Elrod v. Comm'r of Internal Revenue
| Decision Date | 12 November 1986 |
| Docket Number | Docket No. 17669-83. |
| Citation | 87 T.C. No. 67,87 T.C. 1046 |
| Parties | JOHNIE VADEN ELROD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner transferred land pursuant to an optional sales contract, as amended, to be developed in part as a regional shopping center. The terms of the contract were ambiguous and petitioner offered parol evidence that the contract constituted an option agreement rather than a completed sale.
Petitioner orally agreed that his brother and sister each were entitled to share in the net profits realized from his real estate activities. Petitioner deducted consulting fees paid to them with respect to the land transferred pursuant to the optional sales contract, as amended, as expenses incurred pursuant to a family partnership agreement.
Petitioner conveyed to the state two parcels of land and easements located adjacent to the proposed regional shopping center site. One parcel was the site of a proposed interstate highway interchange and access road to the shopping center, without which the shopping center would not be developed. The second parcel and the easements were the site of a proposed access road to a nearby hospital.
The land to be developed as the regional shopping center was conveyed to a newly formed limited partnership in which petitioner was its limited partner. The partnership agreement provided for petitioner to receive a special allocation of partnership losses. It did not require petitioner upon liquidation to restore any deficit capital account balance attributable to the special allocation.
HELD, parol evidence is admissible to corroborate petitioner's position that the optional sales contract, as amended, is an option agreement. HELD FURTHER, however, that the contract constitutes a completed sale and petitioner must include in income payments received in their respective ears of receipt.
HELD FURTHER, petitioner and his brother and sister formed a valid family partnership within the meaning of section 704(e), I.R.C. 1954, and the consulting fees constitute deductible partnership expenses.
HELD FURTHER, petitioner's conveyance of land for a proposed interstate highway interchange and shopping center access road does not constitute a charitable conveyance within the meaning of section 170. HELD FURTHER, the conveyances of land and easements for an improved hospital access road do constitute charitable conveyances and petitioner is entitled to deduct their fair market value as charitable contributions.
HELD FURTHER, petitioner's distributive share of partnership losses is deductible to the extent of his partnership basis, section 704(d), determined in accordance with sections 722, 752, and the regulations thereunder. HELD FURTHER, to the extent that the special allocation creates a deficit in petitioner's capital account that he has no obligation upon liquidation to restore, the special allocation lacks substantial economic effect within the meaning of section 704(b). Carrington Williams and Robert I. Waxman, for the petitioner.
Alan C. Levine and Thomas M. Cryan, for the respondent.
Respondent determined by notice of deficiency dated April 7, 1983 deficiencies in the Federal income taxes of petitioner for the taxable years ended December 31, 1975 and December 31, 1977 through December 31, 1980 as follows:
+---------------------------+
¦Taxable year¦Deficiency ¦
+------------+--------------¦
¦1975 ¦1 $25,543.28 ¦
+------------+--------------¦
¦1977 ¦138,016.00 ¦
+------------+--------------¦
¦1978 ¦127,258.00 ¦
+------------+--------------¦
¦1979 ¦158,030.00 ¦
+------------+--------------¦
¦1980 ¦162,616.00 ¦
+---------------------------+
1 The deficiency determined for 1975 is based upon respondent's disallowance of petitioner's 1978 net operating loss that had been carried back to the 1975 taxable year.
After concessions, the issues remaining for decision are (1) whether payments received by petitioner pursuant to an ‘optional sales contract‘ constitute taxable installment sale payments or nontaxable option payments, (2) whether petitioner is entitled to deduct certain payments as consulting fees incurred pursuant to a family partnership agreement, (3) whether petitioner is entitled to a charitable contribution deduction for conveyances made to the Commonwealth of Virginia, and if so, the value of such deduction, and (4) whether petitioner is entitled to a special allocation of partnership losses.
Some of the facts have been stipulated and are so found. The stipulated facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner, Johnie Vaden Elrod (Elrod), resided in Arlington, Virginia at the time he filed his petition in this case. He filed Federal income tax returns for all of the taxable years in issue with the Internal Revenue Service Center in Memphis, Tennessee.
Petitioner, an attorney with a real estate background, moved to Washington, D.C. from Murfreesboro, Tennessee in 1931. Petitioner's father's principal occupation had been the purchase and sale of real estate, and petitioner had been exposed to and involved with many of his father's real estate transactions. Petitioner's father had been a large land owner in the Murfreesboro area until the 1930's, when he lost virtually all of his property during the Depression. In 1938 petitioner's father died, survived by petitioner, petitioner's mother (Mrs. Elrod), petitioner's brother, Dr. Robert Elrod (Dr. Elrod), and petitioner's sister and her husband, Gladys and Harvey Clark (the Clarks). Thereafter, Mrs. Elrod was taken care of by her children.
Approximately 2 or 3 years after her husband's death, Mrs. Elrod moved in with the Clarks and lived there until her death in 1974. The Clarks ran errands for her, paid for her groceries, and paid other miscellaneous bills. They did not maintain records of expenditures made on her behalf. Dr. Elrod also provided approximately $100-150 per month to the Clarks for her support. Petitioner did not contribute financially to his mother's care. However, petitioner said he would ‘make some of this up to‘ his brother and sister and vowed that each of them would be entitled to a 10-percent interest in the ‘net profits‘ from his real estate ventures.
Petitioner and his brother and sister did not execute any written agreement with respect to the formation of a family partnership. They did not file any Federal or state income tax returns on behalf of any partnership for any of the taxable years in issue. Also, they did not prepare any statements of their respective distributive shares of any partnership interests. However, in 1976, petitioner and his brother executed a Virginia Certificate of Trade name and Partnership stating that petitioner and his brother and sister were conducting business under the name of J.V. Elrod, Associates. Moreover, petitioner treated his brother and the Clarks as participants in a partnership or joint venture.
Petitioner discussed potential real estate investments with his brother and the Clarks during telephone conversations and in letters. In numerous letters, petitioner referred to his brother and the Clarks as his ‘counsel‘ and ‘advisors.‘ In their correspondence, petitioner referred to their joint property interests, and in particular, petitioner's 1977 conveyance of certain land to Ernest W. Hahn, Inc. (Hahn), as discussed in greater detail in the OPTION VERSUS SALE section below. Petitioner requested their ‘advice,‘ ‘suggestions,‘ and ‘recommendations‘ with respect to documents to be executed for the conveyance of this property. Dr. Elrod inspected the property on at least three occasions and appeared before the Prince William County Board of Supervisors on at least two occasions with respect to the development of the proposed shopping center on this site.
Petitioner also referred to his brother and the Clarks as his counsel in correspondence with Hahn. Moreover, the Statement of Sale executed with respect to the land conveyed to Hahn provided that a portion of the initial downpayment was payable directly to petitioner's brother and the Clarks. Also, payments upon the satisfaction of the promissory note executed with respect to the balance of the purchase price were payable directly to petitioner's brother and the Clarks. In 1977 petitioner paid a total of $126,300, one-half each to his brother and to the Clarks, as ‘consulting fees‘ incurred with respect to this sale of land to Hahn. In his calculation of the amount of gain realized on the sale, petitioner deducted the $126,300 as consulting fees incurred pursuant to the family partnership agreement.
As of 1956, petitioner became the sole owner in fee of approximately 300 acres of land in Woodbridge, Virginia, located in Prince William County between Interstate Route 95 and U.S. Route 1 (the 300-acre tract).1 Petitioner intended to develop this land for commercial use as a regional shopping center. In the early 1970's, petitioner engaged in negotiations with several major commercial real estate developers. At some time in 1972 or 1973, petitioner entered into an option agreement with Alfred Taubman with respect to the entire 300-acre tract for the construction of a regional shopping center. The option agreement provided for Taubman to pay an initial downpayment in the amount of $50,000, plus monthly option extension fees in the amount of $5,000. On his 1975 Federal income tax return petitioner reported that this option had expired as of December 31, 1975. Approximately 6 months later, petitioner commenced negotiations with Earnest W. Hahn, Inc., a California corporation authorized to do business in Virginia, with respect to the development of a shopping center on this 300-acre tract.
On April 25, 1977, a document labeled ‘Optional Sales Contract‘ (the contract)...
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