Court Opinion

ID: 9642296
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:54:13.862496+00
Date Added: 2024-06-11T11:36:49.227771
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
Mr. and Mrs. Richards, as sole stockholders, formed the corporation R. & L., Inc., and in exchange for its stock deeded to it a residence in New Orleans which cost $63,218, together with other real and personal property of an unstated amount, but which is income producing and provides funds to pay the insurance and taxes on the corporation’s properties. The corporation afterwards acquired a summer residence on the Gulf Coast for $55,704. The residences are the winter and summer homes of Mr. and Mrs. Richards and their children, for which they pay the corporation no rent. Mr. Richards is president of the corporation and apparently conducts its affairs. It does not appear that he receives any salary. There was in the tax year no agreement to pay rent for the residences, whose rental value is put at $1,700 per year, a very low percentage of their cost and hardly equalling a fair depreciation. The Commissioner and the Board of Tax Appeals, refusing to follow Hillman v. Commissioner, 3 Cir., 71 F.2d 688, held this rental to be income taxable to Mr. and Mrs. Richards. This Court says it is a gift to them from the corporation.
The corporate ownership cannot be ignored and the houses regarded as the homes of the family. For reasons which seemed good to Mr. and Mrs.' Richards they created a corporation which owns the houses. The legal advantages are not only that the death of either of them will not complicate the ownership by throwing it in part on the minor children; but in income tax accounting a deduction for depreciation and insurance and repairs can be taken by the corporation, and in case of sale, for a loss thereby realized; none of which could be had if the homes stood in their individual ownership. Corporate organization can seldom be ignored in income tax matters, for corporations are separate taxpayers. Even an association is not identical with a corporation which succeeds it though one person substantially owned both. Planters’ Cotton Oil Co. v. Hopkins, Collector, 286 U.S. 332, 52 S.Ct. 509, 76 L.Ed. 1135, and cases cited, 5 Cir., 53 F.2d 825, 827. The fact is that Mr. and Mrs. Richards are living free of rent in dwellings belonging to R. & L., Inc., which pays the insurance and taxes and keeps up the property, and could rent it to others for $1,700 per year. They receive this valuable use. If it comes to them because Mr. Richards manages the business of R. & L., Inc., then it is salary and community income. If it comes to them because they are the only stockholders, it is a dividend, though not formally declared. A ratable gift to stockholders because they are stockholders must be a dividend. I do not think the idea will stand up which is advanced in Hillman v. Commissioner, 3 Cir., 71 F.2d 688, that this is like the gift which is presumed when value is passed without a contrary agreement between near relatives. A corporation has no near relatives. Its stockholders are not such. These stockholders appear to me to be enjoying a valued use of property of their corporation which is income to them; either a debt forgiven, or an informal dividend.