DocketNumber: Docket No. 731-62
Citation Numbers: 40 T.C. 506, 1963 U.S. Tax Ct. LEXIS 103
Judges: Scott
Filed Date: 6/10/1963
Status: Precedential
Modified Date: 1/13/2023
Petitioners for 1955 reported on their Federal income tax return gain on the exchange of land for corporate stock and paid tax thereon. Upon receipt of a notice of deficiency for the year 1955 petitioners filed a petition in this Court alleging that the exchange was within the nonrecognition provisions of
*506 OPINION
Respondent determined a deficiency in petitioners' income tax for the calendar year 1956 in the amount of $ 6,452.19, and in his answer claimed an *104 increased deficiency in the amount of $ 357.38 making a total deficiency in controversy of $ 6,809.57.
The issue for decision is whether at the date of issuance of the notice of deficiency, the period within which respondent might determine a deficiency was open under the provisions of
All of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife residing in Oakland, Calif., filed a joint Federal income tax return for the calendar year 1956 with the district director of internal revenue at San Francisco, Calif.
*507 On March 4, 1955, Ralph E. Cotter, Jr. (hereinafter referred to as petitioner), and Lenore A. Meyer were titleholders of 25 acres of undeveloped farmland as tenants in common, each owning a one-half undivided interest. Petitioner's basis in his share of this land on March 4, 1955, was $ 21,023.08.
The land was deeded on March 4, 1955, to Glenhaven, Inc., a corporation, in exchange for 500 shares of stock of that corporation, petitioner and Meyer each receiving 250 shares. No cash was paid by the corporation to either petitioner or Meyer for, or in connection with, the transfer of *105 the land. Immediately following the exchange of the land for the stock, petitioner and Meyer were the owners of 80 percent of the issued shares of stock of Glenhaven, Inc., which shares possessed 80 percent of the total voting power of the corporation. The corporation carried the land on its books at a value of $ 100,000.
Petitioners filed an amended Federal income tax return for the year 1955, reporting thereon as long-term capital gain the difference between petitioner's basis in the land ($ 21,023.08) and the par value of the 250 shares of stock he received in the exchange ($ 50,000) and paid the tax on one-half of that amount.
On August 16, 1956, petitioner received the sum of $ 52,704.52 in exchange for the 235 shares of Glenhaven, Inc., stock that he still owned upon the complete liquidation of the corporation.
Petitioners on their 1956 Federal income tax return reported as long-term capital gain the difference between the amount petitioner received upon the liquidation of the corporation ($ 52,704.52) and petitioner's claimed basis in the shares of Glenhaven, Inc., stock he still owned upon that corporation's liquidation ($ 47,000), and paid tax on one-half of that amount.
The *106 basis of $ 47,000 claimed on petitioners' 1956 Federal income tax return for the Glenhaven, Inc., stock represented the per-share par value of the stock ($ 200) times the number of shares owned by petitioner (235).
On December 24, 1959, respondent mailed to petitioners a statutory notice of deficiency for the year 1955 determining that the gain realized on the 1955 exchange of land for stock was taxable as ordinary income. Petitioners filed a timely petition with this Court alleging that under the provisions of
On July 7, 1961, a
Assessment of a deficiency against petitioners for the taxable year 1956 was barred by
On February 9, 1962, respondent mailed the statutory notice of deficiency from which the petition herein was filed to petitioners. The 1956 deficiency in the amount of $ 6,452.19 determined in this notice resulted from increasing petitioner's long-term capital gain on the liquidation of Glenhaven, Inc., to the amount of $ 31,513.28. In computing the increased long-term capital gain respondent used as the basis of petitioner's shares of Glenhaven stock the amount of $ 22,543.88 which was stated to be petitioner's cost of the land and computed the basis of the 235 shares which petitioner surrendered on the liquidation to be $ 21,191.24. The increased deficiency claimed by respondent in his answer results from substituting for the amount shown in the notice of deficiency as the cost of petitioner's one-half interest in the land, the amount of $ 21,023.08 which the parties have stipulated to be petitioner's basis in the land on March 4, 1955. Petitioner does not contend that the adjustment made in respondent's answer is erroneous but contends that any deficiency for the year 1956 is barred by the statute of limitations.
It is respondent's position that under the *108 provisions of
The facts which we have set forth show that there was a decision of this Court with respect to petitioner's 1955 income tax liability. This decision, if it comes within circumstances listed in
Another circumstance made necessary by
The question then resolves itself to whether the item of income excluded from petitioners' 1955 income was "erroneously * * * omitted from the gross income" of petitioners for 1956. Petitioners argue that the item excluded in 1955 was gain on the exchange of land and that they had no gain on the exchange of land to be excluded in 1956. In 1956 petitioner's stock in Glenhaven, Inc., was redeemed *115 upon the liquidation of that corporation. Under section 302 such a redemption *511 is treated, for income tax purposes, as if the amount received were received on the sale or exchange of the stock. Petitioner on his 1956 income tax return omitted a portion of the gain on the exchange of his stock because of the erroneous inclusion in his 1955 income tax return of the gain on the exchange of the land causing him to use as a basis for the stock other than the basis of the land. Respondent argues that the stock is a substitute for the land and therefore, in effect, the item omitted in 1956 is gain on the exchange of land.
Petitioners argue that the redemption of his Glenhaven stock is an entirely separate transaction from the exchange of his land for the stock, and that even though an erroneous basis for this stock was used in their 1956 return, there is no item omitted from their income for that year which they erroneously excluded from their 1955 income.
The philosophy underlying the nonrecognition of gain upon the exchange of property for stock in a transaction which comes within the provisions of
1. All references herein are to the Internal Revenue Code of 1954 unless otherwise indicated.
(a) General Rule. -- If a determination (as defined in section 1313) is described in one or more of the paragraphs of
(b) Conditions Necessary for Adjustment. -- (1) Maintenance of an inconsistent position. -- Except in cases described in paragraphs (3)(B) and (4) of (A) in case the amount of the adjustment would be credited or refunded in the same manner as an overpayment under (B) in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under and the position maintained by the Secretary or his delegate in the case described in subparagraph (A) or maintained by the taxpayer in the case described in subparagraph (B) is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be.
The circumstances under which the adjustment provided in
* * * * (3) Double exclusion of an item of gross income. -- (A) Items included in income. -- The determination requires the exclusion from gross income of an item included in a return filed by the taxpayer or with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year * * *
2. Respondent does not contend that
3. In
On their 1955 income tax return, petitioners reported the difference between Ralph's basis in the land ($ 21,023.08) and the book value of the 250 shares of stock which he received in the exchange ($ 50,000) as long-term capital gain. The income tax paid by petitioners for the year 1955 was $ 44,329.50, of which $ 6,602.78 was attributable to the capital gain reported on the exchange of the land for the stock.
In the statutory notice of deficiency respondent determined that petitioners erroneously reported Ralph's gain on the transaction as long-term capital gain and that the gain "from the sale" of the land to the corporation was "taxable as ordinary income."
In their petition to this Court petitioners allege that under the provisions of
We agree with petitioners. The stipulated facts bring the exchange in the instant case squarely within the nonrecognition provisions of