Epic Associates v. Commissioner
| Decision Date | 19 March 2001 |
| Docket Number | Docket No. 3963-92.,Docket No. 3877-92. |
| Citation | 81 T.C.M. 1311 |
| Parties | Epic Associates 84-III, William C. Griffith, Jr., and Dottie M. Griffith, Tax Matters Partners v. Commissioner. Epic Associates 83-XII, William C. Griffith, Jr., and Dottie M. Griffith, Tax Matters Partners v. Commissioner. |
| Court | U.S. Tax Court |
William C. Griffith, Jr., pro se.
Carolyn Lee Harber, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent issued notices of final partnership administrative adjustment (notices of FPAA) in which respondent determined the following adjustments with respect to the partnership items reported by Epic Associates 83-XII (referred to herein as EA 83-XII):
1983 1984 1985
Disallow interest and point amortization deductions... $483,029 $556,564 $576,848
Disallow depreciation deductions...................... 173,119 173,119 173,119
Disallow claimed net investment loss.................. (341,010) -0- -0-
Disallow qualified investment income.................. -0- 303,571 330,529
Disallow qualified investment expenses................ -0- 908,960 909,831
Disallow excess expenses from net lease property...... 10,859 -0- -0-
Disallow investment interest income................... 66,366 -0- -0-
Disallow net investment income........................ 29,306 -0- -0-
Disallow investment income............................ -0- 90 1,262
Respondent issued notices of FPAA in which respondent determined the following adjustments with respect to the partnership items reported by Epic Associates 84-III (referred to herein as EA 84-III):
1983 1984 1985
Disallow interest and point amortization deductions........ $121,535 $536,280 $559,662
Disallow depreciation deductions........................... 56,910 170,742 170,742
Disallow deductions in excess of income.................... -0- -0- 44,219
Disallow claimed net investment loss....................... (141,142) -0- -0-
Disallow qualified investment income....................... -0- 217,619 229,131
Disallow qualified investment expenses..................... -0- 872,376 997,436
Disallow net investment income............................. 6,097 -0- -0-
Disallow investment income................................. -0- -0- 494
Among the adjustments summarized above, respondent disallowed all of the interest and depreciation claimed as deductions by each partnership. The principal issues in these cases are whether certain nonrecourse promissory notes issued by each partnership to purchase real estate constitute bona fide indebtedness and whether the activity of each partnership is an "activity not engaged in for profit", as that phrase is defined by section 183(c). Unless stated otherwise, all section references in this opinion are to the Internal Revenue Code as in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. EA 83-XII and EA 84-III are limited partnerships. At the time the instant petitions were filed on their behalf, each partnership was doing business in the State of Virginia, and the tax matters partners of each partnership, William C. Griffith, Jr., and Dottie M. Griffith, resided in Atlanta, Georgia. Both limited partnerships reported income and expenses on a calendar year basis and used the accrual method of accounting.
EA 83-XII was formed on December 3, 1982, pursuant to the Uniform Limited Partnership Act of the Commonwealth of Virginia for a 10-year term ending on December 3, 1992. The Amended and Restated Certificate and Agreement of Limited Partnership dated June 1, 1983 (referred to herein as the 83 partnership agreement) describes the business of EA 83-XII in the following terms:
Business of the Partnership
The business of the Partnership shall be to acquire, directly or indirectly, and finance, fee interests in certain improved residential real properties and to operate, manage, lease or otherwise deal with such properties with the objective of distributing income generated thereby among the Partners as provided for herein; and to hold such properties for investment with the objective of capital appreciation therein and to engage in and perform all acts and activities required in connection with or incident to the foregoing.
The partnership's sole general partner was Equity Programs Investment Corp. (EPIC), a corporation that was originally incorporated in Virginia in 1974 and was reincorporated in Maryland in 1983. EPIC's business involved the purchase, lease, and sale of residential houses and condominiums. We discuss EPIC at greater length below.
The 83 partnership agreement provides that EPIC's "interest shall be deemed to be a one-percent (1%) share in the Partnership's capital contributions for which it shall contribute" $10,580.81. In addition, the 83 partnership agreement authorizes two classes of limited partnership interests: 1 class A unit and 25 class B units. The class A unit was sold to four investors for an aggregate sum of $90,000. The purchasers of the class A unit made cash payments totaling $50,000 and executed recourse promissory notes totaling $40,000 that were payable to the partnership on July 1, 1983. These investors were admitted to the partnership on April 16, 1983.
EA 83-XII also sold 25 class B units of limited partnership interest for $38,300 per unit or a total of $957,500. Approximately $3,300 of the amount paid for each class B unit was paid in cash and the balance of $35,000 was paid in the form of a recourse promissory note payable to EX 83-XII in 14 quarterly installments of $2,500 each with the last payment due on April 1, 1987.
Before selling the class B units in EA 83-XII, EPIC circulated a confidential private placement offering memorandum dated June 1, 1983 (referred to herein as the 83 offering memorandum). The 83 offering memorandum states that persons who purchased class B units would be admitted to EA 83-XII as limited partners commencing September 1, 1983.
The 83 offering memorandum states that the limited partners' contributions would be used primarily to fund operating deficits of the partnership. The 83 offering memorandum includes the following summary of EA 83-XII's anticipated sources and uses of the proceeds of the offering:
Sources Amount Percent
Proceeds from sale of class A unit........................................... $ 90,000 1.66
Proceeds from sale of class B units.......................................... 957,500 17.68
Capital contribution of general partner...................................... 10,581 0.19
First mortgage loans......................................................... 3,706,150 68.38
Builder rebate [referred to herein as rental deficit contribution]........... 655,319 12.09
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5,419,550 100.00
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Uses
Purchase price of homes.................................................. 13,901,550 71.98
Sales commissions to broker/dealers [8% of the price paid for each unit]. 83,800 1.55
Escrows and prepaid insurance............................................. 20,370 0.38
First mortgage loan origination fees...................................... 148,246 2.73
Organization fee to general partner [4% of the price paid for each unit].. 41,900 0.77
Estimated cash-flow deficits through April 15, 1983....................... 58,350 1.08
Available for cash-flow deficits.......................................... 1,165,334 21.51
__________ _______
5,419,550 100.00
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Note: Footnotes omitted
1 This amount is $255 more than the actual purchase price, $3,901,295
As set forth above, it was anticipated that $58,350 of the proceeds of the offering would be offset by cash-flow deficits through April 15, 1983, and $1,165,334 of the offering proceeds would be available for cash-flow deficits after that date. The projected annual income and operating costs of EA 83-XII as set forth in the 83 offering memorandum show an annual operating deficit of $345,344 calculated as follows:
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