Oahu Beach & Country Homes, Ltd. v. Commissioner

Oahu Beach and Country Homes, Limited, a Dissolved Corporation, Pauline E. King, Trustee in Dissolution, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pauline E. King, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent Oahu Beach & Country Homes, Ltd. v. Commissioner Docket Nos. 27473, 27474 United States Tax Court 17 T.C. 1472; 1952 U.S. Tax Ct. LEXIS 253; March 12, 1952, Promulgated *253 Decisions will be entered under Rule 50. Corporation not subject to tax on gain realized on condemnation sale of property made by its stockholder where the corporation had conducted no negotiations for sale prior to liquidation and purchaser had made no commitment prior to distribution by the the corporation to the stockholder. Samuel P. King, Esq., and E. R. Cameron, C. P. A., for the petitioners. E. A. Tonjes, Esq., for the respondent. Arundell, Judge. ARUNDELL *1473 The respondent has determined a deficiency of $ 13,322.45 in the income tax of the petitioner corporation, Oahu Beach and Country Homes, Limited, a dissolved corporation, for the calendar year 1946 and has asserted transferee liability in this amount against the petitioner Pauline E. King, individually, as transferee of the assets of the petitioner corporation. The petitioners have contested this deficiency and, in addition, claim a refund of the $ 4,903.83 paid as corporation income tax for the calendar year 1946. The parties have stipulated that any deficiency in income tax of the petitioner corporation for the calendar year 1946, to the extent of $ 13,322.45, plus interest as provided by law, constitutes a liability of the petitioner, Pauline E. King, as transferee. The principal issue is whether the gain realized on the condemnation sale of land referred*255 to herein as section 1-A was taxable to the petitioner corporation. If the gain is taxable to the petitioner corporation, the alternative issues are whether a part of this gain and the $ 23,789.52 gain realized and reported by the petitioner corporation in 1946 on the condemnation sale of land referred to herein as section 2 was taxable in 1945 rather than 1946 and, further, whether these gains are taxable as ordinary income or capital gain. The petitioners also claim the benefit of a net operating loss carryback deduction in the amount of $ 176 resulting from a net operating loss suffered by the petitioner corporation in 1948. The cases were consolidated for hearing and opinion. All stipulated facts are found as stipulated. FINDINGS OF FACT. Pauline E. King (hereinafter sometimes referred to as Pauline) is the duly constituted and acting trustee for the creditors and stockholders of Oahu Beach and Country Homes, Limited (hereinafter sometimes referred to as the petitioner corporation), a Hawaiian corporation, which was duly dissolved by the treasurer of the Territory of Hawaii on July 3, 1945. The corporation return for the period here involved was filed with the collector of*256 internal revenue, district of Hawaii, at Honolulu. The accounting methods and fiscal years of the petitioner corporation and of Pauline E. King, as trustee for the creditors and stockholders of the dissolved corporation, and as an individual as well, were the cash receipts and disbursements method and the calendar year. *1474 Oahu Beach and Country Homes, Limited, was organized under the laws of the Territory of Hawaii on May 15, 1934. The stockholders of the corporation upon its incorporation were as follows: Stockholder Shares Samuel Wilder King [96] Pauline E. King [1] Francis Evans [1] Henry Chock [1] Marguerite Lino [1] Total [100] Samuel Wilder King (hereinafter sometimes referred to as S. W. King) and Pauline E. King are husband and wife. Francis Evans is Pauline E. King's brother. Henry Chock and Marguerite Lino were employees of Samuel Wilder King. The officers and directors of the corporation upon its incorporation were as follows: S. W. King President, treasurer and director Francis Evans Vice-president and secretary and director Marguerite Lino Director King remained the president and a director of the petitioner corporation until 1944 at*257 which time Pauline E. King, who theretofore held no office, became the president and a director. The articles of association of the corporation permitted the corporation to engage in any business whatsoever which a corporation could lawfully conduct. The petitioner corporation was organized by S. W. King to purchase, subdivide, and sell a tract of land of approximately 28 acres in Honolulu. From the time this land was sold in 1937 until the purchase in 1940 of land known as the Armstrong Tract, the petitioner corporation was not actively engaged in any operation but was used for the convenience of S. W. King for such minor matters as holding title to certain lots. On July 1, 1940, the petitioner corporation purchased certain land at Pearl City, Oahu, totaling 85.432 acres (hereinafter referred to as the Armstrong Tract) for $ 42,500. All of the Armstrong Tract, with the exception of what is known as section 1-A and part of what is known as section 2, was sold in private sales prior to July 1945. Part of section 2 was leased to the United States (represented by the U. S. Navy) on December 15, 1941. Title to this acreage was subsequently acquired by the U. S. Government in a condemnation*258 proceeding that began on July 1, 1944, and continued until at least the following year. An award of $ 33,610.48 for the taking of this acreage was deposited with the court on May 29, 1945, and on June 15, 1945, the petitioner corporation filed a motion and order for payment of the award and receipted for the award. *1475 An amended, stipulated award of $ 57,400 was filed April 22, 1946. A stipulated judgment thereon was signed April 24, 1946, and on June 6, 1946, Pauline E. King, as trustee, receipted for the additional award of $ 23,789.52. The payments of $ 33,610.48 and $ 23,789.52 received in 1945 and 1946, respectively, were included by the petitioner corporation in determining its statutory net income for the calendar years 1945 and 1946. The entire sum of $ 23,789.52 was reported as a long term capital gain. The U. S. Navy entered upon and used 4.434 of the 12.604 acres comprising section 1-A of the Armstrong Tract from January 17, 1944, and 1.17 of the remaining acres from January 19, 1945. On March 9, 1945, the United States began proceedings for the condemnation of the entire 12.604 acres comprising section 1-A by filing a petition for condemnation in a suit known*259 as Civil No. 551, which was a suit to condemn 111.392 acres of land, including section 1-A. The petition and the motion and order granting immediate possession in Civil No. 551 were filed March 9, 1945. Neither the petitioner corporation, Pauline, nor anyone with an interest in the petitioner corporation was specifically named in the petition. Since some time prior to June 1945, S. W. King, the organizer and manager of the petitioner corporation, was serving as an officer in the U. S. Navy. In the spring of 1945, he was preparing to participate in the planned invasion of Japan and while on leave in Honolulu he and his wife, Pauline, who then held all but 10 shares of the petitioner corporation, decided to liquidate and dissolve the petitioner corporation since at that time nearly all of its holdings had been disposed of. S. W. King also considered this to be a desirable step in his plan to settle his wife's affairs before his departure. Thereafter, on June 12, 1945, appropriate resolutions were passed by the stockholders providing for the liquidation and dissolution of the petitioner corporation. Pursuant to this resolution, section 1-A was deeded on July 11, 1945, by the petitioner*260 corporation to Pauline, who was then the sole stockholder. 1 Prior to the time when steps were taken to liquidate and dissolve the petitioner corporation, the board of directors, at a meeting held on December 18, 1944, made the following authorization which was recorded in the minutes: The Secretary, Francis Evans, was authorized to continue negotiations with the Navy re condemnation of the Armstrong Tract on the basis of $ 134,550.00, or not less than $ 130,000.00, for the balance of the Armstrong Tract (excluding the Loko of 3.50 acres, more*261 or less), the offer of the Navy, if any, to be finally *1476 approved by the Directors. The appraisal of Mr. C. C. Crozier for the Navy amounts to $ 110,000.00. The foregoing values are based as follows: Main sub-division (leased to Navy) 23.56 acres C. C. Crozier at $ 2,122 per acre $ 50,000 O. B. & C. H. Ltd. at $ 3,000 per acre $ 70,600 The property listed as "Tank Area and Adjacent Land on Lehua St." is the property known as section 1-A. The petitioner corporation did not enter into any agreement for the private sale of section 1-A to the Government. On December 14, 1945, a motion for an order to amend the petition for condemnation in Civil No. 551 was filed and allowed. This motion added "Samuel & Pauline E. King" as defendants. The petitioner corporation was not named as a defendant in this condemnation proceeding although the original petition did include as defendants "all other * * * corporations, either known or unknown, who claim to have or own any right, title or interest of any character whatever in said land" which appeared after the specific naming of defendants. On the same day, December 14, 1945, there was filed in the District*262 Court of the United States for the District of Hawaii a Declaration of Taking No. 1 dated November 9, 1945, and Order and Judgment on Declaration of Taking No. 1 dated December 14, 1945, relating to several parcels of land, including the 12.604 acres comprising section 1-A. Also, on December 14, 1945, the sum of $ 25,000 was deposited with the registry of the court for the use and benefit of Samuel and Pauline E. King as compensation for the taking. On December 18, 1945, Samuel E. King and Pauline were served with a summons (which was issued to "Samuel and Pauline E. King" on December 14, 1945) together with the original petition, as amended, and the motion and order of immediate possession and Order and Judgment on Declaration of Taking No. 1. Motion and order for payment of the award by and to Pauline E. King and disclaimer of Samuel W. King were filed on March 1, 1946, at which time Pauline E. King receipted for the $ 25,000. An amended award of $ 30,000 was stipulated by Pauline E. King and the United States on March 5, 1946, filed April 22, 1946, and judgment thereon signed and filed on April 24, 1946. Pauline E. King receipted for the additional award of $ 5,000 on July 11, *263 1946. Pauline individually paid a capital gains tax for the calendar year 1945 on the long term capital gain that she realized upon the dissolution of the petitioner corporation, which gain she computed by treating the fair market value of section 1-A as a receipt on account of full payment for her stock of the corporation. Pauline E. King, trustee for the creditors and stockholders of the *1477 dissolved petitioner corporation incurred and paid operating expenses during the calendar year 1948 as follows: Accounting fee $ 175 Interest [1] $ 176 No income was realized during the calendar year 1948. The payment of $ 176 was not claimed as a deduction from net income in the corporation's income tax return for the calendar year 1946, nor was the amount allowed by the Commissioner as a deduction from the taxpayer's gross income for the calendar year 1946 in the Commissioner's determination of the taxpayer's net income for the year 1946. OPINION. The principal question is whether the gain on the condemnation sale of land to the Government by the petitioner Pauline E. King in her individual capacity is taxable to the petitioner corporation. This land, known as section 1-A*264 of the Armstrong Tract, was distributed to Pauline as sole stockholder in the complete liquidation of the petitioner corporation. The basic issue has been considered in numerous cases, particularly Commissioner v. Court Holding Co., 324 U.S. 331, and United States v. Cumberland Public Service Co., 338 U.S. 451; see Steubenville Bridge Co., 11 T. C. 789. In the Court Holding Co. case, 2 T. C. 531, we found that the sale had been made and the gains realized by the corporation but, as explained by the Supreme Court in referring to our decision, "There the corporation had negotiated for the sale of its assets and had reached an oral agreement of sale" and also "One thousand dollars already paid to the corporation was applied as part payment of the purchase price." United States v. Cumberland Public Service Co., supra, at pp. 453-454. There are no similar circumstances in the case before us now. The Commissioner relies on the authorization given by the board of directors of the petitioner corporation which provided that *265 the secretary "continue negotiations with the Navy re condemnation of the Armstrong Tract." But regardless of this authorization it is clear from the record, considered in its entirety, that the petitioner corporation did not enter into a contract of sale either oral or written, or any other agreement for the private sale of section 1-A to the Government. In fact, instead of acquiring the land by private sale as authorized by 50 U. S. C. A., section 171, the Government resorted to condemnation and filed a petition for the condemnation of section 1-A on March 9, 1945. *1478 Furthermore, the fact that the proceeding for the condemnation of section 1-A began March 9, 1945, which was a few months prior to the dissolution and liquidation of the petitioner corporation, does not warrant the conclusion that the sale by Pauline should be attributed to the petitioner corporation. The filing of the petition, together with the motion and order granting immediate possession, was but a preliminary step in a proceeding which, as explained in detail in our findings of fact, was not terminated until more than one year later. This step was not the result of*266 any preliminary agreement; it represented no offer, no acceptance or any settlement as to terms. In fact, the petitioner corporation was not named as a defendant in the condemnation proceeding except insofar as it was included in the general reference to "all other * * * corporations, either known or unknown, who claim to have or own any right, title or interest of any character whatever in said land," which was placed in the petition after the listing of specifically named defendants. Furthermore, no one having an interest in section 1-A was specifically named as a party or served with any pleadings until December 14, 1945, which date was more than 9 months after the petition was filed and more than 5 months after section 1-A was conveyed to the petitioner, Pauline E. King. On that date the petitioner Pauline E. King and her husband were named defendants. The petitioner corporation was never named a party defendant in the proceeding. Nor did this preliminary step in the condemnation proceeding commit the United States to purchase the property. The final disposition remained uncertain and title did not pass prior to December 14, 1945, at which time the declaration of taking was*267 filed and the sum of $ 25,000 was deposited as compensation for the taking, Catlin v. United States, 324 U.S. 229; Moody v. Wickard, 136 F. 2d 801; United States v. Sunset Cemetery Co., 132 F. 2d 163; Hanson Co. v. United States, 261 U.S. 581. Until that time the United States could have abandoned or discontinued the condemnation proceeding, Danforth v. United States, 308 U.S. 271; Moody v. Wickard, supra;Kanakanui v. United States, 244 F. 923; Revised Laws of Hawaii, 1945, Title I, chapter 8, section 318; 30 C. J. S., Eminent Domain, section 335, or could have amended its petition by reducing the estate it sought from a fee simple title to a temporary use and occupancy even though it had gone into possession. United Statesv. 5,901.77 Acres of Land, 65 F. Supp. 454. For these reasons, we are of the view that there were no continued negotiations culminating in a substantial agreement that was deferred until *268 a later date, or any other circumstances from which we may conclude that the sale made by the petitioner Pauline E. King should be attributed to the petitioner corporation. Cf. Commissioner v. Falcon *1479 ., 127 F. 2d 277, affirming 41 B. T. A. 1128; Amos L. Beaty & Co., 14 T. C. 52; United States v. Cumberland Public Service Co., supra. It is not necessary that we decide the alternative issues since the petitioners agreed to abandon them if it were found that the 12.604 acres in section 1-A were sold by Pauline E. King rather than the petitioner corporation. The parties have stipulated that the petitioner corporation incurred operating expenses in the amount of $ 176 in the calendar year 1948 and realized no income in that year. Respondent has raised no argument in opposition to the petitioner's contention that this sum should be deducted from the petitioner corporation's gross income for the calendar year 1946 as a net operating loss carry-back. The petitioner corporation is entitled to this deduction in the amount of $ 176. Section 122 (b) (1), *269 Internal Revenue Code. Decisions will be entered under Rule 50. Footnotes 1. On December 10, 1941, S. W. King, holder of 655 shares in the petitioner corporation, transferred his shares to his son, S. P. King. The remaining 345 shares were held by Pauline. On February 5, 1943, S. P. King transferred 10 shares to Charlotte King McAndrews and 645 shares to Pauline. On June 20, 1945, Charlotte King McAndrews transferred her 10 shares to Pauline. Thereupon and thereafter, Pauline became and remained the sole stockholder in the petitioner corporation.↩