Goudas v. C.I.R., 97-1022
| Decision Date | 23 February 1998 |
| Docket Number | No. 97-1022,97-1022 |
| Citation | 137 F.3d 368 |
| Parties | -831, 98-1 USTC P 50,217 Carl GOUDAS; Marilyn Goudas, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Frederick N. Widen (argued and briefed), Benjamin J. Ockner (briefed), Kahn, Kleinman, Yanowitz & Arnson, Cleveland, OH, for Petitioners-Appellants.
Stuart L. Brown, Internal Revenue Service, Office of Chief Counsel, Washington, DC, Regina S. Moriarty (argued and briefed), Teresa E. McLaughlin (briefed), U.S. Department of Justice, Appellate Section, Tax Division, Washington, DC, for Respondent-Appellee.
Before: GUY, NELSON, and SUHRHEINRICH, Circuit Judges.
Petitioners, Carl and Marilyn Goudas, 1 appeal the decision of the United States Tax Court upholding a $230,158 income tax deficiency. The Commissioner of Internal Revenue (Commissioner) had assessed that amount based on capital gains received by Carl Goudas (Goudas or Taxpayer) from the 1988 sale of a shopping mall. Goudas contended that based on the structure of the transaction, no gains had accrued and therefore it was a non-taxable event. For the reasons that follow, we find petitioner's claims to be without merit and conclude no error has been shown. Accordingly, we affirm.
In 1975, Taxpayer formed a general partnership, Pecaris Enterprises (Pecaris), with two other individuals, Christ Spillas and Peter Boyas. In 1978 the partners executed a written partnership agreement. Under that agreement, Boyas, who had provided the initial financing for the partnership, took a 50 percent interest, while the other two each took 25 percent.
Pecaris was formed to purchase and hold commercial real estate. Spillas handled financial matters, including rent collection, bookkeeping and taxes. An accounting firm prepared the partnership's taxes. As managing partner, Goudas identified prospective properties and negotiated their purchase and sale. Boyas was not involved in the partnership's day-to-day functioning.
In 1987, Goudas and another individual, Vincent S. Giorgi, formed the general partnership, Coastal Investors Co. (Coastal), to purchase a shopping center located in Willowick, Ohio (the Mall) that was owned by Pecaris. Under the terms of Coastal's partnership agreement, Goudas had a 90 percent interest in the partnership and Giorgi, a 10 percent interest. The agreement required the partners to contribute initial capital to acquire the Mall and to provide initial working capital in proportion to their partnership interest.
Coastal obtained financing for the purchase from Canada Life Assurance Company (Canada Life). Canada Life valued the Mall at $5.5 million and was willing to lend $4,100,000, 75 percent of that value. Goudas, as a partner in both Pecaris and Coastal, acted on behalf of both entities in negotiating the purchase agreement and the determination of a purchase price. Goudas' partners in Pecaris, however, did not know until after the sale that Goudas held an ownership interest in Coastal.
A $4.8 million figure was set, $700,000 more than the $4.1 million figure to be provided by Canada Life. 2 All three Pecaris partners executed the purchase agreement on behalf of Pecaris and Giorgi signed for Coastal. As arranged by Goudas, Continental Title Company (Continental) provided escrow services and title insurance for the transaction. The mortgage loan proceeds of $4,100,000 were deposited in an escrow account. The additional $700,000 was made up by two credits, one for $100,000 and one for $600,000. The $100,000 figure represented a brokerage commission purportedly earned by Goudas. 3 The $600,000 figure reflected a down payment that Goudas told Continental he had already collected from Pecaris. 4 This amount was to be deducted from Goudas' "share of distribution" from the escrow account. Continental's fee was determined based on the $4.8 million purchase price.
Coastal recorded the purchase in its general ledger. The $700,000 portion of the $4,800,000 purchase price that was not part of the mortgage proceeds was entered as a capital contribution by Goudas. Giorgi also initially contributed $70,100 in capital to the partnership.
Based on Goudas' 25 percent partnership interest in Pecaris, he was entitled to proceeds from the sale of the Mall, after liabilities and closing costs, in the amount of $695,687. Spillas, who had the same percentage interest as Goudas in the partnership, received a direct cash payment from the escrow account in that amount. Boyas also received a direct cash payment of $1,391,566 for his respective share. Goudas actually received $95,783, consisting of his share minus the $600,000 credit to Pecaris.
Pecaris reported the transaction as a sale of the Mall for $4,800,000 on its Form 1065 U.S. Partnership Return of Income for 1988. The gain recognized, $3,311,873, was computed as follows:
Gross sales price ... $4,800,000
Cost or other basis plus expenses of sale $3,022,670
Depreciation allowed ... $1,534,543
Adjusted basis ... $1,488,127
Total gain ... $3,311,873
Twenty-five percent of this amount, $827,968, was attributed to Goudas.
In contrast, Coastal and Goudas reported the transaction as non-taxable. Coastal's year-end balance sheet disregarded Goudas' capital contribution of $700,000. On Goudas' return, he attached a Form 8082, Notice of Inconsistent Treatment or Amended Return, indicating that he was taking a position inconsistent from Pecaris. Goudas reported that he had not received any gains but, rather, had "Traded Up Real Estate Interest In Like-Kind Exchange."
The Internal Revenue Service audited Goudas and issued a notice of deficiency for the $230,158 tax calculated to be owed on the $827,968 capital gain. The IRS also assessed additions to tax for negligence and substantial understatement of tax. See I.R.C. §§ 6653, 6661. In response, Goudas filed a petition in Tax Court challenging these amounts. The Tax Court upheld the deficiency but rejected the additions to tax. Taxpayer now appeals.
Taxpayer contends that the Tax Court improperly characterized the nature of the conveyance. Instead of finding that Pecaris conveyed a 100 percent interest in the Mall to Coastal in exchange for $4.8 million, Taxpayer alleges the court should have found that Pecaris conveyed a 75 percent interest, in exchange for $4.1 million. Goudas further contends that either of two scenarios then occurred: (1) he separately conveyed his 25 percent interest to Coastal as distributed by Pecaris or (2) Pecaris made a capital contribution to Coastal of a 25 percent interest in the Mall. That partnership interest, in turn, was then distributed by Pecaris to Goudas. 5 Goudas claims that by failing to recognize the true structure of the transaction, the court erroneously evaluated his claim and the determination upholding the deficiency must be reversed. In particular he challenges the court's findings that (1) gain resulted to Goudas from the transaction; (2) the dominant aspect of the transaction was a sale for cash; (3) the direct deed of the Mall from Pecaris to Coastal precluded Goudas' contention that he received from Pecaris a distribution of a 25 percent interest in the Mall; and (4) Goudas failed to raise the alternative argument that the transaction involved the part-sale, part-capital contribution by Pecaris of the Mall to Coastal. Taxpayer concedes that "[i]n the event a 100% interest in the Mall was sold by Pecaris ... resulting in an aggregate gain to Pecaris of $3,311,873, then appellants ... would consequently agree with the Tax Court's position that $827,968 of the gain should be allocated to Mr. Goudas."
Tax treatment of income derived from partnerships is governed by subchapter K of the Internal Revenue Code. I.R.C. § 701 et seq. A partnership is not a taxable entity. Id. § 701. Rather, income is reported through individual partners' returns, based on distributive...
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