95 T.C. 156 (1990), 3547-87, 885 Investment Co. v. C.I.R.

Docket Nº:3547-87, 4560-87.
Citation:95 T.C. 156
Opinion Judge:JACOBS, JUDGE:
Party Name:885 INVESTMENT CO., ENLOW OSE, TAX MATTERS PARTNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent RICHARD D. AND ELNORA BRADISH, EDWARD A. AND KAREN Y. CHRISTENSON, ROBERT R. AND NANCY J. LADDISH AND ENLOW AND MELENA OSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Robert R. Rubin, for the petitioners. James W. Clark, for the respondent.
Case Date:August 16, 1990
Court:United States Tax Court
 
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Page 156

95 T.C. 156 (1990)

885 INVESTMENT CO., ENLOW OSE, TAX MATTERS PARTNER, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

RICHARD D. AND ELNORA BRADISH, EDWARD A. AND KAREN Y. CHRISTENSON, ROBERT R. AND NANCY J. LADDISH AND ENLOW AND MELENA OSE, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 3547-87, 4560-87.

United States Tax Court

August 16, 1990

         In 1979 and 1981, 885, a limited partnership, donated parcels of land to the City of Sacramento for use as a scenic corridor and claimed charitable contribution deductions for such transfers. In 1983, the city conveyed the donated parcels back to 885. HELD:

         1. No charitable contribution deduction is allowable for the 1979 and 1981 conveyances because such conveyances were subject to a condition, the occurrence of which was not so remote as to be negligible. Sec. 1.170A-1(e), Income Tax Regs. Therefore, the individual petitioners, partners in 885, are not entitled to deduct as a charitable contribution their distributive share of 885's donations.

         2. The individual petitioners are not liable for the additions to tax under sec. 6659, I.R.C. 1954, or increased interest under sec. 6621(c).

         3. This Court has jurisdiction of an adjustment to P's income because a tax benefit item is a partnership item under sec. 6231(a)(3), I.R.C. 1954.

         4. The reconveyance of the parcel donated in 1981 did not result in income to P for 1983. However, as to the reconveyance of the parcel donated in 1979, the tax benefit rule requires the fair market value of such parcel to be included in income up to the amount of the charitable contribution deduction previously taken. The fair market value of such parcel at the time of reconveyance is determined.

         Robert R. Rubin, for the petitioners.

         James W. Clark, for the respondent.

          JACOBS, JUDGE:

         Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes in docket number 4560-87:

Additions to tax
Petitioner Year Deficiency Sec. 6653(a)(1)
Page 1 Sec. 6659
Enlow & Melena 1981 $40,650 $2,033 $11,930
Ose 1982 27,984 1,399 8,395
Edward & Karen 1981 6,473 324 1,940
Christenson
Robert & Nancy 1981 5,385 269 1,616
Laddish
Richard & Elnora 1981 1,971 99 591
Bradish
Page 157           Respondent also determined that these petitioners (individual petitioners) were liable for increased interest on tax motivated transactions pursuant to section 6621(c).          With respect to docket number 3547-87, respondent issued a notice of final partnership administrative adjustment (FPAA) for 1983 to Enlow Ose, as tax matters partner for 885 Investment Company, a California limited partnership (885). In the FPAA, respondent increased 885's income by $1,078,023 as a result of the return of two parcels of realty which 885 had previously ‘ donated‘ to the City of Sacramento (the city) and for which it claimed charitable contribution deductions.          These two cases were consolidated because of common issues of fact and law and because the individual petitioners in docket number 4560-87 are partners in 885.          After a concession by respondent, [2] the issues for decision are: (1) whether the individual petitioners are entitled to deduct their distributive share of 885's donation to the city in 1981, and if so, the amount thereof; (2) whether the individual petitioners are liable for the addition to tax under section 6659 and the increased interest under section 6621(c); (3) whether this Court has jurisdiction over 885; and (4) whether 885 is required to recognize income upon the city's conveyance of the donated properties back to 885, and, if so, the amount thereof. Page 158           FINDINGS OF FACT          Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference.          The Oses, Christensons, Laddishes, and Bradishes are married couples who resided in California when they filed their petition. 885's principal place of business was in California at the time its petition was filed. Mr. Ose was the sole general partner of 885.          The South Natomas area of Sacramento, California, is situated between downtown Sacramento and the metropolitan airport. During the late 1960's and early 1970's, several groups supported development of a scenic corridor along the interstate highways crossing the South Natomas area. On February 21, 1978, the Sacramento city council adopted a land use plan known as the South Natomas Community Plan (the Plan) which provided for the development of a scenic corridor along the portion of Interstate 5 bisecting the South Natomas area.          As contemplated by the Plan, the scenic corridor would provide a buffer between the interstate highway and the abutting property. The outer boundary of the scenic corridor would be defined by an undulating masonry wall 8 to 10 feet high. The corridor itself would be landscaped with native trees, shrubs, grass, and wildflowers.          On August 23, 1978, approximately 178 acres were acquired by 885 in the South Natomas area (the South Natomas parcel) in a real estate exchange with Shell Oil. The South Natomas parcel was located on the north and south sides of West El Camino Avenue (West El Camino Avenue runs east and west) with Interstate 5 forming its eastern boundary. Interstate 5 runs north and south.          Sometime during 1978, representatives of the city contacted 885 to discuss the latter's willingness to transfer that portion of the South Natomas parcel lying within the scenic corridor to the city. By letter dated October 13, 1978, from its attorney, 885 offered to donate to the city that portion of its land within the scenic corridor; the donation was based upon 885's understanding that it would not have the responsibility for developing and maintaining the scenic corridor. Page 159           In June 1979, the city acquired 2.33 acres of land within the scenic corridor for $73,820 when an unrelated owner was unwilling to donate the property. Other than this single purchase, the landowners contributed all the other land within the scenic corridor.          By formal agreement between 885 and the city, dated December 21, 1979, and entitled Agreement for the Donation of Property for Interstate 5 Freeway Scenic Corridor (1979 Agreement for Donation), 885 agreed to donate approximately .664 acres situated south of West El Camino Avenue (1979 parcel). Because it was doubtful that the necessary state funding would be available to develop the scenic corridor as contemplated in the Plan, the city required that the following language (paragraph 5 language) be included in the 1979 Agreement for Donation:          5. In the event the City does not use the real property [the 1979 parcel] as part of the Scenic Corridor along Interstate 5 Freeway, the City will, at no cost to the Owner, deed said real property back to the Owner or his successor or successors in title who are the owners of the parcel or parcels that are contiguous to the [1979 parcel] * * *          Concurrently with the execution of the 1979 Agreement for Donation, 885 signed a deed dated December 21, 1979, conveying the 1979 parcel to the city. 885 claimed a $115,695 charitable contribution deduction for the donation in its 1979 partnership return.          In June 1980, three alternate development plans were submitted by 885 to the city with respect to the South Natomas parcel. Each alternative required additional development authority beyond that contained in the Plan.          In February 1981, 885 agreed to donate an additional 5.523 acres situated north of West El Camino Avenue (1981 parcel) to the city for purposes of the scenic corridor. Such was formalized in an agreement between 885 and the city dated February 23, 1981, and entitled Agreement for the Donation of Property for Interstate 5 Freeway Scenic Corridor (1981 Agreement for Donation). As with the donation of the 1979 parcel, the city required language similar to the paragraph 5 language to be incorporated in the 1981 Agreement for Donation. Concurrently with the execution of the 1981 Agreement for Donation, 885 executed a deed conveying the 1981 parcel to the city. 885 Page 160 claimed a $962,328 charitable contribution deduction for the donation.          While state funding of the scenic corridor was doubtful when the 1979 and the 1981 parcels were donated, by mid-1982 the California Department of Transportation formally withdrew its participation in funding the scenic corridor. Given the corridor's odd shape and proximity to the interstate highway, coupled with the city's inability to generate its own funds for development, the land within the scenic corridor had little independent value to the city. In addition, the city's inability to properly police the corridor and its exposure to liability caused the city concern. Thus, the city decided to convey all land contributed for the scenic corridor back to the developers.          In December 1982, the city and 885 entered into an agreement which provided that (1) the city would convey the 1979 and 1981 parcels back to 885, (2) 885 would develop and maintain the returned parcels as a scenic corridor and contribute money to a fund to maintain the corridor, and (3) the permitted building density for the South Natomas parcel adjacent to the parcels...

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