Strong v. Commissioner - 66 T.C. 12 (1976)

Rule:

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.

Facts:

Prior to September 1967, Colburn A. Jones, William B. Strong, Victor L. Alger, Frederic B. Adler, Fred W. Pollman, and Paul W. Henninger agreed to form Heritage Village Apartments Co., a partnership, for the purpose of developing an apartment complex to be known as the Heritage Village Apartments. The partners understood at that time that financing in the amount necessary to develop the apartments was not available to individuals because of the limitations on interest charges in the New York usury statute. The corporations were not subject to these limitations, and that financing might be available to a corporate borrower. Accordingly, Heritage Village, Inc., a corporation owned by the partnership (hereinafter referred to as the corporation), was formed in September 1967 in anticipation of its use to obtain loan commitments. In October 1967, certificates of partnership were filed by the partners on behalf of Heritage Village Apartments Co. (hereinafter the partnership). In August 1967, before either the partnership or the corporation was formed, a commitment for a permanent mortgage loan was obtained from the Bronx Savings Bank. Title to the property was transferred to the corporation which executed the various documents relating to the financing and engaged in other related activities. Construction and operation of the apartments generated net operating losses during the years in issue which were reported on the partnership's returns and as distributive shares on the individual returns of the petitioners. The respondent Commissioner determined that the corporation, as owner of the property, was the proper party to report those losses. Petitioners allege that the corporation was a nominee whose ownership should be disregarded for tax purposes.

Issue:

Was the corporation a mere nominee whose ownership should be disregarded for tax purposes?

Answer:

No.

Conclusion:

The principal guidepost on the road to recognition of the corporate entity is Moline Properties v. Commissioner, 319 U.S. 436 (1943). In that case, a corporation was organized as part of a transaction which included the transfer of mortgaged property to it by the shareholder, the assumption by it of the outstanding mortgages, and the transfer of its stock to a voting trustee named by the mortgagee as security for additional advances. Later the indebtedness was repaid and the shareholder reacquired control of the corporation. Thereafter it mortgaged and sold some of the property it held, and leased another portion. The Court held that the corporation was a separate entity from its inception, and stated its rule of decision as follows: “The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. In Burnet v. Commonwealth Improvement Co., 287 U.S. 415, this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages. [319 U.S. at 438-439. Fn. refs. omitted; emphasis supplied.]” The corporation existed and performed the function intended until the permanent loan was consummated. It was more than a business convenience; it was a business necessity to plaintiffs' enterprise. As such, it came into being. As such, it served the purpose of its creation. Having set up a separate entity through which to conduct their affairs, petitioners must live with the tax consequences of that choice. Indeed, the very exigency which led to the use of the corporation serves to emphasize its separate existence.