Citations
- 335 F.2d 680
Full opinion text
KALODNER, Circuit Judge,
The issue presented is whether gains-realized by the taxpayer 2in 1951 and 1952 from the sale of his stock in two* corporations, Parkway House, Inc. (“Parkway”) and Raleigh Construction; Company (“Raleigh”) were taxable as ordinary income pursuant to section 117 (m) of the Internal Revenue Code of 1939, relating to collapsible corporations.
The stipulated facts, found by the Tax Court, may be summarized as follows:
Taxpayer’s principal occupation is that of „r, a “Builder . In 1949 he had been as- . , . ... T „ . . sociated with E. J. Frankel (“Frankel”) . , .... „ , , . . m the building of an apartment project in Collingswood, New Jersey. Frankel had supervised the actual construction of that project and taxpayer had arranged for the Federal Housing Administration (“FHA”) commitment. Thereafter, in January, 1950, Frankel was instrumental in organizing Parkway for the purpose of constructing a luxury apartment house in Philadelphia, and because of his earlier successful association with taxpayer he permitted taxpayer to participate in this project. On October 18, 1950, taxpayer purchased for $750 a 30% interest in Parkway, receiving 75 shares of $10 par value stock out of the corporation’s authorized capital of 250 shares. Parkway was initially financed by means of a conventional mortgage and taxpayer s special ability and knowledge with respect to FHA mortgages was not required.
After the actual construction of the project was approximately 50% completed, Frankel determined that certain improvements in the building were desirable, including complete air-conditioning. He advised taxpayer that the project would cost approximately $700,-000 more than the invested capital and mortgage proceeds and an additional investment on the part of the shareholders would therefore be required. Taxpayer was not in a position to advance the additional funds, nor did he desire to do so. Frankel then informed taxpayer that he had contacted two people who were willing to advance a portion of the needed funds on the condition that they obtain an equity interest in the corporation, On August 29,1951, at about the time the .project was 50% complete, taxpayer sold .his 75 shares in Parkway for $45,000. Frankel did not sell his interest in Park- . ,. „.. . , , , way. On his 1951 income tax return tax-17 , , . OI_A . ,, . payer reported $44,250 gam on the sale ’ ... of his stock as long-term capital gam. 6 ^
. About one month a^ter the organizaNon Parkway, Raleigh was organized un