an exemption for Sarah as a dependent and not as his wife. Section 152 is devoted to the definition of a "dependent" as that term is used in section 151(e). The exemptions for a "spouse" are separately dealt with in section 151 (b), (c), and (d). Section 152 makes no mention of a "wife" or "spouse." Sarah was clearly not a dependent under section 152 since the record discloses that petitioner and Sarah were living together in violation of the law, Leon Turnipseed, 27 T.C. 758 (1957). Decision will be entered for the respondent. 1 SOUTHWEST PROPERTIES, INC., ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL Revenue, Respondent. Docket Nos. 76036-76040, 76149. Filed April 20, 1962. 1. Southwest Properties, Inc., was incorporated in October of 1954, and in November following purchased an office building and parking lots adjacent thereto. In 1955, it expanded its parking area by the purchase and conversion of two adjoining lots into further parking space. Southwest was organized for the purpose of acquiring, owning, and operating the properties in question for the production of income. The properties were not acquired for resale and several offers and feelers looking to their purchase were rejected. Security Bank, of which two of Southwest's organizers were directors and one was president, had outgrown its existing main office facilities and in September of 1955, began a search for a desirable location. After considering other sites, the bank settled on the Southwest properties as the preferred location. The owners of Southwest resisted the proposal to purchase, but yielded to the persuasion by the bank and on April 4, 1956, Southwest granted an option for the purchase of its properties, which purchase was completed on October 1, 1956. On July 23, 1956, Southwest adopted a plan of complete liquidation, and pursuant to the plan distributed all of its assets to its stockholders on or before November 14, 1956. SEC. 152. DEPENDENT DEFINED. (a) GENERAL DEFINITION.-For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) as received from the taxpayer): (9) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 153, of the taxpayer) who, for the taxable year of the taxpayer, has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household, ✦ ✦ (b) RULES RELATING TO GENERAL DEFINITION.-For purposes of this section (5) An individual is not a member of the taxpayer's household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law. Dewsbury v. United States, 137 Ct. Cl. 1, 146 F. Supp. 467 (1956). The proceedings of the following petitioners are considered herewith: W. H. Black, Docket No. 76037; B. B. Margolis, Docket No. 76038; A. J. Sutherland, Docket No. 76039; Atlantic Life Insurance Company, Docket No. 76040; and The Lamar Life Insurance Company, Docket No. 76149. In its income tax return for the taxable period in which the sale 2. Held, that the useful life of the office building at the time it 3. Held, that petitioners Sutherland, Margolis, Atlantic, and Lamar were transferees of Southwest within the meaning of section 6901 of the 1954 Code, and that petitioner Black was not a transferee. Harrison Harkins, Esq., for the petitioners. Marion Malone, Esq., for the respondent. In these consolidated proceedings the respondent determined deficiencies in income tax against Southwest Properties, Inc., and transferee liability against each of the other petitioners as transferees of the assets of Southwest Properties, Inc., for the taxable periods and in the amounts as follows: The major issue is whether Southwest was a collapsible corporation within the meaning of section 341 of the Internal Revenue Code of 1954 and the gain realized from the sale of its property in October of 1956 is to be considered as gain from the sale or exchange of property which was not a capital asset, as determined by the respondent, it being the position of the petitioners that Southwest was not a collapsible corporation and that the provisions of section 337 apply. For all of the taxable periods, the amounts of allowable depreciation is in issue. FINDINGS OF FACT. Some of the facts and some evidence have been stipulated and the facts stipulated are found as stipulated. Southwest was incorporated in California on October 11, 1954, with an authorized capital stock of 2,500 common shares, par value $100 per share. For the taxable periods here involved, Southwest filed its income tax returns with the district director of internal revenue for the Los Angeles district of California. W. H. Black, B. B. Margolis, and A. J. Sutherland are individual petitioners who reside in San Diego County, California. For the taxable periods here involved, their individual income tax returns were filed with the district director of internal revenue for the Los Angeles district. Atlantic Life Insurance Company, hereafter referred to as Atlantic, is a life insurance company incorporated under the laws of Virginia. Its principal office is in Richmond, Virginia. For the taxable periods here involved, Atlantic filed its income tax returns with the district director of internal revenue for Virginia. The Lamar Life Insurance Company, hereafter referred to as Lamar, is a life insurance company incorporated under the laws of Mississippi. Its principal office is in Jackson, Mississippi. For the taxable periods here involved, Lamar filed its income tax returns with the district director of internal revenue for Mississippi. Ruth Black, sometimes known as Ruth F. Black, is the wife of W. H. Black, the petitioner in Docket No. 76037. Respondent determined transferee liability against W. H. Black but made no such determination against Ruth Black. In or about September 1954, Margolis, Black, and Sutherland became interested in purchasing an office building at 233 A Street in San Diego, known as the Medico-Dental Building (also known as the Medical-Dental Building), together with the parking lots adjacent thereto. The office building and parking lots were owned by the Third Avenue Corporation. The land area involved consisted of lots A, B, C, D, I, J, K, and L, in block 12 of Horton's Addition in downtown San Diego. Block 12 was bounded by A Street on the north, Third Avenue on the east, B Street on the south, and Second Avenue on the west. The lots in question comprised the north two-thirds of block 12 and covered an area of approximately 40,000 square feet. Approximately 7,500 square feet of such land area, consisting of all of lot L and the east half of lot K, was improved by a 14-story and basement office building, located on the northeast corner of the block and having a frontage of 100 feet on both A street and Third Avenue. The building had been erected in 1927 and was of reinforced concrete construction. Except for the first floor its tenants for the most part were physicians, surgeons, and dentists and in the layout of the offices their needs had been taken into account. The first-floor space was rented primarily to businesses which served the other occupants of the building. The remaining land area was devoted to parking purposes, that comprising lots A, B, and C being operated by the building management. The area covering lots D, I, J, and the west half of lot K, was under lease to 3rd Avenue Parking, a partnership of Sutherland and his son, whose lease dated from August 1, 1950. Under date of September 1, 1954, Margolis, as "Buyer," and the Third Avenue Corporation, as "Seller," opened Escrow No. 3841 with Security Trust & Savings Bank of San Diego, sometimes referred to as Security Bank or Security, looking to the purchase by Margolis of the above-described property. In opening the escrow, Margolis made a cash deposit of $10,000 and agreed to make a further deposit of $850,000 and any additional funds necessary under the escrow, all of which funds Security was authorized to apply in carrying out the escrow instructions. At closing, the last date for which was December 1, 1954, Security was to have on hand a deed and bill of sale showing title to the property vested in Margolis or his nominee. Title to the property was conveyed from the Third Avenue Corporation to Margolis, "a married man," by grant deed dated September 13, 1954. Southwest's articles of incorporation recited that it was formed for the purpose, among others, "of owning and operating an office building and adjacent parking lots." At the first meeting of its board of directors, held on October 15, 1954, Black, Margolis, and Sutherland were elected directors. Thereafter, at the same meeting, Black was elected president, Sutherland vice president, and Margolis secretary and treasurer. For use in the purchase of the Medical-Dental property, including the area used for parking lots, Southwest on or about November 15, 1954, obtained loans of $22,000 from Margolis, $22,000 from Sutherland, $22,000 from Ruth Black, and $11,000 each from Atlantic and Lamar, making a total of $88,000. To each lender Southwest issued its unsecured note dated November 1, 1954, due January 1, 1960, and bearing interest at 5 percent per annum from date, payable quarterly. In addition, and on or about the same date, it borrowed $375,000 from Atlantic and $375,000 from Lamar. These amounts were evidenced by two promissory notes, each in the amount of $375,000. Both notes were secured by a deed of trust on the property being purchased. As further security for the notes, Southwest executed in favor of Atlantic and Lamar a blanket assignment of rentals due to accrue thereafter under existing leases or leases thereafter entered into covering any portion of the property, such assignments to become effective only in the event of a default by Southwest under the notes or deed of trust. Incident to the obtaining of the loans from Atlantic and Lamar, Margolis had the property appraised by two appraisers. In one appraisal, dated September 9, 1954, the fair market value of the property was shown as $1,300,000, and in the other dated September 11, 1954, as $1,350,000. The building was 27 years old when appraised and both appraisers arrived at 50 percent as the proper allowance for depreciation to date. In making their appraisals both appraisers expressed the view that the current rental rate per square foot for office space was quite low for the type of building. The percentage of occupancy was regarded as adequate and satisfactory, one of the appraisers being of the opinion that near capacity occupancy should be enjoyed for some years to come, notwithstanding the tendency of doctors and dentists to move further out on Third, Fourth, Fifth, and Sixth Avenues. Another factor, according to both appraisers, was that the building was well designed and modern in appearance, one appraiser stating that he was therefore giving little weight to obsolescence because of design. In his estimate of value he assumed that a change of type of tenancy was inevitable, even if not in the immediate future, but that did not mean loss of value, "but rather allowance to be made for transition period or change from a medical dental building to a conventional office building." He also was of the view that a change from the "present" restricted form of tenancy considered in relation to "continuous" parking would justify a conclusion of a considerably greater useful life for the building. Under date of November 16, 1954, Southwest issued 480 shares of its capital stock for cash at par as follows: The 120 shares issued to Black as the stockholder of record actually belonged to his wife, Ruth Black. She paid for the stock with funds left to her by her father. Black later transferred the shares to her. On or about November 15, 1954, the date of the borrowing, Southwest paid the $750,000 borrowed from Atlantic and Lamar into Escrow No. 3841 for the account of Southwest. Under date of November 16, 1954, Southwest deposited an additional $114,511 in the escrow account. These payments brought the total deposits in the escrow account up to $874,511. In the meantime Margolis and his wife had conveyed title to the property in question to Southwest by grant deed dated November 1, 1954. On November 17, 1954, the deed dated September 13, 1954, from the Third Avenue Corporation to Margolis, and the deed dated November 1, 1954, from Margolis and his wife to Southwest, were recorded. These deeds, as indicated, covered lots A, B, C, D, I, J, K, and L, in block 12 of Horton's Addition in downtown San Diego. |