Opinion
Docket Nos. 51226-51242.
Filed June 28, 1957.
1. Four corporations in which certain of the petitioners were stockholders were engaged in the business of subdividing tracts of land into lots and constructing and selling houses thereon. To procure the waterlines necessary to supply water for the houses so built and sold, the corporations, under contracts with the water company, paid the cost of the extension of the water company's lines into the various properties. For a period of 10 years from the date of completion of the waterlines, the water company agreed to make payments to the corporations based on a percentage of the gross revenue it would derive from the sale of water to the occupants of the houses sold, but in an amount not to exceed cost to the corporations for the running of the waterlines. All of the houses were completed and sold, and the 4 corporations distributed in dissolution the water company contracts to their stockholders. In reporting their gain upon the sales of the houses, the 4 corporations treated the cost to them of the waterlines as part of the cost of the houses sold, which treatment was disallowed by the respondent in the determinations herein. The stockholders, in reporting their gain upon dissolution of the corporations, attributed no value to the water company contracts distributed to them. The respondent determined that each of the contracts had a fair market value at the time of distribution and the amount thereof, and took such fair market value into account in determining the gain to the stockholders from the dissolution of the corporations. Held, that payments made by the corporations to the water company for the construction of the waterlines were properly included by corporations in computing the cost of the houses sold. Colony, Inc., 26 T.C. 30. Held, further, that at the time of distribution each of the water company contracts had a fair market value equal, at least, to the amount determined by the respondent, and the respondent properly took such fair market value into account in determining the gain realized by the stockholders upon receipt of the contracts.
2. Petitioner Albert Gersten and one Robbins had been the owners, in equal part, of the stock of a corporation, the assets of which they had received in equal shares upon its dissolution, and by reason thereof, Gersten and Robbins became liable as transferees of the said corporation for $44,721.60 in Federal taxes and interest thereon. In December 1947, Gersten paid $40,000 of the said sum and on April 5, 1949, paid the remaining $4,721.60, of which $1,261.13 represented interest. At the time of the final payment in April 1949, Robbins was insolvent, and Gersten in his 1949 return deducted the entire $4,721.60. The respondent in his determination of deficiency determined that the $4,721.60 paid by Gersten was paid one-half on his own account and one-half on Robbins's account; that the $2,360.80 paid on Robbins's account was a nonbusiness bad debt, deductible as a short-term capital loss under section 23 (k), I. R. C. 1939; that of the $2,360.80 paid on his own account, $630.57 was interest and deductible as such, and the remaining $1,730.23 was a long-term capital loss. Under authority of Putnam v. Commissioner, 352 U.S. 82, and Arrowsmith v. Commissioner, 344 U.S. 47, the respondent's determination is sustained.
3. On April 3, 1950, petitioner Lucille Gersten obtained a California interlocutory decree of divorce from petitioner Albert Gersten, which, under California law, did not become a final decree until April 3, 1951. On November 2, 1950, Albert Gersten obtained a final decree of divorce in Mexico and on that date married Bernice Anne Gersten in Mexico. He and Bernice filed a joint return for 1950; respondent determined they were not entitled to do so. Albert and Bernice Anne Gersten were at all times residents of California. Held, petitioner Albert Gersten and Bernice Anne Gersten were not entitled to file a joint return of income for 1950.
4. J. Richard Company, a California corporation incorporated on July 10, 1947, was engaged in the business of purchasing tracts of land which it subdivided into lots on which it constructed and sold houses. It dissolved on June 22, 1950. Lawrence Land Company was a California corporation incorporated on March 25, 1949. It dissolved on December 31, 1950. It also was engaged in the business of acquiring tracts of land which it subdivided into lots on which it constructed and sold houses. Petitioners Albert Gersten and Myron P. Beck owned all of the stock of J. Richard Company. They and Milton Gersten owned all of the stock of Lawrence Land Company. Held, the business of J. Richard Company was substantially similar to the trade or business engaged in by Lawrence Land Company during 1950, within the meaning of section 430 (e) (2) (B) (ii), I. R. C. 1939, and Lawrence Land Company was therefore in its fourth taxable year for purposes of such section in computing its excess profits tax liability for the fiscal period March 1, 1950, to December 31, 1950.
Jacob Shearer, Esq., for the petitioners.
George E. Constable, Esq., for the respondent.
The respondent determined income tax and transferee liability deficiencies against the petitioners herein as follows:
Such amount is the determined net deficiency in income tax imposed by sections 13 and 15 of chapter I, the gross deficiency in such tax of $15,202.94 being offset by an overpayment of excess profits tax imposed by section 430 of such chapter in the amount of $4,294.06. Union Telephone Co., 41 B. T. A. 152; cf. Will County Title Co., 38 B. T. A. 1396; Rowan Cotton Mills Co., 1 T.C. 865, affd. 140 F.2d 277, certiorari denied 322 U.S. 740; Pioneer Parachute Co., 4 T.C. 27; Difco Laboratories, Inc., 10 T.C. 660.
The petitioner transferees have conceded their liability as transferees in the amount of any deficiencies determined herein against the corporate petitioners in Docket Nos. 51230, 51233, and 51239. Petitioners Albert Gersten and Myron P. Beck have also conceded their transferee liability, determined in Docket Nos. 51237 and 51238, for such additional taxes as J. Richard Company, which is not a petitioner, should have been liable for, as may be determined herein. The parties agree that Ann H. Beck, the wife of Myron P. Beck and a petitioner in Docket Nos. 51232, 51235, 51238, and 51241, is not liable as a transferee of the corporate petitioners or of J. Richard Company.
The issues to be decided are (1) whether the corporate petitioners and another corporation, J. Richard Company, properly included payments to a water company for extending pipelines to certain subdivisions developed by them, in computing the cost of property sold, when such payments were repayable upon the happening of certain contingencies; (2) what value, if any, was attributable to the said repayment rights in determining the gain realized by the stockholders upon distributions to them in liquidation of the said corporations; (3) whether a payment in 1949 by petitioner Albert Gersten, in final satisfaction of the Federal income tax liability of a dissolved corporation, half of whose assets he had received upon dissolution, resulted in a fully deductible loss under section 23 (e) (2) of the Internal Revenue Code of 1939; (4) whether petitioner Albert Gersten and his alleged wife, Bernice Anne Gersten, were entitled to file a joint Federal income tax return for the year 1950; and (5) whether the business of J. Richard Company was "substantially similar to the trade or business" engaged in by petitioner Lawrence Land Company during the year 1950, within the meaning of section 430 (e) (2) (B) (ii).
See footnote 2, supra.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
During the years in issue, petitioners Albert Gersten and his wife, Lucille Gersten, and Myron P. Beck and his wife, Ann H. Beck, were residents of Los Angeles, California. Petitioners Milton Gersten and his wife, Mary Gersten, were residents of Whittier, California. All of the individual petitioners kept their books and reported their income on a cash basis. The corporate petitioners and another corporation, J. Richard Company, kept their books and filed their returns on an accrual basis. The returns of all petitioners and those of J. Richard Company were filed with the former collector of internal revenue for the sixth district of California.
Lucille Gersten secured an interlocutory decree of divorce in California from Albert Gersten on April 3, 1950. Albert Gersten secured a final decree of divorce from a Mexican court on November 2, 1950, and on that day, in Mexico, married Bernice Anne Gersten with whom he filed a joint return for 1950.
From July 1947 until the end of 1950, petitioners Albert Gersten and Myron P. Beck were the controlling stockholders of 4 corporations which were engaged in the business of subdividing tracts of land, constructing houses thereon, and selling such houses. Petitioner Milton Gersten was a stockholder in 2 of such corporations.
The extension of pipelines for water service was essential to the subdivision of the tracts and the sale of the houses constructed thereon. In order to provide water facilities for the subdivisions, contracts were entered into with the San Gabriel Valley Water Company, hereinafter referred to as San Gabriel, which agreed to extend its waterlines into the subdivisions in question, conditioned, however, upon payment by the subdividing corporations of the cost of such extensions. San Gabriel was a California water utility corporation, subject to the jurisdiction of the Public Utilities Commission of the State of California. It held a franchise to operate in the area in which the tracts in question were located. The minimum rate for water which San Gabriel charged during 1948, 1949, and 1950 was $1.25 per month.
Under the contracts, San Gabriel was to make payments to the subdividing corporations on the basis of its gross receipts from the sale of water to homes in the particular subdivision. The payments were to be made for a period of 10 years from the date the lines were completed, unless the full amount should be paid prior to the end of such 10-year period, and a subdividing corporation might or might not receive repayment in full. The corporations did not hold title to the facilities.
The 4 corporations were all dissolved by December 31, 1950. Substantial amounts of their payments to San Gabriel remained unpaid at the time of their dissolution, and such contracts, which were fully transferable, were assigned to their stockholders. Similar contracts to those here in issue were bought and sold, and, under normal conditions, approximately 70 per cent of the original payment might be expected on such contracts. Some of the conditions which affected the amount which might be refunded were: (1) The time in which all houses within a subdivision were completed; (2) the time within which the houses, once completed, were sold and occupied; and (3) the amount of water the consumers used, which in turn was dependent on such factors as the number of water-consuming appliances owned by them, weather conditions during the year, and the amount of plantings and vegetation needing irrigation.
In computing its gain for income tax purposes, each of the 4 corporations included the payments made to San Gabriel in arriving at the cost of the houses sold. The respondent determined that such payments should not have been so included.
Upon the dissolution of the corporations, Albert Gersten, Myron P. Beck, and Milton Gersten received all corporate assets, including the water contracts. They did not assign any value to their respective interests in such contracts, in arriving at the gain realized upon liquidation of the corporations. The respondent determined that each of the contracts did have a fair market value when they were received by the stockholders in liquidation, and on the basis thereof increased the amount of capital gain realized in his determination of deficiencies herein. Details of the contract which each corporation entered into with San Gabriel, and the manner in which such contracts were treated for tax purposes by both the corporations and the transferees of corporate assets, were as follows:
J. Richard Company. J. Richard Company, hereinafter referred to as Richard, was a California corporation, incorporated on July 10, 1947, and dissolved on or about June 22, 1950. Richard's stock was owned equally by Albert Gersten and Myron P. Beck. During the course of its existence, Richard acquired 3 tracts of land which it subdivided into lots on which it constructed and sold houses. On December 3, 1947, petitioner Albert Gersten, on behalf of Richard, entered into a contract with San Gabriel providing for the installation of waterlines to 2 of the 3 tracts. San Gabriel completed the installation of the waterlines on April 2, 1948. The contract provided for a payment to San Gabriel of $23,764, which sum was paid to it by Richard on or about the date on which the contract was entered into. San Gabriel agreed to repay such payment "in the amount of 1/3 of the gross revenues derived from sale of water to occupants of said subdivisions for a period not to exceed 10 years from date hereof."
On December 2, 1948, petitioner Albert Gersten, on behalf of Richard, entered into a similar contract with San Gabriel to provide water facilities for the third tract. The contract provided for the payment of $15,258, which amount was paid to San Gabriel by Richard on or about December 2, 1948. San Gabriel agreed to repay such payment in the amount of one-third of the gross revenue derived from the sale of water for a period not exceeding 10 years from the date of the contract.
At the time of Richard's dissolution, on June 22, 1950, San Gabriel had repaid $2,325.37 on the contract covering the first 2 tracts, and $1,277.69 on the contract covering the third tract. All of the houses constructed by Richard on the first 2 tracts had been sold by June 1, 1949, and all of the houses constructed by it on the third tract had been sold by February 3, 1950.
On its income tax return for the fiscal year ended June 30, 1949, Richard included $24,735.99 of its payments to San Gabriel in computing the total cost of houses sold by it during such year. On its return for the fiscal year ended June 30, 1950, it included $11,149.22 of the payments made to San Gabriel in computing the cost of houses sold by it during that year. In determining deficiencies against Albert Gersten and Myron P. Beck, as transferees of Richard for such years, the respondent disallowed the inclusion by Richard of payments to San Gabriel for the installation of water facilities, as being a part of the cost of houses sold by it.
Upon the dissolution of Richard on June 22, 1950, petitioners Albert Gersten and Myron P. Beck were each paid cash in the amount of $38,202.12, and received a 50 per cent interest in Richard's contracts with San Gabriel. They did not assign any value to the interest received in such contracts in computing the amount of capital gain realized on the dissolution of Richard. Respondent determined that such contracts had a fair market value of 50 per cent of the amount which remained unpaid on June 22, 1950, or $17,709.48, and accordingly increased the amount of capital gain realized by Gersten and Beck on Richard's distribution of its assets to them.
The contracts had a fair market value at the time of Richard's dissolution, equal, at least, to the amount determined by the respondent.
Whittier Development Company. Whittier Development Company, hereinafter referred to as Whittier, was a California corporation, incorporated on August 20, 1948, and dissolved on or about December 28, 1950. From February 28, 1950, to December 28, 1950, its stock was owned as follows:
Per cent
Albert Gersten ........................ 40 Myron P. Beck ......................... 40 Milton Gersten ........................ 20
During the course of its existence, Whittier acquired 2 parcels of land which it subdivided into lots on which it constructed and sold houses. In order to provide water facilities for such tracts, it entered into 2 contracts with San Gabriel. The first was dated November 29, 1949. Whittier agreed to and did pay, on or about that date, the sum of $23,841 to San Gabriel. San Gabriel agreed to repay such payment within 10 years from the date of the contract by payment of 35 per cent of the annual gross revenues derived from the sale of water. On March 10, 1950, Whittier entered into a second contract with San Gabriel providing for the installation of water facilities to the other tract which it owned. It paid San Gabriel the sum of $5,214. San Gabriel agreed to repay such sum within a 10-year period from completion of the installation of the facilities. Such repayment was to be made from 35 per cent of the gross revenues derived by it from the sale of water. Installation of the facilities was completed by April 14, 1950. By December 28, 1950, San Gabriel had repaid $1,413.02 on the first contract and $62.98 on the second. Whittier had sold all houses on the first tract by June 7, 1950, and on the second tract by December 15, 1950.
On the return which Whittier filed for the fiscal year ended February 28, 1950, it included $14,253.67 of the amount paid to San Gabriel under the first contract as a part of the cost of houses sold during such taxable year. In determining the deficiencies herein, the respondent disallowed the inclusion of such sum as a part of the cost of houses sold by Whittier.
The amount of the payments to San Gabriel included by Whittier in computing the cost of houses sold during the fiscal period March 1, 1950, to December 28, 1950, is not in issue, since respondent determined an overpayment of tax for such period.
Upon the dissolution of Whittier on December 28, 1950, petitioners Albert Gersten and Myron P. Beck each received the sum of $77,160.26 and a 40 per cent interest in each of Whittier's contracts with San Gabriel. Petitioner Milton Gersten received the sum of $38,580.13 and a 20 per cent interest in each of the contracts with San Gabriel. Albert Gersten, Beck, and Milton Gersten did not assign any value to the interest received in such contracts in computing the amount of capital gain realized on the dissolution of Whittier. Respondent determined that such contracts had a fair market value of 50 per cent of the amount which remained unpaid on December 28, 1950, or $14,545.50, and accordingly increased the amount of capital gain realized by Albert Gersten, Beck, and Milton Gersten on Whittier's distribution of its assets to them. Such contracts had a fair market value at the time of Whittier's dissolution, equal, at least, to the amount determined by the respondent.
Rex Land Company. Rex Land Company, hereinafter referred to as Rex, was a California corporation, incorporated on February 4, 1949, and dissolved on or about October 25, 1950. Its stock was equally owned by petitioners Albert Gersten and Myron P. Beck. Rex acquired a tract of land which it subdivided into lots on which it constructed and sold houses. On February 9, 1949, it entered into a contract with San Gabriel for the installation of waterlines to the tract. For the installation of such facilities, Rex agreed to and did pay to San Gabriel the sum of $14,707.20. San Gabriel agreed to repay such payment within a 10-year period from the date on which installation of the facilities was completed, which was April 22, 1949. Such repayment was to be made from 35 per cent of the gross revenues derived by it from the sale of water. By October 25, 1950, San Gabriel had repaid $949.02 of such sum. All of the houses constructed on the tract were sold by March 16, 1950.
On its income tax return for the period February 4, 1949, to January 31, 1950, Rex included $12,658.61 of the amount paid to San Gabriel as a part of the cost of houses sold by it during such period. On its return for the fiscal period ended October 25, 1950, it included $1,265.12 of such payment as a part of the cost of houses sold by it during such period. In determining the deficiencies herein, respondent disallowed the inclusion of such sums as a part of the cost of the houses sold.
Upon the dissolution of Rex on October 25, 1950, petitioners Albert Gersten and Myron P. Beck each received the sum of $1,158.84 in cash, a 50 per cent interest in certain real property having a fair market value of $215,350, and a 50 per cent interest in Rex's contract with San Gabriel. Gersten and Beck did not assign any value to the interest received in such contract in computing the amount of capital gain realized on the dissolution of Rex. Respondent determined that the contract had a fair market value of 50 per cent of the amount which remained unpaid on October 25, 1950, or $7,132.68, and accordingly increased the amount of capital gain realized by them on Rex's distribution of its assets to them. Such contract had a fair market value at the time of Rex's dissolution, equal, at least, to the amount determined by the respondent.
Lawrence Land Company. Lawrence Land Company, hereinafter referred to as Lawrence, was a California corporation, incorporated on March 25, 1949, and dissolved on or about December 31, 1950. The stock of the corporation was owned as follows:
Per cent
Albert Gersten ........................... 40 Myron P. Beck ............................ 50 Milton Gersten ........................... 10
Lawrence acquired a parcel of land which it subdivided into lots on which it constructed and sold houses. On January 26, 1950, it entered into a contract with San Gabriel for the installation of waterlines to the tract. Such contract was modified by a subsequent contract entered into on February 14, 1950. Under the contract, as modified, Lawrence agreed to and did pay to San Gabriel the sum of $31,021. San Gabriel agreed to repay such sum within a 10-year period from the date on which installation of the facilities was completed, which was March 29, 1950. Such repayment was to be made from 35 per cent of the gross revenue received from the sale of water to consumers. All of the houses which Lawrence constructed on the tract were completed and sold by December 11, 1950. On its return for the fiscal period March 1, 1950, to December 31, 1950, Lawrence included the sum of $31,021 paid to San Gabriel as a part of the cost of the houses sold. In determining the deficiencies herein, respondent disallowed the inclusion of the payment to San Gabriel. No repayments were paid by San Gabriel to Lawrence prior to Lawrence's dissolution on December 31, 1950; but payments commenced to be made on March 1, 1951. On December 31, 1950, Lawrence distributed to petitioner Albert Gersten the sum of $78,382.40, and an undivided 40 per cent interest in certain real property, which interest had a fair market value of $29,840, and a 40 per cent interest in the contract, as modified, with San Gabriel. It distributed to petitioner Myron P. Beck cash in the amount of $97,978, a 50 per cent interest in certain real property, which interest had a fair market value of $37,300, and a 50 per cent interest in Lawrence's contract with San Gabriel. It distributed to petitioner Milton Gersten the sum of $19,595.59, a 10 per cent interest in certain real property, which interest had a fair market value of $7,460, and a 10 per cent interest in the contract with San Gabriel. Albert Gersten, Beck, and Milton Gersten did not assign any value to the interest received in such contract in computing the amount of capital gain realized on the dissolution of Lawrence. Respondent determined that the contract had a fair market value of $15,301.96 on December 31, 1950, and accordingly increased the amount of capital gain realized by them on Lawrence's distribution of its assets to them. Lawrence's contract with San Gabriel had a fair market value at the time of its dissolution, equal, at least, to the amount determined by the respondent.
The trade or business of Richard was substantially similar to the trade or business of Lawrence.
Petitioner Albert Gersten and one Theodore Robbins each owned 50 per cent of the outstanding capital stock of a corporation, Homes Beautiful, Inc. Upon the dissolution of such corporation, each stockholder received assets in an amount exceeding $44,721.60. In a proceeding before this Court, Homes Beautiful, Inc., was adjudged liable for deficiencies in its income taxes. The amount of such deficiencies and interest thereon was $44,721.60. Petitioner Albert Gersten paid $40,000 of such sum in December 1947 as a transferee of the corporation's assets and the remaining $4,721.60 on April 5, 1949. Of such payment in 1949, $3,460.47 was applied by the collector to principal and $1,261.13 to interest. Theodore Robbins was insolvent on April 5, 1949.
On the joint return which Albert and Lucille Gersten filed for 1949, they deducted in full the $4,721.60 payment made in that year. The respondent determined that one-half of the total payment, in the amount of $2,360.80, was a payment on behalf of Theodore Robbins and was deductible as a nonbusiness bad debt under the provisions of section 23 (k) (4) of the Code of 1939; that $1,730.23 represented petitioner Albert Gersten's liability as a transferee of the assets of Homes Beautiful, Inc., and was deductible as a long-term capital loss; and that the remaining $630.57 was deductible by him as interest under section 23 (b).
On April 3, 1950, petitioner Lucille Gersten obtained an interlocutory decree of divorce from petitioner Albert Gersten in an action filed in the Superior Court of the State of California in and for the County of Los Angeles. On November 2, 1950, petitioner Albert Gersten obtained a final decree of divorce from Lucille Gersten in the First Civil Court of the State of Chihuahua of the Republic of Mexico, sitting at Juarez. On the same date he married Bernice Anne Gersten in Juarez. The California interlocutory decree was not final on the date of the Mexican divorce and marriage. At all times during the year 1950, petitioner Albert Gersten and Bernice Anne Gersten were residents and domiciliaries of the State of California.
OPINION.
The first issue raised in the proceedings is whether the payments which the 4 corporations, Richard, Whittier, Rex, and Lawrence, made to San Gabriel were properly included by such corporations in computing the cost of the houses which they constructed and sold. The respondent determined that the amounts paid to San Gabriel were not properly includible by the corporations in computing their cost of goods sold because all such payments were repayable. Petitioners, on the other hand, argue that the liability of each of the corporations to pay for the installation of the water facilities was fixed and absolute; and that despite whatever possibility there was of a repayment of part or all of the amounts paid, the payments were nonetheless properly includible in computing the cost of the houses sold.
In Colony, Inc., 26 T.C. 30, we had much the same question as here. There the corporate taxpayer, which was engaged in the business of subdividing tracts of land and selling lots, made payments to utility companies for the installation of gas and electric service under contracts which called for the repayment of the amounts paid, such repayments to be made by payment of a specified amount for each new customer who purchased service from the gas company's mains or connected to the electric company's lines. The repayments were to be made only for a period of either 5 or 10 years from the date of the contract. The Commissioner took the position that the taxpayer was not entitled to include any part of the payments so made to the utility companies as a part of the cost of the lots which it sold during the taxable years, because of the possibility that all or a part of such payments might be repaid. We concluded that the determining factor was that the taxpayer had made unconditional payments to the utility companies in order to obtain service from them for the purchasers of its lots. We held that the payments were thus closely related to the sale of the lots and that the taxpayer's income from such sales would be more clearly reflected if a pro rata portion of the payments which it made to the utility companies was included in its basis for determining the gain or loss on each lot sold.
Colony, Inc., was affirmed 244 F.2d 75, but there was no appeal on the comparable question herein.
We see no distinguishing difference in that case and the one before us here. It is true that there the repayments were measured by a fixed sum to be paid for each new customer who purchased service from the utility companies, while here the payments depended upon the amount of water sold by San Gabriel in the various subdivisions. But in both cases the controlling facts were that the corporations made unconditional payments to provide utility service for the subdivisions, and such payments were directly related to the property sold. We therefore conclude that the payments which the 4 corporations here made were a proper item to be included in computing the cost of the property which they sold.
The second issue is whether each of the water contracts which petitioners Albert Gersten, Milton Gersten, and Myron P. Beck received from the corporations upon their dissolution had a fair market value at that time. The individual petitioners did not report any value for such contracts in computing the amount of gain realized by them upon the distribution of corporate assets. The respondent determined that each contract had a fair market value, and accordingly increased the amount of gain reported by the individual petitioners from the distribution of such assets to them.
The petitioners contend that the contracts had no ascertainable fair market value at the time the corporations were dissolved, and citing Burnet v. Logan, 283 U.S. 404; Westover v. Smith, 173 F.2d 90; and Commissioner v. Carter, 170 F.2d 911, affirming 9 T.C. 364, argue that the distribution in liquidation did not as to those contracts result in closed transactions and, as a consequence, that no amounts were to be attributed to the contracts at the times of liquidation, but that the payments from San Gabriel subsequent to the dissolutions were to be reported as capital gains as received.
The evidence shows that each of the contracts did have a fair market value at the time the corporations were dissolved, and we have so found. None of the contracts were as much as 3 years old at the time of distribution, and the payments under them had commenced on all except the Lawrence contract. They began on that one shortly thereafter. All houses had been completed and sold by the time each corporation dissolved. Expert witnesses testified that contracts, similar to those here, were bought and sold, and that one might expect to receive as much as 70 per cent of the total original payment on such similar contracts. There was testimony to the effect that a proposed freeway would cross the subdivision developed by Lawrence. No showing, however, was made that the plans for the freeway route were final, or, if adopted, the extent to which the occupancy of the houses within the area would be affected during the repayment period. Neither was there any showing that petitioners would or would not have a claim for compensation, if and when their rights to repayment might be destroyed as a result of the building of the freeway.
The record, in our opinion, amply sustains the respondent in his determination of fair market value, and we have so found in our Findings of Fact.
In Westover v. Smith, supra, and Commissioner v. Carter, supra, the facts were that contractual rights received upon the dissolution of the corporation had no ascertainable fair market value. Here the facts are otherwise. See Pat O'Brien, 25 T.C. 376.
The third issue is as to the deductibility of $4,721.60 paid by Albert Gersten in 1949, in satisfaction of Federal tax liabilities of Homes Beautiful, Inc., a dissolved corporation, of which he had owned 50 per cent of the capital stock and had received 50 per cent of the assets in liquidation. The remainder of the stock had been owned by Theodore Robbins, who likewise had received 50 per cent of the assets of the corporation upon liquidation. The payment of $4,721.60 represented a final payment by Gersten, as transferee, of tax and interest owing by Homes Beautiful, Inc. He had previously paid $40,000 in 1947, and presumably had not been reimbursed by Robbins for any part thereof. It is stipulated that Robbins was insolvent at the time of the final payment in 1949.
On the joint return filed by Albert and Lucille Gersten for 1949, they deducted the above $4,721.60 in full. The respondent in his determination treated the payment as having been made by Gersten, one-half for his own account and the remainder for the account of Robbins. He further determined that the $2,360.80 treated as having been paid on behalf of Robbins was a nonbusiness bad debt, deductible as a short-term capital loss under section 23 (k) (4) of the Internal Revenue Code of 1939. Of the $2,360.80 treated as having been paid by Gersten on his own behalf, he allowed in full the deduction of $630.57, as representing one-half of the amount which was interest. The remaining $1,730.23 was determined to have been a long-term capital loss under the provisions of section 117 and subject, for deduction purposes, to the limitations of that section.
Taking the position that Robbins had contributed no amount to the tax payments made as transferee of Homes Beautiful, Inc., and relying on Fox v. Commissioner, 190 F.2d 101, reversing 14 T.C. 1160, and Pollak v. Commissioner, 209 F.2d 57, reversing 20 T.C. 376, it is the petitioner's contention that as a guarantor he had been called upon to pay the principal obligation of an insolvent debtor, and that the resulting loss, under the cases cited, was a loss incurred in a transaction entered into for profit, within the meaning of section 23 (e) (2), and as such, was deductible in full. On brief, the respondent now takes the position that the entire $4,721.60 is to be regarded as having been paid by Gersten for his own account, that $1,261.13 of the amount paid was interest, deductible by Gersten in full, and under Arrowsmith v. Commissioner, 344 U.S. 47, the remaining $3,460.47 was a long-term capital loss, which, for purposes of deduction, is subject to the limitations thereon.
That the Fox and Pollak cases do not represent sound law has recently been settled by the Supreme Court in Putnam v. Commissioner, 352 U.S. 82, and it follows that petitioner's claim that the loss sustained upon the payment in 1949 was a loss incurred in a transaction entered into for profit under section 23 (e) (2) is not well taken. It also follows, from the pronouncements of the Supreme Court in the Putnam case, that such portion of the payment as was made by Gersten on behalf of Robbins, and for which he had a claim against Robbins, was a nonbusiness bad debt, deductible as a short-term capital loss under section 23 (k) (4).
As to that portion of the payment which represented a satisfaction of Gersten's own liability as transferee of Homes Beautiful, Inc., Arrowsmith v. Commissioner, supra, is controlling, and the loss sustained was a long-term capital loss.
Whether or not the 1949 payment was in total amount a payment on Robbins's behalf, as petitioner contended in seeking application of section 23 (e) (2), or represented payments on behalf of both Gersten and Robbins in equal amounts, as the respondent determined, presents a question more difficult of solution. We are not advised as to the circumstances relating to the payment of the $40,000 in 1947. The record does not show whether it was made by Gersten with or without some understanding between him and Robbins. We are only advised that he paid the full $40,000 in 1947, and that at the time of making the final payment in 1949, Robbins was insolvent. The record being as it is, we have found no sound basis for disturbing the respondent's determination herein, under which he treated one-half of the $4,721.60 as having been paid by Gersten for his own account and the other half on account of Robbins. The respondent's determination is accordingly sustained.
The fourth issue is whether petitioner Albert Gersten, and Bernice Anne Gersten, whom he married at Juarez, Mexico, in 1950, were entitled to file a joint income tax return for such year. The respondent has determined that Albert Gersten was not legally married to Bernice Anne Gersten during 1950 and that they therefore were not entitled to file a joint return as husband and wife, as permitted by section 51 (b) of the 1939 Code.
SEC. 51. INDIVIDUAL RETURNS.
(b) HUSBAND AND WIFE. —
(1) IN GENERAL. — A husband and wife may make a single return jointly. Such a return may be made even though one of the spouses has neither gross income nor deductions. If a joint return is made the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several.
Albert Gersten contends, first of all, that the respondent has neither the function nor the right to challenge the validity of the marriage relationship. We think that argument without merit. Section 51 (b) provides that a husband and wife may make a single return jointly. Obviously, the respondent has not only the right but the duty of determining whether a man and woman who file a joint return are, in fact, legally married and entitled to file such a return under the provisions of the statute. This was made clear in Marriner S. Eccles, 19 T.C. 1049, affd. 208 F.2d 796; and Commissioner v. Ostler, 237 F.2d 501, affirming T. C. Memo. 1955-207.
We said, in Marriner S. Eccles, supra, that marriage, its existence, and dissolution, is particularly within the province of the States. Hence, we look to the law of the State of California, the residence and domicile of both Albert Gersten and of Bernice Anne Gersten, to determine if a valid marriage existed between them on December 31, 1950.
Albert Gersten has shown that his second marriage in Mexico was formally solemnized. Under California law, upon such a showing, a second marriage is presumed legal and the former marriage is presumed dissolved. Such presumption, however, is overcome by evidence showing that the former spouse was living and that neither a divorce nor an annulment was ever procured. Goff v. Goff, 52 Cal.App.2d 23, 125 P.2d 848; Clendenning v. Parker, 69 Cal.App. 685, 231 P. 765. No suggestion was made here that Lucille Gersten was not living on the date of Albert's marriage to Bernice, and we know that the California interlocutory decree which she obtained had not become final on that date.
Section 150.1 of the Civil Code of California provides:
Sec. 150.1 Foreign divorce of parties domiciled in state; effect
A divorce obtained in another jurisdiction shall be of no force or effect in this State, if both parties to the marriage were domiciled in this State at the time the proceeding for the divorce was commenced.
Under California law, actual domicile is necessary to give a court jurisdiction for divorce proceedings, and where there is no domicile there can be no valid divorce. In re McNutt's Estate, 36 Cal.App.2d 542, 98 P.2d 253. The State of California was a legitimate party involved in any divorce proceedings between Albert and Lucille Gersten, and its courts have sole and exclusive jurisdiction over the marriage status of those domiciled within its boundaries, as all three parties here concerned were. Foreign divorce decrees obtained on assumed residence are not in good faith and are open to attack in the State of true matrimonial domicile. Kegley v. Kegley, 16 Cal.App.2d 216, 60 P.2d 482; Roberts v. Roberts, 81 Cal.App.2d 871, 185 P.2d 381. The divorce which Albert obtained in Mexico therefore was of no force and effect in California, since it was obtained through assumed residence. In re Davis' Estate, 38 Cal.App.2d 579, 101 P.2d 761.
The Civil Code of California, section 61, provides:
Sec. 16. Bigamous and polygamous marriages; exceptions, absentees
A subsequent marriage contracted by any person during the life of a former husband or wife of such person, with any person other than such former husband or wife, is illegal and void from the beginning, unless:
1. The former marriage has been annulled or dissolved. In no case can a marriage of either of the parties during the life of the other, be valid in this state, if contracted within one year after the entry of an interlocutory decree in a proceeding for divorce. [Emphasis added.]
We think it clear, under the express provisions of the California Code, that Albert and Bernice, who were both residents of the State throughout 1950, were in no position to marry until such time as Albert became finally divorced from his wife, Lucille. The marriage between Albert and Bernice was specifically prohibited by section 61, and void from the beginning. In re Elliott's Estate, 165 Cal. 339, 132 P. 439; In re Gregorson's Estate, 160 Cal. 21, 116 P. 60; Parmann v. Parmann, 56 Cal.App.2d 67, 132 P.2d 851; People v. Little, 41 Cal.App.2d 797, 107 P.2d 634; Vickers v. State Bar of California, 32 Cal.App.2d 247, 196 P.2d 10.
We therefore conclude that the respondent correctly determined that petitioner Albert Gersten and Bernice Anne Gersten were not legally married on December 31, 1950, and were not entitled to file a joint Federal income tax return for such year.
The fifth and final issue raised herein is whether the business of J. Richard Company was substantially similar to the trade or business of Lawrence Land Company, within the meaning of section 430 (e) (2) (B) (ii) of the 1939 Code, for purposes of computing its excess profits tax liability for its fiscal period March 1, 1950, to December 31, 1950.
SEC. 430. IMPOSITION OF TAX.
(e) NEW CORPORATIONS. —
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(2) FIRST FIVE TAXABLE YEARS. — For the purpose of this subsection —
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(B) The taxpayer shall be considered to have been in existence and to have had taxable years for any period during which it or any corporation described in any clause of this subparagraph was in existence, and the taxpayer shall be considered to have commenced business on the earliest date on which it or any such corporation commenced business:
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(ii) Any corporation if a group of not more than four persons who control the taxpayer at any time during the taxable year also controlled such corporation at any time during the period beginning twelve months preceding their acquisition of control of the taxpayer and ending with the close of the taxable year; but only if at any time during such period (and while such persons controlled such corporation) such corporation was engaged in a trade or business substantially similar to the trade or business of the taxpayer during the taxable year. For the purpose of this clause, the term "control" means the ownership of more than 50 per centum of the total combined voting power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock. A person shall not be considered a member of the group referred to in this clause unless during the period referred to in this clause he owns stock in such corporation at a time when the members of the group control such corporation and he owns stock in the taxpayer at a time when the members of the group control the taxpayer. For the purpose of this clause, the ownership of stock shall be determined in accordance with the provisions of section 503, except that constructive ownership under section 503 (a) (2) shall be determined only with respect to the individual's spouse and minor children.
Section 430 imposed an excess profits tax on the income of corporations for each taxable year ending after June 30, 1950, and beginning before January 1, 1954. Subsection (e) of such section imposed a lesser rate of tax in the case of corporations which commenced business after July 1, 1945, and whose fifth taxable year ended after June 30, 1950.
The rates of tax so provided were as follows: First and second year, 5 per cent; third year, 8 per cent; fourth year, 11 per cent; fifth year, 14 per cent. For purposes of determining a corporation's years of existence, the subsection provided that, to the actual number of years which a new corporation had been in existence, there was to be added the years prior to its incorporation in which any other corporation had been in existence, if such old corporation was engaged in a trade or business substantially similar to the trade or business of the new corporation, and if such old corporation was controlled by not more than four persons who also controlled the new corporation. Lawrence Land Company was incorporated on March 25, 1949, and dissolved on December 31, 1950. In computing its excess profits tax liability under section 430, it claimed that it was a second year corporation within the meaning of the statute. J. Richard Company was incorporated on July 10, 1947, and dissolved on June 22, 1950. Respondent determined that since Albert Gersten and Myron P. Beck owned all of its stock, and since they and Milton Gersten owned all of Lawrence's stock, and since J. Richard Company's business was substantially similar to that of Lawrence, that the years of J. Richard Company's existence prior to the incorporation of Lawrence must be added to those of Lawrence for the purposes of section 430 (e) (2) (B) (ii), and that Lawrence was therefore in its fourth taxable year rather than its second.
We think the respondent's determination was correct. Obviously, both corporations were engaged in the subdividing of tracts of land and in the construction and sale of houses, which we are satisfied was substantially the same "trade or business" within the meaning of the statute. The petitioner attempts to find support for a contrary conclusion in the language of the report of the Senate Committee on Finance, S. Rept. No. 781, 82d Cong., 1st Sess. (1951), p. 73. The report states:
These special ceiling rates available to new corporations in their period of development are not to be available to new corporations created as the result of either a tax-free reorganization or a taxable transaction of the type where, under your committee's action, the purchasing corporation would be entitled to base its income credit on the earnings experience of the predecessor. Your committee believes that such corporations do not truly represent "new business." * * *
It further states, however, "They [special ceiling rates] are also denied new corporations which are controlled by persons owning an old corporation engaged in the same business through old corporations." We think the language of the statute itself so clear that no resort need be had to its history in interpreting what it means. But certainly the committee report above referred to does not support a result contrary to the one which we reach here. The businesses of the two corporations were not only similar, but, to our way of thinking, identical. We conclude that the respondent correctly determined that Lawrence Land Company was in its fourth taxable year within the meaning of the statute.
Decisions will be entered under Rule 50.