Tufts v. Comm'r of Internal Revenue , Docket Nos. 1386-76
| Decision Date | 23 August 1978 |
| Docket Number | 1429-76,1434-76—1436-76.,1432-76,Docket Nos. 1386-76 |
| Citation | 70 T.C. 756 |
| Parties | JOHN F. TUFTS and MARY A. TUFTS, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Ps, partners in a general partnership which owned an apartment complex, sold their partnership interests to a third party. At the time of the sale, the complex had a fair market value of $1,400,000, but was subject to a nonrecourse mortgage of $1,851,500. Held, Ps must include in the amount realized upon the sale of their partnership interests the full amount of the nonrecourse liability.
2. Held, further, Ps are not entitled to an award of attorney's fees under the Civil Rights Attorney's Fees Awards Act of 1976. Ronald M. Mankoff, Charles M. Meadows, Jr., Robert Edwin Davis, and Ronald G. Williams, for the petitioners.
David L. Jordan, for the respondent.
The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:
+-----------------------------------------------------------------+
¦Petitioner ¦TYE ¦Deficiency ¦
+-------------------------------------------+--------+------------¦
¦ ¦ ¦ ¦
+-------------------------------------------+--------+------------¦
¦John F. Tufts and Mary A. Tufts ¦12/31/72¦$30,398.75 ¦
+-------------------------------------------+--------+------------¦
¦Clark, Inc. ¦7/31/73 ¦12,729.68 ¦
+-------------------------------------------+--------+------------¦
¦William T. Steger and Ruth C. Steger ¦12/31/72¦30,405.00 ¦
+-------------------------------------------+--------+------------¦
¦Robert C. Austin, Sr., and Birdie L. Austin¦12/31/72¦6,683.49 ¦
+-------------------------------------------+--------+------------¦
¦J. C. Pelt and Jewel Pelt ¦12/31/72¦2,707.00 ¦
+-------------------------------------------+--------+------------¦
¦James E. Stephens and Eula F. Stephens ¦12/31/72¦3,360.89 ¦
+-----------------------------------------------------------------+
The Commissioner also determined, in the case of John F. Tufts and Mary A. Tufts, an addition to tax under section 6651(a) of the Internal Revenue Code of 19542 in the amount of $8,209.25 and an addition to tax under section 6653(a) in the amount of $1,519.24, but the Commissioner has conceded that the petitioners are not liable for such additions. The issues remaining for decision are: (1) Whether the amount realized by the petitioners upon the sale of their partnership interests includes nonrecourse liabilities allegedly in excess of the fair market value of the property owned by the partnership; and (2) whether the petitioners are entitled to an allowance for attorney's fees under the Civil Rights Attorney's Fees Awards Act of 1976.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, John F. Tufts and Mary A. Tufts (husband and wife), William T. Steger and Ruth C. Steger (husband and wife), and Robert C. Austin, Sr., and Birdie L. Austin (husband and wife), all resided in Dallas, Tex., at the time they filed their petitions in these cases. The petitioners, J. C. Pelt and Jewel Pelt (husband and wife), and James E. Stephens and Eula F. Stephens (husband and wife), all resided in Duncanville, Tex., at the time they filed their petitions in these cases. The petitioner, Clark, Inc. (Clark), is a Texas corporation whose mailing address was Duncanville, Tex., at the time it filed its petition in this case. Mr. and Mrs. Tufts filed their joint Federal income tax return for 1972 with the District Director of Internal Revenue, Dallas, Tex. Mr. and Mrs. Steger, Mr. and Mrs. Austin, Mr. and Mrs. Pelt, and Mr. and Mrs. Stephens filed joint Federal income tax returns for 1972 with the Internal Revenue Service Center, Austin, Tex. Clark filed its corporate Federal income tax return for the taxable year ending July 31, 1973,3 with the Internal Revenue Service Center, Austin, Tex.
On August 1, 1970, Mr. Pelt and Clark4 entered into a general partnership agreement; the newly formed partnership was known as Westwood Townhouses (the partnership). The agreement provided for allocation of partnership profits and losses in the following proportions: Mr. Pelt, 90 percent and Clark, 10 percent. Neither Mr. Pelt nor Clark made any capital contributions to the partnership at the time of its formation.
On August 7, 1970, the partnership entered into a building loan agreement with the Farm & Home Savings Association (F. & H.), under the terms of which F. & H. agreed to loan the partnership $1,851,500 for the construction of a 120-unit apartment complex in Duncanville, Tex.5 (the complex). The complex was endorsed for mortgage insurance under section 221(d)(4) of the National Housing Act, 12 U.S.C. sec. 1715 l(d)(4). Also on August 7, 1970, the partnership executed a note and a deed of trust in favor of F. & H. Under the terms of the note, interest alone (at a rate of 8.5 percent per annum) was payable monthly, commencing September 1, 1970, to and including April 1, 1972. Beginning May 1, 1972, installments of interest and principal in the sum of $13,573.24 were payable monthly until the entire indebtedness was paid. In any event, the balance of principal remaining unpaid, plus accrued interest, was due and payable April 1, 2012. Under the terms of the note and deed of trust, neither the partnership nor its partners assumed any personal liability for the payment of the loan.
On August 21, 1970, the partnership agreement was amended to admit Mr. Tufts, Mr. Steger, Mr. Stephens, and Mr. Austin as additional general partners. Under the terms of the amendment to the agreement, the profits and losses of the partnership were allocated as follows:
+-------------------------+
¦Mr. Pelt ¦25 percent ¦
+-------------+-----------¦
¦Clark ¦10 percent ¦
+-------------+-----------¦
¦Mr. Tufts ¦25 percent ¦
+-------------+-----------¦
¦Mr. Steger ¦25 perecnt ¦
+-------------+-----------¦
¦Mr. Stephens ¦7.5 percent¦
+-------------+-----------¦
¦Mr. Austin ¦7.5 percent¦
+-------------------------+
None of the newly admitted partners made any capital contribution to the partnership at the time he was admitted as a partner. The new partners were relatives and friends of Mr. Pelt. In addition, Mr. Steger and Mr. Tufts helped the partnership to obtain financing to build the complex. Although Mr. Pelt had been a builder since 1924, he had not built any apartments previously.
Construction of the complex commenced a short time after financing was arranged. The complex was completed on or about August 21, 1971, at a cost within the projected budget.
As a result of the nonrecourse liability of the partnership, each partner's adjusted basis in his partnership interest on August 21, 1970, was as follows:
During the taxable year 1971, the partners made contributions of cash to the partnership in the following amounts:
+----------------------------+
¦Partner ¦Contribution ¦
+------------+---------------¦
¦ ¦ ¦
+------------+---------------¦
¦Mr. Pelt ¦$21,439 ¦
+------------+---------------¦
¦Clark ¦308 ¦
+------------+---------------¦
¦Mr. Tufts ¦2,771 ¦
+------------+---------------¦
¦Mr. Steger ¦2,771 ¦
+------------+---------------¦
¦Mr. Stephens¦231 ¦
+------------+---------------¦
¦Mr. Austin ¦831 ¦
+----------------------------+
During the taxable year 1972, Mr. Pelt contributed an additional $15,861.00 to the partnership. None of the other partners made any additional contributions to the partnership.
During the taxable years 1970, 1971, and 1972,6 the partners claimed the following amounts as ordinary losses resulting from the partnership operation, exclusive of depreciation:
+------------------------------------------+
¦Partner ¦1970 ¦1971 ¦1972 ¦
+------------+-------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+------------+-------+----------+----------¦
¦Mr. Pelt ¦$21,946¦$40,409.00¦$20,629.25¦
+------------+-------+----------+----------¦
¦Clark ¦8,779 ¦16,163.40 ¦8,251.50 ¦
+------------+-------+----------+----------¦
¦Mr. Tufts ¦21,946 ¦40,409.00 ¦20,629.25 ¦
+------------+-------+----------+----------¦
¦Mr. Steger ¦21,946 ¦40,409.00 ¦20,629.25 ¦
+------------+-------+----------+----------¦
¦Mr. Stephens¦6,584 ¦12,122.80 ¦6,188.38 ¦
+------------+-------+----------+----------¦
¦Mr. Austin ¦6,584 ¦12,122.80 ¦6,188.38 ¦
+------------------------------------------+
In addition, during the taxable years 1971 and 1972, the partners claimed as their allocable shares of depreciation the following amounts:
As of August 28, 1972, the adjusted basis of each partner in the partnership was as follows:
+------------------------------+
¦Partner ¦Adjusted basis ¦...To continue reading
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