Murphy v. Commissioner
This text of 1962 T.C. Memo. 219 (Murphy v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Memorandum Findings of Fact and Opinion
FAY, Judge: The respondent determined deficiencies in the petitioners' income taxes, as follows:
| Year | Amount |
| 1952 | $8,670.52 |
| 1953 | 6,025.78 |
| 1954 | 6,385.38 |
Findings of Fact
Some of the facts are stipulated and are found as stipulated.
The petitioners are husband and wife, residing at Oswego, Oregon. They filed their joint income tax returns for the years involved with the district director of internal revenue for the District of Oregon. The wife is a party solely by reason of her participation in the joint returns. Therefore, the term "petitioner" will be used to refer to Paul F. Murphy.
In 1951 petitioner and Henry Kuckenberg desired to purchase the Medical-Dental Building, an office building located at 833 S.W. 11th Avenue, Portland, Oregon. This building was the principal*94 asset of the H.S. & D. Investment Company, a corporation owned by persons unrelated to the petitioner and Kuckenberg.
The petitioner and Kuckenberg reached a tentative agreement with the owners of H.S. & D. for the purchase of the building. It was contemplated that the major portion of the funds needed for the purchase would be obtained through a mortgage on the building placed with the Massachusetts Mutual Life Insurance Company.
However, shortly prior to the time set for closing the sale, the stockholders of H.S. & D. were advised by their attorneys that it would be greatly to their advantage to sell their stock rather than to cause the corporation to sell the building. They accepted this advice and decided to sell only the stock.
As a result, the petitioner and Kuckenberg were required to find some other means of financing their purchase. The petitioner obtained most of his share of the purchase price by getting a loan from the United States National Bank.
On or about June 4, 1951, therefore, the petitioner and Kuckenberg acquired for $942,500 all of the stock of H.S. & D., each having an equal interest in it. On or about July 6, 1951, H.S. & D. mortgaged the building to*95 the Massachusetts Mutual Life Insurance Company and received a loan of $800,000. For the purpose of this loan the building was appraised at a value of $1,250,000 and $800,000 was the maximum amount the insurance company would lend on a building of this value. A portion of the proceeds of this loan ($46,482.88) was used to discharge a prior mortgage on the building.
On July 10, 1951, H.S. & D. was liquidated and the assets, primarily the building and the remaining proceeds of the loan, were distributed to the petitioner and Kuckenberg. The remaining proceeds of the mortgage loan were used to repay a large part of the sums borrowed to finance the purchase of the H.S. & D. stock. However, this sum was not sufficient to repay all of the monies borrowed by the petitioner for the stock purchase.
The building was operated by the petitioner and Kuckenberg as a partnership from July 11, 1951, to August 31, 1951.
On September 1, 1951, the petitioner formed Murco, Inc., a corporation organized under the laws of the State of Oregon. He transferred to it his interest in the Medical-Dental Building and in return took a negotiable promissory note in the amount of $50,000 and all of the capital*96 stock of Murco except for qualifying shares. Although the petitioner's equity in the building had a fair market value of $225,000 at the time it was transferred to Murco, it was recorded on the books of Murco at a value of $94,572.68, a figure apparently obtained by valuing the building at its adjusted basis for Federal income tax purposes.
The capital stock of Murco consisted of 5000 shares of common stock having a par value of $1 per share. Therefore, $5,000 was assigned to the capital stock account on the books of Murco. The amount of $39,572.68 was assigned to the paid-in surplus account.
The $50,000 note was payable in annual installments of not less than $5,000. Interest was to be paid on deferred balances at the rate of 5 percent per annum.
The petitioner transferred his interest in the Medical-Dental Building to Murco because he believed, for business reasons, that it would be preferable to operate his share of the building in corporate form and because he hoped to avoid certain estate problems should either of the partners die. He took the note for $50,000 from Murco rather than additional capital stock because he continued to owe some of the money he borrowed at the*97 time he purchased the H.S. & D. stock and wished to be in a position to take money from the corporation without impairing its capital to make payments on the loan even if the corporate earnings and profits were not sufficient to allow the payment of a dividend.
Murco did pay interest on the unpaid balance of the sum due under the note at the rate of 5 percent per annum, as follows:
| Date Paid | Amount |
| August 31, 1952 | $ 2,262.25 |
| August 31, 1953 |