Mulligan v. Commissioner

John A. Mulligan, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent Mulligan v. Commissioner Docket No. 23275 United States Tax Court 16 T.C. 1489; 1951 U.S. Tax Ct. LEXIS 143; June 29, 1951, Promulgated *143 Decision will be entered for the petitioner. Income resulting from sale of real property held not taxable to corporation whose only function was to serve as record owner. Archibald R. Watson, 42 B. T. A. 52, followed. John A. Mulligan, pro se. Thomas R. Charshee, Esq., for the respondent. Opper, Judge. OPPER *1489 Petitioner attacks respondent's determination that he is liable in the sum of $ 12,088.89, as a transferee of the assets of Freeminstreet Company, Inc., for deficiencies determined against that corporation in the amounts of $ 20,025.21 and $ 221.02 in income and declared value excess-profits tax, respectively, for the year 1945. The issues are whether respondent correctly charged petitioner's transferor with capital gain on the sale of property held in its name, and whether petitioner is liable as a transferee. Some of the facts were stipulated. FINDINGS OF FACT. The stipulated facts are hereby found. Freeminstreet Company, Inc., hereinafter called Freeminstreet, filed its tax return for 1945 with the collector of internal revenue for the fourteenth district of New York. Freeminstreet was organized in 1912. Prior*144 to October 23, 1943, it acquired three parcels of real property which included apartment buildings. In 1943 all its stock was owned by petitioner's father, Thomas Mulligan, who died intestate on October 23, 1943. An estate tax return was filed. In 1944 petitioner was appointed administrator of the estate, and the Surrogate's Court directed that the Freeminstreet stock be turned *1490 over to petitioner, as administrator. By direction of the Surrogate and his attorney the property was kept in the name of Freeminstreet. Mortgages and leases were up for renewal and the officials of the Surrogate's Court did not want to upset any plans. All interested parties accordingly allowed the title to the property to remain as it was. Petitioner became president and treasurer of Freeminstreet, his wife became secretary, and a board of directors was elected which subsequently held three or four meetings. During 1944 and 1945 rent was collected from the properties and deposited by petitioner in the bank account of the estate. That was the only bank account maintained in connection with the properties. Checks made out to the corporation were endorsed by petitioner and deposited in the*145 estate's bank account, while funds to meet the expenses incurred in managing those properties were withdrawn by petitioner from the same bank account. That arrangement was made with the cooperation of the bank, the knowledge and assent of the bonding company for petitioner as administrator, and with the approval of the estate's attorney and the Surrogate's Court. All obligations, including payments to the mortgagee of the properties and to the collector of internal revenue, were paid by checks drawn upon the estate's bank account, signed by petitioner as administrator, and countersigned by the bonding company for petitioner as administrator. Checks were mailed by petitioner to the bonding company which forwarded them to the payees. The bonding company received a duplicate deposit slip for every deposit made by petitioner in the account. The bank, mortgagees, creditors, and all interested parties dealt with the estate as owner of the properties. No separate bank account was maintained for the corporation, and no corporate books of account were kept. On September 12, 1945, all three properties were sold for a sales price of $ 405,104, which was less than the estate tax valuation*146 of the equity in the properties. Broker's fees of $ 3,500 were incurred. The estate paid attorney's fees for legal services rendered in connection with the sale of the properties as well as for legal services rendered to the estate, but no segregation of fees was made. Payments were made by the purchasers of the properties by checks payable to the corporation, which were endorsed by petitioner as president of the corporation and as administrator of the estate, and deposited in the estate's bank account. Thenceforth the corporation held title to no assets, and no business was conducted in its name. In 1946, on the direction of the Surrogate's Court, the moneys received upon the sale of the properties were divided among the deceased's children. Upon that distribution, petitioner received $ 12,088.89. *1491 No income tax returns were ever filed for the estate. The income from the properties was reported in returns filed in the name of Freeminstreet. A tax return for Freeminstreet for the year 1945, signed by petitioner as president and treasurer on March 11, 1946, reported $ 46,306.40 as rental income and $ 47,323.05 as "Net Cash -- from the sale of real estate"; deductions*147 were taken for compensation of officers which was actually petitioner's commissions as administrator, for wages to building superintendents, repairs, interest and amortization of mortgages, taxes, insurance, legal services, electricity, coal, and fuel oil expenses, which totaled $ 45,329.34; and a deduction of $ 47,323.05 was taken and described as "to estate of Thomas Mulligan, deceased -- for stock." In a notice of liability, mailed on February 24, 1949, respondent determined deficiencies against the corporation aggregating $ 20,246.23 resulting from gain realized upon the sale, and further determined that petitioner was liable as a transferee on the ground that Freeminstreet "has been liquidated and that assets were transferred to you from October 31, 1945 to May 20, 1946." Freeminstreet has never paid those deficiencies. The amended petition alleged error in the determination of the deficiencies against the corporation on the ground that -- (a) In computing the profit on the sale of real estate, it appears that the depreciation to date of sale is excessive; that equipment sold was not included in the cost of buildings; the following items were not deducted from the selling price: *148 -- Attorney's fees $ 9,500.00, appraisal fee $ 600.00, accounting fees $ 650.00, a bad debt amounting to $ 40,788.25, and other items. (b) In computing the deficiency, the respondent treated the income from the properties held in the name of Freeminstreet Company, Inc. as profit of the corporation, although from time of the transfer of the stock of said corporation to your petitioner as Administrator of the Estate of Thomas Mulligan, deceased, on May 1st, 1944, Freeminstreet Company, Inc. existed merely for convenience and as a medium for the flow of funds relating to said properties from and to the Estate of Thomas Mulligan, deceased, the real and equitable owner of said property from the above date. Therefore, the income of said property is in actuality the income of said estate. Respondent's answer to the amended petition alleged that petitioner was a distributee of the assets of Freeminstreet, and further alleged that "by way of affirmative defense, the respondent hereby enters a plea of estoppel against the petitioner," stating that: (d) A claim by the petitioner at this time that the Estate of Thomas Mulligan was the rightful owner of the income received by Freeminstreet *149 Company, Inc. would prevent the Government from collecting the aforesaid deficiencies in taxes from the Estate of Thomas Mulligan or the transferees of the assets of said estate as the Government would be barred from so doing. (e) Unless the petitioner is estopped from now claiming that the income of the said corporation was the income of the said Estate of Thomas Mulligan, respondent will sustain material injury and damages by reason of the fact that *1492 it is impossible at this time to assess and collect any deficiencies in income taxes from the Estate of Thomas Mulligan or from the transferees of the assets of said estate. OPINION. Although petitioner who is not a lawyer represented himself in this proceeding and perhaps for this reason the record and contentions are not presented as cogently as they might be, we think the facts demonstrate that this situation falls in that numerous group where the holding of bare legal title to real property is found to be an insufficient ground for taxing income to a corporation having no other function. Archibald R. Watson, 42 B. T. A. 52, 59, affd. (other issues) (C. A. 2), 124 F. 2d 437;*150 Dallas Downtown Development Co., 12 T. C. 114, acq. (1950-1 C. B. 2); United States v. Brager Bldg. & Land Corp. (C. A. 4), 124 F. 2d 349; Paymer v. Commissioner (C. A. 2), 150 F. 2d 334; see Estate of L. B. Whitfield, 14 T. C. 776, where we said at p. 782: * * * If the Realty Co. had no purpose other than to hold bare title, and did not engage in business, as petitioners assert, the case would fall within a recognized exception to the general rule [that a corporation is a taxpayer separate and distinct from its stockholders]. * * * See also Cleary, "The Corporate Entity in Tax Cases," 1 Tax Law Review 3, 11. We think the record amply demonstrates that petitioner's alleged corporate transferor was employed purely as a convenient means of continuing to hold the real property owned by the estate of which petitioner was administrator. The corporation is shown to have undertaken no activities of its own and did not even exist as a conduit through which the rental income was collected and expenses*151 paid, cf. Lewis Eugene Grigsby Trust, 5 T. C. 51, all of these items having, under the supervision of the Surrogate's Court exercising jurisdiction over the estate, been carried into the separate bank account of the estate. Respondent's affirmative defense of estoppel was not sustained by evidence and indeed could not be. It is conceded that no greater tax would have been due had the income been reported from the beginning as that of the estate. No advantage was secured by the existence of the corporation since even personal liability of the beneficiaries was avoided by the intervention of the estate as effectively as it would have been had the corporation been availed of. Finally, no return having been filed, the statute of limitations has not run as to the tax against the estate on the sale, if any is due, which is difficult to conceive. Since we conclude that the transferor corporation owed no tax, it follows that no transferee liability can attach to petitioner. Archibald Sherrod, 16 B. T. A. 622. Decision will be entered for the petitioner.