Boynton v. Comm'r of Internal Revenue , Docket No. 10526-77.
| Decision Date | 24 September 1977 |
| Docket Number | Docket No. 10526-77. |
| Citation | 72 T.C. 1147 |
| Parties | JOE T. BOYNTON and HELEN J. BOYNTON, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
T and P entered into an equal partnership agreement. As amended, the agreement continued to provide that profits were to be divided equally and losses were to be borne equally; however, it provided further that for purposes of Federal income tax returns 100 percent of the losses were to be allocated to T as his “distributive share.” Held, T is entitled to deduct only one-half of the partnership's 1974 losses. Kresser v. Commissioner, 54 T.C. 1621 (1970), and Holladay v. Commissioner, 72 T.C. 571 (1979), followed. Robert O. Rogers, for the petitioners.
Hans G. Tanzler III, for the respondent.
The Commissioner determined deficiencies in petitioners' Federal income taxes as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1971 ¦$32,917 ¦
+------+-------------¦
¦1972 ¦1,567 ¦
+------+-------------¦
¦1973 ¦505 ¦
+------+-------------¦
¦1974 ¦168,498 ¦
+--------------------+
After concessions, the sole issue for decision is whether petitioner is entitled to deduct as his distributive share of partnership losses all of the losses incurred by the Palm Beach Ranch Groves partnership in the year 1974.
Some of the facts have been stipulated. The stipulation of facts and exhibits thereto are incorporated herein by this reference.
Petitioners Joe T. Boynton and Helen J. Boynton, husband and wife, resided in North Palm Beach, Fla., at the time their petition in this case was filed. They filed their joint Federal income tax return for each of the years 1971 through 1974 with the Internal Revenue Service Center, Chamblee, Ga. Petitioner Helen J. Boynton is a party to this case solely because she filed a joint return with her husband who will sometimes hereinafter be referred to as “petitioner.”
On or about October 22, 1973, Robert S. Plimpton (Plimpton) entered into a contract to purchase approximately 1,922.37 acres of land in Palm Beach County, Fla., on which was situated a citrus grove, for a consideration of $1,600 per acre, in cash, for a total of $3,075,632.1 In addition, as part of the consideration for the property, the buyer was to pay for the fruit on the trees, reimburse the seller for certain expenses, and pay the real estate commission due the broker in the amount of $400,000. Plimpton attempted to obtain financing to close the contract but was unsuccessful. He was advised by one lender that funds for the purchase could be obtained if a financially strong individual with an agricultural background joined in the transaction. Plimpton thereafter approached petitioner with a view to interesting him in participating in the citrus grove purchase. At that time, petitioner was very successful in sugarcane growing and other endeavors, and he had a substantial net worth. Petitioner agreed to join with Plimpton in the purchase.
During February 1974, Plimpton and petitioner organized a partnership known as Palm Beach Ranch Groves for the purpose of purchasing and operating the citrus grove. Pursuant to the undated, written partnership agreement between petitioner and Plimpton, all capital distributions, profits, and losses were to be shared equally by the two partners. It was contemplated that the partnership would obtain the purchase money and initial working capital by partnership borrowing, and that each partner would contribute equally to the partnership any additional funds that might later be needed. Plimpton's contract to purchase the grove was assigned to the new partnership.
On February 28, 1974, utilizing the proceeds of two loans totaling $3,500,000, the grove was acquired by the partnership. Three million dollars of the borrowed funds came from a first mortgage loan from the John Hancock Mutual Life Insurance Co. (John Hancock), and the remaining $500,000 was obtained by loan from the First National Bank & Trust Co. of Lake Worth (First National)2 secured by a note due petitioner (as trustee) in the amount of approximately $725,000. Petitioner, Plimpton, and their respective wives were all jointly and severally liable for repayment of these two loans. At the time of closing, $3,075,632 was paid for the land, $40,000 for the fruit, $85,500 for reimbursement of maintenance expenses, and $116,000 towards the broker's commission.3 The remainder of the borrowed funds was to be used as working capital.
To obtain the $3,500,000 of initial debt financing, petitioners and the Plimptons submitted their personal financial statements to the respective lenders. In these statements, the respective net worths of the Plimptons and Boyntons were reported as follows:
+------------------------------------------+
¦ ¦Net worth per ¦Net worth per ¦
+---------+---------------+----------------¦
¦ ¦John Hancock ¦First National ¦
+---------+---------------+----------------¦
¦Partner ¦statement ¦statement ¦
+---------+---------------+----------------¦
¦ ¦ ¦ ¦
+---------+---------------+----------------¦
¦Plimpton ¦$922,900 ¦$974,745 ¦
+---------+---------------+----------------¦
¦Boynton ¦5,353,507 ¦7,353,507 ¦
+------------------------------------------+
The financial statements submitted by Plimpton to the two institutions were both dated October 10, 1973.4 The principal assets included in the statements were a residence valued at $340,000; 6.7 acres of commercial land located in Jupiter, Fla., valued at $370,000 in one statement and $435,000 in the other (this land had been purchased 1 month earlier for approximately $225,000, of which $67,000 was paid in cash and the balance by a purchase money mortgage note due 1 year from closing); stock in Atlantic & Pacific Research, Inc.,5 valued at $300,000 (the corporation had a book value on December 31, 1973, based on an unaudited financial statement, of approximately $20,000); a boat, antiques, paintings, and miscellaneous personal assets.
The financial statements submitted by petitioner were both dated January 16, 1974. The discrepancy between the net worths listed in the two statements results from the utilization of book value of approximately $200-$250 per acre to value land owned by three sugarcane and cattle corporations in which petitioners owned stock for purposes of determining the value of the stock reported in the John Hancock statement, whereas a more realistic figure of $1,500 per acre was used for purposes of valuing the stock in the First National statement.
In evaluating the partnership's application for the $3 million loan, John Hancock was particularly interested in whether the partners had sufficient cash flow to service the debt in years during which the grove might operate at a loss.6 John Hancock would have made the loan to petitioner without Plimpton's participation, but the loan would have been denied if Plimpton had applied alone. The decision to grant the loan, however, was based on the combined balance sheets and income statements of Plimpton and petitioner.
The $500,000 First National loan similarly would not have been approved on the basis of Plimpton's financial statements alone, but it would have been made to petitioner without Plimpton's involvement. First National made no independent investigation of the assets included in Plimpton's financial statement; such an investigation would have been conducted if the bank were making a loan solely on the basis of Plimpton's credit worthiness. Because of petitioner's sizeable net worth, the bank would have looked to him first for repayment of the loan if the partnership could not make repayment. However, both the Plimptons and the Boyntons each executed a separate “Special Guaranty” in respect of this loan.
Shortly after the partnership commenced business in 1974, it exhausted its initial borrowed working capital, and an additional $150,000 was borrowed from the Production Credit Association for use in partnership operations. This loan was arranged by taking advantage of petitioner's prior contacts with that organization. The proceeds of the Production Credit Association loan also were quickly expended. Plimpton advised petitioner that the partnership needed additional funds to meet current operating expenses, and petitioner began making contributions to the partnership on the assumption that Plimpton would put in his share.
In about June or July 1974, it became clear that the grove was not operating as profitably as had been projected. The grove was planted with approximately 800 acres of oranges and 800 acres of lemons. The lack of profitability was in large part due to poor results in lemon production. Both the yield of harvested lemons per tree and the quality of the harvested fruit were much lower than had been expected. Plimpton and petitioner discovered that other growers in Florida were experiencing similar problems with lemons. The problem appeared to be State-wide and of a “permanent” nature to the extent of the quantity and quality of the fruit produced. However, the profitability of the operation could be affected by an improvement in price structure. Moreover, one could not make a reliable projection beyond 1 or 2 years, and the closer it might be to 2 years the less trustworthy it would become. Plimpton revised his financial projections on the basis of the partnership's actual results with the lemon crop, and he concluded that there was no chance at least in the near future that the grove could produce sufficient revenues to repay the partnership indebtedness unless there were a large increase in the market price for lemons or oranges.
During these periods of time, petitioner became concerned with the fact that Plimpton was not contributing his share of the required capital....
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