of common stock were immediately redeemed for cash at par and retired, Wilson receiving $18,750 and Richards $37,500. On October 27, 1948, when the foregoing transactions occurred, the corporation had no accumulated or current earnings and profits. Wilson and Richards were officers and directors of Brookwood at that time, and participated in the meeting.
Thomas and Mary W. Wilson jointly and Edward N. and Helene H. Richards jointly reported the proceeds from the redemption of the holdings of the respective husbands as long-term capital gains in their 1948 returns. The respondent in his deficiency notices has determined that the entire redemption price of $25,000 in the case of the Wilsons and $50,000 in the case of the Richards was ordinary income.
Edward N. and Helene H. Richards reported gross income of $43,331.01 in their joint return for 1948. The deficiency notice in Docket No. 49003 was mailed to the Richards more than 3 but less than 5 years after the 1948 return was filed.
Immediately prior to March 1, 1949, Richards owned 50,000 shares of Brookwood common stock. On March 1, 1948, he transferred 12,500 of these shares to his wife, Helene, and he sold 12,500 shares to Mary W. Wilson for a consideration of $5,000.
By letter dated February 9, 1950, Richards offered to sell his 25,000 remaining shares of stock in Brookwood, Inc, and the 12,500 shares held by his wife to the board of directors of the corporation for a total consideration of $12,162. He simultaneously tendered his resignation as president and director of Brookwood, Inc., to be effective upon the acceptance of the offer to sell. At a special meeting of the board of directors, held February 9, 1950, the terms of Richards' letter were accepted, and the 37,500 shares were purchased and retired by the corporation on February 13. In their joint return for 1950, Edward N. and Helene H. Richards reported the proceeds of the above sale, $12,162, as long-term capital gain. Respondent, in determining the deficiency for 1950, held that the entire amount of $12,162 was ordinary income of Richards, taxable under the provisions of section 22(a).
After the above transactions, the capital stock of Brookwood, Inc., was held, 25,000 shares by Wilson and 12,500 shares by Mary W. Wilson. Immediately prior to May 1, 1950, Wilson sold 11,000 shares of common stock of Brookwood to F. B. Smitherman and 9,500 shares to Bert L. Bennett, Jr., for a total consideration of.$12,757.24. Wilson offered to sell his remaining 4,500 shares in Brookwood to the corporation for $2,728.29, and at a meeting of the board of directors held May 1, 1950, the offer was accepted, and the stock was purchased by the corporation and retired. As at April 30, 1950, Brookwood, Inc., had accumulated and current earnings and profits totaling $6,512.70.
Immediately prior to May 1, 1950, Mary W. Wilson sold to Bert L. Bennett, Jr., the 12,500 shares of Brookwood which she had acquired from Richards for $5,000 in 1949.
In their return for 1950 the Wilsons reported the proceeds of the sales of stock to Smitherman and Bennett and the...
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