TURNER
Jacob Shearer, Esq., for the petitioners. George E. Constable, Esq., for the respondent.
1. Four corporations in which certain of the petitioners were stockholders were engaged in the business of subdividing tracts of land into lots and constructing and selling houses thereon. To procure the waterlines necessary to supply water for the houses so built and sold, the corporations, under contracts with the water company, paid the cost of the extension of the water company's lines into the various properties. For a period of 10 years from the date of completion of the waterlines, the water company agreed to make payments to the corporations based on a percentage of the gross revenue it would derive from the sale of water to the occupants of the houses sold, but in an amount not to exceed cost to the corporations for the running of the waterlines. All of the houses were completed and sold, and the 4 corporations distributed in dissolution the water company contracts to their stockholders. In reporting their gain upon the sales of the houses, the 4 corporations treated the cost to them of the waterlines as part of the cost of the houses sold, which treatment was disallowed by the respondent in the determinations herein. The stockholders, in reporting their gain upon dissolution of the corporations, attributed no value to the water company contracts distributed to them. The respondent determined that each of the contracts had a fair market value at the time of distribution and the amount thereof, and took such fair market value into account in determining the gain to the stockholders from the dissolution of the corporations. Held, that payments made by the corporations to the water company for the construction of the waterlines were properly included by corporations in computing the cost of the houses sold. Colony, Inc., 26 T.C. 30. Held, further, that at the time of distribution each of the water company contracts had a fair market value equal, at least, to the amount determined by the respondent, and the respondent properly took such fair market value into account in determining the gain realized by the stockholders upon receipt of the contracts.
2. Petitioner Albert Gersten and one Robbins had been the owners, in equal part, of the stock of a corporation, the assets of which they had received in equal shares upon its dissolution, and by reason thereof, Gersten and Robbins became liable as transferees of the said corporation for $44,721.60 in Federal taxes and interest thereon. In December 1947, Gersten paid $40,000 of the said sum and on April 5, 1949, paid the remaining $4,721.60, of which $1,261.13 represented interest. At the time of the final payment in April 1949, Robbins was insolvent, and Gersten in his 1949 return deducted the entire $4,721.60. The respondent in his determination of deficiency determined that the $4,721.60 paid by Gersten was paid one-half on his own account and one-half on Robbins's account; that the $2,360.80 paid on Robbins's account was a nonbusiness bad debt, deductible as a short-term capital loss under section 23(k), I.R.C. 1939; that of the $2,360.80 paid on his own account, $630.57 was interest and deductible as such, and the remaining $1,730.23 was a long-term capital loss. Under authority of Putnam v. Commissioner, 352 U.S. 82, and Arrowsmith v. Commissioner, 344 U.S. 47, the respondent's determination is sustained.
3. On April 3, 1950, petitioner Lucille Gersten obtained a California interlocutory decree of divorce from petitioner Albert Gersten, which, under California law, did not become a final decree until April 3, 1951. On November 2, 1950, Albert Gersten obtained a final decree of divorce in Mexico and on that date married Bernice Anne Gersten in Mexico. He and Bernice filed a joint return for 1950; respondent determined they were not entitled to do so. Albert and Bernice Anne Gersten were at all times residents of California. Held, petitioner Albert Gersten and Bernice Anne Gersten were not entitled to file a joint return of income for 1950.
4. J. Richard Company, a California corporation incorporated on July 10, 1947, was engaged in the business of purchasing tracts of land which it subdivided into lots on which it constructed and sold houses. It dissolved on June 22, 1950. Lawrence Land Company was a California corporation incorporated on March 25, 1949. It dissolved on December 31, 1950. It also was engaged in the business of acquiring tracts of land which it subdivided into lots on which it constructed and sold houses. Petitioners Albert Gersten and Myron P. Beck owned all of the stock of J. Richard Company. They and Milton Gersten owned all of the stock of Lawrence Land Company. Held, the business of J. Richard Company was substantially similar to the trade or business engaged in by Lawrence Land Company during 1950, within the meaning of section 430(e)(2)(B) (ii), I.R.C. 1939, and Lawrence Land Company was therefore in its fourth taxable year for purposes of such section in computing its excess profits tax liability for the fiscal period March 1, 1950, to December 31, 1950.
The respondent determined income tax and transferee liability deficiencies against the petitioners herein as follows:
+-----------------------------------------------------------------------------+ ¦Docket¦Petitioner ¦Taxable year ¦Deficiency¦ ¦ ¦ ¦or ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦No. ¦ ¦period ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51226 ¦Albert Gersten ¦1950 ¦$10,429.15¦ +------+--------------------------------------------+--------------+----------¦ ¦51227 ¦Albert Gersten and Lucille Gersten ¦1949 ¦1,687.02 ¦ +------+--------------------------------------------+--------------+----------¦ ¦51228 ¦Myron P. Beck and Ann H. Beck ¦1949 ¦1,340.00 ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦1950 ¦7,835.92 ¦ +------+--------------------------------------------+--------------+----------¦ ¦51229 ¦Milton Gersten and Mary Gersten ¦1950 ¦1,984.73 ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦(Year ended 1/¦6,568.55 ¦ ¦ ¦ ¦31/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51230 ¦Rex Land Co., a dissolved corporation ¦(2/1/50-10/25/¦1,104.16 ¦ ¦ ¦ ¦50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦(Year ended 1/¦6,568.55 ¦ ¦ ¦ ¦31/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51231 ¦Albert Gersten, transferee of Rex Land Co ¦(2/1/50- 10/25¦1,104.16 ¦ ¦ ¦ ¦/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51232 ¦Myron P. Beck and Ann H. Beck, transferees ¦(Year ended 1/¦6,568.55 ¦ ¦ ¦of Rex Land Co ¦31/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦(2/1/50-10/25/¦1,104.16 ¦ ¦ ¦ ¦50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51233 ¦Lawrence Land Co., a dissolved corporation ¦3/1/50-12/31/ ¦2 ¦ ¦ ¦ ¦50 ¦10,908.88 ¦ +------+--------------------------------------------+--------------+----------¦ ¦51234 ¦Albert Gersten, transferee of Lawrence Land ¦3/1/50-12/31/ ¦10,908.88 ¦ ¦ ¦Co ¦50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51235 ¦Myron P. Beck and Ann H. Beck, transferees ¦3/1/50-12/31/ ¦10,908.88 ¦ ¦ ¦of Lawrence ¦50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦Land Co. ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51236 ¦Milton Gersten and Mary Gersten, transferees¦3/1/50-12/31/ ¦10,908.88 ¦ ¦ ¦of Lawrence ¦50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦Land Co. ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦(Year ended 6/¦10,886.75 ¦ ¦ ¦ ¦30/49 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51237 ¦Albert Gersten, transferee of J. Richard Co ¦(Year ended 6/¦5,306.59 ¦ ¦ ¦ ¦30/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51238 ¦Myron P. Beck and Ann H. Beck, transferees ¦(Year ended 6/¦10,886.75 ¦ ¦ ¦of J. Richard Co. ¦30/49 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦(Year ended 6/¦5,306.59 ¦ ¦ ¦ ¦30/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51239 ¦Whittier Development Co., a dissolved ¦Year ended 2/ ¦7,503.64 ¦ ¦ ¦corporation ¦28/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51240 ¦Albert Gersten, transferee of Whittier ¦Year ended 2/ ¦7,503.64 ¦ ¦ ¦Development Co ¦28/50 ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦51241 ¦Myron P. Beck and Ann H. Beck, transferees ¦Year ended ¦ ¦ ¦ ¦of Whittier ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦Development Co. ¦2/28/50 ¦7,503.64 ¦ +------+--------------------------------------------+--------------+----------¦ ¦51242 ¦Milton Gersten and Mary Gersten, ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦transferees of Whittier ¦Year ended ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦Development Co. ¦2/28/50 ¦7,503.64 ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦ ¦ ¦ +------+--------------------------------------------+--------------+----------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
Such amount is the determined net deficiency in income tax imposed by sections 13 and 15 of chapter I, the gross deficiency in such tax of $15,202.94 being offset by an overpayment of excess profits tax imposed by section 430 of such chapter in the amount of $4,294.06. Union Telephone Co., 41 B. T. A. 152; cf. Will County Title Co., 38 B. T. A. 1396; Rowan Cotton Mills Co., 1 T. C. 865, affd. 140 F. 2d 277, certiorari denied 322 U. S. 740; Pioneer Parachute Co., 4 T. C. 27; Difco Laboratories, Inc., 10 T. C. 660.
The issues to be decided are (1) whether the corporate petitioners and another corporation, J. Richard Company, properly included payments to a water company for extending pipelines to certain subdivisions developed by them, in computing the cost of property sold, when such payments were repayable upon the happening of certain contingencies; (2) what value, if any, was attributable to the said repayment rights in determining the gain realized by the stockholders upon distributions to them in liquidation of the said corporations; (3) whether a payment in 1949 by petitioner Albert Gersten, in final satisfaction of the Federal income tax liability of a dissolved corporation, half of whose assets he had received upon dissolution, resulted in a fully deductible loss under section 23(e)(2) of the Internal Revenue Code of 1939; (4) whether petitioner Albert Gersten and his alleged wife, Bernice Anne Gersten, were entitled to file a joint Federal income tax return for the year 1950; and (5) whether the business of J. Richard Company was ‘substantially similar to the trade or business' engaged in by petitioner Lawrence Land Company during the year 1950, within the meaning of section 430(e)(2)(B)(ii).
The petitioner transferees have conceded their liability as transferees in the amount of any deficiencies determined herein against the corporate petitioners in Docket Nos. 51230, 51233, and 51239. Petitioners Albert Gersten and Myron P. Beck have also conceded their transferee liability, determined in Docket Nos. 51237 and 51238, for such additional taxes as J. Richard Company, which is not a petitioner, should have been liable for, as may be determined herein. The parties agree that Ann H. Beck, the wife of Myron P. Beck and a petitioner in Docket Nos. 51232, 51235, 51238, and 51241, is not liable as a transferee of the corporate petitioners of J. Richard Company.
FINDINGS OF FACT.Some of the facts have been stipulated and are found as stipulated.
+--------------------------+ ¦ ¦Per cent ¦ +---------------+----------¦ ¦ ¦ ¦ +---------------+----------¦ ¦Albert Gersten ¦40 ¦ +---------------+----------¦ ¦Myron P. Beck ¦40 ¦ +---------------+----------¦ ¦Milton Gersten ¦20 ¦ +--------------------------+
During the course of its existence, Whittier acquired 2 parcels of land which it subdivided into lots on which it constructed and sold houses. In order to provide water facilities for such tracts, it entered into 1 contracts with San Gabriel. The first was dated November 29, 1949. Whittier agreed to and did pay, on or about that date, the sum of $23,841 to San Gabriel. San Gabriel agreed to repay such payment within 10 years from the date of the contract by payment of 35 per cent of the annual gross revenues derived from the sale of water. On March 10, 1950, Whittier entered into a second contract with San Gabriel providing for the installation of water facilities to the other tract which it owned. It paid San Gabriel the sum of $5,214. San Gabriel agreed to repay such sum within a 10-year period from completion of the installation of the facilities. Such repayment was to be made from 35 per cent of the gross revenues derived by it from the sale of water. Installation of the facilities was completed by April 14, 1950. By December 28, 1950, San Gabriel had repaid $1,413.02 on the first contract and $62.98 on the second. Whittier had sold all houses on the first tract by June 7, 1950, and on the second tract by December 15, 1950.
+--------------------------+ ¦ ¦Per cent ¦ +---------------+----------¦ ¦ ¦ ¦ +---------------+----------¦ ¦Albert Gersten ¦40 ¦ +---------------+----------¦ ¦Myron P. Beck ¦50 ¦ +---------------+----------¦ ¦Milton Gersten ¦10 ¦ +--------------------------+
Lawrence acquired a parcel of land which it subdivided into lots on which it constructed and sold houses. On January 26, 1950, it entered into a contract with San Gabriel for the installation of waterlines to the tract. Such contract was modified by a subsequent contract entered into on February 14, 1950. Under the contract, as modified, Lawrence agreed to and did pay to San Gabriel the sum of $31,021. San Gabriel agreed to repay such sum within a 10-year period from the date on which installation of the facilities was completed, which was March 29, 1950. Such repayment was to be made from 35 per cent of the gross revenue received from the sale of water to consumers. All of the houses which Lawrence constructed on the tract were completed and sold by December 11, 1950. On its return for the fiscal period March 1, 1950, to December 31, 1950, Lawrence included the sum of $31,021 paid to San Gabriel as a part of the cost of the houses sold. In determining the deficiencies herein, respondent disallowed the inclusion of the payment to San Gabriel. No repayments were paid by San Gabriel to Lawrence prior to Lawrence's dissolution on December 31, 1950; but payments commenced to be made on March 1, 1951. On December 31, 1950, Lawrence distributed to petitioner Albert Gersten the sum of $78,382.40, and an undivided 40 per cent interest in certain real property, which interest had a fair market value of $29,840, and a 40 per cent interest in the contract, as modified, with San Gabriel. It distributed to petitioner Myron P. Beck cash in the amount of $97,978, a 50 per cent interest in certain real property, which interest had a fair market value of $37,300, and a 50 per cent interest in Lawrence's contract with San Gabriel. It distributed to petitioner Milton Gersten the sum of $19,595.59, a 10 per cent interest in certain real property, which interest had a fair market value of $7,460, and a 10 per cent interest in the contract with San Gabriel. Albert Gersten, Beck, and Milton Gersten did not assign any value to the interest received in such contract in computing the amount of capital gain realized on the dissolution of Lawrence. Respondent determined that the contract had a fair market value of $15,301.96 on December 31, 1950, and accordingly increased the amount of capital gain realized by them on Lawrence's distribution of its assets to them. Lawrence's contract with San Gabriel had a fair market value at the time of its dissolution, equal, at least, to the amount determined by the respondent.
The trade or business of Richard was substantially similar to the trade or business of Lawrence.
Petitioner Albert Gersten and one Theodore Robbins each owned 50 per cent of the outstanding capital stock of a corporation, Homes Beautiful, Inc. Upon the dissolution of such corporation, each stockholder received assets in an amount exceeding $44,721.60. In a proceeding before this Court, Homes Beautiful, Inc., was adjudged liable for deficiencies in its income taxes. The amount of such deficiencies and interest thereon was $44,721.60. Petitioner Albert Gersten paid $40,000 of such sum in December 1947 as a transferee of the corporation's assets and the remaining $4,721.60 on April 5, 1949. Of such payment in 1949, $3,460.47 was applied by the collector to principal and $1,261.13 to interest. Theodore Robbins was insolvent on April 5, 1949.
On the joint return which Albert and Lucille Gersten filed for 1949, they deducted in full the $4,721.60 payment made in that year. The respondent determined that one-half of the total payment, in the amount of $2,360.80, was a payment on behalf of Theodore Robbins and was deductible as a nonbusiness bad debt under the provisions of section 23(k)(4) of the Code of 1939; that $1,730.23 represented petitioner Albert Gersten's liability as a transferee of the assets of Homes Beautiful, Inc., and was deductible as a long-term capital loss; and that the remaining $630.57 was deductible by him as interest under section 23(b).
On April 3, 1950, petitioner Lucille Gersten obtained an interlocutory decree of divorce from petitioner Albert Gersten in an action filed in the Superior Court of the State of California in and for the County of Los Angeles. On November 2, 1950, petitioner Albert Gersten obtained a final decree of divorce from Lucille Gersten in the First Civil Court of the State of Chihuahua of the Republic of Mexico, sitting at Juarez. On the same date he married Bernice Anne Gersten in Juarez. The California interlocutory decree was not final on the date of the Mexican divorce and marriage. At all times during the year 1950, petitioner Albert Gersten and Bernice Anne Gersten were residents and domiciliaries of the State of California.
OPINION. TURNER, Judge:The first issue raised in the proceedings is whether the payments which the 4 corporations, Richard, Whittier, Rex, and Lawrence, made to San Gabriel were properly included by such corporations in computing the cost of the houses which they constructed and sold. The respondent determined that the amounts paid to San Gabriel were not properly includible by the corporations in computing their cost of goods sold because all such payments were repayable. Petitioners, on the other hand, argue that the liability of each of the corporations to pay for the installation of the water facilities was fixed and absolute; and that despite whatever possibility there was of a repayment of part or all of the amounts paid, the payments were nonetheless properly includible in computing the cost of the houses sold.
Proceedings of the following petitioners are consolidated herewith: Albert Gersten and Lucille Gersten, Docket No. 51227; Myron P. Beck and Ann H. Beck, Docket No. 51228; Milton Gersten and Mary Gersten, Docket No. 51229; Rex Land Co., a dissolved corporation, Docket No. 51230; Albert Gersten, alleged Transferee of Rex Land Co., Docket No. 51231; Myron P. Beck and Ann H. Beck, alleged Transferees of Rex Land Co., Docket No. 51232; Lawrence Land Co., a dissolved corporation, Docket No. 51233; Albert Gersten, alleged Transferee of Lawrence Land Co., Docket No. 51234; Myron P. Beck and Ann H. Beck, alleged Transferees of Lawrence Land Co., Docket No. 51235; Milton Gersten and Mary Gersten, alleged Transferees of Lawrence Land Co., Docket No. 51236; Albert Gersten, alleged Transferee of J. Richard Co., Docket No. 51237; Myron P. Beck and Ann H. Beck, alleged Transferees of J. Richard Co., Docket No. 51238; Whittier Development Co., a dissolved corporation, Docket No. 51239; Albert Gersten, alleged Transferee of Whittier Development Co., Docket No. 51240; Myron P. Beck and Ann H. Beck, alleged Transferees of Whittier Development Co., Docket No. 51241; and Milton Gersten and Mary Gersten, alleged Transferees of Whittier Development Co., Docket No. 51242. See footnote 2, supra. Lucille Gersten secured an interlocutory decree of divorce in California from Albert Gersten on April 3, 1950. Albert Gersten secured a final decree of divorce from a Mexican court on November 2, 1950, and on that day, in Mexico, married Bernice Anne Gersten with whom he filed a joint return for 1950. The amount of payments to San Gabriel included by Whittier in computing the cost of houses sold during the fiscal period March 1, 1950, to December 28, 1950, is not in issue, since respondent determined an overpayment of tax for such period. Colony, Inc., was affirmed 244 F.2d 75, but there was no appeal on the comparable question herein. SEC. 51. INDIVIDUAL RETURNS.(b) HUSBAND AND WIFE.—(1) IN GENERAL.— A husband and wife may make a single return jointly. Such a return may be made even though one of the spouses has neither gross income nor deductions. If a joint return is made the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several. SEC. 430. IMPOSITION OF TAX.(e) NEW CORPORATIONS.—(2) FIRST FIVE TAXABLE YEARS.— For the purpose of this subsection—(B) The taxpayer shall be considered to have been in existence and to have had taxable years for any period during which it or any corporation described in any clause of this subparagraph was in existence, and the taxpayer shall be considered to have commenced business on the earliest date on which it or any such corporation commenced business:(ii) Any corporation if a group of not more than four persons who control the taxpayer at any time during the taxable year also controlled such corporation at any time during the period beginning twelve months preceding their acquisition of control of the taxpayer and ending with the close of the taxable year; but only if at any time during such period (and while such persons controlled such corporation) such corporation was engaged in a trade or business substantially similar to the trade or business of the taxpayer during the taxable year. For the purpose of this clause, the term ‘control’ means the ownership of more than 50 per centum of the total combined voting power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock. A person shall not be considered a member of the group referred to in this clause unless during the period referred to in this clause he owns stock in such corporation at a time when the members of the group control such corporation and he owns stock in the taxpayer at a time when the members of the group control the taxpayer. For the purpose of this clause, the ownership of stock shall be determined in accordance with the provisions of section 503, except that constructive ownership under section 503(a)(2) shall be determined only with respect to the individual's spouse and minor children.
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