## Facts

- In 1986, Paul A. Rendina and Thomas Ackerman formed Wood Street Apartments, Inc. (WSAI), an Ohio C corporation, to construct and sell 18 condominium units.
- Rendina and Ackerman each paid about $250 for an equal number of WSAI shares.
- WSAI financed construction through: a bank construction loan of about $740,000; a cash deposit from Rendina of about $41,200; and loans from three of Rendina’s accounting clients totaling $68,000 ($53,000, $10,000, and $5,000).
- WSAI issued promissory notes to the three clients at 12% annual interest.
- By the end of 1988, two condominium units remained unsold.
- In late 1988, WSAI transferred the two remaining units to Rendina.
- In exchange, Rendina assumed WSAI’s obligations on the three client promissory notes and agreed to allow WSAI to discharge its debt to him (stemming from his advances to the corporation).
- After transferring the units, WSAI ceased doing business and held no remaining business assets, but it did not formally dissolve; its charter was revoked in 1990.
- Rendina and his wife filed a joint 1988 return and did not report gain or income from the receipt of the two units.
- In 1989, Rendina sold one of the units for approximately $68,000.
- The Commissioner determined the 1988 transfer was a dividend and issued a notice of deficiency for 1988 of $35,934, plus additions to tax of $1,797 under I.R.C. § 6653(a)(1) (negligence) and $8,984 under I.R.C. § 6661(a) (substantial understatement).

## Issues

1. Whether WSAI’s transfer of the two condominium units to Rendina was a taxable dividend or a distribution in de facto liquidation of WSAI.
2. If the transfer was in liquidation, how Rendina’s gain should be computed, including the effect of his stock basis and the third-party note liabilities he assumed.
3. Whether the additions to tax for negligence under § 6653(a)(1) and substantial understatement under § 6661(a) applied.

## Decision

- The court held the transfer of the two condominium units was a distribution in de facto liquidation of WSAI, not a dividend.
- The court held Rendina’s realized gain was reduced by his basis in his WSAI shares and by certain liabilities to third parties that he assumed, producing a deficiency lower than the Commissioner’s dividend-based determination.
- The court sustained the § 6653(a)(1) negligence addition and the § 6661(a) substantial understatement addition, to be computed on the reduced deficiency.

## Legal Principles

- A distribution can be treated as a liquidating distribution even without formal dissolution when the facts show (1) intent to liquidate, (2) a continuing purpose to wind up corporate affairs, and (3) actions directed toward termination of the business.
- When a corporation distributes property to a shareholder in liquidation, the shareholder generally recognizes gain or loss under I.R.C. § 331 as if the shareholder exchanged stock for the property received.
- In computing gain from a liquidating distribution, the shareholder’s stock basis reduces the amount of gain, and certain corporate liabilities assumed by the shareholder may reduce the net value of what the shareholder received.
- A negligence addition under § 6653(a)(1) may apply when a taxpayer fails to exercise reasonable care in reporting the tax consequences of a significant transaction; the taxpayer’s training and sophistication may be considered.
- A substantial understatement addition under § 6661(a) applies when the understatement exceeds the statutory threshold and the taxpayer does not establish an exception (such as adequate disclosure or substantial authority); if the underlying deficiency is reduced, the addition is recomputed on the reduced amount.

## Conclusion

The Tax Court recharacterized WSAI’s transfer of its last two condominium units to Rendina as a distribution in de facto liquidation rather than a dividend, which allowed reduction of Rendina’s recognized gain by his stock basis and certain assumed client-note liabilities, but the court still imposed the negligence and substantial understatement additions as recalculated on the smaller deficiency.


Rendina v. Commissioner, 72 T.C.M. 474 (1996)