Greene v. Commissioner, Docket No. 6913-89.
| Decision Date | 15 August 1991 |
| Docket Number | Docket No. 6913-89. |
| Parties | Joanne H. Greene and Estate of Robert H. Greene, Deceased, Joanne H. Greene, Executor, Petitioners v. Commissioner. |
| Court | U.S. Tax Court |
J.H. Mitchell, Jr., 1801 Century Park East, Los Angeles, Calif., for the petitioners. Kathryn Vetter and Alan S. Beinhorn, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in Mr. and Mrs. Greene's individual Federal income tax for the tax year ended December 31, 1981, in the amount of $137,161.
The issue presented is whether the gains on the sale of Mr. Greene's interests in two separate properties qualify for nonrecognition under section 1031.1
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, together with the attached exhibits, are incorporated herein.
Petitioners resided in San Rafael, California, at the time the petition in this case was filed.
Mr. and Mrs. Greene filed a joint Federal income tax return for 1981. They did not report their share of the gain realized on the transfer of two properties. The first was located at 1925/45 Francisco Boulevard, San Rafael, California (Francisco Boulevard Property), in which Mr. Greene owned a 40-percent interest. The second was 1.7 acres of undeveloped real estate in Hayward, California (West Winton Property), in which Mr. Greene owned an 85-percent interest.
Mr. Greene attempted to structure each transaction to qualify for nonrecognition of the gain under section 1031, through use of a Starker trust. Accordingly, his share of the proceeds from each transaction was placed in a separate grantor trust (Francisco Boulevard Trust or West Winton Trust). Mr. Greene named David J. DeLuca as trustee of each trust. Mr. DeLuca was also employed by Mr. Greene on an at will basis, as controller of Mr. Greene's real estate brokerage. Mr. Greene operated the real estate brokerage as a sole proprietorship.
Mr. Greene died on February 28, 1988.
Mr. Greene and the other owners of the Francisco Boulevard Property entered into a purchase agreement with Marin County Employees Retirement Association (MCERA) on December 22, 1980. MCERA agreed to cooperate with the sellers to "effect an IRS Code Section 1031 tax deferred exchange," but nevertheless insisted that the "[p]urchase price [was] to be all cash to Sellers."
On March 10, 1981, Mr. Greene and MCERA entered into an Exchange Agreement Amendment and Trust Agreement, wherein Mr. Greene and MCERA agreed that Mr. Greene would transfer his 40-percent interest in the Francisco Boulevard Property to Mr. DeLuca as trustee of the Francisco Boulevard Trust. If an exchange property was not located prior to the sale MCERA would deposit Mr. Greene's 40-percent share of the proceeds into the Francisco Boulevard Trust.
A suitable exchange property was not located prior to the sale. In contravention of the Trust Agreement, however, Mr. Greene did not transfer his interest in the Francisco Boulevard Property to the trustee. Regardless, MCERA paid Mr. Greene's 40-percent share of the net proceeds, $467,199, to the trustee of the Francisco Boulevard Trust on March 12, 1981.
The trustee was vested with the following powers: (1) To invest the funds in money market certificates or equivalent money fund shares until Mr. Greene located a suitable exchange property; (2) to retain all income received by the trust in the trust account; (3) to acquire the exchange property on Mr. Greene's behalf after being advised to do so by him; and (4) to terminate the trust, and pay over the trust corpus to Mr. Greene "as full consideration for the transfer of [the Francisco Boulevard Property]," if Mr. Greene did not locate an exchange property before March 2, 1983. The trustee was to be paid a fee for providing these services.
Pursuant to the trust document, the trustee deposited the proceeds of the sale into a money market account in the name of "David J. DeLuca, Trustee for Robert H. Greene." During the period April 3, 1981, through April 25, 1983, the trustee made seven advances from the sale proceeds to Mr. Greene, which totaled $298,044. Mr. Greene executed unsecured promissory notes for each of the advances, which were payable on demand and bore interest at rates varying from 8 percent to 15 percent. The trustee continued this arrangement, in spite of his fiduciary obligations to invest only in money market vehicles, based on his knowledge of Mr. Greene's financial position. Mr. Greene used most of the proceeds of the advances for personal purposes.
Mr. Greene repaid six of the advances on October 22, 1986, directly to the trust. One of the advances was deemed repaid on March 11, 1982, when Mr. Greene made a payment on behalf of the trust for the purchase of a trust investment property.
The interest due on the advances was not paid on a regular basis, or in amounts which represented the interest due to date. The trustee neither refused any loan requests made by Mr. Greene, nor did he enforce the interest payments or make demand for payment on the promissory notes.
The trustee paid $13,903 to Mr. Greene during 1981, which represented distribution of the income earned by the trust. No such payments were made after 1981.
The Francisco Boulevard Trust loaned $63,000 to Greene Financial Corporation between October 1, 1982, and December 15, 1982, at Mr. Greene's direction. Greene Financial Corporation was owned by Mr. Greene and his family. These loans bore interest, and were paid in full on October 19, 1983.
On June 30, 1981, the trust loaned $95,000 to the Marin Freeholders, a partnership of which Mr. Greene owned 50 percent. Again, the advance was made at Mr. Greene's direction. The loan bore interest, and was repaid in full on July 31, 1981.
On July 21, 1981, the trust loaned $11,510 to Jerry Suyderhood, a real estate broker in Mr. Greene's real estate firm. The loan was made at Mr. Greene's direction. It bore no interest and was repaid on July 23, 1981.
On July 2, 1981, the trust loaned $20,000 to Harold Holtzinger, friend and business associate of Mr. Greene. The loan was made at Mr. Greene's direction. It bore interest and was repaid in full on October 1, 1981.
The trustee did not investigate the creditworthiness of any individual or entity to whom he loaned or advanced money, but instead relied on Mr. Greene's direction.
Mr. Greene entered into a joint venture agreement with Richard and Marie Parkinson (Parkinson) on July 27, 1981, for the development of property at 17 Linda Vista Avenue, Tiburon, California. Mr. Greene caused the Francisco Boulevard Trust to pay $334,194 for development of the property. Nowhere in the Joint Venture Agreement (the Agreement), or in the grant deed through which Parkinson contributed the land to the joint venture, was the Francisco Boulevard Trust mentioned. The Agreement refers to Mr. Greene as a joint venturer, not the trust.
In spite of this, the trustee considered this property to be a trust investment, notwithstanding the limitation on the types of trust investments allowed by the trust agreement (i.e., money market vehicles). When the joint venture was dissolved on September 17, 1982, Mr. Greene took title to the liquidating distribution in his name, not that of the trust. Mr. Greene arranged for a loan against the property on September 29, 1982, after the joint venture was dissolved. The proceeds of this loan were deposited into the trust money market account.
The trust reported the income and expenses (including depreciation)2 of the property on its annual fiduciary income tax returns. When the property was sold on December 23, 1986, the trust reported the gain on the transaction.
Mr. Greene purchased five condominium units in Pebble Creek Condominiums, Denver, Colorado, on March 5, 1982. Mr. Greene made an aggregate downpayment of $10,350 for them, and the seller financed the remainder of the purchase price. The trustee considered this property to be in exchange for the Francisco Boulevard Property, and deemed the $10,350 paid by Mr. Greene to be interest expense paid to the trust on account of the previous advances made to Mr. Greene.
The trustee was not a party to any contract concerning the Pebble Creek Condominiums. The units were purchased in Mr. Greene's name, and he reported the income and expenses from the Pebble Creek Condominiums on his individual income tax return.
Mr. Greene purchased an additional property at 2155 Coldwater Canyon, Los Angeles, California, on February 9, 1984. He paid a downpayment of $5,000 from his own funds, and the trustee paid $49,000 on April 16, 1984. Mr. Greene adjusted his basis in the Coldwater Canyon property to reflect deferral of the gain on the Francisco Boulevard Property. The income and expenses for the property were reported on Mr. Greene's individual income tax return. The trustee was not a party to any contract concerning the Coldwater Canyon Property, nor did he participate in any of the negotiations.
Mr. Greene and the other owners of the West Winton Property entered into a Real Estate Purchase Contract with Messrs. Y.C. Yang and E.H. DeWolf (Yang and DeWolf) on November 21, 1980. The buyers of the property agreed to cooperate with the sellers to "effect an IRS Code section 1031 tax deferred exchange," but nevertheless insisted that the "Purchase price [was] to be * * * all cash."
On February 6, 1981, Messrs. Greene, Yang, and DeWolf entered into an Exchange Agreement Amendment and Trust Agreement,...
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