Opinion
Docket No. 31896.
1953-04-22
JOHN A. SNIVELY, SR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James P. Hill, Esq., and William R. Frazier, Esq., for the petitioner. Newman A. Townsend, Jr., Esq., for the respondent.
Petitioner owned approximately 94 per cent of the preferred stock of Lake Eloise Groves, Inc., which operated citrus groves in and near Winter Haven, Florida. The corporation experienced financial difficulties and, in 1943, its assets were sold at a loss to a family trust. The petitioner's son was the trustee and petitioner's other children and grandchildren were the beneficiaries. The respondent disallowed the loss on the ground that it was barred by section 24(b) of the Code. He determined deficiencies and a penalty against the corporation and asserted them against petitioner as a transferee. He disallowed net operating loss carry-backs from 1944 to 1942 and 1943 and he determined that the fruit on the trees at the time of sale had a fair market value of $222,459.56 which constituted ordinary income to the corporation.
1. Held, the sale of the assets of the dissolved corporation was made to a valid existing trust and the loss sustained does not fall within the provisions of section 24(b).
2. Held, further, net operating loss carry-backs allowed to the extent of offsetting the corporation's income for 1942 and 1943.
3. Held, further, there are no deficiencies or penalty due from the corporation, and petitioner is, therefore, not liable as a transferee.
4. Held, further, in a transferee proceeding this Court has no jurisdiction to determine who is entitled to any overpayment of tax made by the transferor. James P. Hill, Esq., and William R. Frazier, Esq., for the petitioner. Newman A. Townsend, Jr., Esq., for the respondent.
The respondent determined deficiencies in income tax, excess profits tax, and declared value excess-profits tax against the taxpayer, Lake Eloise Groves, Inc., for its fiscal years ended April 30, 1942, 1943, and 1944, and a penalty for 1944 as follows:
+-------------------------------------------------------------+ ¦Type of tax ¦1942 ¦1943 ¦1944 ¦ +---------------------------------+------+---------+----------¦ ¦Income tax ¦$44.83¦$1,752.15¦$32,286.01¦ +---------------------------------+------+---------+----------¦ ¦Declared value excess-profits tax¦ ¦666.14 ¦43,892.18 ¦ +---------------------------------+------+---------+----------¦ ¦Excess profits tax ¦ ¦ ¦190,614.22¦ +---------------------------------+------+---------+----------¦ ¦25% Penalty ¦ ¦ ¦42,888.27 ¦ +---------------------------------+------+---------+----------¦ ¦Total ¦44.83 ¦2,418.29 ¦309,680.68¦ +-------------------------------------------------------------+
Respondent determined that petitioner was liable as transferee of property of the taxpayer for such deficiencies and penalty.
The issues to be decided are: (1) Whether Lake Eloise Groves, Inc., may deduct for the fiscal year 1944 a loss arising from the sale of its assets to a family trust, or whether such loss is disallowed by the provisions of section 24(b)(1)(A) or (B) of the Internal Revenue Code; (2) whether Lake Eloise Groves, Inc., is entitled to net operating loss carry-backs, and if so in what amounts, from the fiscal year 1944 to the fiscal years 1942 and 1943; (3) whether Lake Eloise Groves, Inc., realized ordinary income on account of the unharvested citrus crops on its trees at the time of the sale, and if so in what amount; (4) whether Lake Eloise Groves, Inc., is liable for a 25 per cent delinquency penalty for failure to file an excess profits tax return for the fiscal year 1944; (5) whether petitioner is liable as a transferee of the assets of Lake Eloise Groves, Inc.; and (6) whether Lake Eloise Groves, Inc., overpaid its taxes for the fiscal years 1942 and 1943, and may a determination with respect to such overpayments, if any, be made in this proceeding. One issue relating to an unused excess profits credit was settled by stipulation and will be taken into consideration in a recomputation under Rule 50, together with certain other uncontested adjustments.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
Petitioner is an individual, residing at Winter Haven, Florida. He filed his returns with the collector of internal revenue for the district of Florida.
Lake Eloise Groves, Inc. (hereinafter referred to as Lake Eloise), is a dissolved Florida corporation. For the taxable years 1942, 1943, and 1944, corporation income and declared value excess-profits tax returns were filed on behalf of Lake Eloise with the collector of internal revenue for the district of Florida. An excess profits tax return was filed on behalf of Lake Eloise for the taxable year 1943, but none was filed for the taxable year 1944. During those years Lake Eloise was an association taxable as a corporation
Lake Eloise was incorporated under the laws of Florida on April 16, 1928, for the purpose of acquiring the assets of Hundred Lakes Corporation, another Florida corporation which was then insolvent. The property and assets of Hundred Lakes Corporation consisted, for the most part. of subdivided lots located in and around Winter Haven. The Hundred Lakes Corporation owed various firms and corporations approximately $1,000,000, and its creditors agreed to accept preferred stock in Lake Eloise for their claims. Among the assets acquired by Lake Eloise from Hundred Lakes Corporation were approximately 272 acres of bearing citrus groves. A large part of the citrus acreage was located within the city limits of Winter Haven. A number of lots had been sold from this acreage, and, as a result, there were few solid blocks of land. Subsequent to its acquisition by Lake Eloise, the value of this acreage decreased to such an extent that Lake Eloise encountered financial difficulties.
On October 14, 1932, Lake Eloise executed in favor of Growers Loan & Guaranty Co. of Tampa, Florida, a trust deed encumbering its groves to secure debts aggregating the sum of $126,000 evidenced by seven notes as follows:
+---------------------------------------------------------+ ¦1 Note to Lyons Fertilizer Co. for ¦$27,000¦ +-------------------------------------------------+-------¦ ¦1 Note to Snell National Bank of Winter Haven for¦30,000 ¦ +-------------------------------------------------+-------¦ ¦1 Note to Dundee Citrus Growers Association for ¦10,000 ¦ +-------------------------------------------------+-------¦ ¦1 Note to Florence Citrus Growers Association for¦10,000 ¦ +-------------------------------------------------+-------¦ ¦1 Note to Growers Loan & Guaranty Co. for ¦39,000 ¦ +-------------------------------------------------+-------¦ ¦1 Note to John A. Snively, Sr., for ¦5,000 ¦ +-------------------------------------------------+-------¦ ¦1 Note to A. M. Tilden for ¦5,000 ¦ +---------------------------------------------------------+
Lake Eloise defaulted in the payment of the debts secured by the aforementioned trust deed and for several years, including the fiscal year ended April 30, 1943, Growers Loan & Guaranty Co. cared for the groves and marketed the fruit grown thereon in an effort to collect the defaulted loan. During the fiscal year ended April 30, 1944, the loan was finally liquidated, and Growers Loan & Guaranty Co. relinquished possession of the groves. Under that deed of trust, Growers Loan & Guaranty Co. was given full authority to manage the grove properties and to appoint agents for that purpose. The petitioner was appointed its agent for the purpose of managing the groves.
The years from 1928 to 1940 were poor years for citrus growers in Florida. Many growers did not make expenses. The financial condition of Lake Eloise grew progressively worse. Two of the largest creditors of Lake Eloise settled their claims in 1935 for one-third of the amount due. In 1936 Lake Eloise lost its corporate charter for failure to pay its annual capital stock tax due the State of Florida. Lake Eloise was dissolved on September 17, 1936, by proclamation of the Governor of Florida for failure to pay its capital stock tax. Ford J. DeHaven, petitioner's brother-in-law, was the corporation's sole surviving director.
John A. Snively, Jr. (hereinafter sometimes referred to as John), is petitioner's son and the husband of May Pate Snively. Avis Snively and Evalyn Snively Walde, are the daughters of petitioner. On November 1, 1943, all of them were over 21 years of age. John A. Snively, III, and McClendon Pate Snively are the sons of John. John A. Snively, III, was born January 4, 1940, and McClendon Pate Snively was born May 15, 1942.
In January 1941, John A Snively, Jr., trustee of the Snively Trust (hereinafter, in his trustee capacity, referred to as Trustee), purchased a citrus grove known as the Babson Park Grove. He was an experienced citrus grove operator. The initial payment of the purchase price for this grove was advanced to the Trustee by the petitioner, and petitioner was repaid out of the proceeds of the grove when the fruit was picked. On December 28, 1941, John, Avis Snively, Evalyn Snively Walde, and May Pate Snively executed an instrument setting forth the terms and conditions under which title to the Babson Park Grove, and any other property which might thereafter be acquired, was to be held by the Trustee. The instrument provided, in part, as follows:
WHEREAS, the equitable title and beneficial interest in and to said property belongs in equal share to Avis Snively, Evalyn S. Walde and May Pate Snively; and
WHEREAS, the above named persons have requested that I hold the legal title to said property for them until they shall otherwise direct, and to operate the same as their agent or trustee, until such time as they shall request otherwise.
NOW THEREFORE, I, the undersigned, John A. Snively, Jr., as Trustee, do hereby declare to each of the persons above named that I hold the legal title to the hereinabove described (property) for them in equal shares; that I will convey said title to them, or any person they may designate, upon request; and that I will keep and maintain an accurate set of books in the operation of said property, and will distribute any funds coming into my hands from the operation thereof, or otherwise, in equal shares to the above named parties, after first deducting actual expenses incurred in connection therewith.
Said Avis Snively, Evalyn S. Walde and May Pate Snively hereby request the said John A. Snively, Jr., Trustee, to hold the title to said property, and to maintain and operate the same.
In December 1942, petitioner conveyed a grove, known as the Dundee Thirty Grove, to the Trustee. Petitioner had negotiated the purchase of this property for the Trustee, and had advanced the purchase price. When title was conveyed to the Trustee, he reimbursed petitioner out of trust funds.
In January 1943, May Pate Snively assigned her interest in the Snively Trust to her two children, John A. Snively, III, and McClendon Pate Snively.
In July 1943, 1,053 shares of the preferred stock of Lake Eloise was held by the Exchange National Bank of Winter Haven and W. H. Hamilton as trustees for the estate of Mary B. Jewett, deceased. The bank employed an accountant to determine the value of that stock. He made an audit of the books and affairs of Lake Eloise and determined its preferred stock was worth $22.50 per share. In that same month, petitioner purchased that stock at $22.50 per share (originally $100 par value) after the bank was authorized to sell at that price by order of the Circuit Court of Polk County, Florida, dated July 28, 1943. Petitioner had previously purchased some of the preferred stock at as low as 5 cents and 10 cents on the dollar. For a number of years, petitioner had been buying up the preferred shares, and the Jewett estate's shares was the last large block that he didn't own. After petitioner acquired the shares of preferred stock in Lake Eloise from the Jewett estate, he and his son undertook to work out a plan to acquire Lake Cloise's grove properties for the Snively Trust. Petitioner and his son were both interested in creating an estate for the daughters and grandchildren of petitioner.
On October 15, 1943, petitioner owned approximately 94 per cent of the outstanding preferred stock of Lake Eloise and approximately 50 per cent of its outstanding common stock. The common stock had no market value. On that date, the Trustee entered into an agreement with Ford J. DeHaven, sole surviving director of the dissolved Lake Eloise, to purchase all of its assets for $135,930 cash plus the assumption of its liabilities. The principal assets consisted of the 272 acres of citrus groves heretofore mentioned. Under the terms of the agreement, the sale was to be effected as of November 1, 1943, but was not to be consummated until authorized by the Circuit Court of Polk County. Ford J. DeHaven thereafter filed with the Circuit Court of Polk County, Florida, a petition setting forth the fact that as sole surviving director of Lake Eloise he had been offered for the assets of the dissolved corporation a sum which would net the preferred stockholders $22.50 for each share of preferred stock and asking the court to ‘make any orders herein that may seem just and proper.‘
The circuit court reviewed the petition, including a balance sheet from the corporation's books, and found that under the laws of Florida it was the duty of the trustee of the assets of the dissolved corporation to liquidate the assets; that the trustee had been unable in the past to liquidate the assets of said company for an amount sufficient to pay the indebtedness of the company, much less anything to the stockholders. It found the offer made by the Trustee to be fair and reasonable, and by its order dated December 10, 1943, approved the sale.
At the time of the execution of the agreement of October 15, the Trustee paid to Ford J. DeHaven from the funds accumulated by the Snively Trust through the operation of Babson Park and Dundee Thirty Groves, the sum of $10,000 as an initial payment on account of the purchase of the assets of Lake Eloise. At the time, it was contemplated by petitioner and the Trustee that the latter would be able to realize from the sale of the unharvested fruit crop on the groves sufficient funds to pay most of the balance of the cash consideration due in the transaction. If the fruit crop did not produce enough funds to pay off this balance, it was planned that the Trustee should owe the balance to petitioner until such time as it could be paid off.
By a deed dated November 15, 1943, and assigned dated the same date, both of which were delivered after the issuance of the order of the circuit court of December 10, Ford J. DeHaven, as sole surviving director and trustee of Lake Eloise, conveyed to the Trustee all of the assets of Lake Eloise. On the same date, John executed a new declaration of trust setting forth in detail his duties as Trustee of the Lake Eloise Groves. This declaration specified that Evalyn Snively Walde and Avis Snively were each vested with life interests in undivided one-third shares of the property with remainders to their children. It further provided that the children, then living and thereafter to be born, of John were vested with the fee to the other undivided one-third interest. The trust was to terminate upon and after the death of Evalyn Snively Walde. Avis Snively, and John, and as soon thereafter as the youngest child of Evalyn or Avis, whichever died leaving the youngest child, attained 21 years of age. The instrument vested the Trustee with broad powers to manage the properties covered thereby and authorized him to withhold distribution of current income to buy other property, to maintain the corpus, or to establish reasonable reserves. Neither John nor petitioner was a beneficiary of the trust and the petitioner, by the terms of the declaration, had no control over the corpus or the income of the trust. However, petitioner was entitled to participate in the selection of a successor trustee.
A transcript of the journal entry which recorded the transaction on the books of the Snively Trust is as follows:
+-----------------+ ¦THE SNIVELY TRUST¦ +-----------------¦ ¦ ¦ ¦ ¦ +-----------------+
WINTER HAVEN, FLORIDA
Transcript of Journal
Entry per Books
November 1, 1943: Debit Credit Accounts receivable—Polk Packing Assn $105,368.72 Lands—272 acres approx 13,600.00 Citrus trees—272 acres approx 13,600.00 Grove equipment 500.00 Water works and irrigation equipment 500.00 Other assets (including retain certificates) 10,001.00 Fruit (on trees) (1943-44 crop) 91,074.60 Accounts payable—Ford J. DeHaven, Trustee $135,930.00 Accounts payable—John A. Snively, Sr 50,875.00 Accounts payable—Collector of Internal Revenue—Taxes for year ended Apr. 30, 1943 23,772.24 Accounts payable—Attorney and accountant's fees 10,000.00 Accounts payable—T.V. Snively 14,067.08 234,644.32 234,644.32
To record the purchase, as of Nov. 1, 1943, of all assets of Lake Eloise Groves, Inc., and the assumption of all liabilities of said corporation as set forth in the Circuit Court (of Polk County) Order dated Dec. 10, 1943. The amount due from Polk Packing Association represents fruit returns for the prior season less expenses paid to Nov. 1, 1943, and was reconciled with the books of Polk Packing Association. The remaining cost of the assets was prorated to the various assets in proportion to their relative value. The amount due Ford J. DeHaven, Trustee, represents the cash consideration as outlined in the Court Order. The other accounts payable represent liabilities of Lake Eloise Groves, Inc. assumed by John A. Snively, Jr., Trustee.
For the calendar years 1942 and 1943, partnership information returns were filed by the Snively Trust upon which operations of the Babson Park and Dundee Thirty Groves were disclosed. The returns were captioned ‘John A. Snively, Jr., Trustee.‘ Both recite that the date of organization was January 1, 1942, and that the ‘nature of (the) organization ‘ was a partnership. The 1942 return disclosed that Evalyn S. Walde, May Snively, and Avis Snively were the partners to whom income was distributable. The 1943 return disclosed that income was distributable to the same persons except that John, as guardian for John A. Snively, III, and McClendon Pate Snively, replaced May Snively.
For the period November 15, 1943, to December 31, 1943, a fiduciary income tax return was filed under the caption ‘Snively Trust, John A. Snively, Jr., Trustee.‘ This return was delinquently filed on March 15, 1945. It disclosed operations of the Lake Eloise Grove for the indicated period and recited that the trust was created on November 15, 1943. It did not name the beneficiaries of the trust. For the taxable year 1944, the Snively Trust filed a fiduciary return on which it was recited that the trust was created November 15, 1943, and that its beneficiaries were Evalyn S. Walde, Avis Snively, John A. Snively, III, and McClendon Pate Snively. The deduction for depreciation claimed on this return included depreciation on the trees in the Dundee and Lake Eloise Groves.
Effective as of November 1, 1943, the dissolved Lake Eloise had no assets except an account receivable from the Snively Trust in the amount of $135,930. This account was liquidated on August 11, 1944, by a cash payment of that amount from the Trustee to Ford J. DeHaven. On the same date and in exchange for the surrender and cancellation of their stock certificates, DeHaven distributed the $135,930 in cash to the preferred stockholders of Lake Eloise. Petitioner received as his pro rate share the sum of $127,761.13. After the cash distributions to its preferred stockholders, Lake Eloise was left without any assets. The proposed deficiencies and penalty in the amount of $312,143.80 have not been paid.
On the income tax return filed on behalf of Lake Eloise for the fiscal year 1944 by Ford J. DeHaven, trustee, a loss in the amount of $503,225.58 was claimed on account of the sale of the assets of Lake Eloise to the Trustee. The loss was disallowed by respondent, and the statement accompanying the notice of deficiency explained the adjustment as follows:
It has been determined that the loss claimed, in the amount of $503,225.58, from the transfer of Lake Eloise Groves, Inc., assets to the Snively Trust is not allowable under the provisions of section 24(b)(1)(A) or section 24(b)(1)(B) of the Internal Revenue Code.
On November 1, 1943, there was an unharvested citrus crop on the trees of the Lake Eloise Groves in various stages of maturity. A small amount of it was mature on that date. Approximately two-thirds of it was picked and marketed after March 1. 1944. The Trustee harvested and sold some of the fruit immediately after the Snively Trust acquired the groves. The fruit consisted of midseason and late-season oranges, grapefruit, and tangerines. Grapefruit mature early and late. Tangerines and midseason oranges mature between November 15 and March 1. Late-season oranges mature after March. On November 1, 1943, the Valencia oranges (late fruit) were the only completely immature fruit in the groves. The citrus crop on the trees on November 1, 1943, was sold after maturity for $307,940.
In the deficiency notice, respondent determined that Lake Eloise realized additional income in the amount of $222,459.56 during the fiscal year 1944 from the sale of fruit. This adjustment was explained in the statement accompanying the statutory notice as follows:
It has been determined that the fair market value of fruit on trees when assets were sold to John A. Snively, Jr., Trustee, was $222,459.56 which amount is held to be ordinary taxable income within the purview of section 22(a) of the Internal Revenue Code for the fiscal year ended April 30, 1944.
In the revenue agent's report dated May 26, 1946, covering the tax liability of Lake Eloise for the fiscal year 1944, the fair market value of the citrus fruit on its trees at the time of the conveyance was computed as follows:
+-------------------------------------------------------+ ¦Gross returns for 1943-44 season¦ ¦$307,940.00¦ +--------------------------------+----------+-----------¦ ¦Less: Picking and hauling ¦$46,486.62¦ ¦ +--------------------------------+----------+-----------¦ ¦Packing house loss ¦12,232.86 ¦ ¦ +--------------------------------+----------+-----------¦ ¦Operations to Dec.31,1943 ¦26,760.96 ¦ ¦ +--------------------------------+----------+-----------¦ ¦ ¦ ¦85,480.44 ¦ +--------------------------------+----------+-----------¦ ¦ ¦ ¦$222,459.56¦ +-------------------------------------------------------+
Citrus fruit will not ripen if picked before maturity, and immature citrus fruit, if severed from the tree, has no commercial value. However, immature citrus fruit does possess commercial value in Florida if it is allowed to remain on the trees until ripe. Both Federal law and Florida law prohibit the sale of citrus fruit to consumers if harvested while green. It is common practice in Florida for citrus fruit to be bought and sold on the tree. Such sales are either bulk transactions, or at a fixed price per box when harvested. In bulk transactions, the buyer takes the risk of hazards which might destroy the crop; while in fixed-price-per-box transactions, such risks are borne by the grower-seller. Where fruit is sold in bulk before maturity, the agreed sales price usually approximates 50 to 75 per cent of what the crop is expected to bring at maturity.
Except for the aforementioned trust deed executed in favor of Growers Loan & Guaranty Co., Lake Eloise had not prior to November 1, 1943, mortgaged or agreed to sell any part of the citrus crop then on the trees of its groves. The fruit on the trees on November 1, 1943, would have had little, if any market value on November 1, 1943, had it been picked on that date. It was appraised by John at the sum of $91,074.60 upon the assumption that it would remain on the trees until ripe, and was set up on his books of account at that figure.
This figure represents a simple average because the weighted average for such year was not shown.
On the fiduciary return filed by the Snively Trust for the taxable year 1944, the sum of $91,774.60 was deducted as cost of fruit in reporting the income derived from its sale. 2. SEC. 24(b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY—(1) LOSSES DISALLOWED.— In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly—(A) Between members of a family, as defined in paragraph (2)(D);(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;(C) Except in the case of distributions in liquidation, between two corporations more than 50 per centum in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;(D) Between a grantor and a fiduciary of any trust;(E) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or(F) Between a fiduciary of a trust and a beneficiary of such trust.
The Lake Eloise Groves contained trees as follows:
+-----------------------------------------------------------------+ ¦ ¦No. of trees ¦Per cent ¦ +---------------------------------------+--------------+----------¦ ¦Midseason oranges (Temples, pineapples)¦8,328 ¦28.22 ¦ +---------------------------------------+--------------+----------¦ ¦Late oranges (Valencias) ¦10,239 ¦34.70 ¦ +---------------------------------------+--------------+----------¦ ¦Grapefruit ¦8,123 ¦27.53 ¦ +---------------------------------------+--------------+----------¦ ¦Tangerines ¦2,817 ¦9.55 ¦ +---------------------------------------+--------------+----------¦ ¦Total ¦29,507 ¦100.00 ¦ +-----------------------------------------------------------------+
During the crop year 1943-44, the groves produced the following:
+-------------------------------+ ¦Type of fruit ¦No. of boxes ¦ +----------------+--------------¦ ¦Oranges ¦78,974 ¦ +----------------+--------------¦ ¦Grapefruit ¦57,768 ¦ +----------------+--------------¦ ¦Tangerines ¦9,164 ¦ +----------------+--------------¦ ¦Total ¦145,906 ¦ +-------------------------------+
In the fall of 1943, the trend of citrus fruit prices was upward. For the crop years 1940-41 to 1943-44, inclusive, the average-per-box prices on the tree at which Florida citrus fruit sold were as follows:
+---------------------------------------+ ¦Crop year¦Oranges¦Grapefruit¦Tangerines¦ +---------+-------+----------+----------¦ ¦1940-41 ¦$0.79 ¦$0.33 ¦$0.64 ¦ +---------+-------+----------+----------¦ ¦1941-42 ¦1.10 ¦1 .63 ¦1.34 ¦ +---------+-------+----------+----------¦ ¦1942-43 ¦1.74 ¦.92 ¦1.18 ¦ +---------+-------+----------+----------¦ ¦1943-44 ¦1.81 ¦1.31 ¦1.89 ¦ +---------------------------------------+
During the fall of 1943, the average-on-tree prices at which Florida citrus fruit sold by months were as follows:
+-----------------------------------------------------+ ¦Prices on tree per box ¦ ¦ ¦ ¦ +---------------------------+-------+--------+--------¦ ¦Type of Fruit ¦ ¦ ¦ ¦ +---------------------------+-------+--------+--------¦ ¦ ¦October¦November¦December¦ +---------------------------+-------+--------+--------¦ ¦Oranges—early and midseason¦$2.12 ¦$2.05 ¦$1.90 ¦ +---------------------------+-------+--------+--------¦ ¦Grapefruit—seedless ¦1.39 ¦1.42 ¦1.28 ¦ +---------------------------+-------+--------+--------¦ ¦Grapefruit—seeded ¦1.17 ¦1.30 ¦1.26 ¦ +---------------------------+-------+--------+--------¦ ¦Tangerines ¦ ¦1.85 ¦1.95 ¦ +-----------------------------------------------------+
The number of boxes of fruit in an unharvested citrus crop can be estimated with reasonable accuracy. In the fall of 1943, petitioner and John knew that there was a good crop on the Lake Eloise Groves.
On June 10, 1946, the petitioner, by an agreement in writing, admitted that he is a transferee of the assets of Lake Eloise and agreed to pay the amount of any or all Federal income or excess profits taxes finally determined or adjusted to be due and payable by Lake Eloise for the taxable years ended April 30, 1942, to April 30, 1945, inclusive.
The transaction as of November 1, 1943, was a bona fide sale, and Lake Eloise had a net operating loss in its fiscal year 1944. There was reasonable cause for the failure of Lake Eloise to file an excess profits tax return for its fiscal year 1944.
Lake Eloise paid income taxes for the fiscal year 1942 in the amount of $7,510.77 on a normal-tax net income of $29,001.76. For the fiscal year 1943, it paid income and declared value excess-profits taxes in the amount of $31,702.07. Its net income for declared value excess-profits tax computation for that year was $72,354.06; and its normal-tax net income was $67,753.32.
Claims for refund of the taxes paid in both years were filed by ‘John A. Snively Jr.— Trustee Assignee of Lake Eloise Groves, Inc.— (Dissolved)‘ on May 12, 1945. The claims were based presumably on the theory that the loss resulting from the sale of the assets of Lake Eloise in the fiscal year 1944 exceeded the net income for the years 1942 and 1943 and, since the loss was a net operating loss carry-back, Lake Eloise had overpaid its taxes for those years; and the Trustee, as assignee of the assets of Lake Eloise, was entitled to a refund of the overpayments.
OPINION.
RICE, Judge:
The respondent argues that under the provisions of section 24(b)
of the Code, Lake Eloise may not deduct a loss on account of the sale of its assets to the Snively Trust because it arose from a sale between a corporation and an individual, or group of individuals, who were indirect owners of more than 50 per cent in value of Lake Eloise's stock. Section 24(b)(1)(B). Or, in the alternative, the loss is not deductible because it arose from a sale between members of a family. Section 24(b)(1)(A).
The respondent's argument with respect to this first issue is that the transaction was between Lake Eloise and John, an individual, or between Lake Eloise and the beneficiaries of the Snively Trust. He contends that the Snively Trust ‘If a trust at all, it was a dry, naked or passive trust which under Florida law is regarded as executed so as to vest the legal estate in the beneficiaries.‘ He argues that the arrangement was in substance simply a joint venture or a partnership because it filed partnership information returns and was identified on such returns as a ‘partnership.‘ He states that if the purchaser were John, the sale clearly falls within the ambit of section 24(b)(1)(B) and section 24(b)(2)(B) and (D)
; and that, if the purchaser were the ‘partnership,‘ every person beneficially interested therein was a member of the family of petitioner within the definition contained in section 24(b)(2)(B) and the loss must be disallowed, since 94 per cent in value of the seller's stock was owned by the petitioner and a constructive ownership of such stock is imputed to his family by application of section 24(b)(2)(B)(D). The respondent concluded this argument by stating that, even if the Snively Trust were a valid trust, the loss is nevertheless not deductible because the beneficiaries of the trust were all members of the family of petitioner, citing Estate of Charles C. Ingalls, 45 B.T.A. 787 (1941), affd. 132 F.2d 862 (C.A. 6, 1943).
SEC. 24(b). LOSSES FROM SALES OR EXCHANGES OF PROPERTY.—(2) STOCK OWNERSHIP, FAMILY, AND PARTNERSHIP RULE.— For the purposes of determining, in applying paragraph (1), the ownership of stock—(A) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;(B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
His alternative argument on this issue is that, if the loss is not disallowed under section 24(b)(1)(B), it must be disallowed by section 24(b)(1)(A) because every person beneficially interested to any substantial extent in the sale creating the loss in question was a ‘member of the family‘ of the petitioner. He states that the petitioner, the holder of 94 per cent of the stock of Lake Eloise, was the individual who was beneficially interested as the seller and that the individuals who acquired beneficial interests in the property through the sale as buyers were his son, his daughters, and his grandchildren. He cites McWilliams v. Commissioner, 331 U.S. 694 (1947), for the proposition that the section applies to either direct or indirect sales between family members, and its coverage is therefore broad. He concludes by saying that stripped to its bare essentials, it is obvious that the instant sale was made either directly or indirectly between members of the family of the petitioner, that no outsider participated in the transaction or shared its benefits, except the group which held about 6 per cent in value of Lake Eloise's preferred stock, that the net result achieved by the sale was simply a transfer of petitioner's beneficial interest in Lake Eloise's properties to his children and grandchildren, and that looking to the substance of the transaction and ignoring the camouflage created by its form, the sale clearly occurred, directly or indirectly, between ‘family members.‘
The respondent determined deficiencies in excess profits taxes, declared value excess-profits taxes, and also a penalty for failure to file an excess profits tax return, in addition to deficiencies in income taxes. The transaction that gave rise to the deficiencies was a sale of assets; therefore, according to the notice of deficiency, the sale had to be made by a corporation, or an association taxable as a corporation, if income from the sale could be taxed at excess profits tax rates. This would seem to eliminate section 24(b)(1)(A) from further consideration since a corporation, or an association taxable as a corporation, is not a member of a family within the purview of that subsection. One of respondent's arguments is that the sale was made indirectly by petitioner, an individual. If that were so, it is difficult to see how a corporate tax could be asserted on the gain from the sale of the fruit.
We have found that Lake Eloise was an association taxable as a corporation and, under our holding in Pierce Oil Corporation, 32 B.T.A. 403 (1935), it is settled law that an association taxable as a corporation is to be treated as a corporation for all purposes of the Internal Revenue Code. Respondent, in his argument that the loss should be disallowed under section 24(b)(1)(B), agrees that ‘the actual seller in the critical transaction was an association which for tax purposes is regarded as a corporation,‘ citing sec. 3797(a)(3), I.R.C.; Regs. 111, sec. 29.3797-2; John Crocker, 32 B.T.A. 861 (1935), affd. 84 F.2d 64 (C.A. 7, 1936); Coast Carton Co. v. Commissioner, 149 F.2d 739 (C.A. 9, 1945), affirming 3 T.C. 676 (1944.) There can be no question but that Lake Eloise suffered a loss, and we think it was an actual loss and not an artificial one as claimed by respondent.
We are also of the opinion that the Snively Trust was a valid and not a ‘naked or passive‘ trust. The declaration of trust executed by John in December 1941, long before the transaction here in question, placed on him the burden of operating the grove property, keeping accurate records of transactions, and distributing the profits. He was an experienced grove operator. The fact that he erroneously reported the income of the pre-1943 trust on partnership information returns rather than on fiduciary returns is, on the basis of the entire record, unimportant. A partnership is not a taxable entity, and the tax liability of the beneficiaries of a distributable trust is the same whether the income is reported on a partnership or a fiduciary return. Cf. L. A. Westerweller, 17 T.C. 1532 (1953). It is to be noted that the partnership returns themselves indicated that John was the trustee. The Lake Eloise assets were purchased with funds of the Snively Trust, and it seems clear under Florida law that those assets were vested in John as trustee of the Snively Trust. See Whetstone v. Coslick, 117 Fla. 203, 157 So. 666 (1934); Elvins v. Seestedt, 148 Fla. 408; 4 So.2d 532 (1941).
We, therefore, conclude that the sale was made by a corporation to a valid trust under the laws of the State of Florida, and that since section 24(b)(1)(B) relates to sales between an individual and a corporation, the instant sale to a trust is not encompassed therein and the loss should have been allowed. That t is result is the proper one to reach is buttressed by the fact that, where Congress intended to disallow losses in transactions where a trust is a party, it did so expressly. In subparagraphs (D), (D), and (F) of section 24(b)(1), the Code disallows losses on a sale between a grantor and a fiduciary of any trust; or between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or between a fiduciary of a trust and a beneficiary of such trust. If Congress had intended that section 24(b) should apply to transactions between a trust and a corporation, we think it would have made specific provision therefor as it did in the various subparagraphs just referred to relating to other transactions by a trust.
In concluding that the loss should have been allowed, we follow the rationale in our holding in Charles B. Bohn, 43 B.T.A. 953 (1941). There we held that the grantor of a trust for the benefit of his daughter could take a loss on a bona fide sale of stock by him to the trust. It is true that the Code now prohibits the deduction of such a loss, but what we said under the state of the law in that case is equally applicable here. We said there, at page 957:
The sale here was not between father and daughter, but between father and trustee for daughter. The daughter would not come into full legal possession of the stock until the termination of the trust, and even then her estate might be defeated by her prior decease. No powers over the trust corpus were retained by petitioner, hence rendering inapposite Helvering v. Clifford, 309 U.S. 331. To hold that the transaction falls within section 24(a)(6) is to read something into an ambiguous statute which is not there, in an attempted clarification ad hoc.
Respondent relies on the Estate of Charles C. Ingalls, supra, stating, in substance that the rationale in that case suggests that section 24(b)(2)(A) is applicable to determine ownership of properties sold and, as a corollary, who participated in the sale as buyer and seller; and that if this is true, there can be no question but that the property involved in this case was bought by members of the family of petitioner, namely, the beneficiaries of the Snively Trust (who were the daughters and grandchildren of petitioner), thus fulfilling the standards of the family rule. In the Ingalls case, an estate sold bank stock to a corporation more than 50 per cent of the outstanding stock of which it owned. We held that the deduction of the loss resulting from such sale was not barred by the provisions of section 24(b)(1)(B). In arriving at that conclusion, we applied section 24(b)(2)(A) to determine the indirect owners of the stock sold, and we looked through the estate to determine that the sale was made by a group of individuals, namely, the beneficiaries thereof. We concluded that since no ‘such individual‘ owned ‘more than 50 per centum in value of the outstanding stock‘ of the purchasing corporation that section 24(b)(1) did not prohibit the deduction of the loss in question. Thus, the Ingalls case was decided on a different set of facts, i.e., the estate owned the stock of the purchasing corporation, and on the application of a different paragraph of the statute, namely, section 24(b)(2)(A), and is therefore distinguishable.
Our holding on the first issue disposes of issues (2) through (5), inclusive. The parties are agreed that the petitioner is entitled to a net operating loss carry-back if Lake Eloise had a deductible loss on the sale. Whether the sale of the fruit constituted ordinary income and what is its fair market value become moot because, even if we assume that the sale resulted in ordinary income and that the fair market value of the fruit was $222,459.56, Lake Eloise still suffered a net operating loss in fiscal 1944 sufficient, when carried back to 1942 and 1943, to offset its income for those years. Further more, whether the sale of the fruit constitutes income to the corporation under the facts of this case has recently been decided against the respondent. Burrell Groves, Inc., 16 T.C. 1163 (1951). Since there is no deficiency due for the year 1944, there can be no penalty for failure to file an excess profits tax return for that year. Nor can petitioner be liable as a transferee since there are no deficiencies or penalty owed by the transferor.
The sixth and last issue involves the question as to whether Lake Eloise overpaid its taxes for the years 1942 and 1943 and whether this Court has jurisdiction in this proceeding to make a determination with respect to such overpayments. The petitioner, by amendment to the petition, asserted that Lake Eloise overpaid its income tax liability for those years and requests a determination as to the amount of such overpayments. He further requests that we determine that proper claims for refund have been filed, and that we enter a decision that such overpayments are due.
The petitioner is here as a transferee of Lake Eloise. We have jurisdiction because of the deficiency determined against Lake Eloise and, in turn, asserted against the petitioner as a transferee. We have held that no deficiency or penalty is due from petitioner as a transferee, and this holding must necessarily conclude the issues properly presented to us. Our findings show that the Trustee filed claims for refund, but he is not a party to this proceeding. DeHaven, as trustee of the assets of the dissolved Lake Eloise, may be entitled to a refund of any overpayments; but he is not a party to this proceeding either. In a transferee proceeding, this Court has no jurisdiction to determine who is entitled to any overpayment of tax made by the transferor and we must therefore leave the parties where we found them on this issue.
Reviewed by the Court.
Decision will be entered under Rule 50.