SCOTUS Reports

Tag: Construction

  • Manassas Airport Industrial Park, Inc. v. Commissioner, 72 T.C. 588 (1979): Determining Collapsible Corporation Status and Taxable Income Realization

    Manassas Airport Industrial Park, Inc. v. Commissioner, 72 T. C. 588 (1979)

    A corporation may be deemed collapsible if it was availed of principally for construction with a view towards liquidation before realizing a substantial part of its taxable income.

    Summary

    In Manassas Airport Industrial Park, Inc. v. Commissioner, the Tax Court held that the petitioner was a collapsible corporation under section 341(b) of the Internal Revenue Code, thus precluding it from nonrecognition benefits under section 337(a). The case centered on the sale of real property and the allocation of road construction costs. The court determined that the petitioner engaged in continuous construction activities up to the point of liquidation, and only realized 9. 3% of its taxable income before the intent to liquidate, which was deemed not substantial. This ruling impacts how taxable income is computed for collapsible corporations and highlights the complexities of determining when construction ends for tax purposes.

    Facts

    Petitioner, Manassas Airport Industrial Park, Inc. , purchased the Hurst Farm in 1965 with the intention of developing and reselling the property. It subdivided the land and facilitated the construction of access roads, including a specific obligation to construct a road to the Powell property sold in April 1968. Discussions about potential liquidation started in March 1968, and a plan of liquidation was adopted in August 1968. The Commissioner assessed a deficiency in petitioner’s federal income tax, arguing that it was a collapsible corporation and had not realized a substantial part of its taxable income before liquidation.

    Procedural History

    The Commissioner determined a tax deficiency and the petitioner contested it. The case came before the U. S. Tax Court, which reviewed the issues of collapsible corporation status and the allocation of construction costs among the sold properties.

    Issue(s)

    1. Whether the petitioner was a collapsible corporation under section 341(b) when it adopted its plan of liquidation?
    2. If not a collapsible corporation, whether the petitioner sold its property in a bulk sale to one person in one transaction as per section 337(b)(2)?
    3. How should the cost of constructing the Powell property road be allocated among the properties sold?

    Holding

    1. Yes, because the petitioner was availed of principally for construction with a view towards liquidation before realizing a substantial part of its taxable income, which was only 9. 3%.
    2. The court did not reach this issue due to the affirmative answer to the first issue.
    3. The court allocated $35,000 of the road construction cost to the Powell property and the remainder to parcels P and Q, based on the benefits each property derived from the road.

    Court’s Reasoning

    The court applied section 341(b) to determine that the petitioner was a collapsible corporation because it engaged in continuous construction activities up to the point of liquidation. The construction of the Powell property road was considered to have commenced when the petitioner became obligated to absorb its cost, not when physical construction began. The court rejected the petitioner’s argument that construction had ended more than three years before the shareholders realized gain, citing that the construction obligation persisted. The court also computed the taxable income derived from the property, excluding unrelated interest income but including rental income and expenses, and determined that the 9. 3% realized before liquidation was not substantial. The court relied on previous cases such as Sproul Realty Co. and James B. Kelley to support its analysis of taxable income and collapsible corporation status.

    Practical Implications

    This decision clarifies that construction activities can be deemed continuous for tax purposes even if physical work has not yet started, as long as the corporation is obligated to undertake it. For legal practitioners, this means careful consideration of when construction begins and ends is crucial for determining collapsible corporation status. Businesses involved in real estate development must be aware of the tax implications of their development plans and liquidation intentions. Subsequent cases have cited Manassas for its approach to determining what constitutes a substantial part of taxable income and the broader interpretation of construction activities in the context of collapsible corporations.

  • Glickman v. Commissioner, 35 T.C. 820 (1961): Collapsible Corporations and the Timing of Intent

    Glickman v. Commissioner, 35 T.C. 820 (1961)

    The intention to collapse a corporation, for purposes of Section 117(m) of the 1939 Internal Revenue Code (collapsible corporation provisions), must exist during the construction of the property to render the corporation collapsible.

    Summary

    The case of Glickman v. Commissioner addresses whether a corporation was a “collapsible corporation” under Section 117(m) of the 1939 Internal Revenue Code. The central issue was the timing of the shareholders’ intent to sell their stock relative to the corporation’s construction of a shopping center. The Tax Court held that the shareholders’ intent to sell the stock arose before the completion of the shopping center’s construction, making the corporation collapsible, and therefore the shareholders’ gain on the stock sale was taxed as ordinary income, not capital gains. The court emphasized that the intention to collapse must exist during construction and that construction is not complete until the project is ready to earn net income.

    Facts

    Petitioners, the Glickmans, owned stock in a corporation formed to construct a shopping center. The corporation completed the physical structure of the shopping center by mid-December. However, a retaining wall and parking area still needed to be finished. The shareholders sold their stock, realizing a gain. The Commissioner determined that the corporation was “collapsible” within the meaning of Section 117(m) of the Internal Revenue Code of 1939, meaning the gain from the stock sale should be taxed as ordinary income and not capital gain. The Commissioner’s assessment was based on the contention that the shareholders formed the intention to sell their stock before the shopping center construction was completed.

    Procedural History

    The Commissioner of Internal Revenue determined that the gain from the sale of stock should be taxed as ordinary income under the collapsible corporation provisions of the 1939 Internal Revenue Code. The taxpayers, Glickman, contested the determination, leading to a case in the United States Tax Court. The Tax Court reviewed the facts to determine the timing of the intent to sell the stock and the completion of construction.

    Issue(s)

    1. Whether the Commissioner’s regulations, which require the intention to collapse the corporation must occur during “construction”, constitute a valid interpretation of section 117(m) of the 1939 Code?
    2. Whether, given the timing of construction and the shareholders’ intent to sell, the corporation was a “collapsible corporation” under section 117(m)?

    Holding

    1. Yes, the regulations are a valid interpretation of the statute.
    2. Yes, the corporation was a collapsible corporation because the decision to sell the stock was fixed no later than late November or early December, and the date of full completion was not earlier than January.

    Court’s Reasoning

    The court first addressed the validity of the Commissioner’s regulations defining when the intention to collapse the corporation must exist. The court determined that the regulations were a reasonable interpretation of the statute and should be given effect. The court emphasized that the intention to collapse must exist during construction and the word “construction” is not considered complete until the project is ready to begin earning a “substantial part” of the net income.

    The court then examined the factual question of when construction was completed and when the shareholders decided to sell the stock. The court found the decision to sell stock occurred before the shopping center was ready to earn a substantial part of its net income. The court found the date of full completion was not earlier than January and the intention to sell the stock was fixed before completion. The court considered the definition of construction and determined that it was not complete until the retaining wall and parking area were also completed. The court noted, “the project should not be considered constructed until it is in shape to begin to realize net income.” Because the sale occurred before a substantial part of the net income was realized, the corporation was deemed collapsible. The court rejected the petitioners’ argument that the Commissioner’s determination was arbitrary, finding the characterization of the situation was supported by the necessary supporting conclusions.

    Practical Implications

    This case highlights the importance of timing in determining whether a corporation is collapsible. It establishes that the intent to collapse must exist during the construction phase and that construction is not complete until the property is ready to generate income. The court’s emphasis on the practical impact of the construction suggests that factors that affect income generation, such as a parking lot, are important. For attorneys, this means carefully scrutinizing the sequence of events – when construction began and ended, when the intent to sell was formed, and when income started to flow. This case informs how to analyze fact patterns in tax planning, particularly when forming a corporation or structuring a sale of assets or stock. It also serves as a reminder of the importance of considering all activities, including those not directly related to the main structure, in determining the completion of construction.

  • Glickman v. Commissioner, 35 T.C. 820 (1961): Collapsible Corporations and the Timing of Intent

    Glickman v. Commissioner, 35 T.C. 820 (1961)

    To classify a corporation as “collapsible” under Section 117(m) of the 1939 Internal Revenue Code, the intention to engage in a transaction like the sale of stock must exist during the construction phase of the project undertaken by the corporation, and construction is not complete until the project is ready to generate net income.

    Summary

    The case of Glickman v. Commissioner deals with the application of the collapsible corporation provisions of the Internal Revenue Code. The issue was whether the taxpayer’s gain from the sale of stock in a corporation that constructed a shopping center should be taxed at ordinary income rates because the corporation was “collapsible.” The Tax Court held that the intent to sell the stock existed during the construction phase and before the realization of substantial net income. Thus, the corporation was “collapsible” and the gain was taxed at ordinary income rates, affirming the Commissioner’s determination. The case emphasizes the importance of the timing of the taxpayer’s intent, relative to the construction phase of the project, for determining whether a corporation is collapsible.

    Facts

    The taxpayers, Glickman, owned stock in a corporation that constructed a shopping center. The corporation was formed for the construction of the shopping center. Before the corporation realized substantial income from the shopping center, the stockholders decided to sell their stock. Construction of the shopping center was substantially completed by mid-December, but a retaining wall and parking area were not completed until January. The taxpayers sold their stock in March 1950. The Commissioner of Internal Revenue determined that the gain from the sale of the stock should be taxed as ordinary income under Section 117(m) of the 1939 Internal Revenue Code, which deals with collapsible corporations.

    Procedural History

    The case was heard in the United States Tax Court. The Tax Court agreed with the Commissioner and ruled that the corporation was collapsible, and the gains from the sale of the stock should be treated as ordinary income. The case was reviewed by the entire court.

    Issue(s)

    1. Whether the Commissioner’s regulations regarding the timing of the intent to collapse the corporation during construction, were a valid interpretation of Section 117(m) of the 1939 Internal Revenue Code.
    2. Whether, under the facts, the intention to sell the stock originated before the completion of construction.

    Holding

    1. Yes, the regulations were a valid interpretation.
    2. Yes, the intention to sell the stock originated before the completion of construction.

    Court’s Reasoning

    The court first addressed the validity of the Commissioner’s regulations, which required that the intent to collapse the corporation must exist during the construction period. The court found that these regulations were a reasonable interpretation of the statute. The court reasoned that the regulations allowed for the flexibility needed to fulfill the legislative purpose of taxing as ordinary income the gains from certain transactions that the statute was aimed at. The court held that the word “construction” in the regulation included all periods until the project was ready to generate net income. The court then determined that the intention to sell the stock occurred before the shopping center was fully operational and earning income.

    The court stated, “The statute is concerned with the realization of ‘net income from the property.’ It aims at a situation where, before a substantial part of that net income has been realized, the individual stockholders take action designed to result only in capital gain.”

    The court found that the intention to sell the stock was formed no later than December. The court held that construction was not complete until all integral parts of the project were finished, which, in this case, was not until January, when the retaining wall and parking area were completed and ready to be used.

    Practical Implications

    This case illustrates the importance of timing in determining whether a corporation is collapsible. The court’s emphasis on the completion of construction and the point at which net income is realizable is critical. This case informs how courts will analyze similar cases. Legal practitioners must carefully document the dates relevant to both the construction project’s progress and the formation of the intent to collapse the corporation. The case is still relevant to the current version of the collapsible corporation rules, found in Section 341 of the Internal Revenue Code. Understanding the definition of construction, which extends to all actions before the project can generate income, is essential. Finally, the case highlighted the need to analyze the subjective intent of the taxpayer within the context of objective facts, which is a central theme in all tax cases involving intent. Later cases have cited Glickman to support the timing rules, demonstrating its continuing importance in tax law.

  • Paul v. Commissioner, 20 T.C. 663 (1953): Determining the Holding Period for a Newly Constructed Building

    20 T.C. 663 (1953)

    For tax purposes, the holding period of a newly constructed building begins upon its completion, not from the date of land acquisition or the commencement of construction contracts.

    Summary

    The petitioner, Paul, sold an apartment building shortly after its construction. The IRS argued that the profit from the sale should be taxed as ordinary income rather than as a capital gain, as the building was not held for more than six months. The Tax Court agreed with the IRS, holding that the holding period for the building commenced upon its completion. Since the building was sold within six months of completion, the gain was taxable as ordinary income. The court emphasized that for tax purposes, buildings and land are treated separately, and the holding period of the building itself begins when it is complete and ready for use.

    Facts

    The petitioner constructed an apartment building, intending to rent the apartments. He did rent them out. The building was sold shortly after construction. The petitioner reported rental income and claimed operating expenses related to the building. The petitioner argued that the holding period of the building began when he entered into construction contracts.

    Procedural History

    The Commissioner of Internal Revenue determined that the gain from the sale of the apartment building should be taxed as ordinary income, not as a capital gain. The petitioner appealed this determination to the Tax Court.

    Issue(s)

    1. Whether the apartment building constituted property “used in his trade or business” under Section 117(a)(1)(B) of the Internal Revenue Code.
    2. Whether the holding period of a newly constructed building, for capital gains purposes, begins when construction contracts are signed or upon completion of the building.

    Holding

    1. Yes, because the petitioner constructed the building with the intention of renting the apartments, and he did rent them out, demonstrating that the building was being used in his trade or business.
    2. No, because the holding period begins only when the building is complete, as the taxpayer cannot “hold” something that does not yet exist.

    Court’s Reasoning

    The court reasoned that the petitioner was engaged in the trade or business of renting apartments. The fact that he had another primary business was irrelevant. Regarding the holding period, the court cited McFeely v. Commissioner, stating that “to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding.” The court found that the petitioner did not “acquire” the building until it was completed. The court explicitly rejected the argument that the holding period began when the construction contracts were signed, as the building did not exist at that time. The court also referenced Helen M. Dunigan, Administratrix, 23 B. T. A. 418, noting the established principle that land and buildings are treated separately for federal tax purposes.

    Practical Implications

    This case provides a clear rule for determining the holding period of newly constructed buildings for tax purposes. It clarifies that the holding period starts upon completion of the building, not from earlier events like land acquisition or signing construction contracts. This is particularly relevant for developers and real estate investors who frequently sell properties shortly after construction. This ruling emphasizes the importance of tracking the completion date of construction projects to accurately determine capital gains tax liabilities. Later cases and IRS guidance have consistently followed this principle, solidifying the distinction between the holding period of land and the holding period of improvements made to that land.