Gaines v. Commissioner, Docket No. 8305-78

CourtUnited States Tax Court
Citation1982 TC Memo 731,45 TCM (CCH) 363
Docket Number8309-78.,Docket No. 8305-78,8306-78,8308-78,8307-78
PartiesBilly J. Gaines and Martha C. Gaines, et al. v. Commissioner.
Decision Date21 December 1982

S. Ralph Gordon and H. Jere Ford, 1000 Fidelity Federal Bldg., Nashville, Tenn., for the petitioners. Shuford A. Tucker, Jr., for the respondent.

Memorandum Findings of Fact and Opinion

PARKER, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes as follows:

                                         Calendar Year
                                         or Date Fiscal
                      Petitioners          Year Ends          Amount
                  Billy J. Gaines and
                  Martha C. Gaines
                  (docket No. 8305-78)       1973 ........   $2,234.66
                  Lewis E. Gaines, Jr. and
                  Jackie Gaines
                  (docket No. 8306-78)       1973 ........    5,711.60
                  Gaines and Wright
                  Construction Co., Inc.      2-28-73       $ 7,875.31
                  (docket No. 8307-78)        2-28-74        13,336.86
                  James P. Mather and
                  Martha T. Mather
                  (docket No. 8308-78)       1973             3,112.00
                  Lewis E. Gaines and
                  Donna A. Gaines
                  (docket No. 8309-78)       1973            81,762.06
                

Respondent also determined an addition to tax of $4,088.10 under section 6653(a)2 in docket No. 8309-78.

These consolidated cases generally involve transactions between the various petitioners and certain real estate partnerships. The issues for our decision are as follows:

1. Whether loan fees and other organizational expenses incurred by the various limited partnerships were deductible under section 162(a) or were capital expenditures under section 263;

2. Whether Gaines Properties, the general partner of several limited partnerships, should have reported as income certain guaranteed payments, which were accrued on the books of the limited partnerships and claimed as deductions on their partnership returns, but never paid to Gaines Properties;

3. Whether Gaines Properties, as a general partner of certain limited partnerships, should have reported as income sums charged to incoming limited partners as imputed interest and accrued by the limited partnerships on their books as deferred interest payable to the general partners;

4. Whether Gaines and Wright Construction Co., Inc., properly deducted certain expenses of a predecessor partnership that the corporation paid;

5. Whether Gaines and Wright Construction Co., Inc., properly deducted certain compensation credited to its officers' accounts;

6. Whether Riverbend Apartments, a partnership (and its partners derivatively) properly recognized as a loss from an involuntary conversion under section 1231 the expenses of constructing an access road;

7. Whether certain payments by a partnership (Belmont Lodge), were includable in the income of its partners or in the income of a corporation (Gaines and Wright Construction Co., Inc.) in which the partners were the shareholders and officers;

8. Whether eight bank deposits were includable in the income of Lewis E. Gaines and Donna A. Gaines in 1973; and

9. Whether any part of any underpayment of any tax in 1973 by Lewis E. Gaines and Donna A. Gaines was due to negligence or intentional disregard of rules and regulations within the meaning of section 6653(a).

Certain other issues were raised by the various petitioners in their petitions, but they have presented no evidence or argument on these items and we assume petitioners have conceded those adjustments.3

Because of the multiple parties and issues, we will first make general findings of fact and then make specific findings of fact and a separate opinion on each of the issues that we must decide. All of these issues were properly raised in respondent's notices of deficiency, and petitioners bear the burden of proof on all issues. Welch v. Helvering 3 USTC ¶ 1164, 290 U.S. 111 (1933); Rule 142(a).

General Findings of Fact

Petitioners in docket No. 8305-78, Billy J. Gaines and Martha C. Gaines, are husband and wife. Billy is a party only because he filed a joint return with his wife; Martha C. Gaines will be treated as if she were the sole petitioner in their case. Petitioners in docket No. 8306-78, Lewis E. Gaines, Jr., and Jackie Gaines (Eddie and Jackie), are husband and wife. Jackie is a party only because she filed a joint return with Eddie; Eddie will be treated as if he were the sole petitioner in their case. Petitioners in docket No. 8308-78, James P. Mather and Martha T. Mather, are husband and wife. Martha Mather is a party only because she filed a joint return with James; James will be treated as if he were the sole petitioner in their case. Petitioners in docket No. 8309-78, Lewis E. Gaines and Donna A. Gaines, are husband and wife. Donna is a party only because she filed a joint return with Lewis; Lewis will be treated as if he were the sole petitioner in their case.

When they filed their petitions in their cases, all of the individual taxpayers resided in Nashville, Tennessee, except Lewis E. Gaines and Donna A. Gaines, who resided in Mt. Juliet, Tennessee. All of the individual taxpayers filed their joint income tax returns for the taxable year 1973 with the Internal Revenue Service Center at Memphis, Tennessee. Lewis and Donna also filed an amended return (Form 1040X) for 1973, which the Internal Revenue Service received on December 23, 1977.

Gaines & Wright Construction Co., a partnership, was formed on July 1, 1969. Lewis, James, and Eddie were partners in that partnership. On March 12, 1971, Gaines & Wright Construction Co. (the partnership) was incorporated as Gaines & Wright Construction Co., Inc. (G & W, Inc.). G & W, Inc., is the petitioner in docket No. 8307-78. Lewis, James, and Eddie were also shareholders in the corporation. Gaines & Wright Construction Co. filed its final partnership information return for the period January 1, 1971 to March 11, 1971. G & W, Inc., adopted as its first taxable year the period ending February 29, 1972. G & W, Inc., is a corporation chartered in the State of Tennessee. At the time it filed its petition in its case, G & W, Inc., was located in Nashville, Tennessee. G & W, Inc., filed its corporate income tax returns for the taxable years ending February 28, 1973, and February 28, 1974, with the Internal Revenue Service Center at Memphis, Tennessee.

In the year 1973, Lewis and James were partners in Gaines Properties. The partnership filed its information return (Form 1065) for the year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.

In the year 1973, Lewis was a partner in Willow Creek Apartments (Willow Creek), Walker Springs Apartments (Walker Springs),4 Chippington Towers, Dawson Village Apartments (Dawson Village), and Westview Tower Association (Westview). Except for Westview, these partnerships filed their information returns (Forms 1065) for the year 1973 with the Internal Revenue Service Center at Memphis, Tennessee. Westview did not file a partnership information return for the year 1973.

In the year 1973, Lewis and Martha C. Gaines were partners in Executive Plaza. The partnership filed its information return (Form 1065) for the year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.

In the year 1973, Lewis and Gaines Properties were partners in Lincoln Manor Apartments (Lincoln Manor), Brookwood Apartments (Brookwood), Gaines Realty Company (Gaines Realty), and Riverbend Apartments (Riverbend). Gaines Properties was the general partner in each of these partnerships. Each partnership filed its information return (Form 1065) for the year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.

In the year 1973, Lewis and Gaines Properties were also partners in Northfield Manor Apartments (Northfield Manor). Lewis was a general partner while Gaines Properties was both a general and a limited partner. The partnership filed its information return (Form 1065) for the year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.

In the year 1973, Eddie, Lewis, and James were partners in Belmont Lodge. The record does not indicate whether this was a general or limited partnership, whether there were other partners, or whether (and, if so, where) a partnership information return was filed for Belmont Lodge for the year 1973.

H. Jere Ford (Ford) is a licensed Certified Public Accountant and a licensed attorney in the State of Tennessee.5 Ford has represented Lewis as well as Lewis' business enterprises since the early 1960's. Ford also represented Lewis at the audit which led to this case, and particiapted extensively in this litigation. Ford, or some other person in his accounting firm, prepared all of the individual tax returns for the year 1973 involved in these cases, and also prepared Lewis' amended 1973 return. Ford, or some other person in his accounting firm, prepared the corporate income tax returns for G & W, Inc., for the corporation's taxable years ending February 28, 1973, and February 28, 1974. Either Ford, or some other person in his accounting firm, prepared the 1973 partnership returns of Willow Creek, Gaines Properties, Executive Plaza, Northfield Manor, Walker Springs, Gaines Realty, and Riverbend. Neither Ford nor anyone else in his accounting firm prepared the 1973 partnership information returns of Lincoln Manor, Brookwood, Chippington Towers, Dawson Village, and Westview.

Issue No. 1: Loan Fees and Organizational Expenses

Findings of Fact

In 1973, Lewis was a general partner in Willow Creek with a one-third interest therein. Willow Creek borrowed $1,400,000 from Commerce Union Bank on a nonrecourse basis to finance construction of an apartment complex. The loan was secured by a mortgage on the real estate and planned apartment and required a $14,000 commitment fee to be paid. Willow Creek was required to pay $8,750 to Commerce Union Bank as a commitment fee on another $200,000 loan. Willow Creek was required to pay $14,000 to Kimbrough-Kavanaugh &...

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