Moline Properties, Inc. v. Commissioner

MOLINE PROPERTIES, INC., A FLORIDA CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Moline Properties, Inc. v. Commissioner Docket No. 103862. United States Board of Tax Appeals 45 B.T.A. 647; 1941 BTA LEXIS 1095; November 7, 1941, Promulgated *1095 Petitioner was organized in 1928 to take title to certain mortgaged real property on which the mortgagee agreed to advance further funds on condition that the petitioner should be organized. The stock was pledged with the mortgagee. In 1933 the mortgages were discharged with funds secured from a new mortgage loan. The property was sold in three parcels in 1934, 1935, and 1936. Held, petitioner functioned as a mere agent and its existence must be disregarded in taxing gain on the sale of the property. Douglas D. Felix, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. ARUNDELL *647 This proceeding is brought for redetermination of the following deficiencies: Calendar year Income tax Excess profits tax [1935] $1,067.19 $388.06 [1936] 3,926.63 3,956.89 The respondent has added a 10 percent delinquency penalty for the year 1936 in the amount of $788.35. The issue here is whether the petitioner's sole stockholder is entitled to report the income of the petitioner from the sale of real property as his income, treating the petitioner as a corporation without substance. FINDINGS OF FACT. *1096 The petitioner is a corporation, organized under the laws of Florida in 1928. Its president and sole stockholder, with the exception of those holding qualifying shares, throughout the period from the time of its organization down through the taxable years, was Uly O. Thompson. Tax returns for the years in question were filed with the collector for the district of Florida. On August 17, 1920, Thompson acquired four lots of unimproved realty situated in Dade County, Florida, which he mortgaged in 1923 *648 to William F. Whitman for a $20,000 debt. On March 18, 1926, he gave a second mortgage to the Miami Beach Bank & Trust Co. to secure an additional indebtedness of $20,000. Subsequently the mortgaged land did not prove profitable to Thompson and he allowed taxes due on the property to remain unpaid. In 1928 back taxes were owing in the sum of $6,500. At this time Thompson was told by the second mortgagee that the taxes must be paid to prevent loss of the property and the following agreement was reached whereby this was accomplished: The Bank of Bay Biscayne, an affiliate of the Miami Beach Bank & Trust Co., agreed to loan Thompson $6,750 for the payment of taxes provided*1097 he convey title to the property to a corporation organized by the bank to hold such title. Stock of the corporation was to be issued to Thompson but was to be pledged as collateral for the loan and be placed by him in a voting trust of which an officer of the bank should be trustee with power to vote the stock for all purposes. The trust was to cease either on the payment of the loan or on the sale of the stock pledged as collateral. Pursuant to this agreement Thompson, on June 5, 1928, conveyed the property to the petitioner corporation, which had been organized also pursuant to the agreement, and received in return all of the petitioner's stock, with the exception of qualifying shares. He thereupon executed a trust agreement conveying that stock to the voting trustee. The corporation assumed and agreed to pay the mortgages on the property. The Bank of Bay Biscayne closed during the year 1930 and thereafter its powers under the voting trust were exercised by the liquidator of the bank. During this period a suit was instituted to remove certain restrictions imposed on the property by a prior deed. Expenses connected with this suit in the sum of $4,005.39 were paid by Thompson*1098 in 1933 and subsequent years. The petitioner was also required to defend certain condemnation proceedings during this period. The petitioner on October 1, 1929, purchased from the Bank of Bay Biscayne a note of Uly O. Thompson, together with a mortgage securing it, in the amount of $43,000, on which interest of $9,703.14 was due, at its par value plus accrued interest. The petitioner gave its note for the purchase money, securing it with Thompson's mortgage which it received on the purchase of the note. On July 29, 1933, the petitioner discharged and satisfied the two mortgages which were outstanding on the property owned by it, each in the amount of $20,000. Funds for these discharges were obtained by Thompson through a loan which he negotiated with the National Investment Holdings, Inc. This loan was secured by a mortgage on a portion of the property in question. The debt of $6,750 owed to the Bank of Bay Biscayne was settled by the petitioner during 1933. Control of the petitioner corporation was returned to Thompson in 1933. The mortgage debt owed to the National Investment Holdings, Inc., *649 was paid in 1936 through the sale of a portion of the mortgaged*1099 property. The petitioner did not keep books of account or maintain a bank account during the period of its existence. It owned no assets other than the real estate described above. It leased a portion of its properties in 1934 for a parking lot, from which it received rental of $1,000. Thompson owned other extensive real property in Miami, title to all of which was in his name individually. The real property held by the petitioner was sold in three separate parcels, on in each of the years 1934, 1935, and 1936. Proceeds of these sales were received by Thompson and deposited in his bank account. The sales made in 1934 and 1935 were reported in the returns of the petitioner, which were prepared by an auditor retained by Thompson. A loss of $698.11 was reported for 1934 and a gain of $5,851.94 for 1935. Subsequently, Thompson was advised by his auditor that, due to the circumstances of the petitioner's organization, gain on these sales might be reported by Thompson and a claim for refund of tax was accordingly filed on the petitioner's behalf for 1935. In a delinquent return filed on December 2, 1938, Thompson reported the 1935 gain as his individual gain. Gain on the 1936*1100 sale was reported by Thompson in the amount of $3,829.14. Thompson was, during the year 1934 and a part of the year 1935, a circuit judge of the State of Florida. His salary was his principal source of income. When his office was abolished in 1935 he returned to the practice of law. The petitioner corporation has not been dissolved; however, it has transacted no business since the sale of its property in 1936. OPINION. ARUNDELL: The petitioner here seeks to be relieved from reporting gain on the sale of real property to which it held title, and to have that gain taxed to its sole stockholder. It argues that the purpose for which it was established and the limited scope of its function render it so unsubstantial as to require us to disregard it in fixing tax liability. The answer to this argument, the respondent contends, is that the original limited purpose for which the petitioner was organized was terminated in 1933 and that during the taxable years it must be regarded as an ordinary taxable corporation, especially in view of its activities in renting and selling its realty holdings. There is some substance in the latter contentions and in the presence of evidence*1101 of additional activity on the petitioner's part in 1935 and 1936 we should perhaps incline to the respondent's view. However, as we regard the issue, it reduces to a question of whether limited activities involving the sale of vacant property and the rental *650 of a portion of it during a part of the interim, carried through by a corporation of the type we have consistently disregarded, after the reasons for its organization have lapsed, can convert the petitioner into a substantial concern which must be taxed separately. The answer is to be found in the facts. The organization of the petitioner was undertaken at the suggestion of Thompson's creditors as a means of protecting their investments and of saving his equity in certain Florida real estate. Control of the corporation was placed in the bank. It had no activities from that time until 1933 except one transaction of somewhat dubious character whereby the bank apparently sought to charge the petitioner with an additional debt of Thompson. During the year 1933 the creditors instigating its organization were paid by Thompson and control of the petitioner was returned to him. Settlement of the indebtedness was made*1102 with borrowings from other sources. The corporation continued to exist down through the taxable years, sales of its holdings being made in each of the intervening years. No other activities were carried on by it except rental of a portion of the property in 1934 for use as a parking lot. It maintained none of the equipment or paraphernalia ordinarily associated with the corporate form, including offices, employees, books, or other records. From this review of the circumstances before us it must be apparent that the petitioner existed for very limited purposes. The primary purpose, the protection of the stockholders' creditors, was one which we have considered before. . There we held that a corporation, organized to hold title to mortgaged property, to protect the mortgagees and to secure an equitable distribution of the proceeds when the land was condemned, should be disregarded in taxing any gain resultant on the condemnation. See also . The limited activities for which it was maintained thereafter do not alter its essential nature. It continued merely as a holder*1103 of title. Full beneficial ownership was in Thompson, who continued to manage and regard the property as his own individually. We have frequently held that a corporation which existed merely to facilitate the passage of title to real estate, where its stockholders acted without regard for the corporate entity, was a mere figmentary agent which should be disregarded in the assessment of taxes. ; ; affd., ; . These cases give adequate answer to the respondent's chief contentions. It is true that the petitioner was not organized originally for the purpose for which it was maintained during the taxable years. Both purposes, however, fall within the holdings wherein we have *651 disregarded the corporate entity to effect a more realistic assessment of taxes. The final circumstance of rentals collected in 1934 falls in the category of a limited incidental operation which was undertaken without disturbing the essential functioning of the petitioner. Its minor character renders it of no effect on our conclusion. *1104 The case of , relied on by the respondent, is not applicable here, where it is plain that Thompson did not organize the petitioner as a "shield against judgment creditors." Cf. also . The petitioner must accordingly be sustained. Decision will be entered for the petitioner.