Dolese v. Comm'r of Internal Revenue
| Decision Date | 30 May 1984 |
| Docket Number | Docket No. 29240–81. |
| Citation | 82 T.C. No. 64,82 T.C. 830 |
| Parties | ROGER M. DOLESE and SUSAN B. DOLESE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
An individual (R) and his wholly owned corporation (D) caused a partnership (P), in which R held a 49% interest and D a 51% interest, to distribute a 160 acre tract of land in two tracts (of approximate equal value but not of equal size) to them in ownership percentages disproportionate to their respective partnership interests. As a result of the distribution, R had a 76% interest in Tract I and a 24% interest in Tract II; D had a 24% interest in Tract I and a 76% interest in Tract II. Immediately following the distribution (which admittedly was done solely for tax purposes), Tract I was contributed to the City for use as a public park, and the City acquired options to purchase substantially all of Tract II. The City subsequently exercised its purchase options. R claimed a deduction for the contribution of Tract I to the City on the basis of a 76% ownership interest therein; he reported 24% of the gain from the sale of substantially all of Tract II to the City. Held: Based on the stipulated facts of this case, R and D, in their individual capacities and not on behalf of P, contributed and sold the property to the City; therefore, the substance and form of the transaction were as one. Held further: The Commissioner could, and properly did, apply section 482, I.R.C., 1954, to reallocate the amount of the charitable contribution deduction, and the amount of the capital gains, between R and D on the basis of their respective percentage interests in P. Edward H. Moler, for the petitioners.
Osmun R. Latrobe and Michael O'Brien, for the respondent.
*
Respondent determined the following deficiencies in petitioners' Federal income tax:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1976 ¦$57,455.12 ¦
+------+-------------¦
¦1977 ¦151,077.00 ¦
+--------------------+
This case involves the distribution of two tracts of land by a partnership to its two partners (an individual and his wholly owned corporation) followed by a partial gift/ partial sale of the tracts to Oklahoma City (hereinafter sometimes referred to as the “City”). The distribution of each tract was disproportionate to the partners' interests in the partnership, and was made for the purpose of adjusting the partners' ownership interests in the land prior to their contribution and sale of such land to the City. The purpose of the disproportionate distribution was to maximize the available tax benefits flowing from the charitable contribution deduction available under section 170 to the partners.1 Thus, the issues to be decided, after concession by the petitioners, are:
(1) Whether the respondent properly disregarded a disproportionate distribution of land by a partnership to its partners where such distribution was made solely to avoid the statutory limitations imposed on the charitable contribution deduction by a corporation;
(2) Whether the respondent properly reallocated between an individual and his wholly owned corporation gain from sales of land by such individual and corporation.
The facts in this case have been fully stipulated and are so found.
The petitioners are Roger M. Dolese (hereinafter referred to as “Roger”) and his wife, Susan B. Dolese. Roger and his wife resided in Oklahoma City, Oklahoma at the time of filing the petition herein, and timely filed joint returns for the years at issue with the Internal Revenue Service Center at Austin, Texas.
At all times material hereto, (1) Roger owned all of the stock of The Dolese Company (hereinafter referred to as “the Corporation”), (2) Roger and the Corporation were the only partners in Dolese Bros. Co. (hereinafter referred to as “the Partnership”) and (3) the Corporation held a 51% interest in the Partnership and Roger held the remaining 49% interest.
From 1973 until March 29, 1976, the Partnership held title to approximately 160 acres of undeveloped land located at the northwest corner of N.W. 50th and Meridian, Oklahoma City, Oklahoma (hereinafter referred to as “the Property”).2
In November, 1974, the Partnership engaged an engineering firm to devise a plan for the development of the Property and to obtain the necessary zoning. The firm developed a Master Development Plan involving different uses of various parts of the Property. In April, 1975, the Partnership submitted to the City a proposed Community Unit Plan and an application requesting zoning for the Master Development Plan. The Community Unit Plan and zoning request provided for development of the Property (except for approximately three acres to be used for an elderly housing project site) as duplexes, single family homes, condominiums, and commercial areas, together with recreational3 and common areas. The Plan and the zoning request were approved by the Oklahoma City Council on September 20, 1975.
In the late summer of 1975, representatives of Roger and the Corporation discussed with the Director of Parks of the City a possible gift by Roger and the Corporation to the City of the east half of the Property (containing approximately 67 acres and having a value of $1,376,240) and the simultaneous sale of the west half of the Property (containing approximately 90 acres) to the City for its appraised value of $1,387,560. Hereinafter the west half of the Property will be referred to as Tract I and the east half as Tract II.
Although Roger and the Corporation were willing to contribute approximately one-half of the Property to the City for use as a park, they desired to do so only if the amount of such a large contribution could be fully utilized as charitable deductions by the two donors. Roger and a vice President of the Corporation discussed the proposed gift with tax advisors, and were advised that the Corporation could only claim a charitable contribution equal to 5% of its net income before contributions, certain special deductions and loss carrybacks. Roger, on the other hand, could deduct up to 30% of his contribution base. Although it was anticipated that the Corporation's fiscal year ending March 31, 1976 would be exceptionally profitable, it was doubtful, based on the Corporation's earnings history, that the net income of the Corporation for 1976 and the succeeding five taxable years would be sufficient to utilize the full amount of the charitable contribution deduction if the Property were owned by Roger and the Corporation in the ratio of 49% and 51%, respectively.4 Roger and the Corporation were therefore advised that the portion of the Property to be contributed to the City should first be distributed from the Partnership to the two partners in the ratio of 75% to Roger and 25% to the Corporation. On the basis of this advice, no consideration was ever given to the possibility of having the Partnership make the contribution, The City proposed to finance the purchase of Tract I with federal funds obtainable through the Bureau of Outdoor Recreation of the U. S. Department of Interior. On September 15, 1975, the City applied for such federal funds. Prior to March 27, 1976, discussions between the City and representatives of Roger and the Corporation had been with regard to the sale of Tract I to the City for its appraised value or $1,387,560 and a simultaneous gift of Tract II to the City, both of which were to be consummated prior to March 31, 1976 (the last day of the Corporation's fiscal year). On March 26, 1976, the Mayor of the City informed a representative of Roger and the Corporation that the City would not be able to obtain the necessary funds to purchase Tract I by March 31, 1976; therefore, it appeared the proposed partial sale/partial contribution of the Property would not be consummated.
On March 27, 1976, a representative of Roger and the Corporation discussed with the Mayor the possibility of the City acquiring Tract I by gift, with no requirement that the City purchase the remainder of the Property. During the next several days, the further discussions of the gift that ensued were expanded to include discussion of the possibility of the City acquiring through purchase options the remainder of the Property. During this same period, Roger and a representative of the Corporation met with their tax advisors and counsel.
On March 29, 1976, the Property was distributed by the Partnership to Roger and the Corporation by a warranty deed which divided the Property into Tract I (consisting of approximately 90 acres) and Tract II (consisting of approximately 70 acres). The Property, as so divided, was distributed to Roger and the Corporation, as tenants in common, as follows:
+---------------------------------+
¦Tract I - ¦76% to Roger ¦
+----------+----------------------¦
¦ ¦24% to the corporation¦
+----------+----------------------¦
¦ ¦ ¦
+----------+----------------------¦
¦Tract II -¦76% to the corporation¦
+----------+----------------------¦
¦ ¦24% to Roger ¦
+---------------------------------+
On March 29, 1976, the date of the distribution , the Partnership owned other properties and assets.
On March 30, the warranty deed was recorded; and immediately thereafter, Roger and the Corporation contributed Tract I to the City, with no commitment on the part of the City to purchase any part of Tract II. On the date of the contribution, Tract I had a fair market value of $1,387,560.
On May 4, 1976, Roger and the Corporation granted the City options to purchase the remainder of the Property, except for approximately three acres to be used for an elderly housing project. The options covered three parcels - one parcel containing approximately 51 acres, and the other two parcels containing eight acres each.
In July, 1976, Roger and the Corporation...
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