Winterburn v. Commissioner, Docket No. 3717-66.
| Decision Date | 29 August 1968 |
| Docket Number | Docket No. 3717-66. |
| Citation | 1968 TC Memo 187,27 TCM (CCH) 910 |
| Parties | William I. Winterburn and Jean T. Winterburn v. Commissioner. |
| Court | U.S. Tax Court |
Harvey Bruce Mininberg, for the petitioners. James E. Merritt and Joel Sharon, for the respondent.
The Commissioner determined a deficiency of $9,205.37 in petitioners' income tax for the year 1962. The principal question is what part if any of the taxpayer's one-third share of gain on sale of certain property to a corporation is entitled to nonrecognition under sections 351 and 357, I. R. C. 1954.
The two stipulations of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners William I. and Jean T. Winterburn filed a joint income tax return for the year 1962 with the district director of internal revenue in San Francisco, California. On the date of the petition to this Court, the residence of Jean T. Winterburn was San Anselmo, California, and the residence of William I. Winterburn was San Rafael, California. Jean T. Winterburn is a party to this case solely by virtue of having signed the joint return; William I. Winterburn will sometimes hereinafter be referred to as "petitioner."
On March 13, 1962, petitioner entered into an agreement entitled "Offer to Purchase Real Property" with Lee Crane, Jr., Geraldine Crane (hereinafter referred to as "the Cranes"), Alfred Bettman and Maureen Bettman (hereinafter referred to as "the Bettmans") regarding two tracts of real property (hereinafter referred to as the "Walker Creek Ranch") located in Marin County, California. The agreement provided for the sale of the Walker Creek Ranch by the Cranes and the Bettmans to petitioner or his nominee for a total purchase price of $215,000. On the same date petitioner made a cash deposit of $3,000. The remainder of the purchase price was to be paid by the deposit of an additional $72,000 cash in escrow within 90 days, by the assumption of two notes secured by deeds of trust (held by one R. F. Weber) in the aggregate amount of $85,200, and by the giving of two additional notes secured by deeds of trust in the aggregate amount of $54,800 (one such note to the Cranes in the amount of $14,900 and the other to the Bettmans in the amount of $39,900). The Cranes agreed to enter into a 25-month lease at a total rental of $8,000.
Petitioner was an officer in Pacific Coast Title Company. On March 21, 1962 he entered into an agreement with Raymond J. Eckert, a real estate broker, and Frank E. Hawkins, a used car dealer, looking towards the consummation of the purchase of the ranch property and its exploitation for the benefit of all three ("the promoters") on an equal basis. The agreement recited that the promoters were "mutually desirous of contracting as between themselves, to undertake and consummate the purchase of said ranch property, as equal owners thereof, or in the alternative to sell the same to a corporation which the parties hereto may form for such purposes." Petitioner agreed to assign his rights to purchase the property to the group as a whole. The promoters agreed that each would contribute an equal amount of capital toward consummating the purchase, with petitioner to be "reimbursed" for his $3,000 down payment. They further agreed that each would be the beneficial owner of an undivided one-third interest in the property, with title to be held by the Pacific Coast Title Company. Petitioner and Eckert authorized Hawkins to act as agent for the promoters in transferring title to the Walker Creek Ranch property.
It was finally determined to organize a corporation to which the promoters would sell the property at a profit, and it was contemplated that the corporation would obtain the necessary cash from the proceeds of sales of shares of its stock to various persons at $1,000 a share. To that end, the three promoters and 19 others executed a "Pre-Incorporation Subscription Agreement" on April 7, 1962 with regard to the formation of such corporation and the issuance of stock in order to obtain funds to purchase the ranch property. Each subscriber agreed to "take and pay for" the number of shares appearing after his signature, generally between 1 and 5, but 150 in the case of one subscriber. The agreement recited that Hawkins and his wife were the equitable owners of the property, and stated that it was "proposed that said corporation upon its formation shall purchase" the property from them for a total purchase price of $319,800. The price was to be paid by a cash payment of $179,800, by the assumption of the trust deed secured obligations owing to R. F. Weber in the amount of $85,200, and by the assumption of the trust deed secured obligations owing to the Cranes and the Bettmans in the aggregate amount of $54,800. The prepaid lease to the Cranes was to operate as a credit toward the corporation's intended purchase of the property. It was further proposed that the corporation be authorized to issue 250 shares of $1,000 par value stock. Each promoter was to receive three shares of stock for promotional and other services. It does not appear that there was disclosure to the subscribers that petitioner of Eckert had any interest in the property or that the sales price to the corporation was $104,800 in excess of the price to be paid to the Cranes and the Bettmans.
On April 30, 1962, articles of incorporation were filed with the Secretary of State of California for Walker Creek Ranch, Inc. The three promoters signed the document as incorporators and were listed therein as the first directors of the corporation.
On May 7, 1962, escrow account number 6829-W was opened at Pacific Coast Title Company between Hawkins and the Cranes and the Bettmans. On May 14, 1962, escrow account number 7292-W was opened at Pacific Coast Title Company between Hawkins and Walker Creek Ranch, Inc. Payments by subscribers for capital stock in Walker Creek Ranch, Inc., were paid into this escrow account.
On May 18, 1962, Walker Creek Ranch, Inc., applied to the Division of Corporations, State of California, for a permit to issue securities. In the application, the three promoters, were listed as the permanent officers and directors of the corporation. On May 23, 1962, a permit to issue securities was granted to Walker Creek Ranch, Inc., by the Division of Corporations.
Although some shares were sold to several persons in addition to the original subscribers, the latter did not in fact buy all the shares that they had undertaken to purchase. As a consequence, the corporation did not have sufficient cash to consummate the purchase, as previously planned. Accordingly, Hawkins, by letter dated May 31, 1962, authorized the corporation to substitute 91 shares of its stock for $91,000 of the cash to be paid by it for the property. It was thus contemplated that part of the sales price would be reflected in these 91 shares. However, at about that time 28 of those 91 shares were sold for $28,000 by Hawkins on behalf of the three seller-promoters, thus leaving only 63 shares to be distributed among them as part of the proceeds of sale of the ranch property to the corporation.
The parties herein have presented by stipulation copies of escrow statements in both escrow number 6829-W and escrow number 7292-W, dated May 7, 1962 and May 14, 1962, respectively. Each consists of two sheets, one sheet with respect to the account of the seller and the other with respect to the account of the purchaser. The accounts set forth in the statement relating to escrow number 6829-W, involving the sale of the property by the Cranes and Bettmans to Hawkins, are as follows:
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Seller's Account
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Debit Credit
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Sale Price ............................................... $215,000.00
Internal Revenue Stamps .................................. $ 143.00
Notary Fee 2 Deeds ....................................... 4.00
Pay Brokerage To Timmer Realty ........................... 5,910.00
Lakeport Realty .......................................... 5,910.00
By Assumption of Weber Note as of 7/1 .................... 85,200.00
By Note and D/T to Crane ................................. 14,900.00
By Note and D/T to Bettman ............................... 39,900.00
Credit buyer Crane lease ................................. 8,000.00
Credit buyer 5 mos. int. on Weber Note 2/1/62 to 7/1/62 .. 1,307.50
By Check to Crane less $8,000.00 per lease contract ...... 35,362.75
By Check to Bettman ...................................... 18,362.75
___________ ___________
TOTALS ................................................... $215,000.00 $215,000.00
Purchaser's Account
Purchase Price ........................................... $215,000.00
Notary Fee 2 Deeds of Trust .............................. 4.00
Recording 2 Deeds and 2 Deeds of Trust ................... 15.40
Photostats and Maps ...................................... 12.39
By Assumption of Weber Loan as of 7/1/62 ................. $ 85,200.00
By Note and D/T above to Crane ........................... 14,900.00
By Note and D/T above to Bettman ......................... 39,900.00
By Credit to Buyer for Crane lease ....................... 8,000.00
Credit buyer 5 mos. int. on Weber note ................... 1,307.50
Credit for
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