Finkelman v. Commissioner
| Decision Date | 16 February 1989 |
| Docket Number | Docket No. 7581-86,34999-86. |
| Citation | 1989 TC Memo 72,56 TCM (CCH) 1269 |
| Parties | Sol Finkelman v. Commissioner. |
| Court | U.S. Tax Court |
Marvin J. Garbis and L. Paige Marvel, 2 Hopkins Plaza, Baltimore, Md., for the petitioner. Mary Schewatz, Steve Mather and Thomas Coker, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent, in statutory notices of deficiency as identified below, determined deficiencies and additions to petitioner's income taxes as follows:
Notice ofIncome Tax Additions to Tax DeficiencyYearDeficiencySec. 6651(a)(1)2Sec. 6653(a)Sec.6659 1/30/86 ....................... 1975 $ 9,035 $ 1,980 $ 507 $ - 1/30/86 ....................... 1976 70,535 17,634 3,587 - - .......................... 1977 120,787 30,093 6,177 - - .......................... 1978 315,368 - 15,768 - 6/16/86 ....................... 1979 96,156 20,878 4,808 - 6/16/86 ....................... 1980 129,051 23,281 6,453 - - .......................... 1981 243,919 - 12,196* 33,603 - .......................... 1982 91,571 - 4,579* 23,078 * Pursuant to section 6653(a)(1), plus 50 percent of the interest on the deficiencies pursuant to section 6653(a)(2)
After concessions, the issues remaining for our consideration involve petitioner's real estate investment activity. The specific issues to be considered are: (1) Whether petitioner should be allowed claimed losses related to certain real estate transactions; (2) whether petitioner should recognize gross income attributable to partnership interests received for services; (3) whether the section 6653(a) addition to tax applies to any underpayments; (4) whether petitioner is liable for additions to tax pursuant to section 6659; and (5) whether petitioner is liable for increased interest on tax motivated transactions under section 6621(c).
This is a "lead" case of a related group of taxpayers who invested in and claimed tax benefits regarding certain real estate partnerships formed and managed by petitioner, Sol Finkelman. Respondent determined adjustments with respect to 17 of the partnerships. Adjustments involving eight of the partnerships are still at issue, and these will be resolved, by agreement of the parties, on the basis of findings regarding these five "test" cases or properties. The properties selected by the parties are representative and are intended to obviate the need for further litigation concerning each property owned by the eight partnerships.
The five "test" partnerships and properties are as follows:
Name and Address of Property Partnership Name
Bank of Florida Building Seaside Properties Co
2350 34th St. North
St. Petersburg, Florida
Duluth Post Office Duluth Properties Co
2800 W. Michigan St
Duluth, Minnesota
Hacienda Bank Building Oxnard Properties Co.
11900 Brookhurst St.
Garden Grove, California
First Valley Bank Building Bethlehem Properties Co.
One Bethelehem Plaza
Bethlehem, Pennsylvania
Progressive Savings and Loan Building Progressive Properties Co.
12175 Ventura Blvd.
Studio City, California
Petitioner, Sol Finkelman, resided in California when the petition was filed in this case. His tax return for 1975 was filed jointly with his "then" wife, Helen. His tax returns for the years 1976 to 1982 were filed jointly with his "then" wife, Luisa. The stipulated facts and exhibits are incorporated herein by this reference.
Petitioner was born in Warsaw, Poland, in 1918 and immigrated to the United States in 1923. During military service in the United States Army, petitioner was responsible for various financial and accounting functions. In 1947, petitioner received his Bachelor's degree in Business Administration with a specialization in accounting from the City College of New York. In 1949, he became a certified public accountant in the State of New York and, in 1951, was certified in California. After graduating from college, he worked as an accountant, initially in New York and then in California. In June 1956, petitioner opened his own office, representing clients in financial and business matters, including real estate transactions, estate planning, pension matters, investment planning, accounting and tax matters. He has engaged in investment counseling as part of his accounting practice since 1948.
Petitioner typically proposed investments in real estate to his clients. Commercial property under a long-term lease to a single tenant was normally recommended. During the years 1947 to 1970, petitioner, on numerous occasions, advised clients concerning specific real estate transactions.
Sometime in 1969, petitioner began to look for and buy commercial real estate for his own account and for clients who were interested in real estate investment. During 1969, petitioner, on behalf of several of his clients, purchased two post offices from Selden Ring (Ring), a real estate developer. Several months later, petitioner contacted Ring about the purchase of additional commercial properties and was referred to Ring's partner, Joseph Penner (Penner).
Penner, a real estate builder and developer, had engaged in real estate investment since 1962. His activities included the construction, development, acquisition, management and sale of real estate throughout the United States. Penner purchased and/or constructed numerous post office buildings for the United States, Government. Penner also built and owned commercial buildings leased to single "major credit" tenants. Penner's business, up until 1970, involved the occasional sale of real properties.
Beginning approximately in 1970, the Penner Ring Co. (a partnership in which Penner was involved) and thereafter Penner individually, began to sell3 real estate to partnerships formed by petitioner, or to petitioner on behalf of partnerships. From 1970 to 1982, petitioner or said partnerships purchased approximately 50 properties from Penner. The first two properties (post offices located in California and Montana) were acquired in 1970 by the Orange/Wolf Point Properties partnership. The vast majority of the properties Penner sold were to petitioner or to entities controlled by petitioner. From 1970 to 1975, the properties purchased were all post offices. In 1975, petitioner purchased ten properties from Penner, one of which was the Pacific Telephone Building in Concord, California. This was the first "Penner property" that was not a post office.
After 1975, petitioner shifted focus from post offices to commercial buildings with long-term net or master leases. This was done because the maintenance costs and obligations of a lessor under a standard post office lease had increased considerably as a result of inflation and other factors, and Penner was reluctant to enter into the kind of maintenance contracts for future post office deals that had been negotiated in prior transactions.4 During the period at issue, rents for the type of properties petitioner acquired could be expected to rise between three and four percent annually.
Generally, negotiations for the purchase and sale of properties owned by Penner to petitioner or the partnerships would commence late in the year preceding the year of sale or early in the year of sale. At the beginning of the negotiation process, information would normally be furnished by Penner to petitioner. The information concerned the land, improvements, tenant, applicable lease terms including the rental, underlying indebtedness, and Penner's desired purchase terms. The purchase terms included the amount of the down payment, amount of any balloon payments, and the length of the payout period. After the initial exchange of information and terms, Penner and petitioner would negotiate the final terms of sale. The negotiations would focus on price, interest rate, seller financing, down payment, financing period and amount of balloon payments.
In some of the transactions, instead of a purchase of the fee, the improvements were purchased and a ground lease was executed. In such transactions, the improvements would revert to Penner at the end of the ground lease. In two out of three instances, for the test properties, there was some documentation indicating that the partnerships had the option to purchase the underlying property at or near the termination of the ground lease. This documentation included an option agreement with "November, 1980" as the date (Progressive) and a letter written 3 years after the date of sale (Bank of Florida).
Penner would typically ask for a price based on an all cash deal. Petitioner would then submit a "below-market financing proposal" back to Penner with an increased purchase price.
The down payment, in a typical real estate transaction between Penner and Finkelman (or a partnership),5 was paid out over 2 or 3 calendar years. The transaction was structured so that after the down payment was fully paid, the cash flow from the rental payments under the existing lease on the property would be paid by the tenant either to an independent corporate trustee or to Penner directly. It was credited to the unpaid interest and principal on the promissory notes, as well as to any ground rents due Penner on properties where the partnership had only a ground lease. Ten to fifteen years after the purchase agreement was executed, a substantial balloon payment, equal to two to four times the original down...
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