Source: https://openjurist.org/577/f2d/212/millar-v-commissioner-of-internal-revenue
Timestamp: 2018-09-18 19:32:48
Document Index: 275395169

Matched Legal Cases: ['§ 6653', '§ 111', '§ 1001', '§ 113', '§ 1011', '§ 1012', '§ 1016', '§ 1001', '§ 38', '§ 6653', '§ 1001']

577 F2d 212 Millar v. Commissioner of Internal Revenue | OpenJurist
577 F. 2d 212 - Millar v. Commissioner of Internal Revenue
577 F2d 212 Millar v. Commissioner of Internal Revenue
577 F.2d 212
78-2 USTC P 9514
Gavin S. MILLAR, Petitioner-Appellant,
COMMISSIONER OF INTERNAL REVENUE. (Tax Court Docket No. 5884-72)
Philip D. RODGERS and Elizabeth C. Rodgers, his wife,
COMMISSIONER OF INTERNAL REVENUE. (Tax Court Docket No. 5888-72)
James L. TENLEY and Betty J. Tenley, his wife, Petitioners-Appellants,
COMMISSIONER OF INTERNAL REVENUE. (Tax Court Docket No. 5892-72)
Robert K. CONRAD and Jane H. Conrad, his wife, Petitioners-Appellants,
COMMISSIONER OF INTERNAL REVENUE. (Tax Court Docket No. 5893-72)
Godfrey Hammel, Jr., Raymond A. Regner, St. Clair Shores, Mich., for petitioners-appellants.
M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Michael L. Paup, Libero Marinelli, Jr., Tax Div., Dept. of Justice, Washington, D. C., for appellee.
In this appeal from a redetermination by the Tax Court, the issues presented are: (1) whether funds received by the taxpayers1 from R. H. Jamison, Jr. ("Jamison"), were loans rather than gifts; and, (2) whether the taxpayers realized taxable gain in the form of cancellation of indebtedness upon surrender of their stock in the Grant County Coal Corporation ("Grant County") in complete satisfaction of their nonrecourse obligations, which were secured solely by the stock, even though at the time of surrender the stock had a value less than the value of the nonrecourse obligations. For the reasons stated below, we conclude that the funds received by the taxpayers from Jamison were loans rather than gifts and that the taxpayers realized taxable gain when their Grant County stock was surrendered to Jamison in complete satisfaction of their nonrecourse obligations. However, we agree with taxpayers Robert K. and Jane H. Conrad ("Conrads") that no penalty should be imposed for failure to recapture previously claimed investment credits. Accordingly, we will affirm the decision of the Tax Court on all issues, except the imposition of a penalty pursuant to 26 U.S.C. § 6653(a), which shall be stricken.
Second, in finding that the taxpayers realized taxable income when their Grant County stock was surrendered to Jamison in complete satisfaction of their nonrecourse obligations, the Tax Court relied upon the Supreme Court's holding in Crane v. Commissioner of Internal Revenue, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947), that: (1) the basis of property subject to a mortgage includes the amount of the mortgage, even though the owner of the property assumes no liability on the mortgage debt; and (2) when such property is sold, the "amount realized" includes the amount of the unassumed mortgage. The taxpayers, on this appeal, argue that the Tax Court erred when it determined that they had realized taxable gain as a result of the foreclosure and surrender of the stock, because the value of the stock surrendered was less than the value of the note foreclosed upon. In support of their arguments, the taxpayers rely exclusively upon footnote 37 of the Crane opinion, wherein the Supreme Court said:
Crane v. Commissioner of Internal Revenue, supra, 331 U.S. at 14, n.37, 67 S.Ct. at 1054. We must determine, therefore, whether footnote 37 of Crane creates an exception to the principal holding of Crane which would relieve the taxpayers of the otherwise taxable consequences of this exchange. We find that it does not and that the reasoning and analysis of the Crane opinion squarely sustain the imposition of tax liability in this case.
In Crane v. Commissioner of Internal Revenue, supra, the taxpayer, as the sole beneficiary of her deceased husband, acquired depreciable property in the form of an apartment building and lot which, at the time of acquisition, was subject to a mortgage upon which the taxpayer was not personally liable. As of the date of the inheritance, the property was appraised for federal estate tax purposes at a value exactly equal to the total amount of this encumbrance. During the time that the taxpayer owned the property, she reported the gross rentals as income and claimed deductions for taxes, operating expenses, interest paid on the mortgage and for the physical exhaustion of the building. Seven years after acquiring the property, the taxpayer sold the property to a third party for $3,000 cash, subject to the mortgage and paid $500 expenses of sale. She thereafter reported a taxable gain of $1,250.
In calculating the tax liabilities resulting to the taxpayer as a result of this sale, the Supreme Court held, inter alia, that the amount of the mortgage was properly included in the amount realized for purposes of computing the gain or loss resulting therefrom. §§ 111(a), (b) of the Revenue Act of 1938, as amended, 26 U.S.C. §§ 1001(a), (b) (1954).2 Thus, in Crane, the gain realized by the taxpayer as a result of the sale was not only the cash receipts, but also the principal amount of the mortgage subject to which the property was sold, less the adjusted basis of the property. Crane v. Commissioner of Internal Revenue, supra, 331 U.S. at 11, 13-14, 67 S.Ct. 1047, § 113(b) of the Revenue Act of 1938, as amended, 26 U.S.C. § 1011. In so ruling, the Supreme Court noted that:
Crane v. Commissioner of Internal Revenue, supra, 331 U.S. at 15-16, 67 S.Ct. at 1055 (footnote omitted).
While the facts of the instant case are distinguishable from those in Crane, the principal reasoning of the Supreme Court in reaching its determination applies equally well to the facts of the case before us. In this case, the taxpayers' basis in the Grant County stock received from Jamison was equal to their costs, which was zero. 26 U.S.C. § 1012. The loan funds received by the taxpayers from Jamison increased the basis in their respective stock by the amount of the total money each contributed to Grant County's capital, for a total tax basis of $245,000. 26 U.S.C. § 1016. This basis of $245,000 was reduced by the amount of the interest and net operating loss deductions claimed by the taxpayers, which resulted in a total adjusted basis in the stock of $39,492 by the end of 1966. The total outstanding nonrecourse indebtedness of the taxpayers, which for the taxpayers before us amounted to $245,000, thus exceeded the total adjusted basis in the stock by $205,508. The Commissioner determined that the surrender of stock, in exchange for the cancellation of the nonrecourse obligation which resulted from the foreclosure, amounted to a gain to the taxpayers in the amount of $205,508, or the amount by which the value of the nonrecourse obligation satisfied by the foreclosure exceeded the adjusted basis of the stock. 26 U.S.C. §§ 1001(a), (b). In calculating this gain, the Commissioner relied upon Crane, supra, to find that the amount realized by the taxpayers upon this exchange included the value of the nonrecourse obligation, even though the taxpayers were not personally liable for that obligation.
Finally, although we affirm the Tax Court's determination that the previously claimed investment credits were subject to recapture, pursuant to26 U.S.C. §§ 38, 48(e), we find that the record does not justify imposition of a penalty upon the Conrads pursuant to 26 U.S.C. § 6653(a). We cannot find that, in light of the complex issues and confusion resulting from the bankruptcy of Grant County, note foreclosure and stock surrender, the record supports a finding that the Conrads' failure to recapture the investment credits previously claimed by them was due to negligence or intentional disregard of tax rules and regulations.
Four of Grant County's original shareholders are not parties to this appeal. Hereinafter, the term "shareholder" shall refer to all of Grant County's original shareholders, and the term "taxpayer" only to the shareholders involved in this appeal
Section 111 of the Revenue Act of 1938, as amended, 26 U.S.C. § 1001 (1954), states, in pertinent part: