Blitzer v. United States, 426-76.

Citation684 F.2d 874
Decision Date14 July 1982
Docket NumberNo. 426-76.,426-76.
PartiesArnold R. and Marion R. BLITZER v. The UNITED STATES.
CourtCourt of Federal Claims


Bruce S. Lane, Washington, D. C., attorney of record, for plaintiffs. Jack M. Feder, Barbara Sarshik, Lane & Edson, Washington, D. C., Ronald L. Rosenfield, and Spero & Rosenfield Co., Cleveland, Ohio, of counsel.

Bruce W. Reynolds, Washington, D. C., with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D. C., for defendant. Theodore D. Peyser, Jr., Donald H. Olson and Micheal G. Lichtenberg, Washington, D. C., of counsel.

Ralph A. Muoio, Washington, D. C., attorney of record, for amicus curiae Touche Ross & Co. Leon E. Irish, Albert G. Lauber, Jr., Daniel N. Shaviro, Caplin & Drysdale, Washington, D. C., Jeffrey H. Miro, Martin L. Katz and Miro, Miro & Weiner, Bloomfield Hills, Mich., of counsel.

William C. Gifford, Washington, D. C., attorney of record, for amici curiae The National Housing Partnership and The National Corp. for Housing Partnerships. F. David Lake, Jr., Gary A. Herrmann, and Wilmer, Cutler & Pickering, Washington, D. C., of counsel.

D. Barton Doyle, Washington, D. C., attorney of record for amicus curiae National Ass'n of Home Builders. Gus Bauman and Nancy H. Liebermann, Washington, D. C., of counsel.

Edward J. Sack, New York City, attorney of record for amicus curiae International Council of Shopping Centers. Stephanie McEvily, New York City, of counsel.

William D. North, Chicago, Ill., attorney of record, for amicus curiae The National Ass'n of Realtors. John R. Linton, Laurene K. Janik and Arthur R. Weiss, Chicago, Ill., of counsel.

Before COWEN, Senior Judge, and DAVIS and NICHOLS, Judges.



In this suit for refund of 1973 income taxes, plaintiffs seek to deduct Arnold Blitzer's distributive share of the reported losses for that year of a real estate partnership, Terrace Investors, Ltd., in which he was a limited partner, while defendant denies that the partnership actually suffered the losses claimed for that year. The case was tried before Trial Judge Miller.

The partnership constructed, and now owns and operates an 80-unit multifamily housing project for low-income families in McAllen, Texas. The project, known as Ivy Terrace Apartments, was constructed and is operated under Section 236 of the National Housing Act, a program administered by the U. S. Department of Housing and Urban Development (HUD) to encourage private investment in low-income housing. 12 U.S.C. § 1715z-1 (1976).

Under HUD regulations in effect during 1973, a for-profit entity seeking to sponsor a Section 236 project was able to receive federal insurance of private mortgage loans of up to 90 percent of the HUD approved cost of a project for the construction and operation of qualified low-income housing. In addition, a federal subsidy was available to reduce the owner's mortgage payments to the equivalent of a mortgage bearing a 1 percent interest rate. In return, rents, charges, rate of return, and methods of operation were regulated by HUD, and cash distributions of income were restricted to a maximum of 6 percent per annum on the amount of equity invested. See generally, 24 C.F.R. § 236 (1971).

With a depreciation base of up to ten times the equity investment and accelerated depreciation and interest deductions, these projects typically generate substantial losses in their earlier years. To enable investors to obtain the tax benefits of such losses, sponsors of these projects ordinarily operate in the form of limited partnerships. The ability to obtain such benefits is a significant factor in attracting private capital, and it is sometimes described as a form of tax shelter.1

During 1971, acting through an agent, the initial sponsors of the project purchased an option to buy the land needed, obtained appropriate zoning, water and sewer clearances, and engaged an architectural firm which submitted a site plan. Contemporaneously, they reached an oral agreement with Security Pacific, Inc. (SPI), a Washington corporation, calling for SPI's assistance with HUD processing, and at an appropriate time for SPI to become the administrative general partner in a limited partnership, and to direct the partnership's equity syndication activities and manage the partnership.

On November 7, 1972, HUD issued a conditional commitment to insure a mortgage representing 90 percent of the maximum project costs determined by HUD to be supportable by the economics of the project. Thereafter, the sponsors submitted a loan application to Oak Cliff Bank & Trust Company (OCBT) for a construction loan in that amount.

In March 1973, SPI received checks from eight investors for an initial $140,000. Subsequently, one of the eight withdrew and his interest plus the 50 unsold units were sold to two other investors, including the plaintiff, Arnold Blitzer. SPI deposited such funds in a partnership escrow account in the Bank of California.

On August 24, 1973, HUD issued a firm commitment that it would endorse for insurance a note in the sum of $1,106,500 secured by a mortgage on the proposed Ivy Terrace Apartment project. The note was to bear interest at 7 3/4 percent and was to be amortized over a 40-year term from the estimated date of completion of the project.

On October 11, 1973, the sponsors executed an original limited partnership agreement for Terrace Investors, Ltd., and filed the certificate with the State of Texas. On October 12, 1973, OCBT agreed to make a construction loan to the partnership; and on the same day the HUD commitment for loan insurance was assigned to OCBT.

On or about October 19, 1973, OCBT paid $11,065 (1 percent of its projected insured loan) to the Government National Mortgage Association (GNMA), a government-owned corporation, for a separate commitment contract, which obligated GNMA to purchase OCBT's loan to the partnership for its face value, $1,106,500, provided that construction was completed and that HUD finally endorsed the note and deed of trust by October 20, 1975.2

On October 19, 1973, the Bank of California transferred to OCBT by wire $79,283 in partnership capital contributions which had been on deposit there.

On October 23, 1973, there was an initial closing with respect to the project, in the course of which the following pertinent events took place:

(1) The partnership, as then constituted, executed a building loan agreement with OCBT providing that the partnership was to take a building loan in the sum of $1,106,500 at 7 3/4 percent interest with a maturity date of January 1, 2015. OCBT was to advance this sum in installments: part pursuant to monthly application therefor and for HUD approval of insurance thereon, to cover 90 percent of the value of work completed and materials and equipment delivered to the building site during the month; and part to cover various specific nonconstruction fees for which HUD also insured advances.

(2) The partnership executed and delivered to OCBT a $1,106,500, 7 3/4 percent interest, 42 year and 2 month mortgage note in favor of OCBT, secured by a deed of trust, providing for payment of interest alone for the period from November 1, 1973 to January 1, 1975, and for $7,486.80 monthly thereafter for amortization of principal and interest to January 1, 2015.

(3) The partnership and HUD executed a regulatory agreement wherein the partnership agreed to comply with HUD requirements as to the construction and operation of the housing project.

(4) HUD approved for insurance in favor of OCBT the partnership's first request to OCBT for payment of a $104,206.10 advance on the loan, which stated it was needed to pay specified expenses, among which were included the lender's own demands of $22,130 for its "Initial Service Charge" and $11,065 to reimburse it for the "FNMA/GNMA commitment fee" which OCBT had already paid.

(5) The partnership delivered to OCBT a check drawn on OCBT for $33,210, for both the $22,130 and the $11,065 plus $15 in interest.

(6) The closing taking place after banking hours on October 23, as soon as practicable thereafter on the next day, October 24, OCBT opened a new account in the partnership's name, to which it credited the $79,283 in partnership capital wired October 19 and the $104,206.10 loan advance and charged the $33,210 check.

On December 26, 1973, the limited partnership agreement was amended to substitute the investor limited partners, including plaintiff Arnold Blitzer, for the pre-existing limited partners and to admit SPI as the administrative general partner. The general partners in addition to SPI were two members of the original sponsors designated as developer general partners.

Under the partnership agreement, none of the general partners was to make any contribution of capital. But the limited partners' contributions were to be the source of a number of fees, including an initial fee to the developer general partners and another to the administrative general partner.

Construction of Ivy Terrace Apartments began shortly after October 23, 1973. Five buildings were completed by July 1974 and the remaining five in the following month. Certificates of occupancy were issued by the City of McAllen, Texas, in each of such months.

Final endorsement for insurance of the $1,106,500 note by HUD took place on January 22, 1975, and OCBT sold the note and deed of trust to FNMA.

A number of the issues presented by the petition have been settled by the parties. There remain for decision the deductibility from plaintiffs' 1973 income of plaintiffs' distributive share of the losses attributable to the $22,130 and $11,065 fees claimed to have been paid in that year by the partnership to OCBT and $35,852 paid to SPI as a fee for its services.


As this case has been presented to the court, the principal issue is whether the partnership, Terrace Investors, Ltd., was engaged in...

To continue reading

Request your trial
21 cases
  • Thomas v. Comm'r of Internal Revenue (In re Estate of Thomas)
    • United States
    • United States Tax Court
    • March 14, 1985
    ...fees incurred by partnerships for syndication of their shares are nondeductible expenses which must be capitalized. Blitzer v. United States, 684 F.2d 874 (Ct. Cl. 1982); Derr v. Commissioner, 77 T.C. 708, 733-734 (1981); Kimmelman v. Commissioner, 72 T.C. 294, 304-306 (1979). See 4A J. Mer......
  • Hoopengarner v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • March 21, 1983
    ......COMMISSIONER of INTERNAL REVENUE, RESPONDENT Docket No. 14462-79. United States Tax Court Filed March 21, 1983. .         In April of 1976, petitioner acquired ...1932); Carter-Colton Cigar Co. v. Commissioner , 9 T.C. 219, 221 (1947); Blitzer v. United States , docket No. 426-76 (Opinion of Trial Judge, Ct. Cl. 1981, 47 AFTR 2d 81-1005, ......
  • Cabintaxi Corp. v. C.I.R.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • August 17, 1995 a trade or business. See, e.g., Jackson v. Commissioner, 864 F.2d 1521, 1526 n. 7 (10th Cir.1989); Blitzer v. United States, 684 F.2d 874, 880, 231 Ct.Cl. 236 (1982) (per curiam); Malmstedt v. Commissioner, 578 F.2d 520, 527 (4th Cir.1978). (Aboussie v. United States, 779 F.2d 424, 428 (......
  • Sealy Power, Ltd. v. C.I.R.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • February 15, 1995
    ...was not carrying on a business until its housing project was substantially ready for rental); Blitzer v. United States, 684 F.2d 874, 880-81, 231 Ct.Cl. 236 (Cl.Ct.1982) (per curiam) (corporation may be considered to be engaging in business when it begins business operations even if income ......
  • Request a trial to view additional results
1 books & journal articles
  • Quasi Sec. 195 regulations.
    • United States
    • The Tax Adviser Vol. 23 No. 5, May 1992
    • May 1, 1992
    ...1.248-1(a)(3) and 1.709-2(c)). In the early 1980s, Congress perceived three court cases as limiting the scope of Sec. 195. In Blitzer, 684 F2d 874 (Ct. Cl. 1982), the then Court of Claims intimated that newly organized business entities could currently deduct, under Sec. 162(a), amortizatio......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT