Aladdin Industries, Inc. v. Commissioner

Decision Date20 May 1981
Docket NumberDocket No. 1981-79.
Citation41 TCM (CCH) 1515,1981 TC Memo 245
PartiesAladdin Industries, Inc. and Subsidiaries v. Commissioner.
CourtU.S. Tax Court

James T. O'Hare and William M. Waller, 2100 One Commerce Place, Nashville, Tenn., for the petitioners. Robert B. Nadler and Richard J. Neubauer, for the respondent.

Memorandum Opinion

GOFFE, Judge:

The Commissioner determined deficiencies in the Federal income tax of petitioners for the taxable years ended April 30, 1972, April 27, 1975, and April 25, 1976, in the respective amounts of $163,952, $145,943.50, and $589,392.18. We have this matter before us on the parties' cross-motions for partial summary judgment.

These issues are presented for our decision:

(1) whether section 482, Internal Revenue Code of 1954,1 can be applied to the sale of land by a partnership to its controlling partner; and

(2) whether any material facts are in issue so as to preclude a decision in favor of petitioners on the substantive issue.

Pursuant to Rule 121, Tax Court Rules of Practice and Procedure, petitioners filed affidavits with exhibits in support of their motion. Respondent, in opposing petitioners' motion filed an affidavit. Subsequently, respondent made a cross-motion for summary judgment solely on the issue of whether section 482 may be applied to the sale of land by a partnership to a partner. Respondent filed no affidavits in support of such motion. Petitioners objected to respondent's motion and supported such objection with an affidavit with exhibits. We refused, for failure to comply with Rule 121(e), Tax Court Rules of Practice and Procedure, to allow respondent to file an affidavit which he subsequently attempted to file. The pleadings of and affidavits filed by the parties contain the facts used for the purpose of ruling on these motions. Rule 121(b), Tax Court Rules of Practice and Procedure. Relevant facts from those pleadings and affidavits follow.

Petitioner Aladdin Industries, Inc. (herein Aladdin), is a corporation organized under the laws of the State of Delaware, having its principal office and place of business in Nashville, Tennessee. The controversy with which this motion is concerned involves one of Aladdin's wholly owned domestic subsidiaries, Pathfinder Resources, Inc. (herein Pathfinder). Petitioners Aladdin, Pathfinder, and Aladdin's other domestic subsidiaries filed consolidated Federal income tax returns with the Internal Revenue Service Center at Memphis, Tennessee, for the taxable years in issue.

On October 1, 1970, Pathfinder and an individual by the name of Robert C. Mathews, Jr. (herein Mathews) formed a partnership named MAT-NEL Company (herein the Partnership). Mathews has never owned any stock in Aladdin and is not related to any of Aladdin's shareholders. The Partnership was formed for the purpose of "acquiring and intergrating contiguous tracts of real estate in the bend of the Cumberland River in North Nashville, Tennessee, to hold for investment."

Under the terms of the October 1, 1970 partnership agreement, Pathfinder and Mathews each had a 50 percent interest in the profits, losses and capital of the Partnership. By an amendment to the partnership agreement dated October 1, 1972, Mathews transferred a 45 percent interest in the Partnership to his controlled corporation R.C. Mathews Contractor Inc. (herein Contractor). No stock of Contractor is owned directly or indirectly by Aladdin its subsidiaries, or its stockholders. By an amendment dated January 1, 1973, the interests in the Partnership were altered to provide that the three partners would have the following interests in the Partnership:

                                         Interests in       Interests in
                                       Profits & Losses       Capital
                Pathfinder ................. 80%              55.0%
                Mathews ....................  2%               4.5%
                Contractor ................. 18%              40.5%
                

The interests in the Partnership were shifted because Pathfinder's parent, Aladdin, guaranteed a $9 million loan obtained by the Partnership and also because Pathfinder agreed to advance to the Partnership funds sufficient to pay the portion of the periodic interest payments which the Partnership itself did not have the funds to pay. The above-listed percentage interests in the Partnership were to be in effect only for as long as Pathfinder made such advances. During the taxable years before us, the above-listed percentages were in effect. Petitioners concede, for purposes of this motion, that the Partnership and Pathfinder were owned and controlled by the same interests.

At all times the partnership agreement provided that Pathfinder and Mathews would have equal votes in decisions relating to the management of the Partnership, including but not limited to partnership operations, expenditures and investments involving amounts in excess of $1,000.

On November 1, 1970, the Partnership entered into an Agreement to Lease with Aladdin in which Aladdin agreed to lease 50 acres of land from the Partnership for a term of five years beginning November 1, 1970, with the right to extend the lease term for an additional term of not less than one nor more than five years at the same rental and terms. In addition, the agreement gave the lessee the option of purchasing all or any part of the 50 acres at any time during the lease term at a price of $6,000 per acre. The rental provided in the agreement was $60,000 per year payable in semiannual installments of $30,000. On November 19, 1973, Aladdin assigned all of its right and interest in the lease agreement, including all option rights and obligations, to Pathfinder.

On June 27, 1974, Pathfinder exercised the above-mentioned option and purchased 5.84 acres of the leased land from the Partnership, paying the purchase price specified in the option of $6,000 per acre. The purchase by Pathfinder was, in reality, of an undivided one-half interest in an 11.68-acre tract of the leased land. The other undivided one-half interest in such tract was sold at the same time to Malfam, Inc., an unrelated corporation, for $65,000 per acre. Neither Pathfinder nor the Partnership had any formal or informal agreement with anyone to sell the interest sold to Pathfinder to a third party. Pathfinder continued to hold this property after the sale until June 1, 1977, at which time it exchanged its undivided one-half interest in the entire 11.68-acre tract for a sole interest in 5.84 specific acres of such tract. No rental or other income from transactions with third parties was derived from the sold property during the years involved. The property has not been used by Pathfinder or Aladdin since it was transferred.

The sale of 5.84 acres of land by the Partnership to Pathfinder was reported on the Federal information return of the Partnership (Form 1065) for the calendar year 1974 as a sale of property by the Partnership at a sale price of $6,000 per acre or a total sale price of $35,040. Petitioners concede for purposes of their motion, that the fair market value of the 5.84 acres on June 27, 1974, was $65,000 per acre, as determined by the Commissioner.

On November 1, 1975, a "Lease Extension Agreement" was entered into between the Partnership and Pathfinder with respect to the remaining 44.16 acres of the previously leased property.2 The agreement provided for an extension of the 1970 Lease Agreement for five years upon payment of $53,000 per year "Basic Rent" in semiannual installments of $26,500 and "Incremental Rent" for each lease year in the following amounts:

                     Year                 Amount
                  1st year ............. $21,800
                  2nd year .............  16,800
                  3rd year .............  11,800
                  4th year .............   6,800
                  5th year .............   1,500
                

Pathfinder was given the option of buying all or any part of the 44.16 acres during the term of this latter agreement for $6,000 per acre with a credit against the purchase price of all of the Basic Rent that had been paid to the time of purchase. The Partnership reported this 1975 agreement on its 1975 information return (Form 1065) as a sale of the 44.16 acres to Pathfinder at a price of $6,000 per acre. The 44.16 acres have never been deeded to Pathfinder, nor has Pathfinder ever "exercised" its option to purchase such land. The parties agree that, for purposes of these motions, the Court may treat the Lease Extension Agreement as a completed sale as reported on the 1975 information return of the Partnership. Petitioners concede, for purposes of their motion, that the fair market value of the 44.16 acres on November 1, 1975, was $45,000 per acre, as determined by the Commissioner. Since that date the 44.16-acre tract has not been sold or rented to any third party.

The Commissioner determined that the sales prices of the two parcels (the 5.84-acre parcel sold in 1974 and the 44.16-acre parcel sold in 1975) should be adjusted to an arm's-length price pursuant to section 482. In accordance with this determination, the Commissioner increased the sale price of the 5.84-acre parcel from $35,040 to $379,600, which was the price paid by Malfam, Inc., for an identical interest in the same land. He also increased the sale price of the 44.16-acre tract from $265,000 to $1,987,200. These increases in sales prices reduced the Partnership's losses in each relevant year and thereby reduced Pathfinder's share of the losses of the Partnership for its fiscal years ending April 27, 1975, and April 25, 1976.

Section 482 provided, during the taxable years before us:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or
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