Concord Village, Inc. v. Commissioner , 65 T.C. 142 ( 1975 )

Concord Village, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent

Concord Village, Inc. v. Commissioner

Docket No. 2778-70

United States Tax Court

65 T.C. 142; 1975 U.S. Tax Ct. LEXIS 47;

October 28, 1975, Filed

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Decision will be entered under Rule 155.

Petitioner is a nonstock, not-for-profit, housing cooperative corporation organized and operated for the benefit of its members. It is subject to Federal Housing Administration (FHA) regulations. When a member of petitioner sells his membership (i.e., his proprietary interest), he must forfeit to petitioner any part of the selling price which exceeds an FHA-specified "transfer value." Held, such forfeitures are gain to it and includable in its gross income under sec. 61(a). General American Investors Co., 19 T.C. 581 (1952), affd. 211 F. 2d 522 (2d Cir. 1954), affd. 348 U.S. 434">348 U.S. 434 (1955).

FHA regulations require petitioner to establish and maintain a replacement reserve and a general operating reserve, both of which are funded from monthly carrying charges. No amounts accumulated therein may be distributed back to petitioner's members until minimum accumulations set by regulatory agreement with the FHA are satisfied. In each of the years in issue, accumulations in each of said reserves exceeded the minimum requirements, but no funds were distributed back to petitioner's members. Petitioner also accumulated funds in a painting reserve as recommended but not required by the FHA. Held, petitioner must include in gross income all the funds accumulated in the painting reserve, Park Place, Inc., 57 T.C. 767 (1972), followed, and such funds are not contributions to capital. Held, further, that all amounts accumulated in the replacement reserve are contributions to capital excludable from petitioner's gross income under sec. 118. Held, further: That petitioner must include in gross income all amounts accumulated in the general operating reserve, Park Place, Inc., supra, followed as to amounts accumulated beyond minimum FHA requirements; Park Place, Inc., supra, distinguished as to amounts accumulated to satisfy FHA requirements but petitioner was neither a custodian nor a trustee of such funds. Ford Dealers Advertising Fund, Inc., 55 T.C. 761">55 T.C. 761 (1971), distinguished. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Said funds are not contributions to capital.

William Lee McLane, for the petitioner.

Dennis C. DeBerry, for the respondent.

Forrester, Judge.

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FORRESTER

Respondent has determined deficiencies in petitioner's income tax as follows:

TYE Oct. 31 --	Amount
1965	$ 3,170.00
1966	6,888.00
1967	$ 9,243.00
1968	35,527.30

Concessions having been made, two issues that involve the taxable years 1966, 1967, and 1968 remain for our decision: (1) Whether a portion of the monthly carrying charges collected by petitioner, a cooperative housing corporation within the meaning of section 216, ¹ from its member-occupants and not spent, but accumulated in certain reserve accounts as required or recommended by Federal Housing Administration regulations, is includable in petitioner's gross income; (2) whether amounts forfeited to petitioner by members on certain sales of memberships are includable in petitioner's gross income.

FINDINGS OF FACT

All of the facts have been stipulated and are so found.

Petitioner Concord Village, Inc. (sometimes hereinafter referred to as Concord), is a not-for-profit corporation formed under the laws of Arizona having its principal office at Tempe, Ariz. Petitioner filed its corporate income tax returns (Form 1120) for the years involved with the District Director of Internal Revenue, Phoenix, Ariz.

In the early 1960's a building contractor corresponded with the Foundation for Cooperative Housing (foundation) seeking an agreement to erect a cooperative housing development. The foundation is organized and operated for the purpose of promoting housing cooperatives, and is exempt from Federal income tax under section 501(c)(3).

An application was submitted to the local Federal Housing Administration (FHA) insuring office to form a cooperative housing development under section 221(d)(3), title II, National Housing Act (hereinafter NHA sec. 221(d)(3)), 12 U.S.C. sec. 1715 1(d)(3). NHA sec. 221(d)(3) housing cooperatives, including Concord, provide dwellings for families displaced from urban renewal areas or as a result of governmental action, and for families with moderate and low incomes. The FHA determined the project to be feasible.

Concord is a nonstock cooperative housing corporation organized and operated exclusively for the benefit of its members as a low-cost housing development. There are no commercial establishments on Concord's land. Petitioner was incorporated without any assets and with the trustees of the foundation acting as its board of directors.

The construction of Concord was initiated through F. C. Housing Co., Inc. (Housing), sponsored by the trustees of the foundation. Land and necessary rezoning had already been obtained at the building contractor's own expense. Construction financing commitments were made with an Arizona bank.

The FHA, pursuant to NHA sec. 221(d)(3), provided Concord with mortgage insurance enabling Concord to obtain a mortgage loan at 3 3/8-percent interest to be repaid over 50 years. Concord and the FHA executed a regulatory agreement which provided the terms and conditions governing the mortgage insurance. Petitioner operates as any other housing cooperative with one important exception in that, by agreement, ultimate authority to regulate Concord resides in the FHA.

The FHA may foreclose petitioner's mortgage, assume management of the cooperative, or institute legal proceedings should petitioner break any of the terms of the regulatory agreement. Petitioner has complied with the guidelines and regulations applicable to NHA sec. 221(d)(3) cooperatives imposed by the FHA.

Housing began a program to presell the cooperative units, insuring that the marketing procedures complied with all FHA standards and requirements. Even though petitioner was incorporated, its charter, bylaws, all contracts, brochures, and insurance policies required FHA approval. All of the accounting procedures utilized by Concord were required, suggested, or approved by the FHA.

Simultaneously, the building contractor began construction of the recreational facilities, including a clubhouse, a pool, and several model units to aid the sales program. Petitioner is comprised of six sections, each containing one, two, three, and four-bedroom dwelling units. Each section was constructed and financed separately. When Housing had presold 90 percent of the units in any one of the six proposed sections of petitioner, an initial closing took place.

Concord then bought the land involved from the building contractor and made mortgage arrangements for the section through the FHA and the Government National Mortgage Association or the Federal National Mortgage Association. After the initial closing, the building contractor constructed the dwelling units in each section.

In order to purchase and reside in any of petitioner's dwelling units, one must become a member of Concord. A prospective member had to meet FHA-established maximum income limitations. A prospective member would apply by submitting a "credit application form," executing a subscription agreement, and paying a fee of $ 50. ² In executing a subscription agreement each prospective member would ratify Concord's charter and bylaws which incorporate the regulatory agreement by specific reference. The $ 50 fee would be deposited in a special subscription account; the credit application and subscription agreement would be submitted to the FHA for approval.

While a section was being completed, units or portions were occupied, which generated subscription agreement fees, occupancy agreement fees, and monthly carrying charges that in turn were held in trust for petitioner.

The occupancy agreement fee was normally $ 230 and was paid by a member upon execution of an occupancy agreement shortly before occupying his dwelling. The subscription agreement fee together with the occupancy agreement fee were intended to be the member's downpayment on his proprietary interest in petitioner.

The occupancy agreement was the member's contract with Concord governing the parties' correlative rights and duties. The term of this agreement was 3 years, and it was automatically renewed unless the member elected to terminate at least 4 months prior to the expiration of the agreement.

When the units in each section were completed and occupied and FHA approval obtained, a final closing took place at which time Concord obtained title to that section of the cooperative and controlled the activities of that section. At the completion of the entire project, Concord owned all of the units and controlled their activities. Although petitioner's articles of incorporation state that it shall have 384 members, all of one class, petitioner in fact constructed only 373 dwelling units and therefore has only 373 members.

Petitioner's members elect their own board of directors to conduct corporate activities. Concord's board meets monthly. It sets Concord's general policy within the framework of the bylaws and the regulatory agreement, and has several subcommittees. Concord's officers are elected by the board from among its members.

During the period between the initial and final closing of each section of petitioner, interim financing was made available through a local bank to Housing to provide the funds necessary to meet all of petitioner's financial obligations. When each final closing took place, Housing elected pursuant to FHA regulations to place in the replacement reserve any excess over expenses, of the interim financing funds, of occupancy agreement fees, and of preclosing monthly carrying charges collected from members occupying units during this period.

By FHA regulation, Concord is required to maintain the replacement reserve. The replacement reserve funds may be used by petitioner only for the necessary replacement of structural and mechanical equipment such as ranges, refrigerators, plumbing facilities, washers and dryers, disposals, etc., whose useful life has ended. The FHA sets minimum "floor" amounts or percentages that petitioner must collect from its members as a portion of monthly carrying charges to allocate to the replacement reserve. The regulatory agreement sets the monthly amount to be accumulated in the replacement reserve from carrying charges at $ 481.67. Occupancy agreement fees are also placed in the replacement reserve.

Each member of petitioner is required to pay monthly carrying charges which pay for the maintenance of the cooperative, the payment of principal and interest and other required payments on the mortgage, the creation and maintenance of reserves, and any other expenses of the corporation approved by Concord's board of directors, including operation deficiencies. The monthly carrying charges are prorated among the members according to the type and size of dwelling unit each occupies. Petitioner deposits the monthly carrying charges into its general operating bank account. Concord is obligated under the occupancy agreement to "refund or credit to the Member within ninety (90) days after the end of the fiscal year, his proportionate share of such sums as have been collected in anticipation of expenses which are in excess of the amounts needed for expenses of all kinds, including reserves, in the discretion of the Board of Directors."

If current monthly carrying charges are insufficient to meet current costs, the charges are increased; the replacement reserve is not drawn upon. Separate accounts are maintained both for the replacement reserve and for the general operating reserve, a reserve account which the FHA also requires petitioner to maintain and fund with a percentage of the monthly carrying charges. The funds in the replacement reserve and in the general operating reserve were kept in either savings accounts or interest-bearing Government obligations. All rights to rents, profits, income, and charges are pledged to the FHA as security for the payments due to maintain the reserves.

Use of funds from the general operating reserve is restricted by the regulatory agreement to occasions of financial stress, such as deficiencies caused by members' delinquent payments, and to repurchase memberships. Disbursements totaling in excess of 20 percent of the total balance of the general operating reserve as of the close of the preceding annual period may not be made during any annual period without the consent of the FHA. The regulatory agreement provides that the total amount allocated to the general operating reserve is to be "not less than 3 percent of the monthly amount otherwise chargeable to the members residing in the Project * * * pursuant to their occupancy agreements." It further provides that when an accumulation of 15 percent of a current year's total carrying charges otherwise due under the occupancy agreements is reached, the amount chargeable may be reduced to 2 percent of the monthly charges, and eliminated when the maximum accumulation equals 25 percent of the current annual amount otherwise chargeable.

The painting reserve was established by Concord's board of directors to provide funds for the necessary repainting of the dwelling units and common areas. The amounts collected by means of added carrying charges for the painting reserve were determined by petitioner's board of directors. The FHA suggests that such a reserve be established.

No amounts were expended from the reserve accounts in any of the years in issue. The only amount spent by petitioner from the painting reserve was $ 10,585 during the year ending October 31, 1972, which was expended for the repainting of petitioner's buildings. The only amounts petitioner expended from the replacement reserve are $ 29,760 during the year ending October 31, 1970, and $ 7,889 during the year ending October 31, 1971, which were used to pay off the chattel mortgages on the washers and dryers that were in the dwelling units. No amounts from the general operating reserve have been expended by petitioner.

Petitioner cannot, without FHA approval, (1) fail to establish and maintain the replacement and general operating reserves as set forth in the regulatory agreement or (2) make any investments in any property except obligations of or guaranteed by the United States.

Additional carrying charges due from tenants whose income exceeds the maximum prescribed by FHA regulations were placed in a separate Government National Mortgage Association nonreserve account.

During the years involved, increases to the replacement reserve were funded as follows:

	Year ending	Year ending	Year ending
	Oct. 31, 1966	Oct. 31, 1967	Oct. 31, 1968
From monthly carrying
charges	$ 5,209	$ 10,356	$ 15,389
From preclosing amounts 1	8,795	7,169	13,519
Total annual increases
to the replacement
reserve	14,004	17,525	28,908

During the years involved, increases to the general operating reserve were funded from monthly carrying charges as follows:

Year ending
Oct. 31 --	Amount of increase
1966	$ 2,182
1967	6,468
1968	6,366

During the years involved, increases to the painting reserve were funded from monthly carrying charges as follows:

Year ending
Oct. 31 --	Amount of increase
1966	$ 1,011
1967	2,807
1968	3,286

Pursuant to FHA accounting procedures, Concord did not include in gross income, for the year ending October 31, 1966, the amounts collected from its members which were used to establish and maintain its reserve accounts. For the year ending October 31, 1967, Concord included in gross income $ 45,223 of such collections which totaled $ 47,621 in that year. For the year ending October 31, 1968, $ 64,876 of such collections totaling $ 67,376 in that year were included in Concord's gross income.

Such collections were reflected on petitioner's books for its taxable years 1966, 1967, and 1968, as follows:

		1966		1967		1968
Account		Increase		Increase		Increase
Replacement
reserve 1		$ 13,418		$ 33,063		$ 54,477
Washer dryer
reserve 2		130		(130)
Painting reserve		1,020		2,807		3,286
Operating reserve		1,729		6,468		6,366
Vacancy reserve 3		2,635		4,465		(1,111)
Self insurance
reserve		466		700		810
Undesignated funds				248		1,048
Paid-in reserve	$ 13,777		$ 18,606		$ 35,621
Less: Mortgage
reduction 4	(8,231)	5,546	(18,606)	0	33,121	2,500
		24,944		47,621		67,376

Under petitioner's bylaws, membership in Concord is transferable only upon a member's death or upon written notice given to petitioner by a member of intent to terminate membership. Upon notice being given and for 30 days thereafter, Concord has the right, but not the obligation, to purchase the membership. If Concord waives this right in writing or fails to exercise the right within the 30 days, then the member may sell his membership to any person duly approved by Concord as a member and occupant.

The amount for which a membership may be sold is strictly limited by Concord's bylaws and FHA regulation, and is termed "transfer value." If the sales price is above the transfer value, the member must forfeit such excess amount to the cooperative. If a unit were abandoned by a member, petitioner would realize all profit from the sale. No units were abandoned during the years involved.

Petitioner's bylaws define "transfer value" as follows:

ART. III. MEMBERSHIP

* * *

Section 8. Transfer of Membership. * * *

* * *

(d) Transfer Value. Whenever the Board of Directors elects to purchase a membership, the term "transfer value" shall mean the sum of the following:

(1) The consideration (i.e. downpayment) paid for the membership by the first occupant of the unit involved as shown on the books of the Corporation; plus

(2) The Value of Occupancy Agreement [defined by section 4(c) to be a downpayment of $ 230]; plus

(3) The value, as determined by the Directors, of any improvements installed at the expense of the member with the prior approval of the Directors, under a valuation formula which does not provide for reimbursement in an amount in excess of the cost of the improvements; plus

(4) The amount computed in accordance with the following table of increases applicable to the membership and to the particular class of Occupancy Agreement appurtenant to such membership. Such increase is shown for each full year commencing after the Corporation has made its first principal payment on the applicable section mortgage as follows:

Membership and	Increase per year	Increase per year	Increase per year
class of occupancy	from the 1st	from the 4th	from the 21st
agreement	through 3d year	through 20th year	through 40th year
A -- Plymouth	None	$ 120	$ 180
B -- Jamestown	None	130	195
C -- Savannah	None	135	205
D -- Raleigh	None	145	220
E -- Dover	None	155	235

As shown by the above table of allowable, incremental increases in the transfer value of membership, no increase in equity is permitted during the first 3 years of Concord's mortgage payments. Upon transfer of membership, there is no return of contributions which the member has made to any reserve through monthly carrying charges. The formula for calculating transfer value, as contained in the bylaws and shown above, represents the whole of a member's equity in Concord.

When leaving a member must pay for any repairs to his dwelling unit. The reserve accounts are not used for such maintenance, each member being responsible for all interior upkeep of his home. If the petitioner made the necessary repairs, then the cost was deducted from transfer value. If the cost exceeded transfer value, then Concord would sue for the difference.

During its taxable years 1966, 1967, and 1968, Concord collected $ 5,546, $ 2,500, and $ 2,500, respectively, as "resale" amounts from its previous members as a result of sales of units above the transfer value.

The $ 5,546 resale amount collected in taxable year 1966 was placed on the books in the "paid-in reserve" account for the year 1966. This account normally comprises the tenants' pro rata portion of carrying charges paid for the reduction of mortgage principal. This resale amount was in a later year allocated to petitioner's operating funds for general use. The resale amounts collected in taxable years 1967 and 1968 were allocated to petitioner's operating funds for general use.

OPINION

Concord is a not-for-profit housing cooperative incorporated under Arizona law. It is organized and operated for the benefit of its members. Because Concord was formed pursuant to NHA sec. 221(d)(3), 12 U.S.C. sec. 1715 1(d)(3), it was able to obtain an FHA-insured mortgage loan at 3 3/8 percent over 50 years. The FHA regulates Concord by contract (regulatory agreement) and Federal regulations. Within this regulatory framework, petitioner's board of directors, elected by Concord's members, sets policy and governs petitioner's affairs. Petitioner collects monthly carrying charges from its members which are used to fund its costs, including mortgage payments of principal and interest, taxes, operating expenses, and the creation and maintenance of certain reserve accounts required or recommended by the FHA. The taxability of these reserve accounts ³ is the first issue before us.

Issue 1. Whether Unexpended Funds Collected by Petitioner Housing Cooperative from Its Members and Earmarked for andAccumulated in the Replacement, General Operating, and Painting Reserves are Includable in Petitioner's Gross Income

Petitioner contends that it has neither collected nor held the unexpended funds accumulated in the reserve accounts under a claim of right, and that the funds have always been restricted as to use. Relying primarily upon Ford Dealers Advertising Fund, Inc., 55 T.C. 761">55 T.C. 761 (1971), affd. per curiam 456 F. 2d 255 (5th Cir. 1972); Portland Cremation Assn. v. Commissioner, 31 F. 2d 843 (9th Cir. 1929); and Seven-Up Co., 14 T.C. 965">14 T.C. 965 (1950), petitioner would have us conclude that none of the funds at issue are includable in its gross income. In the alternative it argues the funds are excludable from gross income under section 118 as contributions to its capital.

Respondent's primary contention is that our decision in Park Place, Inc., 57 T.C. 767">57 T.C. 767 (1972), is controlling. He argues that the unexpended funds accumulated in the reserve accounts are overassessments. Because Park Place holds that overassessments "fall under the statutory category of patronage dividends" within the meaning of section 1388(a), ⁴ respondent contends that petitioner must distribute such overassessments to its members within 8 1/2 months after the close of the taxable year in order for Concord to avoid including the reserve funds in gross income. Sec. 1382(b); sec. 1382(d).

Park Place involved the issue of whether overassessments (amounts collected in a taxable year from members which exceed amounts expended or refunded) which were carried on the books of the taxpayer housing cooperative to the credit of its tenant-stockholders in subsequent taxable years were taxable to it. 57 T.C. at 777-780. We specifically held that the housing cooperative had never collected any amounts, including the overassessments, under claim of right and that the reasoning of Seven-Up Co., supra (excluding such amounts from gross income), was applicable to both the assessments and overassessments. 57 T.C. at 779. Notwithstanding, we held the overassessments to be taxable income because in enacting subchapter T Congress had specifically provided a method by which the housing cooperative could avoid taxation on overassessments, i.e., by distributing them back to the members as patronage dividends within a certain time after the close of the taxable year. 57 T.C. at 779, 780. Thus, to the extent Park Place controls here, the reasoning of Seven-Up Co., supra, and like cases, is irrelevant because in Park Place we held such reasoning to have been preempted by subchapter T.

At least as to a certain portion of the replacement reserve and the general operating reserve, we do not think that Park Place controls the resolution of the issue before us. The linchpin of our holding in Park Place was that the taxpayer cooperative could have paid back the overassessments to its tenant-stockholders. Had they been paid back, the overassessments would have become patronage dividends not includable in income pursuant to section 1382(b). The barest essential of a patronage dividend is that it be "an amount paid." Sec. 1388(a). Because the overassessments could have been paid back as patronage dividends, we held that they fell "under the statutory category of patronage dividends." 57 T.C. at 780. The accumulations in the replacement reserve and the general operating reserve cannot all be so categorized.

By Federal regulation, Concord cannot refund to its members any amounts from the replacement reserve or the general operating reserve until minimum monthly and annual amounts have been accumulated in each. 24 C.F.R. secs. 221.530, 221.534(a) (1966-68). Petitioner's regulatory agreement with the FHA effects these restrictions and establishes the minimum accumulations required.

No such circumstance existed in Park Place. In Park Place the overassessments could have been readily paid out to the cooperative's members. In the instant case, only after meeting reserve requirements and all obligations of the cooperative may "surplus funds" be "disbursed to the members in the form of reduced carrying charges or reduced sales prices of the dwelling accommodations, or patronage refunds." 24 C.F.R. sec. 222.534(b) (1966-68). Petitioner's bylaws and occupancy agreements with its members are in accord with the Federal regulations. Thus, to the extent that no amounts were collected and accumulated in the replacement reserve or the general operating reserve beyond the FHA requirements, no funds were available therefrom to be distributed as patronage dividends, and to that extent the reasoning of Park Place is inapplicable to these two reserves. The converse is also true; that is, amounts that were collected and accumulated in the reserves beyond FHA requirements were surplus funds and were available to be distributed as patronage dividends, and to that extent the reasoning of Park Place applies. Moreover, merely because Park Place is inapplicable to certain portions of the funds does not mean that those funds are otherwise excludable from gross income. Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426 (1955).

Concord's regulatory agreement with the FHA provides that an amount of $ 481.67 shall be allocated monthly to the replacement reserve from monthly carrying charges. The record would indicate that funds were accumulated in this reserve beyond the minimum FHA requirement. Some of the increases to the replacement reserve consisted of occupancy agreement fees which represent members' downpayments on their proprietary interests in Concord. Respondent concedes that the occupancy agreement fees are not includable in income. However, it appears that funds were collected and accumulated in the replacement reserve from monthly carrying charges which exceeded FHA minimum requirements. Under Park Place, these funds are includable in Concord's gross income unless otherwise specifically excludable.

The replacement reserve is a special account earmarked solely for capital expenditures. Funds in the reserve may be used only for the necessary replacement of structural and mechanical equipment such as ranges, refrigerators, plumbing facilities, washers and dryers, and disposals whose useful life has ended. The reserve funds accumulated from the monthly carrying charges are from assessments against each member pro rata according to the size and type of his dwelling unit, i.e., in proportion to his proprietary interest in Concord. The purpose of the reserve is to maintain the value of membership by providing assurance that capital equipment will be replaced upon its wearing out. These factors all indicate that the funds accumulated in the replacement reserve are contributions to capital. Brown Shoe Co. v. Commissioner, 339 U.S. 583">339 U.S. 583 (1950). ⁵ The funds, like those in Brown Shoe Co., are collected under contract, that being each member's occupancy agreement with Concord. 339 U.S. at 589 n. 10.

The member receives no goods or services from Concord in consideration for his payments to the replacement reserve. The payments are made for the well being of the cooperative, and each member benefits from outlays from the reserve according to his proportionate interest in the cooperative. The member contributes to the replacement reserve in order to insure sufficient funds to replace wornout capital assets. Though one or more members may benefit directly, for example where a member's refrigerator must be replaced, the asset in the first instance belongs to the cooperative. Cf. Moline Properties v. Commissioner, 319 U.S. 436 (1943); compare Affiliated Government Employees' Distributing Co., 37 T.C. 909">37 T.C. 909 (1962), affd. 322 F. 2d 872 (9th Cir. 1963); 874 Park Avenue Corp., 23 B.T.A. 400">23 B.T.A. 400 (1931). Each member's payment to the reserve is determined solely on the basis of his equity interest in the cooperative. Compare James Hotel Co., 39 T.C. 135 (1962), affd. 325 F. 2d 280 (10th Cir. 1963); compare University Country Club, Inc., 64 T.C. 460 (1975).

The replacement reserve is a required corollary of Concord's FHA-insured, preferred interest rate mortgage loan, and under Federal regulation and its regulatory agreement with the FHA, Concord risked, inter alia, foreclosure of the mortgage in the event minimum accumulations were not maintained in the replacement reserve. We think this circumstance, in conjunction with the other indicia of a contribution to capital discussed above, is sufficiently analogous to the facts of Cambridge Apartment Building Corp., 44 B.T.A. 617">44 B.T.A. 617 (1941) (overassessments used for early retirement of mortgage indebtedness that had been extended under a plan of reorganization after bankruptcy held to be contributions to capital), to bring the instant case within the scope of the Cambridge holding. Accumulations beyond the FHA minimum strengthened Concord's capital position so that if a large capital outlay in 1 year were required, the reserve could absorb the extraordinary expense.

One factor has given us some concern. Upon transfer of his membership, the member has no right to any of the contributed amounts in the replacement reserve except his occupancy agreement fee which represents his downpayment on his proprietary interest in Concord. Under Concord's bylaws and each member's occupancy agreement, the transfer value of a membership is strictly limited to a set schedule which does not expressly include his contributions to the replacement reserve. However, we cannot say that the value of a member's equity in Concord has no relation to the amount he contributes to the replacement reserve. Moreover, this is only one factor to be considered, United Grocers, Ltd. v. United States, 308 F. 2d 634 (9th Cir. 1962), and we think on balance the funds collected and accumulated in the replacement reserve were contributions to petitioner's capital and excludable from gross income under section 118, ⁶ and we so hold.

We hold that the funds accumulated in the general operating reserve cannot be excluded from Concord's gross income as contributions to capital.

Concord is in the business of providing housing for the benefit of its members. Its role in managing the cooperative assets is similar to that of a caretaker. Park Place, Inc., 57 T.C. at 777. Although we have some doubts about whether Concord's "economic interest in the * * * [dwelling units] is no more substantial than that of a custodian of the bare legal title," 57 T.C. at 777, it is true in the instant case as it was in Park Place that "the only business of petitioner (if any) during the taxable years was to manage and maintain the * * * [dwelling units] for its * * * [members]." 57 T.C. at 777. Concord's board of directors decides corporate policy within the FHA regulatory framework and approves and sets the amount of monthly carrying charges. Concord's only source of funds to meet current expenses is from the monthly carrying charges collected from its members. ⁷

In order to insure Concord's secure operating position, the FHA requires the establishment and maintenance of the general operating reserve; failure to do so may result in mortgage foreclosure. However, use of these funds is limited only by the occasions on when they may be spent, that is, during periods of financial stress. Their use is not intended for nor in any way restricted to capital expenditures, though the funds could be so spent. We think the reasoning of Paducah & Illinois Railroad Co., 2 B.T.A. 1001">2 B.T.A. 1001 (1925), forcefully applies to the instant case.

In Paducah a number of railroad companies had formed the taxpayer to construct and maintain bridge facilities for the companies' rail traffic across the Ohio River. The taxpayer's income was derived from tolls and charges assessed according to use of the bridge facilities. If the tolls were insufficient to cover operating costs, taxes, interest, and principal on its bonded indebtedness, the companies would pay the deficit to the taxpayer by additional assessments according to use. We said, 2 B.T.A. at 1006-1007:

From the beginning, the funds so contributed by the railroad companies were earmarked partly for the ordinary expenses of the taxpayer and partly for its capital requirements. In so far as the contributions were used or to be used for ordinary expenses, interest, taxes, and dividends, there can be no question that the railroad companies were making payments for services rendered by the taxpayer, which constituted expenses to themselves and income to the taxpayer. * * *

Likewise in the instant case, funds contributed to the general operating reserve were payments to Concord to be used for ordinary expenses incurred in the course of rendering its services to its members. The fact that the payments were made in advance of any expenses incurred, or that expenses entailing the use of the reserve funds might never be incurred, does not in our opinion change the character of those funds as part of the price of Concord's services. Cf. Teleservice Co. of Wyoming Valley, 27 T.C. 722">27 T.C. 722 (1957), affd. 254 F. 2d 105 (3d Cir. 1958).

Although accounting practices are not determinative, United Grocers, Ltd. v. United States, 308 F. 2d at 641, the name by which parties choose to characterize an account is important. Terminal Realty Corp., 32 B.T.A. 623">32 B.T.A. 623, 632 (1935); cf. Clay Sewer Pipe Association, Inc., 1 T.C. 529">1 T.C. 529, 537 (1943), affd. 139 F. 2d 130 (3d Cir. 1943). Here, form comports with substance; the contributions to the general operating reserve are not contributions to Concord's capital.

Funds accumulated in the general operating reserve beyond the FHA minimum requirements are eligible for distribution as patronage dividends. Therefore, they are taxable under the rationale of Park Place, Inc., supra. Moreover, we think that the funds accumulated in the general operating reserve to satisfy the minimum FHA requirements are also taxable income to Concord. Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426 (1955).

Concord was neither a mere conduit nor a trustee of these funds. We cannot find, as we did in Ford Dealers Advertising Fund, Inc., 55 T.C. 761 (1971), that no benefit, profit, or gain accrues to petitioner from the reserve or that there exists a trust relationship between Concord and its members as regards the funds in the reserve.

Members have no right to the funds in the general operating reserve, except in their shareholder capacity which is itself restricted by contract, i.e., each member's occupancy agreement. Concord, through its board of directors, retains control over the reserve. The board decides upon the disposition of the funds, which may be used wherever needed to pay for Concord's operational services to members in a tight financial situation. Concord may also use the funds to repurchase memberships for its own account from departing members. Except excess accumulations which may be returned as patronage dividends in the board's discretion, no funds from the reserve can be paid back to members. The transfer value of a membership does not have any relation to a member's contributions to the general operating reserve. Unlike the replacement reserve, expenditures from which maintain the value of a membership and are foreseeable, the general operating reserve funds may possibly never be spent. Concord's right to use the funds is limited only by circumstances of financial stress and by approval of the FHA, should Concord desire to spend more than 20 percent of the reserve in any accrual period. See Angelus Funeral Home, 47 T.C. 391">47 T.C. 391, 398 (1967), affd. 407 F. 2d 210 (9th Cir. 1969). Compare Growers Credit Corp., 33 T.C. 981">33 T.C. 981, 997 (1960), where we allowed the taxpayer cooperative to exclude similar funds from income because under the circumstances of that case we found the taxpayer to have been a mere custodian of the funds. ⁸

We find Concord's right to control the general operating reserve funds not subject to the restrictions normally placed on a trustee. Beyond the corporate-shareholder relationship, the record indicates the existence of only a contractual relationship between Concord and its members governing Concord's use of the general operating reserve. Portland Cremation Assn. v. Commissioner, 31 F. 2d 843 (9th Cir. 1929), relied on by petitioner, is distinguishable in that the record in the instant case is devoid of evidence from which we might infer any intent to create a trust relationship. All amounts accumulated in the general operating reserve are includable in petitioner's gross income.

As to the painting reserve, we think Park Place, Inc., supra, controls. The FHA suggests the creation and maintenance of this reserve, but does not require it. Concord's board of directors established the reserve, and it exists at the board's directive. Concord's board determines the amounts to be accumulated in the painting reserve. There is no prohibition against paying back to members amounts that are allocated to the painting reserve and not expended.

Petitioner argues that the accumulations in the painting reserve are not overassessments because the reserve is a necessary expense of operation. We can see no difference between this reserve fund and the overassessments in Park Place which were carried from year to year on the cooperative's books to the credit of the cooperative's tenant stockholders. 57 T.C. at 779, 780. We defined "overassessments" in Park Place as "the excess of the amount collected in a taxable year over the amount refunded or actually expended in that year." (57 T.C. at 779; emphasis supplied.) Funds accumulated in the painting reserve were not actually expended or refunded in any of the taxable years before us.

Neither are the amounts accumulated in the painting reserve contributions to capital. Painting is a repair and maintenance expense of operation, not a capital expenditure. Luce Furniture Co., 9 B.T.A. 1413 (1928); E. L. Potter, 20 B.T.A. 252">20 B.T.A. 252 (1930); see William K. Coors, 60 T.C. 368">60 T.C. 368, 403 (1973), affd. 519 F. 2d 1280 (10th Cir. 1975). Members' payments accumulated in the painting reserve were part of the price of Concord's services. In this regard, our reasons for holding the funds in the general operating reserve not to be contributions to capital are equally applicable here. Such funds are includable in Concord's gross income.

Issue 2. Whether Amounts that Petitioner's Members Receive from the Sale of Their Memberships Which Are in Excess of the FHA-Established Transfer Value of the Memberships and Which Are Forfeited to Concord Are Includable in Petitioner's Gross Income

When a member of Concord sells his membership, he must forfeit to Concord any part of the selling price which exceeds the "transfer value" of his membership as defined by Concord's bylaws pursuant to FHA specification. Concord received from such forfeitures the amounts of $ 5,546, $ 2,500, and $ 2,500 in taxable years 1966, 1967, and 1968, respectively. ⁹

Petitioner argues that such amounts are not includable in its gross income by virtue of either section 1032(a) ¹⁰ or section 118.

Petitioner misconstrues section 1032(a). This section applies only to transactions in which a corporation is disposing of its own shares. Sec. 1.1032-1(a), Income Tax Regs. In the instant case it is not Concord, but Concord's members who are exchanging memberships for "money or other property." ¹¹ Thus, section 1032(a) provides no relief from taxation to Concord. See Cardinal Corp., 52 T.C. 119">52 T.C. 119, 126 (1969).

Neither can we hold the forfeitures to be contributions to capital. We think General American Investors Co., 19 T.C. 581 (1952), affd. 211 F. 2d 522 (2d Cir. 1954), affd. 348 U.S. 434">348 U.S. 434 (1955), is on point here.

In General American Investors, taxpayer corporation had excluded from its gross income amounts forfeited to it as insider profits under section 16(b) of the Securities and Exchange Act of 1934, 48 Stat. 881, 896, and section 30(f) of the Investment Company Act of 1940, 54 Stat. 789, 837. It was held that such forfeitures constituted income to the taxpayer under section 22(a), I.R.C. 1939, the predecessor of section 61(a).

The forfeiture to Concord of the difference between the selling price of a membership and its transfer value is designed to prevent windfall profits from accruing to Concord's departing members. Such windfalls could be occasioned by the preferential 3 3/8-percent interest rate on Concord's mortgage loan. The forfeitures received by Concord, like those received by the taxpayer in General American Investors, may be used for any purpose. In affirming the Second Circuit which had affirmed us, the United States Supreme Court held in General American Investors as follows (348 U.S. at 436):

The reasons which dictated that result [the result in Commissioner v. Glenshaw Glass Co., 348 U.S. 426">348 U.S. 426 (1955)] are equally compelling here. We see no significant difference in the nature of these receipts which might make that ruling inapplicable. As in Glenshaw, the taxpayer realized the money in question free of any restrictions as to use. The payments in controversy were neither capital contributions nor gifts. * * *

The forfeitures to petitioner were clearly gain to it. We hold that they are includable in petitioner's gross income. Sec. 61(a).

Decision will be entered under Rule 155.

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Footnotes

• 1. Unless otherwise specified, all statutory references are to the Internal Revenue Code of 1954.↩

• 2. Petitioner's bylaws view this $ 50 fee as the par value of the membership.↩

• 1. Preclosing -- Net cash made available to petitioner from premortgage operations. As stated, supra↩, petitioner was operated for a period prior to the time FHA accepted a section consisting of several units. Monthly carrying charges would be collected as each unit was occupied before such FHA acceptance.

• 1. The discrepancies between the collections reflected on the books for the 1966, 1967, and 1968 increases to the replacement reserve and the funded figures found supra have not been explained to us. Likewise unexplained are discrepancies between the collection figures for the 1967 increases to the painting reserve and the operating reserve and funded figures found supra↩. We have found the facts as stipulated and the discrepancies have no effect on the resolution of the legal issues involved.

• 2. The "washer dryer reserve" of $ 130 in 1966 was eliminated the following year and was allocated to the various other book reserves.↩

• 3. The "vacancy reserve" of $ 4,465 in 1967 was reduced the following year by $ 1,111 which was allocated to the various other book reserves.↩

• 4. Respondent asserts that the contingency reserve adjustment in the statutory notice of deficiency should be increased for the years 1966 and 1968 as follows:

  ↩

  	10/31/66	10/31/68
  Reserve increase	$ 24,944	$ 67,376
  Amount reported
  on return		64,876
  Amount not reported
  on return	24,944	2,500
  Amount per statutory
  notice	19,398
  Increase	5,546	2,500

• 3. With regard to respondent's determination of deficiency as to the includability in income of Concord's reserve accounts, the parties have contested on brief only the amounts relating to the replacement, general operating, and painting reserves. We assume that the parties have reached an agreement concerning the amounts accumulated in the other reserves, notably the vacancy, self insurance, and the undesignated funds reserves.↩

• 4. SEC. 1388. DEFINITIONS; SPECIAL RULES.

  (a) Patronage Dividend. -- For purposes of this subchapter, the term "patronage dividend" means an amount paid to a patron by an organization to which part I of this subchapter applies --

  (1) on the basis of quantity or value of business done with or for such patron,

  (2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid, and

  (3) which is determined by reference to the net earnings of the organization from business done with or for its patrons.↩

  Such term does not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings from business done with or for other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions.

• 5. See Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 3.14 (1971); Rev. Rul. 74-563, 2 C.B. 38">1974-2 C.B. 38; accord, Minnequa University Club, T.C. Memo 1971-305">T.C. Memo. 1971-305, and Lake Petersburg Assn., T.C. Memo. 1974-55↩.

• 6. Accord, Rev. Rul. 75-371, 35 I.R.B. 7">1975-35 I.R.B. 7↩.

• 7. Minor amounts of income are derived from interest on Government obligations and savings accounts and from soda-vending machines.↩

• 8. Compare also Rev. Rul. 75-370, 35 I.R.B. 6">1975-35 I.R.B. 6↩.

• 9. To the extent that respondent bears the burden of proving the taxability of these amounts to Concord, we find that he has carried the burden. Rule 142(a), Tax Court Rules of Practice and Procedure.↩ In his statutory notices of deficiency for taxable years 1966 and 1968 respondent did not determine the respective amounts of $ 5,546 and $ 2,500, allocated to "paid in reserve" on petitioner's books, to be includable in Concord's gross income. The parties stipulated that "respondent asserts that the contingency reserve adjustment in the statutory notices of deficiency should be increased for the years 1966 and 1968" by those respective amounts. Petitioner did not argue that respondent bears the burden of proof as to these amounts.

• 10. SEC. 1032. EXCHANGE OF STOCK FOR PROPERTY.

  (a) Nonrecognition of Gain or Loss. -- No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation.↩

• 11. Concord's memberships are its "stock" for purposes of sec. 1032(a). Affiliated Government Employees' Distrib. Co. v. Commissioner, 322 F. 2d 872↩ (9th Cir. 1963).