Duffy v. United States

• Decision Date: 22 September 1982
• Docket Number: No. 200-77.,200-77.
• Parties: Richard E. DUFFY and Margaret A. Duffy v. The UNITED STATES.
• Court: U.S. Claims Court

690 F.2d 889

Richard E. DUFFY and Margaret A. Duffy v. The UNITED STATES.

No. 200-77.

United States Court of Claims.

September 22, 1982.

Paul Frederic Marx, Los Angeles, Cal., atty. of record, for plaintiff.

Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen. Glenn L. Archer, Washington, D. C., for defendant. Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D. C., of counsel.

Before FRIEDMAN, Chief Judge, BENNETT, Judge, and MARKEY, Chief Judge, United States Court of Customs and Patent Appeals.^*

OPINION

PER CURIAM:^**

The plaintiffs seek refunds of income taxes and assessed interest totalling $87,636.90, plus interest for calendar years 1965, 1968, 1969, and 1971. The claims arise from two separate sets of facts: (I) the development and construction of a hotel project in Irvine, California; and (II) the purchase and use of two condominium units located on the island of Maui, Hawaii.¹

The hotel project involves three issues: (1) whether a $34,500 payment to the lender was a loan commitment paid in the ordinary course of the plaintiff's trade or business; (2) whether $46,000 paid to a loan broker constituted a payment for his services or payment of a loan commitment fee or interest to the lender; and (3) whether a $170,400 loss on the resale of a building, which the plaintiff was required to purchase from the lender as a condition of a loan, must be amortized over the life of the loan.

The Maui condominium transaction involves one issue: whether the plaintiffs held the units for the production of income or for personal use and pleasure.

For the reasons discussed below, the plaintiffs prevail on the $34,500 loan commitment fee issue, and the defendant prevails on the remaining issues.

I.

A. 1. The plaintiff, Richard E. Duffy, since 1954 has been a licensed general contractor in California, and since 1957 has been in the business of developing, constructing and operating hotels and motels. By 1960, Duffy had been involved in the following projects in Anaheim, California:

a. In 1957, Duffy designed and constructed the Peter Pan Motor Lodge. Duffy operated this motor lodge until he sold it in 1959.

b. In 1958, Duffy designed and constructed, as a general contractor, the Alamo Motor Lodge.

c. In 1959, Duffy designed and constructed, as a general contractor, the Jack and Jill Motel.

d. In 1959, Duffy designed and constructed the Kettle Motor Hotel, which he operated for approximately one year until its sale. An unnamed person was part-owner of the Kettle Motor Hotel.

e. In 1960, Duffy designed and constructed the Jolly Roger Inn. Duffy Motor Hotels, Inc., of which Duffy owns 100 percent of the stock, owns the Inn. Since 1960, Duffy has operated the Jolly Roger Inn. Jolly Roger Anaheim, Inc., operates a restaurant in the Jolly Roger Inn under a lease from Duffy Motor Hotels, Inc. Duffy owns 54 percent of the stock of Jolly Roger Anaheim, Inc.

The record indicates that from 1960 until 1967, Duffy was not involved in hotel/motel development, construction, and operation other than through his connection with Jolly Roger Inn.

In 1967, Duffy responded to a solicitation from the Irvine Company for proposals for the development and construction of a hotel on six acres of land owned by the Irvine Industrial Complex, a subsidiary. In mid-1967, the Irvine Company informed Duffy that his proposal for the hotel project (the Airporter Inn Hotel) had been selected from approximately one dozen proposals.

Duffy contacted numerous lending institutions, but his efforts to obtain financing for the Airporter Inn Hotel project were complicated because he was not associated with a known hotel chain and because the project was to be built on leased ground. In late 1967 or early 1968, he engaged Milo A. Beers to seek financing for the project. Beers located a potential lender, the Home Savings and Loan Association. Before Duffy could consummate a loan agreement with the Savings and Loan, however, the latter canceled all commercial loans because of the death of its president.

After the loan from Home Savings and Loan fell through, Beers introduced Duffy to a loan broker, Donald B. Lehman. Lehman had connections with the Retirement Fund Trust of the Plumbing, Heating, and Piping Industry of Southern California (the "Trust") that allowed him to present the Trust's finance committee with feasible loan packages. Lehman felt that the Trust might be interested in financing the Airporter Inn project.

Although Lehman initially represented both the plaintiffs and the Trust in the negotiations concerning the Airporter Inn loan, by August 15, 1968, Bankers Mortgage Company of California ("Bankers") took over as the Trust's representative. Bankers, however, was never Duffy's agent.

As a result of Lehman's efforts (see below), on August 19, 1968, the plaintiffs executed a listing agreement with him pertaining to a construction loan for, and permanent financing of, the Airporter Inn. Lehman was identified in the agreement as the loan-acquisition agent for both loans. He was to receive for his services one percent of the total amount of both loans — a total of $46,000. In addition, the agreement identified Beers as the loan-originating agent for the permanent loan. Beers was to receive one percent of that loan — $23,000.

The Trust rejected Lehman's initial submission, in April or May 1968, of the proposed loan package for the Airporter Inn. Approximately one month later, Lehman suggested the loan request possibly could be approved if, in connection with the loan, the plaintiff purchased the Western Avenue Medical Building (medical building), which the Trust owned. The Trust wanted to sell the medical building for $500,000. At first, Duffy was not interested, but he later told Lehman that he would consider purchasing the medical building if Lehman could find a buyer to whom the building could be resold. Lehman located a buyer for the medical building, Pacific Atlantic Financial Corporation ("Pacific"). Pacific, however, was willing to pay considerably less than $500,000.

A letter dated June 27, 1968, prepared by Lehman and signed by Duffy, authorized Lehman to submit a loan package to the Trust that conditioned Duffy's purchase of the medical building for $500,000 ($200,000 in cash and $300,000 on a deed of trust) on a commitment by the Trust to lend $2,300,000 for construction and permanent financing of the Airporter Inn project. This letter was not submitted to the Trust. It is clear from this letter, however, that the sole reason Duffy agreed to purchase the medical building was to obtain the proposed loan.

2. The parties agreed to the terms of the purchase and resale of the medical building in mid-August 1968. It is unnecessary to describe the agreements and their subsequent amendments in detail. Rather, we will set out only the basic aspects of those agreements insofar as they are relevant to our decision.

Duffy agreed to pay the Trust $500,000 for the medical building. Duffy paid the Trust $130,000 (partly through escrow), and a first deed of trust secured the remaining $370,000. The sale was to close prior to October 15, 1968.

Duffy also agreed to pay $17,220 for six-months' prepaid principal and interest on the mortgage. In addition, he would pay $7,000 for six-months' prepaid taxes. Pacific was the beneficiary of these prepayments (see below). The agreement also required Duffy to pay the $500 in escrow costs. Finally, the Trust agreed to pay a $30,000 commission to Lehman.

Under the purchase agreement with Pacific, Pacific agreed to pay the plaintiff $370,100 — $100 through the escrow and the remainder secured by a mortgage. The agreement essentially provided that Pacific would be substituted for Duffy on the $370,000 encumbrance held by the Trust (this was accomplished in early September 1966). Pacific did not have to make mortgage payments or pay taxes for six months as a result of Duffy's prepayment of those items. The resale to Pacific also was to close prior to October 15, 1968.

Duffy agreed (in a subsequent modification of the agreement with Pacific) to place $45,780 in escrow. Pacific was entitled to use $15,780 of that amount for repairs on the medical building. The other $30,000 was to "be set aside to pay the costs of Builder Control disbursements" in connection with the Airporter Inn. While Pacific did not receive the benefit of the $30,000, the payment of the costs through the escrow indicates that the double transfer of the medical building, the loan from the Trust and the construction of the Airporter Inn were interrelated.

Duffy's purchase from the Trust, and sale to Pacific, of the medical building were completed on September 26, 1968. Except for about $6,000, Duffy used proceeds of his loan from the Trust to pay for $30,000 of his downpayment obligation to the Trust (which the Trust apparently paid to Lehman as commission), for the $17,220 prepayment on the first deed of trust, for the $7,000 in prepaid taxes on the medical building, and for the $45,780 obligation under its escrow agreement with Pacific (see below).

As a result of the multiple transactions, the plaintiff paid $500,500 to the Trust for the medical building ($370,000 mortgage + $100,000 downpayment + $30,000 downpayment (commission subsequently to Lehman) + $500 escrow costs). Pacific simultaneously paid the plaintiff for the same building $330,100 ($370,000 mortgage + $100 escrow costs ± $40,000 ($15,780 improvements + $17,220 prepaid principal and interest + $7,000 prepaid taxes)). The net effect was that Duffy paid the Trust $170,400 more for the building than the amount he obtained from Pacific (which we treat as the building's fair market value).

3. Development of a loan from the Trust for the Airporter Inn project proceeded simultaneously with the purchase and sale of the medical building. An undated, proposed letter agreement, signed by Duffy but not by the Trust, stated the terms of the loan agreement....