L&C Springs Associates v. Commissioner, Docket No. 11361-92.
| Decision Date | 15 October 1997 |
| Docket Number | Docket No. 10933-93.,Docket No. 11969-94.,Docket No. 11361-92. |
| Citation | 74 T.C.M. 928 |
| Parties | L&C Springs Associates, Solomon A. Weisgal Investment Associates, Tax Matters Partner, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
By notices of final partnership administrative adjustments (FPAA), respondent determined adjustments to L&C Springs Associates' (L&C Springs') 1988, 1989, and 1990 Federal partnership income tax returns, as follows:
Respondent's Partnership Adjustments
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Income On Discharge Interest Depreciation
Year Of Indebtedness Expense Expense
1988 .............................. $2,250,000 $(254,413) $(168,350)
1989 .............................. 2,250,000 (264,858) (167,707)
1990 .............................. 2,250,000 (261,961) (167,722)
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The above $2,250,000 in income that respondent charged to L&C Springs in respondent's FPAA for each of the years 1988, 1989, and 1990 is the same item of income and relates to respondent's contention that L&C Springs' ownership interest in two apartment complexes (the L&C Properties) through a Florida land trust was effectively abandoned or terminated in either 1988, 1989, or 1990, triggering, for Federal income tax purposes, a sale or exchange of L&C Springs' interest in the L&C Properties.
Respondent's primary position is that L&C Springs' ownership interest in the L&C Properties should be treated as having been terminated as of the end of October of 1990. Alternatively and only as a protective measure, respondent contends that L&C Springs' interest in the L&C Properties should be treated as having been terminated in 1988 or 1989.
The only issue for decision is whether L&C Springs' ownership interest in the L&C Properties was abandoned or terminated triggering for Federal income tax purposes a sale or exchange of L&C Springs' interest therein in 1988, 1989, or 1990. If we conclude that L&C Springs' ownership interest in the L&C Properties was abandoned or terminated in one of those years, then L&C Springs would be required, under sections 1001, 1231, 1245, and 1250, to recognize ordinary income and capital gain in the year of such abandonment or termination based on the amount of accelerated depreciation claimed on the L&C Properties and on the amount realized on such sale or exchange. Also, the above interest and depreciation deductions that were claimed for 1988, 1989, and 1990 with respect to L&C Springs' ownership interest in the L&C Properties would not be allowable for any period of time after such abandonment or termination occurred.
On May 5 and June 30, 1980, Tanglewood Properties, Inc. (Tanglewood), purchased from the Clinton Family Trust for a total stated consideration of $2.1 million, subject to three existing mortgages securing the land and buildings, an ownership interest in a Florida land trust that owned the L&C Properties and the related land. The L&C Properties were located in Miami and in Miami Springs, Florida, just north of Miami International Airport.
From 1980 through 1983, Burton Kanter (Kanter), and from 1983 through 1991, Lawrence A. Freeman, served as president of Tanglewood. From 1983 through 1991, Lloyd J. Boggio (Boggio) served as vice president of Tanglewood.
Tanglewood's $2.1 million stated purchase price for the L&C Properties was reflected by cash, by short-term notes guaranteed by Kanter, and by a $1.6 million wrap-around mortgage note that Tanglewood issued in favor of the Clinton Family Trust.
The record does not reflect the history of the ownership of the L&C Properties by the Clinton Family Trust, specifically when and for what consideration the Clinton Family Trust acquired the L&C Properties.
On October 29, 1981, L&C Springs was formed under the laws of the State of Illinois as a tax-oriented limited partnership for the purpose of purchasing from Tanglewood an interest in the L&C Properties.
At the time the petitions were filed, L&C Springs' principal place of business was located in Chicago, Illinois. L&C Springs' two original general partners were Solomon A. Weisgal Investment Associates (SAWIA)2 and Century Capital Corp. (Century Capital).3
L&C Springs' limited partners included, among others, First Rate Investments, a partnership composed of members of Kanter's family and trusts established for the benefit of members of Kanter's family.
As of 1981 and throughout the years in issue, Tanglewood was a wholly owned subsidiary of The Holding Co., a Delaware corporation, with its principal place of business in Chicago, Illinois.4 The same few individuals (namely, Kanter, Solomon A. Weisgal (Weisgal), and Boggio) who controlled Tanglewood and The Holding Co. also controlled L&C Springs and the activities of L&C Springs. The transactions entered into between Tanglewood and L&C Springs and the management companies relating to the L&C Properties were not conducted in an arm's-length manner.
In order to finance L&C Springs' purchase of the L&C Properties, SAWIA and Century Capital, as L&C Springs' general partners, promoted investment in L&C Springs through private placement memoranda distributed primarily to friends and family of Kanter and Weisgal. These memoranda described generally the significant economic risks associated with investments in L&C Springs and explained the significant tax benefits that the investors, as limited partners, were expected to claim on their individual income tax returns.
L&C Springs' private placement memorandum specifically indicated that the projected rental revenue from the L&C Properties would not be sufficient to cover expenses and to pay off L&C Springs' debt obligations and that the only way an investment in L&C Springs would be profitable would be if the apartments were converted into condominium units and sold or if the L&C Properties were sold for a substantial gain.
Under L&C Springs' partnership agreement, during each of the years 1981 through 1986, each limited partner was obligated to make additional annual capital contributions to L&C Springs in amounts based on each limited partner's ownership interest. The total amount of the additional capital contributions that L&C Springs was to receive from its limited partners equaled $1,035,000.
At the time investments in L&C Springs were being promoted, the apartment units in the L&C Properties maintained a high occupancy rate due to employees of Eastern, National, and Pan American Airlines who were based at the Miami International Airport.
On October 30, 1981, L&C Springs entered into an agreement with Tanglewood to purchase for a stated consideration of $2.8 million Tanglewood's ownership interest in the Florida land trust that held title to the L&C Properties and that held title to the underlying land. L&C Springs' stated $2.8 million purchase price for the L&C Properties was reflected solely by a seller-financed, nonrecourse $2.8 million promissory wrap-around note from L&C Springs (the L&C Note) in favor of Tanglewood.
At the time of the above transaction, Tanglewood's $1.6 million mortgage note and the three existing mortgages relating to its 1980 purchase of the L&C Properties were not paid off. Those mortgages remained outstanding and were wrapped by the $2.8 million L&C Note. In other words, L&C Springs' payments to Tanglewood on the $2.8 million L&C Note were intended to be used by Tanglewood to make payments due on Tanglewood's $1.6 million mortgage note.
Effective simultaneously with the above transaction, L&C Springs exercised an option set forth in the L&C purchase agreement to reduce the stated purchase price for, and to alter significantly the nature of, its ownership interest in the Florida land trust and in the L&C Properties. Under that option, the stated purchase price for L&C Springs' interest in the L&C Properties was reduced from $2.8 million to $2,450,000 (reflected by a nonrecourse promissory note), and L&C Springs immediately reconveyed to Tanglewood ownership of the underlying land and effectively ownership of the apartments and other improvements associated with the L&C Properties. L&C Springs, through the Florida land trust, retained only nominal title to the L&C Properties and a 15-year leasehold interest in the land, in the apartments, and in other improvements on the land. For the 15-year lease of the underlying land, L&C Springs agreed to make separate, fixed lease payments of $36,000 each year.
In effect, for the reduced stated purchase price of $2,450,000, L&C Springs retained, through the Florida land trust, only a 15-year leasehold interest in the L&C Properties.
Under the lease agreement that L&C Springs and Tanglewood entered into, during the last year of the 15-year lease of the land (namely, from January 1, 1995 through July 1, 1996), L&C Springs, through the Florida land trust, had an option to purchase from Tanglewood the L&C Properties and the related land.
L&C Springs' $2,450,000 debt obligation agreed to in connection with the reduced purchase price for L&C Springs' 15-year leasehold interest in the L&C Properties was due to be paid to Tanglewood with four annual principal payments to Tanglewood of $50,000 each, due on July 1 of 1982, 1983, 1984, and 1985, and with a balloon payment due on January 31, 1987, of $2,250,000, plus accrued interest.
Under a collateral agreement of December 15, 1981, that was...
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