Gyro Engineering Corporation, a California Corporation v. United States

The taxpayer, Gyro Engineering Corporation, appeals from a judgment of the district court denying its claim for refund of moneys paid pursuant to the Commissioner’s determination of deficiencies in income tax for the years 1959 and 1960.

The dispute arose out of the transfer of three apartment house properties to Gyro by its two principal stockholders, Chris Mowry and Natalie, his wife. In reporting income Gyro declared that the property was acquired by purchase and calculated depreciation based upon the portion of the purchase price allocated to improvements. 26 U.S.C. §§ 167 (g), 1011, 1012. The Commissioner rejected Gyro’s purchase-priee-depreciation basis and, applying the Mowrys’ substantially lower basis, assessed deficiencies. The district court, declaring that the transaction in substance was little more than “a paper tax device or ‘gimmick’,” concluded that the transfer was not pursuant to sale but rather was a contribution by the Mowrys to Gyro’s capital; it applied 26 U.S.C. § 362 (a) (2), which provides that a transferee’s basis for property so acquired remains the same as “in the hands of the trans-feror.” It entered judgment against Gyro. We reverse.

On the surface…