Court Opinion

ID: 9465910
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:59:33.015441+00
Date Added: 2024-06-11T17:39:26.421406
License: Public Domain

TUTTLE, Circuit Judge,
dissenting:
With deference, I dissent. I am unable to understand how the Tax Court reached its conclusion disallowing the additional taxes *900in light of its statement that “For purposes of this decision, the parties have agreed that there was a preconceived plan whereby the individual condominium units to be sold by Lakeside would first be burdened with an obligation to pay excessive rentals to the stockholders of Lakeside on account of the 99-year lease of the recreation facilities, in order to provide the stockholders of Lakeside with a continuing income in the form of rents.”
The Tax Court had before it only a question of law arising from stipulated facts. I summarize the facts.
Briefly stated, the facts are that the taxpayer and another jointly owned all of the stock of the corporation Lakeside Garden Developers, Inc. They confected a plan to build 11 buildings, each containing a number of condominiums to be sold to the public. During the course of the. construction, two individual stockholders, who were also the only officers of the corporation, acquired from their corporation sufficient land to enable them to build on it what is known as “recreational facilities.” These recreational facilities would be totally surrounded by the condominium units and it was part of their plan that every condominium purchaser, in addition to paying the price of his own unit would also be required to pay a proportionate part of a 99 year recreational lease which the condominium owners association for his unit had entered into with taxpayers-stockholders. The stockholders’ total outlay for the land and buildings used for recreational purposes amounted to $68,213.61. The annual rental from the condominium owners association’s 99 year leases equaled $65,280.00, a 95.7 percent return each year on the stockholders’ total investment in these facilities. Significantly, the corporation showed a loss on two of the years and a small gain on the remaining two of the four years under review.
To such an arrangement, which eliminated substantially all net income to the corporation and resulted in very substantial income directly to the stockholders, which but for the relationship between the corporation and its owners would in all likelihood have belonged to the corporation, the Internal Revenue Service cries “foul.” The commissioner says that this is a “tie-in” situation. It is as if a corporation with a single stockholder was selling automobiles to the public by requiring a sale for a total of $7,500 to be accomplished by the corporation’s selling the automobile for $6,500 only on condition that the purchaser would buy a fountain pen at the same time for $1,000, the pen to be supplied by the stockholder and the $1,000 received by him to be free of corporate taxes.
To me the situations are hardly distinguishable. I agree with what the Tax Court said in its opinion:
For purposes of this decision, the parties have agreed that there was a preconceived plan whereby the individual condominium units to be sold by Lakeside would first be burdened with an obligation to pay excessive rentals to the stockholders of Lakeside on account of the 99 year lease of the recreational facilities, in order to provide the stockholders of Lakeside with a continuing income in the form of rents. Such transactions between a corporation and its sole stockholders need not be given effect for tax purposes.
Citing Green v. United States, 460 F.2d 412 (5th Cir. 1972); Riss v. Commissioner, 478 F.2d 1160 (8th Cir. 1973); Waldheim v. Commissioner, 244 F.2d 1 (7th Cir. 1957); 58th St. Plaza Theatre, Inc. v. Commissioner, 195 F.2d 724 (2d Cir. 1952).
The Tax Court then said:
The court thus would sustain the right of the respondent to look to the substance of the transactions involved in this proceeding for purposes of determining the resulting tax liabilities of the parties.
Citing among others Waterman Steamship Corp. v. Commissioner, 430 F.2d 1185 (5th Cir. 1970), cert. denied 401 U.S. 939, 91 S.Ct. 936, 28 L.Ed.2d 219; United States v. General Geophysical Co., 296 F.2d 86 (5th Cir. 1961).
All of these cases stand for the proposition which we stated in Kanawaha Gas & Utilities Co. v. Commissioner of Internal Revenue, 214 F.2d 685 (5th Cir. 1954):
*901In determining the incidence of taxation, we must look through form and search out the substance of a transaction. * * * This basic concept of tax law is particularly pertinent to cases involving a series of transactions designed and executed as parts of a unitary plan to achieve an intended result. Such plans will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation. The series of closely related steps in such a plan are merely the means by which to carry out the plan and will not separate.
214 F.2d at 691.
The Tax Court then, however, instead of viewing the series of transactions as a unit, undertook to point out what other steps the commissioner might have taken but which he did not take in this case. The Tax Court pointed out that:
Respondent could have determined that the recreational facilities coupled with the 99 year lease which Lakeside as sole owner of the apartments entered into contemporaneously with the sale of the recreational facilities to its stockholders, gave rise to a ‘bargain sale’ and a resulting distribution by the corporation to its stockholders at that time.
The court then said that in the alternative, the IRS could have determined that the sale of the recreational facilities by Lakeside to its stockholders, accompanied by a lease back of those facilities for an excessive rental resulted in the payment of dividends in the form of excessive rents. Pointing out that the IRS has not sought to assert either of these alternatives, the court then inexplicably decided that the commissioner is not entitled to have the transactions recast in the manner which he asserted — that to the extent that the monthly payments by the condominium purchasers were excessive, the agreement by the condominium purchaser to pay the excessive rent must be considered as “other property” received on the sale of the condominium which should be valued as of the time of sale and should be added to the purchase price.
Once it is clear that the transaction between the related corporation and its sole stockholders can be reconstructed, there appears to be no reason why the commissioner should not prevail.
Section 1001 of the Internal Revenue Code makes clear what is to be done with respect to an agreement by the purchasers of real estate to make future payments. This, section provides:
The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money received) .
Here, upon a recasting of the transaction, as the Tax Court said is permissible, we find that the corporation would have received the monthly obligation of the condominium purchaser to make the excess payment for the recreational facilities. This obligation to make the monthly payment is part of the “property received.” upon the sale. It must be valued and added to the amount realized from the sale.
In reaching the conclusion that the present cash value of the excessive amount of the monthly payments for the use of the recreational facilities1 must be added to the amount of the sales price received by the corporation, I do hot think it is necessary to rely on § 482 of the Internal Revenue Code providing for “Allocation of income and deductions among taxpayers.” I am of the view that the general rule provided in § 61 of the Code defining gross income as including “(3) Gains Derived From Dealings in Property” is sufficient, when viewed with the requirement that we look to substance rather than form, to require that judgment be rendered for the Internal Revenue Service.
If the substance of the transaction as I have outlined cannot be thought to be sufficient to place the excess rents paid directly to the stockholders within the corporation’s *902income, as I have indicated, then I would agree with the IRS that § 482 would fit the case like a glove. That section 2 is designed to enable the commissioner to allocate income between two or more affiliated organizations in order to prevent evasion of taxes or clearly to reflect .the income of such organizations. When he undertakes to make such apportionment, the commissioner’s action is reviewable only if his determination is arbitrary and capricious and by a showing as to what the correct allocation should have been. Engineering Sales, Inc. v. United States, 510 F.2d 565 (5th Cir. 1975). The appropriate regulations make clear the scope and purpose of this section. Section 1.482-1 of Treasury Regulations on Income Tax (1954, 26 C.F.R.) provides:
Scope and purpose. (1) The purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining according to the standard of an uncontrolled taxpayer, the true taxable income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the taxable income from the property and business of each of the controlled taxpayers. . If, however, this has not been done, and the taxable incomes are thereby understated, the district director shall intervene, and, by making such distributions, apportion-ments, or allocations as he may deem necessary of gross income, deductions, credits, or allowances, or of any item or element affecting taxable income, between or among the controlled taxpayers constituting the group shall determine the true taxable income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer, (emphasis added.)
The Tax Court having recognized that the parties conceded that there was excessive rental charge for the recreational facilities and the court having recognized that that condition was a part of the preconceived plan, I am convinced that the Tax Court erred in its determination that the part of excess income that was agreed to be paid over the period of the lease should not be valued and added to the purchase price paid for the individual condominiums.
I would reverse the holding of the Tax Court.

. It must be borne in mind that the Tax Court has found that the parties contemplated that there would be an excessive charge in some amount.

. In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not orgánized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegates may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.