Gardner v. Commissioner

• Decision Date: 25 August 1987
• Docket Number: Docket No. 21684-82,29044-82.
• Citation: 1987 TC Memo 420,54 TCM(CCH) 250
• Parties: Samuel C. Gardner v. Commissioner.
• Court: U.S. Tax Court

54 TCM 250

1987 TC Memo 420

T.C. Memo. 1987-420

Samuel C. Gardner v. Commissioner.

Docket Nos. 21684-82, 29044-82.

United States Tax Court.

Filed August 25, 1987.

Hallison H. Young and Frederick A. Patmon, 3770 City Nat. Br. Bldg., Detroit, Mich., for the petitioner. Oksana O. Xenos, for the respondent.

Memorandum Findings of Fact and Opinion

PARKER, Judge:

In these consolidated cases, respondent determined deficiencies in and additions to petitioner's Federal income tax as follows:

                                                        Additions
                Docket No.     Year    Deficiency   Sec. 6651(a)1    Sec. 6653(a)
                21684-82    1977   $49,289.00        2
                29044-82    1978     2,880.70                  $144.04
                            1979     1,355.00                    67.75
                

The issues for decision³ are:

(1) Whether petitioner, a limited partner in Boulevard East Apartments Limited Dividend Housing Association, defaulted in the payment of his required capital contributions to the partnership, resulting in the forfeiture of his partnership interest effective January 1, 1977, so that he was not entitled to deduct a partnership loss for that year;

(2) Whether petitioner realized a capital gain in 1977 as a result of his release from partnership liabilities upon the forfeiture of his partnership interest;

(3) Whether petitioner had unreported income of $12,115.98, $4,200.00, and $5,803.00 in his taxable years 1977, 1978, and 1979, respectively;

(4) Whether petitioner is entitled to a claimed $500 charitable contribution deduction for 1978;

(5) Whether petitioner is entitled to a dependency exemption for his minor son for 1977, 1978, and 1979; and,

(6) Whether petitioner is liable for the additions to tax under section 6651(a) for 1977, and under section 6653(a) for 1978 and 1979.

Findings of Fact

Some of the facts have been stipulated and are so found. The first stipulation of facts, the third stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference.⁴

Petitioner Samuel C. Gardner resided in Detroit, Michigan at the time each petition was filed in these consolidated cases. Petitioner's occupation during each of the taxable years in issue was that of Judge of the Recorders Court for the city of Detroit. Petitioner filed his U.S. Individual Income Tax Returns (Forms 1040) for the calendar years 1977, 1978, and 1979 with the Internal Revenue Service Center in Cincinnati, Ohio, as follows:

                Taxable Year                         Date of Filing
                  1977                              10/16/78
                  1978                              10/16/79
                  1979                              06/16/80
                  1979 (Amended)                    06/04/81
                  1979 (Amended)                    04/20/83
                

Applications for extensions of time to file were filed for the 1978 and 1979 returns, but no such application was filed for the 1977 return.

I. The Partnership. On March 12, 1971, William H. Williams and Nellie T. Williams, his wife, executed a nonrecourse mortgage and mortgage note evidencing a debt of $459,000 to Inner City Mortgage Corporation, secured by the real property located at 190 East Grand Boulevard, Detroit, Michigan. The proceeds of the loan were used to rehabilitate the building on the property, known as Boulevard East Apartments. On the same date, the Williamses and the Secretary of the U.S. Department of Housing and Urban Development (HUD) entered into a Regulatory Agreement under section 236 of the National Housing Act, as amended, wherein HUD agreed to provide mortgage insurance on the property. On April 19, 1972, the Williamses and Inner City Mortgage Corporation executed a nonrecourse supplemental mortgage and mortgage note for an additional $32,300, which was contemporaneously consolidated with the original $459,000 mortgage.

On December 28, 1972, "Boulevard East Apartments" was organized under the laws of Michigan as a limited partnership.⁵ The partnership was organized with two general partners, William H. Williams and Nellie T. Williams, and one limited partner, Edward J. Holland, Jr. Under the partnership agreement, profits and losses were to be apportioned five percent to the general partners and 95 percent to the limited partner. The general partners' capital contribution to the partnership was their entire interest in the real property located at 190 East Grand Boulevard, Detroit, Michigan and their entire interest in the commitment for mortgage insurance from HUD and the Commissioner of the Federal Housing Administration. The purpose of the partnership was to acquire the property located at 190 East Grand Boulevard, Detroit, Michigan (hereinafter referred to as the "property") in order to rehabilitate, construct, develop, and manage the property under section 236 of the National Housing Act, as amended. This property was a housing project for persons of low or moderate incomes.

On December 27, 1973, the partnership agreement was amended to admit four additional limited partners, James Del Rio, Douglas Strong, Lemuel Barney, and petitioner. The amended partnership agreement provided that neither the partnership nor any partner was to have any personal liability for the mortgage encumbering the partnership's property, i.e., the housing project. That nonrecourse mortgage was included in the basis for depreciation deductions claimed by the partnership. Each of the additional limited partners, including petitioner, acquired a 22.5 percent interest in the net profits and losses of the partnership, which was subsequently modified to 23.5 percent. In return for their interests, the additional limited partners each agreed to contribute $25,000 to the partnership, payable as follows: $12,500 upon execution of the partnership agreement, $4,167 on or before December 1, 1974, $4,167 on or before December 1, 1975, and $4,166 on or before December 1, 1976. Petitioner executed a subscription agreement, paid $12,500 in cash, and executed a promissiory note evidencing the $12,500 balance of his required capital contributions to the partnership.

With regard to the default of any limited partner in his required capital contributions, section 4.10 of the partnership agreement provided as follows:

4.10 Defaulting Limited Partner

In the event that any Investor Limited Partner shall default in the payment of any of the installments required to be paid, as aforesaid, the Defaulting Limited Partner shall forfeit his percentage interest in the Partnership capital, profits and losses and the remaining Limited Partners, if any, may acquire, pro rata, Limited Partnership interests of such Defaulting Partner, after contributing pro rata all of the balance of the cash contributions required to be made by such Defaulting Limited Partner. For purposes of this subsection, the General Partners are constituted and appointed the true and lawful attorney of any such Defaulting Limited Partner to effectuate the transfer assignment and substitution of said Defaulting Limited Partner's interest to the remaining Limited Partners upon the making of the payment, as aforesaid, or to effectuate the contraction and reduction of said Defaulting Limited Partner's interest to the Additional Limited Partners upon the making of any such agreed payment as the parties may mutually agree, and to execute any and all documents which may be required. Nothing herein provided for shall preclude the remaining Limited Partners from providing a Substitute Limited Partner in the place and stead of the Defaulting Limited Partner or the Partnership from providing an Additional Limited Partner in the place and stead of the Defaulting Limited Partner upon payment as aforesaid, upon the payment by such Substitute Limited Partner of the balance of the cash contribution required to be made by the Defaulting Limited Partner; provided however, that such new Substitute Limited Partner or Additional Limited Partner shall first be approved by the General Partners and, if required by the Regulatory Agreement, the FHA.

The partnership agreement did not provide for, or require, any notice to a defaulting limited partner to effectuate the forfeiture of his partnership interest. The partnership agreement did not provide that such a forfeiture was conditioned upon any remaining limited partner's making the payment of the defaulting limited partner's share. Further, the partnership agreement did not provide that the payments of the capital contributions by the limited partners were conditioned upon the financial viability or solvency of the partnership, upon the ability of the partnership to remain current on the mortgage, or upon any other circumstance or event.

Petitioner paid in $12,500 to the partnership by his check dated December 24, 1973, in accordance with the partnership agreement and his subscription agreement. However, petitioner did not make any of the three installment payments due to the partnership on or before their due dates of December 1, 1974, 1975, and 1976. Another limited partner, James Del Rio, who executed a subscription agreement and promissory note similar to that of petitioner, also did not make the installment payments due to the partnership.

Petitioner did not make his required capital contributions to the partnership in 1974, 1975, or 1976. However, during 1976 and 1977, he paid the sum of $12,500 for his capital contribution to his attorneys instead of to the partnership. Section 6.4 of the partnership agreement provided that the general partners had the sole right to manage the business of the partnership, and section 6.5 prohibited any limited partner from participating in or having any control over the partnership business. Petitioner's attorneys, however, told him they were not satisfied with the way the property was being managed, and they decided, apparently with petitioner's acquiescence, not to pay the money to the partnership.⁶ Petitioner's attorneys also represented James Del Rio. Thus, as of January 1, 1977, petitioner had only paid...