Court Opinion

ID: 4485126
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:11.759446+00
Date Added: 2024-06-11T07:58:25.999920
License: Public Domain

Cohen, J., dissenting: I respectfully dissent. The facts of this case are far from unusual. Petitioner was a member of a partnership engaged in the real estate business and sought construction financing in order to develop an office building. He, not unlike innumerable other business persons in a variety of other businesses, found that the usury laws of the jurisdiction in which the building was to be constructed were not consistent with commercial reality. He, not unlike innumerable other business persons in a variety of other businesses, found a way around the local usury laws. As set forth in the stipulation: 12. At the time involved, the District of Columbia Code made a loan at a rate exceeding eight percent (8%) to non-corporate borrowers usurious. D.C. Code, Title 28, sec. 3301. That prohibition was inapplicable to loans to corporations. D.C. Code, Title 29, sec. 904(h). 13. The partnership of Donohoe and Ourisman could not borrow the funds required to construct the office building under the loan commitment without raising usury problems. 14. Wisconsin-Jennifer, Inc. (the "Corporation”) was formed by Donohoe and Ourisman on February 5, 1970. * * * 15. AS & T advised Donohoe and Ourisman that it would be necessary for record title to the leasehold to be held by its borrower, here a corporation. [[Image here]] 17. Immediate reconveyance of the leasehold to Associates after the construction loan closed on May 7,1970, was believed by the parties not to be practical under the District of Columbia usury law because the loan called for periodic advances as construction proceeded. Each advance of funds in a construction loan is treated as a separate loan transaction; accordingly, it was necessary that title to the leasehold he in the name of the Corporation at the time of each advance. Moreover, reconveyance with each advance would have created what the parties believed to be a highly impractical situation in which it would have been necessary to assign and reassign the leasehold with each recurring advance of funds. * * * Not unlike innumerable other businesses, petitioner’s office building venture incurred losses in the initial years. Unlike many of those other businesses, however, petitioner’s corporation could not maintain the requirements established by Congress as embodied in subchapter S of the Internal Revenue Code, which are necessary for a corporation to pass losses through to its shareholders. The corporation’s receipt of "passive investment income,” i.e., rents, would soon effect a termination of any subchapter S election. Sec. 1372(e)(5) during the years in issue, now sec. 1362(d)(3); see Howell v. Commissioner, 57 T.C. 546, 556 (1972). But now petitioner and the majority have avoided the limitations established by Congress just as neatly as petitioner and his partner avoided the local usury laws. The majority opinion (page 177) quotes from the U.S. Supreme Court opinion in Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943). The language quoted, it seems to me, when combined with the stipulated facts quoted above, compels the conclusion that petitioner’s corporation was a separate taxable entity. The corporation was formed for a business purpose and served that purpose by taking and maintaining title to property. Other cases cited below confirm my conclusion. My main reason for dissent, however, is expressed in the portion of the Moline Properties opinion immediately following the portion quoted by the majority, to wit: In Burnet v. Commonwealth Improvement Co., 287 U.S. 415, [53 S.Ct. 198, 77 L.Ed. 399] this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages. In National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949), the Supreme Court stated that its opinion did "not foreclose a true corporation agent or trustee from handling the property and income of its owner-principal without being taxable therefor.” (336 U.S. at 437, majority opinion page 178.) That language, regardless of whether the factors to be considered are six factors of equal weight or four factors and two essential criteria, does not compel a holding of agency in inappropriate circumstances. It anticipates cases where the corporation serves as agent for unrelated taxpayers as well as its shareholders, such as those cited by the majority opinion at page 179-180. In Strong v. Commissioner, 66 T.C. 12, 24-26 (1976) (Court reviewed), affd. 553 F.2d 94 (2d Cir. 1977), and cited with apparent reaffirmation by the majority (page 187), this Court stated: In short, a corporate "straw” may be used to separate apparent from actual ownership of property, without incurring the tax consequences of an actual transfer; but to prevent evasion or abuse of the two-tiered tax structure, a taxpayer’s claim that his controlled corporation should be disregarded will be closely scrutinized. If the corporation was intended to, or did in fact, act in its own name with respect to property, its ownership thereof will not be disregarded. [Emphasis added.] * * * * * * * Having set up a separate entity through which to conduct their affairs, petitioners must live with the tax consequences of that choice. Indeed, the very exigency which led to the use of the corporation serves to emphasize its separate existence. See Moline Properties v. Commissioner, 319 U.S. at 440; David F Bolger, 59 T.C. at 766. Our conclusion is not based upon any failure of the petitioners to turn square corners with respondent; they consistently made clear their intention to prevent separate taxation of the corporation if legally possible. They took most precautions consistent with business exigency to achieve that end. We simply hold that their goal was not attainable in this case [Strong v. Commissioner, supra at 24-26. Fn refs. omitted.] I agree with the dissent of Judge Nims in Roccaforte v. Commissioner, 77 T.C. 263, 291-293 (1981), revd. by the Fifth Circuit for reasons discussed in the majority opinion (pages. 184-185), in which he stated that "there is no real substantive distinction between this case and Strong v. Commissioner” and: In short, I would hold that these taxpayers cannot have it both ways: either the corporation must be recognized as a viable entity engaged in business, with all the tax benefits and burdens attendant thereupon, or its relationship with the partnership must be exposed as a transparent artifice, i.e., a sham, designed solely to thwart the law of [the local jurisdiction], an effort upon which this Court should seriously reflect before lending its support. This Court has repeatedly said that its function is not to rewrite tax laws enacted by Congress. A fortiori, we should not decide cases as an accommodation to a percéived unfortunate effect of nontax oriented local laws. I see no reason to depart from the principles of those cases that hold that the taxpayer must take the chaff with the wheat, or, if you will, with the straw. Goffe, Wilbur, Chabot, and Nims, JJ., agree with this dissent.