Nace Realty Co. v. Commissioner

THE NACE REALTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Nace Realty Co. v. Commissioner Docket No. 55381. United States Board of Tax Appeals 28 B.T.A. 467; 1933 BTA LEXIS 1126; June 20, 1933, Promulgated *1126 After contracting to sell its leasehold, petitioner corporation assigned the lease to its two stockholders, who thereafter consummated the sale and received the proceeds. Held that, in taking over and disposing of the leasehold, the individuals acted as agents for and on behalf of the corporation; that the profit from the sale inured and is taxable to the corporation. Herman R. Tingley, Esq., and B. G. Simpich, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent. GOODRICH *467 This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $10,825.46. The sole question involved is whether the profit resulting from sale of a leasehold is taxable to petitioner corporation or to its stockholders as individuals. FINDINGS OF FACT. Petitioner is an Ohio corporation, and maintained its principal office at 40 East Spring Street, Columbus, Ohio. At the times here material all of its stock was owned equally by two brothers, Edward *468 E. Nace and Sinclair B. Nace, the latter having been president of the company since its organization. Prior to 1920 petitioner owned*1127 a parcel of real estate in Columbus, designated as Inlot No. 492, which was improved by a small factory building. This building was leased to the Columbus Bank Note Co., of which the two Nace brothers were officers and majority stockholders. Petitioner owned no other properties and its only activity was the management of Inlot 492. In 1920, for a consideration of $1,500, the brothers Nace acquired a 99-year lease, renewable forever, on Inlot No. 491, which adjoined the premises then owned by petitioner. The lease provided for an annual rental of $2,500 for 5 years and $2,750 thereafter, and contained an option to purchase the fee for $55,000 at any time upon 60 days' notice. The Nace brothers acquired this property with a view to improving it or selling it to someone who would improve it, and thus enhance the value of the adjoining property owned by their corporation. They carried this property from February 1920, to December 1921, at a cost of approximately $7,800. It then appeared to them that no immediate sale of the leasehold could be made and that it would be necessary to make some improvements on the property to increase its income to meet carrying charges. As they*1128 had no partnership account and did not desire to establish one because of the complications which might arise in event of the death of either of them, they decided to turn the property over to petitioner. On December 8, 1921, an assignment of the lease, reciting a nominal consideration, was executed and delivered, and its acceptance was authorized by appropriate corporate action. No further consideration was paid by petitioner for the assignment, nor did it reimburse the brothers Nace for their expenditures in connection with the leased premises. Thereafter, until in January 1927, petitioner managed the property, collected the rents, made necessary disbursements, and took up all such items as a part of its own accounts on its annual income tax returns. On August 26, 1926, petitioner granted to the Postmaster General of the United States or his assigns an option to purchase prior to December 1, 1926, the fee simple title to Inlot No. 491 for $150,000. This option was assigned by the Postmaster General to Jacob Kulp. On November 24, 1926, petitioner joined in a four-party agreement with Jacob Kulp, as purchaser, Harvey S. Cashatt as a vendor owning property adjoining Inlot No. *1129 491, and the Citizens Trust & Savings Bank, which was to act as trustee. This contract we incorporate by reference as a part of our findings of fact and here mention only those provisions most material to the issue. Under its terms, petitioner *469 and Cashatt agreed to sell their respective properties to Kulp in fee, each at the price of $150,000 cash, to be paid upon delivery of proper deed. It was provided that the conveyances should be made simultaneously and within 60 days after the contract; that Kulp should take possession within this same period and should not be required to pay any part of the considerations until the deeds were tendered and unrestricted possession of the lots was given him. Kulp deposited $30,000 with the Citizens Trust & Savings Bank in trust, to be returned to him should the vendors fail to carry out the transaction; otherwise to be applied on the purchase price or to be equally divided between the vendors in event of default by Kulp. By instrument executed on January 3, 1927, but effective from January 7, 1927, petitioner reassigned the lease on Inlot No. 491 to the Nace brothers. This transfer was approved at a meeting of petitioner's directors*1130 held, after waiver of notice, on January 6, 1927, the accepted consideration for the assignment being $12,061.36 which represented the expenditures made by petitioner over and above its receipts during its management of the lease in the period from December 1921, to January 1927. On January 7, 1927, the Nace brothers were advised that Kulp would carry out his agreement and were notified to be at an attorney's office for the transfer of the papers. At that time they executed and delivered to Kulp an assignment of the lease to Inlot No. 491, and received his check for $95,000. Of this amount $4,750 was paid as commission to real estate agents, $12,061.35 was paid to petitioner, and the balance was divided between the two brothers. Kulp, dealing directly with the heirs of the original grantor of the lease, caused them to prepare under date of December 16, 1926, a deed conveying the fee. On January 7, 1927, this deed was delivered to Kulp and he paid the heirs $55,000. All of the assignments and contracts above referred to were recorded. The fee title did not pass through petitioner, nor was it at any time the owner thereof. On its return for 1927, petitioner reported $7,421.90*1131 as profit on the sale of the leasehold. This profit was based on reported figures of $314.25 cost, $5,351.06 subsequent additions, $1,026.85 depreciation since acquisition, and sales price of $12,061.35. Petitioner's return was made upon the cash receipts and disbursements basis. Respondent determined a profit of $85,610.54 to petitioner based upon a sales price of $95,000 and a net cost of the property of $9,389.46, which includes $1 for cost of leasehold and $4,750 for commission on the sale. *470 OPINION. GOODRICH: We have here a transaction, planned and carried out for the purpose of avoiding a tax liability otherwise resulting to a corporation upon the disposition of certain of its assets. In the absence of fraud, such a device, if effected by legal means, must be recognized and the liability for tax imposed where it thereafter falls, for the proper avoidance or diminution of a foreseen tax liability is not prohibited. ; ; ; *1132 . There is no suggestion of fraud in this record; indeed, it is conceded that no fraudulent intent may be charged either to the corporation's officers or to the individuals. Consequently, our task is narrowed to the determination of whether the means adopted to shift this tax burden were legally effective; whether the sale was made by, and the profit resulting therefrom taxable to, the petitioner corporation or the individuals, the brothers Nace. Relying chiefly upon ; affd., ; certiorari denied, ; and ; respondent has determined that the profit upon the sale was earned by and inured to the corporation. He points out that the corporation, not the individuals, entered into the contract for sale of the lease, and that no other agreement covering the transaction was ever made. He contends that there was no doubt but that the transaction would be carried out in accordance with the contract, and that the last minute subsitution of the individuals as vendors*1133 served only to make them the medium through which the property was transferred, leaving the corporation as the real vendor. On the other hand, petitioner contends that the assignment to the individuals was valid and effective because the contract with Kulp was merely executory; that thereafter the individuals were the owners of the leasehold and in disposing of it acted, not for the corporation, but for themselves, even though they made their sale upon the terms previously agreed to by the corporation. They contend that in making the sale they were not the agents of the corporation but, on the contrary, the corporation had always been their agent in managing the property and in entering into the contract for sale. We doubt whether the contract with Kulp was merely executory, but we need not decide that question. Even assuming that it was executory so that the corporation continued to possess complete ownership of the leasehold and was able to make a valid assignment of it to the individuals, still, despite the legal form, a reasonable view of the substance of the transaction demands that we regard the *471 individuals as acting on behalf of the corporation in taking title*1134 to and disposing of the lease. The contract itself was not assigned; the corporation was still bound by it. We have little doubt but that specific performance of it would have been ordered upon Kulp's application had the individuals failed to discharge the corporation's obligations thereunder, nor have we much doubt that the assignment made to the individuals, for a purported consideration of about one eighth of the price at which the corporation had agreed to sell, and less than the default deposit made by the purchaser, would have been set aside upon the complaint of creditors of the company. In other words, this assignment was not a bona fide, arm's length transaction between the corporation and its individual stockholders, and in such circumstances the individuals could take the lease and dispose of it only for the benefit of the corporation and as its agents. There is nothing in the record before us to indicate that the corporation sought to abandon its contract, whatever the consequences of such an act. On the contrary, since before its assignment to the individuals, Kulp, the purchaser, had negotiated with the heirs of the original lessor for a deed to the property under*1135 lease, which the owner of the lease might do under its terms and which the corporation had contracted to do, we infer that all parties to the contract fully expected it to be carried out and stood ready to perform. It will be noted in the case of , so strongly relied on by petitioner, that, so far as appears, the corporation had made no contract for the sale of its assets prior to their transfer to the individual. That fact alone is sufficient to distinguish the case from that now at bar. We see nothing in the record sufficient to impel us to regard the corporation as the agent of the individuals. True, there is testimony that the Nace brothers turned over the leasehold to the corporation only for purposes of accounting and management, but that is contradicted by the fact that no restriction of any sort appears in their assignment of the lease, and by the further fact that the items of income and disbursement received and made by the corporation in connection with the leasehold were taken into its accounts as a part of its own business. There is no evidence of any agreement that the corporation should be reimbursed for*1136 any loss it incurred because of its ownership of the leasehold, nor is there may evidence that in entering the contract for its sale, the corporation was acting as agent for the individuals or otherwise than as the owner of the leasehold, making sale of its own property. We conclude that in taking title to the leasehold, and subsequently making sale of the same in accordance with the contract by which the corporation was bound, the Nace brothers acted on behalf of the corporation, and that the *472 profit from the sale inured and is taxable to the corporation. The fact that the sales price was paid directly to the individuals rather than to the corporation is immaterial. Since respondent's computation of the profit is not attacked, it will not be disturbed. . Cf. ; ; ; ; *1137 . Judgment will be entered for the respondent.