Bartolme v. Comm'r of Internal Revenue, Docket No. 1948-72.
| Decision Date | 19 September 1974 |
| Docket Number | Docket No. 1948-72. |
| Parties | G. RALPH BARTOLME AND BARBARA G. BARTOLME, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert B. Kosse, for the petitioners.
Stephen Zerick, for the respondent.
Simi Valley Investment Co. (SVIC) was a limited partnership formed to acquire, develop, and sell land. In 1964 it acquired a 270-acre tract of land, giving three notes totaling $1,859,000, as consideration therefor. SVIC prepaid 53 1/2 months' interest on these notes, in the amount of $580,000, in 1964 and deducted the entire amount as interest on its partnership return for 1964. Petitioner was a member of an investor group which acquired a 1/3 interest in SVIC in 1965. On its partnership return for 1965 SVIC elected, pursuant to sec. 754, I.R.C. 1954, and related sections, to adjust the basis of the investor group in the partnership properties, allocating $12,193.58 to petitioner's interest in an asset designated ‘unamortized prepaid interest.’ On his tax returns for the years 1965, 1966, 1967, and 1968 petitioner claimed a deduction for amortization of the prepaid interest, which respondent denied. Held: Petitioner is entitled to deductions for amortization of his adjusted basis in the prepaid interest over the remainder of the prepaid interest period. Amount of petitioner's adjusted basis determined.
The Commissioner determined the following deficiencies in petitioner's Federal income tax:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1965 ¦$325.29 ¦
+------+-------------¦
¦1966 ¦1,735.37 ¦
+------+-------------¦
¦1967 ¦1,818.11 ¦
+------+-------------¦
¦1968 ¦1,953.13 ¦
+--------------------+
Petitioners were members of an investment group which purchased a one-third interest in a limited partnership in 1965. In 1964, the limited partnership prepaid 53 1/2 months of interest on certain notes and claimed a deduction for that entire amount. In 1965, the partnership elected, pursuant to section 754, I.R.C. 1954, to adjust the basis of the partnership property in respect to the petitioners and other members of the investment group. The principal issue before us is whether petitioners may allocate a part of their purchase price to, and thus acquire an adjusted basis in, an intangible asset designated ‘unamortized prepaid interest,‘ and amortize their new basis in this intangible asset over its remaining life, i.e., 37 1/2 months.
Certain of the facts have been stipulated and are so found. The stipulation of facts together with attached exhibits are incorporated herein by this reference.
Petitioners G. Ralph Bartolme and Barbara G. Bartolme are husband and wife residing in Arcadia, Calif. Petitioners filed their joint Federal income tax returns for the years 1965, 1966, 1967, and 1968, with the Western Service Center, Ogden, Utah. They reported their income on the cash method of accounting.
G. Ralph Bartolme (hereinafter Bartolme or petitioner) was, during the period in issue, vice president of VSI Corp., a manufacturing company. Barbara Bartolme was a housewife during this time period.
The Simi Valley Investment Co. (hereinafter SVIC) is a limited partnership organized pursuant to the laws of California and was formed in 1964 with Property Research Corp. as the general partner. SVIC filed its U.S. partnership returns for the calendar years 1964, 1965, 1966, 1967, and 1968 on the cash basis of accounting.
According to its articles of limited partnership, SVIC was formed to acquire, own, hold for investment, improve, sell, exchange, transfer, or dispose of certain parcels of real property (hereinafter Simi land) situated in Simi Valley, Ventura County, Calif.
The Simi Valley is located approximately 50 miles northwest of Los Angeles and 30 miles east of Ventura. Prior to 1960, Simi Valley was primarily an agricultural community, but commencing around 1960, extensive and rapid residential development of the Simi Valley area began. There also occurred an explosive growth in Simi Valley's population from 1960 through 1965.
SVIC purchased on June 24, 1964, 270.37 acres of land in the Simi Valley for $1,859,000. In 1962, a freeway route had been adopted which was designed to cross the land purchased by SVIC; however, this freeway had not been completed in 1965.
Three notes secured by deeds of trust were executed by SVIC for the purchase of this 270.37 acres of land. The terms of the notes provided for prepaid interest. No payments of principal were required during the first 6 years. Pursuant to the notes' requirements, in 1964 SVIC prepaid interest on the notes in the amount of $580,000, representing prepaid interest for a period totaling 53 1/2 months.
The entire amount of prepaid interest was deducted as an interest expense on SVIC's partnership return for the calendar year 1964. The books of SVIC treated the interest deduction as an expense item.
M. Sears & Co. (hereinafter Sears), a limited partnership, owned a 33 1/3-percent interest in SVIC from the time of SVIC's organization until the sale by Sears of this interest in October 1965. On its partnership return for 1964, Sears deducted its distributive share of a loss from SVIC. Actually, the major portion of Sears' share of the SVIC loss resulted from its distributive share of the SVIC interest expense of $580,000.
On or about September 16, 1965, Property Research Corp., the general partner of SVIC, communicated by letter to Sears an offer Property Research had received from Southwest Investment Co. to purchase Sears' 33 1/3-percent interest in SVIC. Property Research's letter to Sears stated in pertinent part:
This offer results in a net price ($9400 per acre) to M. Sears Company in excess of our original projection. The original investment analysis forecast a gross price of $9000 per acre by July of 1967. Exclusive of any tax benefits you may have received through your share of the partnership deduction in 1964 ($193,280.26), the offer to purchase your interest affords you substantial profit. We recommend you accept this offer.
On or about October 4, 1965, Sears received a letter from Southwest Investment Co. constituting Southwest's offer to purchase Sears' entire interest in SVIC. Sears accepted this offer on October 4, 1965.
On or about October 29, 1965, Southwest Investment Co. assigned its rights to acquire the 33 1/3-percent interest owned by Sears in SVIC to an investor group consisting of petitioner G. Ralph Bartolme and seven others (hereinafter investor group). The investor group paid an aggregate cash consideration for their one-third interest in SVIC in the amount of $312,312, and assumed a proportionate interest in SVIC's liabilities, which amounted to $623,526. Thus, the aggregate adjusted basis to the investor group of their interest in SVIC was $935,838 on the date of transfer.
Petitioner's participation in the investor group was 9.09 percent which resulted in his acquiring a 3-percent interest in SVIC. Petitioner's cash consideration for this 3-percent interest was $28,392. Bartolme's proportionate interest in SVIC's assumed liabilities was $56,679. On the date of transfer, his adjusted basis in his interest in SVIC was $85,071.
In October 1965, at the time of the transfer, the books of SVIC reflected assets consisting of land having a book value of $1,901,804, cash in the amount of $3,819, loans receivable in the amount of $5,000, and unamortized loan fee of $600. The parties agree that for purposes of this case, at the time of the transfer, the unamortized loan fee had a fair market value equal to its book value of $600; the cash had a fair market value of $3,819; and the loan receivable had a fair market value equal to its book value of $5,000. The parties also stipulated that for purposes of allocation the fair market value of the 270.37 acres of land, at the time of the transfer, was $2,640,000.
In 1965, Sears reported capital gain on the sale of its 33 1/3-percent partnership interest in SVIC to the investor group. At the time of the transfer the book value of Sears' capital account in SVIC was $7,104.47.
After this transfer by Sears of its partnership interest in SVIC to the investor group, the SVIC partnership filed an election for treatment under section 754, I.R.C. 1954, for the years 1965, 1966, 1967, and 1968, thereby electing to adjust the basis of the transferee partners in the partnership properties.
When the SVIC partnership filed the election pursuant to section 754, it claimed to have two partnership assets to which an adjustment in the basis of partnership property could be allocated. These alleged assets were: Land in Simi Valley and an item which was designated ‘unamortized prepaid interest.’ At the time of transfer of Sears' partnership interest to the investor group, SVIC determined that if the principal amount due on the notes issued to acquire the Simi Valley land were prepaid, then approximately $406,493 in prepaid interest would be recovered since 37 1/2 months of the original 53 1/2-month prepayment period had not expired.
SVIC determined that the amount to be added as an adjustment to the investor group's basis in partnership property was $305,207.53.1 On its partnership return for 1965, SVIC allocated this amount as adjustments in the basis of the members of the investor group in the eligible partnership properties as follows:
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¦ ¦Purchased ¦ ¦Purchasing¦
+--------------------------------------------+----------+----------+----------¦
¦Investor group partner ¦interest ¦Land ¦partner's ¦
¦ ¦cost ¦ ¦ ¦
+--------------------------------------------+----------+----------+----------¦
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Fed. Home Loan Mortg. Corp. v. Comm'r of Internal Revenue, s. 3941–99
...entitlement to amortization deductions. IT & S of Iowa, Inc. v. Commissioner, 97 T.C. at 511; see also Bartolme v. Commissioner, 62 T.C. 821, 830–832, 1974 WL 2673 (1974).16 Our resolution of the legal question in these cases is, in any event, not dependent upon accounting principles or whe......