Lomas Santa Fe, Inc. v. Comm'r of Internal Revenue

• Citation: 74 T.C. 662
• Decision Date: 09 July 1980
• Docket Number: Docket No. 6578-77.
• Parties: LOMAS SANTA FE, INC., and SUBSIDIARY COMPANIES: LOMAS SANTA FE COUNTRY CLUB, NORCO LANDSCAPE & MAINTENANCE CO., PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

74 T.C. 662

LOMAS SANTA FE, INC., and SUBSIDIARY COMPANIES: LOMAS SANTA FE COUNTRY CLUB, NORCO LANDSCAPE & MAINTENANCE CO., PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6578-77.

United States Tax Court

Filed July 9, 1980.

As the first step in the development of a luxury residential community, X built a golf course and country club. The golf course and country club were to serve as a marketing tool for adjacent residential properties. To solve real estate title problems and to insulate X and its operations from the membership of the country club, X formed Y as a wholly owned subsidiary and transferred the assets of the golf course and country club to Y. Some assets were transferred outright, but some were transferred subject to a retained estate for 40 years in X. The estate for years was retained so that X could operate the golf course and country club until the residential properties were sold. Held, Y is to be respected as an entity separate from X. Held, further, the transfer of assets to Y by X and the existence of the estate for 40 years will not be disregarded for tax purposes.

X claimed a depreciation deduction due to the amortization of the estate for 40 years, which deduction was disallowed by respondent. Held, the retained estate for 40 years is not an interest which is subject to an allowance for depreciation under sec. 167(a), I.R.C. 1954. Cf. United States v. Georgia Railroad & Banking Co., 348 F.2d 278 (5th Cir. 1965), revg. an unreported case (S.D. Ga. 1963, 11 AFTR 2d 1435, 63-1 USTC par. 9443), cert. denied 382 U.S. 973 (1966). William P. Shannahan and John S. Huiskamp, for the petitioners.

Louis A. Boxleitner, for the respondent.

GOFFE, Judge:

The Commissioner determined a deficiency in the Federal income tax of petitioners for the taxable year ended July 31, 1973, in the amount of $107,460.76. Due to concessions, one issue remains to be decided: whether an estate for 40 years retained by petitioner Lomas Santa Fe, Inc., is an interest subject to an allowance for depreciation under section 167(a), I.R.C. 1954. ¹

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Lomas Santa Fe, Inc. (hereinafter Lomas), and its two subsidiary corporations, Lomas Santa Fe Country Club and Norco Landscape & Maintenance Co., filed their consolidated Federal income tax return for the taxable year ended July 31, 1973, with the Office of the Internal Revenue Service, Fresno, Calif.² Petitioners, all of which are California corporations, had their principal offices in Solana Beach, Calif., when their petition was filed in this proceeding.

At all times relevant to this proceeding, Theodore E. Gildred (hereinafter Gildred) owned all of the outstanding capital stock of Lomas, was the chairman of the board of directors of Lomas,³ and was the president of Lomas. Thomas E. Kern (hereinafter Kern) was at all times relevant to this proceeding a member of the board of directors of Lomas and was a vice president of Lomas.

In 1964, Lomas began to formulate a plan for the development of a high quality residential community. The community, which was to be called Lomas Santa Fe, was to be developed on acreage which had been purchased in 1959 from the Rancho Santa Fe Irrigation District. The plan included a neighborhood shopping center, residential units (single-family homes, condo__miniums, and apartments), and a championship golf course and country club. The development of the golf course and country club was contemplated for two major reasons: first, to enhance the value of the residential properties; and second, to ease the density restrictions imposed by the Rancho Santa Fe Irrigation District.

Gildred had considerable experience as a developer and, based upon that experience, he believed that houses which bordered a golf course would be in greater demand and would fetch higher prices than those which did not. Lomas intended that the golf course would be the hub of the residential community of Lomas Santa Fe. It was contemplated that the golf course would attract the higher income residential market and would greatly enhance the value of the lots which would be sold for residential use. The golf course was needed as an amenity to attract potential purchasers of residential properties because Lomas Santa Fe was some distance from the city of San Diego. In addition to the obvious recreational aspects of the golf course, its cart paths would enable residents of Lomas Santa Fe to travel from their homes to the shopping center via electric cart or similar vehicle.

The Rancho Santa Fe Irrigation District imposed strict density limits upon developments within that district.⁴ The acreage held by Lomas was within that district, and it accordingly was subject to deed restrictions upon the density of residential development thereon. In 1967, a master plan for the development of Lomas Santa Fe was submitted to the San Diego County Board of Supervisors and to the Rancho Santa Fe Irrigation District, both of which had control over the development of the acreage on which Lomas Santa Fe was to be built. In approving the master plan, the San Diego County Board of Supervisors and the Rancho Santa Fe Irrigation District imposed the condition that an open-space easement on the acreage used for the golf course be dedicated in perpetuity to the county of San Diego.⁵ Such an easement was granted, and the master plan was approved. Because of the dedication of acreage for the golf course to open-space use, the Rancho Santa Fe Irrigation District raised the density limits for the remaining acreage, permitting roughly the same number of dwellings to be built on the remaining land as would have been constructed on the total acreage.

The golf course and country club, being a central and dominant feature of Lomas Santa Fe, was to be used as an essential marketing tool and sales vehicle in the offer of residential properties. Lomas did not intend to keep the golf course and country club indefinitely, but rather, intended to dispose of it when its usefulness as a marketing tool expired.

The idea of including a golf course as an integral part of a development community was not novel, but residential development usually preceded the development of the golf course. As a result, the promises of the developer were the most tangible assurance that home buyers would receive concerning the completion of their development community. In contrast, Lomas undertook the development of the golf course in 1967 as the first step in its project to develop Lomas Santa Fe. Gildred was convinced that his marketing approach would produce results superior to those attainable with only the promise of a golf course.

Lomas Santa Fe Country Club (hereinafter Country Club) was organized on November 14, 1968. Country Club was formed to serve as a vehicle for the refinement of title to the residential properties and to ensure that membership in the country club would not constitute an equity interest in Lomas.

On February 11, 1969, Country Club issued 72,869 shares of its capital stock to Lomas in exchange for certain property as described below. The 72,869 shares so exchanged were all of the issued and outstanding shares of stock in Country Club. Lomas was the sole shareholder of Country Club until July 26, 1973, when 21 percent of such shares were sold by Lomas to Gildred. At all times relevant to this proceeding, Lomas controlled the board of directors of Country Club.

On December 2, 1968, at a meeting of the board of directors of Lomas, several resolutions were adopted concerning a sale of the golf course facilities which Lomas had already developed and which Lomas still owned. The resolutions were as follows:

RESOLVED that the officers of (Lomas) are hereby authorized and instructed to offer for sale, and to sell, to Lomas Santa Fe Country Club, in return for shares of capital stock in Lomas Santa Fe Country Club, as of a date certain for evaluation purposes, all of the real property set aside, planned and developed as a Country Club, subject thereto to an estate for 40 years in the property generally known as, and containing thereon, the golf professional shop, the existing clubhouse, the area for the contemplated future clubhouse, and the golf course proper.

RESOLVED FURTHER that in order to insure the control of (Lomas) for future development of real property in the vicinity of the property on which the golf course is located that there will be specifically excluded from the conveyance to Lomas Santa Fe Country Club, the tenth fairway and the areas known as the east and west parkways, but the use of such tenth fairway shall be granted pursuant to a separate agreement between (Lomas) and Lomas Santa Fe Country Club, or an easement thereon.

RESOLVED FURTHER that (Lomas) will maintain and operate the golf course, bar, dining and related facilities pursuant to its reserved estate for years, and that this corporation will repair, maintain and make improvements upon the golf course, bar, dining and related facilities in consideration for 75% of the membership dues charged by Lomas Santa Fe Country Club for the use of all facilities located upon the subject property.

RESOLVED FURTHER that Lomas Santa Fe Country Club would have administrative control over all of the operations and facilities upon the subject real property hereinabove referred to.

By letter dated December 3, 1968, and pursuant to the foregoing resolutions, Lomas submitted its offer to Country Club. Lomas offered to transfer property valued by Lomas at $728,680.89 and cash of $9.11 in exchange for 72,869 shares of capital stock in Country Club at the par value of $10 per share. In addition to a technical description of the property transferred, Lomas explained and expanded upon its offer in the letter as follows:

You will note that the real property over which the...