Court Opinion

ID: 4628399
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:16.851876+00
Date Added: 2024-06-11T07:57:12.458743
License: Public Domain

ABRAMS SONS' REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  ESTATE OF HARRY ABRAMS, DECEASED, CLARA PLISKIN, LOUIS GROSSBERG AND MORRIS E. LASDON, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Abrams Sons' Realty Corp. v. CommissionerDocket Nos. 9275 , 96595.United States Board of Tax Appeals40 B.T.A. 653; 1939 BTA LEXIS 823; October 6, 1939, Promulgated *823  AGENT, TRUSTEE, OR CONDUIT. - Where property is conveyed to a corporation for the benefit of creditors of the transferors to permit the corporation to receive the proceeds of a pending condemnation and distribute all of those proceeds to the creditors, the corporation realizes no taxable gain from the disposition, since it is a mere trustee, agent, or conduit.  Benjamin E. Shove, Esq., for the petitioners.  C. C. Holmes, Esq., for the respondent.  MURDOCK *653  The Commissioner determined a deficiency of $5,229.73 in income tax and a deficiency of $1,754.11 in excess profits tax of the corporation for the calendar year 1935.  He determined a deficiency of $386.98 in income tax and a penalty of $20.14 against the estate.  The only adjustment made by the Commissioner in determining the deficiency against the estate was to include in income a gain of $38,034.38 from the disposition of property under a condemnation award.  That action is assigned as error.  The Commissioner held that 50 percent of that gain was constructively received by the estate as a dividend, since it was used to discharge debts of the estate.  That action is assigned as error. *824  FINDINGS OF FACT.  Harry and Louis Abrams had been engaged for a number of years in an equal partnership business dealing in waste materials.  They owned premises at 515-523 Canal Street, Syracuse, New York, where their business was conducted.  It was known in 1929 that the New York Central Railroad Co. wanted to acquire and would have to acquire that property in order to eliminate a grade crossing.  The Railroad offered $100,000 for the property in 1930, but the partners refused the offer.  Negotiations were discontinued.  Tenants of a part of the property vacated the premises on May 1, 1929, following a notice from the railroad to have the premises vacated by that date.  The property was encumbered with mortgages.  Creditors of the partnership were pressing for payment of amounts due in 1930, 1931, and 1932.  Two small creditors obtained judgments.  Bankruptcy seemed imminent unless the larger creditors could be protected and assured that they would receive a pro rata share of whatever the partners obtained for the Canal Street property over and above the amount due on the mortgages.  Harry Abrams died in May 1932.  *654  The partners frequently consulted their attorney, *825  Stewart F. Hancock, in regard to their financial difficulties, and he tried to persuade the creditors to wait until the Canal Street property could be disposed of.  The principal unsecured creditor finally insisted in the fall of 1933 that the property be placed in trust for the creditors of the former partnership.  Hancock suggested that a corporation be formed to hold title to the real estate for the benefit of the creditors and another formed to continue the waste business with the understanding that the latter would be the property of the Abrams provided they cooperated in reducing the loss of the creditors to a minimum.  The creditors had great confidence in Hancock and agreed informally to the plan.  Hancock assured them that he would see that all of the free proceeds of the condemnation would be distributed to them.  It was known that the proceeds would be less than sufficient to pay the mortgages and the debts of the partnership.  The petitioner corporation (hereinafter called the petitioner) was incorporated in December 1933, under the laws of New York.  Louis Abrams and the estate of Harry Abrams conveyed the Canal Street property to it in exchange for all, 100 shares, *826  of its capital stock.  The stock certificates were held by Hancock and his signature as treasurer was necessary for the disbursement of funds of the petitioner.  The waste business was conveyed to another corporation, known as the Abrams Waste Material Corporation.  The Canal Street property was conveyed subject to some taxes and five mortgages in the total amount of $55,000.  Other debts of the partnership amounted at that time to more than $70,000.  The railroad commenced condemnation proceedings in October 1933.  Thereafter, the petitioner was made a party.  Creditors of the partnership were advised by the attorneys for the petitioner that it held the Canal Street property solely for their benefit and that the creditors would finally decide how the proceeds in excess of the secured claims would be divided.  The condemnation proceeding was tried by Hancock and an award of $99,676 was made in November 1934 and became final in that year.  In November 1934 the directors of the petitioner adopted a resolution that the petitioner held the property in trust for the creditors of the partnership and any balance of the award, after payment of secured liens, taxes, and expenses, would be*827  divided fairly among the unsecured creditors.  Principal and interest of the award in the total amount of $105,039.50 was received by the petitioner in February 1935.  $70,454.15 was used to pay the mortgagees, judgment creditors, taxes, expenses, and legal fees and $34,585.35 was left to pay debts amounting to about $76,000.  The creditors met a number of times in 1935 and finally agreed upon a division of the fund in complete satisfaction of their debts.  The *655  petitioner paid 37 percent of the agreed list of debts on May 22, 1936.  The balance of the fund, amounting to about 6 percent of the debts, is being held pending decision of the income tax liability of the petitioner and any balance is to be distributed to the creditors.  The petitioner was dissolved on September 13, 1937.  It never did any business or owned any property except as above described.  The basis for gain or loss of Louis and Harry Abrams on the Canal Street property was $52,743.05 - $21,218.05 for Louis and $31,525 for the estate of Harry.  OPINION.  MURDOCK: The corporate petitioner claims that the proceeds of the condemnation never belonged to it but were to go and did go to the creditors of*828  a partnership.  It argues that the Commissioner erred in taxing it as if it had sold a piece of its own property at a profit.  The respondent contends that the petitioner was the owner of the property and taxable with the gain.  The evidence shows that the record title was transferred to this corporation merely for the purpose of benefiting the creditors of the partnership and there never was any intention that the petitioner could benefit from the ownership of the property.  It did not benefit and dissolved as soon as its purpose was accomplished.  It was a mere trustee or agent to dispose of the property for Harry and Louis Abrams and a conduit to distribute the entire proceeds to their creditors.  The following quotation from 112 , is apposite: In , the Court of Appeals in the Eighth Circuit, speaking through Judge Stone, said: "Tax laws are essentially practical in their purposes and application, and the federal income tax laws are no exception.  While, for purposes of convenience and certainty in collection of such taxes, *829  it is sometimes provided that those who collect income for others shall pay therefrom the taxes thereon, yet a cardinal purpose of the income tax laws is to tax the income to the person who has the right or beneficial interest therein, and not to throw the burden upon a mere collector or conduit through whom or which the income passes." We think this is a correct statement of the law.  If, therefore, it appears, as we think it does appear, that petitioner was a mere "conduit," and that it never at any time had any legal right to retain the profits from the transaction in question and never at any time had possession of such profits, but that on the contrary the profits in right and in law were always the property of the trust, then it would seem to follow that the liability to pay the tax under the federal income tax laws was solely a liability of the trust and not a liability of petitioner.  And this is particularly true when we consider that the former duly reported and paid the tax and no question of bad faith in the organization of petitioner or in its participation in the transaction is or can be attributed to it.  The brief of the Commissioner frankly says "there is no fraud*830  here." That petitioner on the admitted facts is a mere trustee is beyond question.  If the contest, instead of involving a tax, were a contest between petitioner *656  and the trust, it would be unconscionable to argue that, because the property was taken in petitioner's name, it could claim a beneficial ownership therein.  It may well be that at the time of the transaction there was no specific or formal agreement that petitioner should hold the property for the benefit of the trust, but the absence of such agreement or the lack of formality does not alter the obvious intent of the arrangement.  No court would in the circumstances we have named permit it to retain the property or the profits in fraud of the real owner.  Petitioner is a New York corporation, and the doctrine we have stated is that recognized and enforced by the courts of that state.  See also ; ; ; *831 . Cf. ; . No part of the gain is taxable to the corporate petitioner. The Commissioner has determined that the net amount realized from the condemnation was $90,777.43 and the basis of the Harry Abrams estate upon its one-half was $31,525.  Counsel for the estate concedes that the difference of $13,863.72 between the basis and one-half of the amount realized is gain of the estate from the disposition of a capital asset held for more than two and less than five years, so that 60 percent of the gain, or $8,318.23, would be taxable income.  $10,178.11 was reported on the return.  He concedes two other adjustments made by the Commissioner and states that the correct deficiency is $9.12.  He does not contest the 5 percent penalty under section 406 of the Revenue Act of 1935.  Decision will be entered under Rule 50.