Braunstein v. Commissioner

PETITIONER: Braunstein
RESPONDENT: Commissioner
LOCATION: Clauson's Inn

DOCKET NO.: 476
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 374 US 65 (1963)
ARGUED: Apr 29, 1963
DECIDED: Jun 10, 1963

Facts of the case

Question

Media for Braunstein v. Commissioner

Audio Transcription for Oral Argument - April 29, 1963 in Braunstein v. Commissioner

Earl Warren:

[Inaudible]

Louis Eisenstein:

Mr. Chief Justice, may it please the Court.

This case is an income tax case, which is here on a writ of certiorari to the Court of Appeals for the Second Circuit.

There are three tax payers involved and the taxable year is 1950.

The asserted deficiencies come to about $500,000.

The resolution of the dispute before the Court turns on the meaning and application of Section 117(m) of the Internal Revenue Code of 1939.

Section 117(m) deals with tax avoidance through so called collapsible corporations.

This avoidance consists of realizing the everyday ordinary income from property as a capital gain through the device of incorporation and a disposition of stock.

In other words, the device is designed to take unfair advantage, as President Truman put it, of the difference between the ordinary income tax rates and the capital gain rate.

I will now briefly summarize the relevant facts, which I gather are not in dispute, and then I will turn to the statute.

The three tax payers are Benjamin Braunstein, Benjamin Neisloss, and Harry Neisloss.

For many years starting in 1919, the Neisloss’s and then the Neisloss’s and Braunstein were engaged in holding and managing investments in real estate.

In the 1920’s, the Neisloss’s through corporation acquired an improved commercial properties, and they also purchased parcels of land for development.

Then between 1930 and 1948, the Neisloss’s and then the Neisloss’s and Braunstein built, held, and operated multiple dwelling apartments and commercial properties all through corporations.

In every case, the stock as well as the underlying property was held as a long-term investment.

In a number of instances the holdings were retained for as long as nine, ten, and 15 years.

Five of the projects were multiple dwelling developments financed under Section 608 of the National Housing Act.

Now this case involves another FHA rental development.

In March 1948, the taxpayers organized two corporations to build and operate a development known as Oakland Gardens.

Each taxpayer owned a third of the common stock in each corporation.

Construction started in April, 1948 and the buildings were completed and ready for occupancy between September 1948 and June 1949.

In May 1950, the taxpayers were approached by brokers on behalf of certain prospective purchasers.

In June 1950, the taxpayers agreed to sell their stock and the sale was eventually consummated through a sale of stock in November 1950.

After the sale, the taxpayers remained active in the construction and operation of rental properties held as long-term investments.

They continued to own and operate four FHA developments, which had been built before Oakland Gardens.

They built a shopping center, a number of stores, and a large apartment house, and they also remodeled apartments all as a source of rental income.

They have never held rental property for sale to customers in the ordinary course of business.

It is clear, if they had owned the development as individuals their profit on its disposition would have clearly been a capital gain and it is equally clear that the corporations did not hold the development for sale.

Potter Stewart:

The Government agree with you on both of those, you mentioned?

Louis Eisenstein:

We notice that in its brief in the Supreme Court the government has suggested that if we are right on the main issues then case should be remanded and I would gather that they mean a remanding with respect to this point.