PARKLAND PLACE COMPANY v. UNITED STATES

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Docket Number

No. 22145.

Attorney(S)

Edward R. Smith, Smith Baker, Lubbock, Tex., for appellant. Howard Feldman, Atty., Dept. of Justice, Washington, D.C., John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D.C., Barefoot Sanders, U.S. Atty., Dallas, Tex., for appellee, Melvin M. Diggs, U.S. Atty., of counsel.

Judges

Joseph Chappell Hutcheson
John Robert Brown

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Smart Summary

Factual and Procedural Background

This appeal arises from a judgment denying Parkland Place Company recovery of federal income taxes paid for its fiscal years ended September 30, 1958, and September 30, 1959. Parkland was incorporated in 1955, initially funded with $50,000 in cash used to purchase a 168.67-acre tract for subdivision development. Subsequently, on April 22, 1957, Parkland acquired an additional 93.14-acre tract from its stockholders, issuing a $150,000 note payable within ten years as consideration. The note has been recorded as a liability, but accrued interest has neither been paid nor deducted as an expense, nor was an election made to capitalize such interest on tax returns. Parkland used the fair market value of $150,000 as the basis for the 93-acre tract, adding accrued interest charges as capitalized expenses. The Commissioner of Internal Revenue adjusted the basis downward to the transferor-stockholders' basis under Internal Revenue Code Section 351, disallowing capitalization of accrued interest under Section 266. Parkland’s refund claim from this adjustment led to the lawsuit.

Legal Issues Presented

Whether the transaction whereby Parkland acquired property from its stockholders qualifies for nonrecognition of gain or loss under Internal Revenue Code of 1954 Section 351.
Whether Parkland is entitled under Internal Revenue Code of 1954 Section 266 to capitalize accrued but unpaid interest charges on the note given to stockholders in exchange for property for determining the basis of such property.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Internal Revenue Code of 1954 Section 351 (and Section 362)	Nonrecognition of gain or loss on property transferred to a corporation solely in exchange for stock, with carryover of transferor's basis to transferee.	The court found all requirements of Section 351 satisfied: the note was a security exchanged for property, and the transferor-stockholders controlled Parkland immediately after the exchange. Therefore, no gain or loss was recognized and Parkland’s basis was the same as the transferors'.
Internal Revenue Code of 1954 Section 266	Capitalization of taxes and carrying charges only if such charges are otherwise deductible and an election to capitalize is made on the original return.	The court held that accrued interest charges on the note were not otherwise deductible and Parkland made no election to capitalize them; thus, capitalization was disallowed.
Treasury Regulation Section 1.266-1	Clarifies that items not otherwise deductible cannot be capitalized under Section 266 and requires election to capitalize on original return.	Supported the Commissioner's disallowance of capitalization because Parkland neither deducted the interest nor made the required election.

Court's Reasoning and Analysis

The court first analyzed the Section 351 issue, determining that the $150,000 note given by Parkland to its stockholders constituted a security exchanged for property, and that the stockholders maintained control of the corporation immediately after the transaction. These facts satisfied the statutory requirements for nonrecognition of gain or loss, mandating that Parkland’s basis in the acquired property be the same as the transferors’ basis.

Regarding the Section 266 issue, the court examined whether Parkland could capitalize accrued interest charges on the note. Since these interest charges were not otherwise deductible under the tax code and Parkland failed to elect capitalization on its original returns, the court concluded that capitalization was impermissible. The court relied on the statutory language and Treasury regulations that strictly limit capitalization to otherwise deductible carrying charges accompanied by a proper election.

The district court’s opinion was deemed well-reasoned and thorough, and the appellate court adopted its analysis and judgment without further elaboration, affirming the denial of Parkland’s refund claim.

Holding and Implications

The judgment of the district court was affirmed.

The direct effect of this decision is that Parkland Place Company is denied recovery of the contested federal income taxes. The court confirmed that the acquisition transaction qualifies under Section 351 for nonrecognition of gain or loss, establishing that Parkland’s basis in the property is the transferor-stockholders’ basis. Furthermore, the court upheld the denial of capitalization of accrued but unpaid interest charges due to non-deductibility and absence of election. No new legal precedent was established; the ruling primarily enforces existing statutory and regulatory provisions as applied to the facts.

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PARKLAND PLACE COMPANY, Appellant, v. UNITED STATES of America, Appellee.

PER CURIAM:

This is an appeal from a judgment denying appellant Parkland Place Company recovery of federal income taxes paid for its fiscal years ended September 30, 1958, and September 30, 1959. The issues presented are two: whether the transaction whereby Parkland acquired certain property from its stockholders is within the nonrecognition provisions of Internal Revenue Code of 1954 Section 351; and whether Parkland is entitled under Internal Revenue Code of 1954 Section 266 to capitalize interest charges accrued but not actually paid on an obligation given by it to its stockholders in exchange for property in determining the basis of such property.

The relevant facts may be summarized as follows: Parkland was incorporated under charter dated October 25, 1955, and organized on October 28, 1955. At that time cash in the amount of $50,000 was paid into the corporation in return for its stock. Almost immediately Parkland used this cash as part of the purchase price of a 168.67 acre tract acquired to start a subdivision. Development of the 168 acre tract was postponed temporarily. On April 22, 1957, the stockholders conveyed to Parkland a 93.14 acre tract also to be used for a subdivision; as consideration Parkland executed and delivered to its stockholders a note for $150,000 payable on or before ten years from the date thereof. Development of this tract began shortly after acquisition. The $150,000 note has always been reflected as a liability on Parkland's balance sheet. Parkland has not, however, paid the interest charges accrued on this note, nor has it deducted the accrued interest charges as an expense on its income tax returns. No election was made on its returns to capitalize the interest charges.

On its income tax returns for the years in question Parkland used the fair market value at the time of transfer — i.e., $150,000 — as the basis for the 93 acre tract for purposes of computing gain on sales of subdivided lots in this tract. To this basis was added the accrued interest charges on the $150,000 note as a capitalized expense. Relying on Internal Revenue Code of 1954 Section 351 the Commissioner reduced the basis of the 93 acre tract to an amount equal to the basis in the hands of the transferor-stockholders and increased Parkland's income accordingly. Capitalization of interest charges under Section 266 was denied. Parkland's refund claim for the increased taxes resulting from the Commissioner's adjustments is the basis of this suit.

Int.Rev. Code of 1954 Section 351, in conjunction with Section 362, provides for non-recognition of gain or loss upon transfer and the carry-over of the transferor's basis to the transferee. These sections read in pertinent part:
[Section 351] (a) General Rule.

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c) of the corporation. * * *

[Section 362] (a) Property acquired by issuance of stock or as paid-in surplus.

If property was acquired * * * by a corporation —

(1) in connection with a transaction to which section 351 * * * applies, * * * then the basis shall be the same as it would be in the hands of the transferor * * *.

The Commissioner disallowed capitalization of the interest charges because such charges were not otherwise deductible and, in the alternative, because Parkland had not elected to capitalize this expense on its annual tax returns, both of which are required. Internal Revenue Code of 1954, Section 266 reads:

No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.

Pursuant to the express direction of Section 266 the Commissioner has issued Treas. Reg. Section 1.266-1, stating in part:
* * * * *

(b) Taxes and carrying charges. * * * (2) The sole effect of section 266 is to permit the items enumerated in subparagraph (1) of this paragraph to be chargeable to the capital account notwithstanding that such items are otherwise expressly deductible under the provisions of subtitle A of the Code. An item not otherwise deductible may not be capitalized under section 266.

(3) * * * [A]n item not otherwise deductible is not deductible by this section. * * *

(c) Election to charge taxes and carrying charges to capital account. * * * (3) If the taxpayer elects to capitalize an item or items under this section, such election shall be exercised by filing with the original return for the year for which the election is made a statement indicating the item or items * * * which the taxpayer elects to treat as chargeable to capital account.

* * * * *
Section 267 renders the interest charges accrued but not actually paid on the $150,000 note "not otherwise deductible" in the present case.

The district court in its well reasoned opinion sustained the Commissioner in toto. With regard to the Section 351 issue, the court found that the $150,000 note is a "security"; that this note was exchanged for property transferred to Parkland; and that the transferor-stockholders were in control of Parkland immediately after the exchange. Since all the requirements of Section 351 were satisfied, the court ruled that there was no recognition of gain or loss on the transaction and that Parkland's basis in the transferred property is the same as the basis of the transferor-stockholders. With regard to the Section 266 issue, the court held that since the interest charges accrued on the $150,000 note were not otherwise deductible, and since Parkland had made no election to capitalize such charges on the appropriate income tax returns, Parkland was not entitled to capitalize these charges. The district court adequately stated and properly decided the issues presented in this suit. We agree with the opinion and judgment of the district court and adopt this opinion as our own. Without saying more, and thereby unduly lengthening the opinion, we order the judgment affirmed.

Reported at 248 F. Supp. 974 (N.D.Tex. 1964).