74 T.C. 684 (1980), 3229-28, Goodman v. C.I.R.

Docket Nº:3229-78.
Citation:74 T.C. 684
Opinion Judge:SCOTT, Judge:
Party Name:WILLIAM J. GOODMAN, GLORIA GOODMAN, BARRY S. GOODMAN, MICHAEL A. GOODMAN, LAUREN B. GOODMAN, NORMAN A. ROSSMAN, MARILYN ROSSMAN, and PAULA M. ROSSMAN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
Attorney:Charles H. Egerton and Lauren B. Goodman, for the petitioners. Thomas K. Purcell, for the respondent.
Case Date:July 16, 1980
Court:United States Tax Court
 
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Page 684

74 T.C. 684 (1980)

WILLIAM J. GOODMAN, GLORIA GOODMAN, BARRY S. GOODMAN, MICHAEL A. GOODMAN, LAUREN B. GOODMAN, NORMAN A. ROSSMAN, MARILYN ROSSMAN, and PAULA M. ROSSMAN, PETITIONERS

v.

COMMISSIONER of INTERNAL REVENUE, RESPONDENT

No. 3229-78.

United States Tax Court

July 16, 1980

Held: 1. The sale of an apartment building by two individuals to trusts of which they were trustees were bona fide sales recognizable of tax purposes where the declarations of trusts authorized such sales and the sales were advantageous to the trusts even though the following day the trusts sold the apartments to a third party;

2. Where the mortgage note provided for payments by the purchaser of property to a bank so long as purchaser had the written commitment of the bank to make payments from the funds received from the purchaser on a preexisting mortgage, purchaser took property subject to the preexisting mortgage.

Charles H. Egerton and Lauren B. Goodman, for the petitioners.

Thomas K. Purcell, for the respondent.

Page 685

SCOTT, Judge:

Respondent determined the following deficiencies and additions to tax under section 6653(a), I.R.C. 1954,[1] in petitioners' Federal income taxes for the calendar year 1973:

Deficiencies in Additions to tax
Name income tax under sec.6653(a)
William J. and Gloria Goodman $55,346.51 $2,767.33
Norman A. and Marilyn Rossman 51,701.07 2,585.05
Barry S. Goodman 865.00 0
Lauren B. Goodman 865.00 0
Michael A. Goodman 705.05 0
Paula M. Rossman 692.00 0
Following concessions by each of the parties, the issues remaining for decision are: (1) Whether the sale of apartments by petitioners William J. Goodman and Norman A. Rossman to six trusts of which they were trustees and the sale by the trusts the following day to an unrelated party should be regarded as a single sale from petitioners William J. Goodman and Norman A. Rossman to the unrelated party for Federal income tax purposes; and (2) whether the unrelated party, if the transactions are viewed as one, or the trusts, if both transactions are recognized, " assumed" the mortgage on the apartments or took the apartments " subject to" the mortgage so that the excess of the mortgage over the basis of the property to Mr. Goodman and Mr. Rossman is included in the first-year payments to them under the installment method of reporting income. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners William J. and Gloria Goodman, husband and wife, who resided in Altamonte Springs, Fla., at the time of the filing of their petition in this case, filed a joint Federal income tax return for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioners Norman A. and Marilyn Rossman, husband and wife, who resided in Orlando, Fla., at the time of the filing of their petition in this case, filed a joint Federal income tax return Page 686 for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioner Barry S. Goodman, who resided in Altamonte Springs, Fla., at the time of the filing of the petition in this case, filed a Federal income tax return for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioner Lauren B. Goodman, who resided in Altamonte Springs, Fla., at the time of the filing of the petition in this case, filed a Federal income tax return for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioner Michael A. Goodman, who resided in Tucson, Ariz., at the time of the filing of the petition in this case, filed a Federal income tax return for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioner Paula M. Rossman, who resided in Orlando, Fla., at the time of the filing of the petition in this case, filed a Federal income tax return for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. [2] The Executive House Apartments partnership (the EHA partnership), owned equally by petitioners William J. Goodman and Norman A. Rossman, filed a Federal United States Partnership Return of Income, Form 1065, for the calendar year 1973 with the Internal Revenue Service Center in Chamblee, Ga. Petitioner William J. Goodman (Mr. Goodman) has been in the real estate business--investment, development, construction, and operation--since 1946. Petitioner Norman A. Rossman (Mr. Rossman) has been in the real estate business--investment, development, construction, and operation--since 1956. Mr. Goodman and Mr. Rossman through various entities have conducted their real estate business together since 1958. On February 23, 1961, Morris Pianka, Mr. Goodman's father-in-law, created the Lauren Beth Goodman Trust, the Michael Page 687 Allen Goodman Trust, and the Barry Stuart Goodman Trust (the Goodman trusts). Mr. Pianka contributed $2,500 to each of the three trusts at their inception. No further contributions were made to the trusts. Mr. Goodman was designated the trustee of each trust at inception, and the beneficiaries of the three individual trusts were Mr. Goodman's three children, Lauren, Michael, and Barry, respectively. On February 23, 1961, Sadye Rossman, Mr. Rossman's mother, created the Paula Michele Rossman Trust, the Ruth Jordana Rossman Trust, and the Nancy Ann Rossman Trust. Sadye Rossman contributed $2,500 to each of the three trusts at their inception. No further contributions were made to the trusts. Mr. Rossman was designated the trustee of each trust at inception, and the beneficiaries of the three individual trusts were Mr. Rossman's three children, Paula, Ruth, and Nancy, respectively. The six declarations of trust were identical except for the individuals named as grantor, trustee, and beneficiary. The trustee was given great discretion in his decisions on investments and distributions. Paragraph (7) of each " Declaration of Trust" provided that " In the administration of the Trust, the Trustee shall have the following powers, all of which shall be exercised in a fiduciary capacity, solely in the interest of the beneficiaries." Subparagraphs (a) through (o) of paragraph (7) enumerated broad powers of the trustee (1) to hold as an investment for the trust any property as long as he deems proper, whether or not the property is income producing; (2) to rent or lease trust property upon such terms and conditions as he deems proper; (3) to sell or convey trust property or to exchange it for other property or for stock in a corporation (whether or not created by him); (4) to make repairs or improvements to the trust property; (5) to pay out trust moneys for proper trust expenses; (6) to vote trust securities; (7) to consent to the reorganization, consolidation, merger, or other change in any corporation in which the trust holds stock; (8) to settle or defend any claim against the trust; (9) to pay expenses of administering the trusts, including reasonable attorneys' and accountants' fees; (10) to act for the trust through an agent or attorney; (11) to borrow money for the trust upon his bond or note as trustee; (12) to lend moneys of the trust to any persons upon such terms as he deems advisable; (13) to invest the trust property as a general or limited partner; (14) to take trust property in his Page 688 name without describing himself as trustee; and (15) to make distribution of the trust property in kind or in money or in both. Paragraph (7)(p) of the declaration, the concluding statement of that paragraph, and paragraph (8) read as follows: (p) The Trustee may freely act under all or any of the powers by this agreement given to him in all matters concerning the Trust herein created, after forming his judgment based upon all the circumstances of any particular situation as to the wisest and best course to pursue in the interest of the Trust and the beneficiaries hereunder, without the necessity of obtaining the consent or permission of any person interested therein, or the consent or approval of any court, and notwithstanding that he may also be acting individually, or as trustee of other trusts, or as agent for other persons or corporations interested in the same matters, or may be interested in connection with the same matters as stockholder, director, or otherwise, provided, however, that he shall exercise such powers at all times in a fiduciary capacity primarily in the interest of the beneficiaries hereunder. The powers herein granted to the Trustee may be exercised in whole or in part, from time to time, and shall be deemed to be supplementary to and not exclusive of the general powers of trustees pursuant to law, and shall include all powers necessary to carry the same into effect. (8) Notwithstanding anything herein contained to the contrary, no powers enumerated herein or accorded to trustees generally pursuant to law shall be construed to enable the Grantor, or the Trustee, or any other person, to purchase, exchange, or otherwise deal with or dispose of all or any part of the corpus or income of the Trust for less than an adequate consideration in money or money's worth, or to enable the Grantor or Trustee to borrow all or any part of the corpus or income of the Trust, directly or indirectly, without adequate interest or security. The trusts were irrevocable and terminated in favor of the beneficiary when the beneficiary reached the age of 35.[3] On July 2, 1965, and August 2, 1965, Mr. Goodman and Mr. Rossman each acquired an undivided 50-percent interest in parcels of real property located in Orange County, Fla. On February 23, 1967, Mr....

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