Guest v. Comm'r of Internal Revenue
| Decision Date | 02 July 1981 |
| Docket Number | Docket No. 8844-76. |
| Citation | 77 T.C. 9 |
| Parties | WINSTON F. C. GUEST and LUCY C. GUEST, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Guest contributed real properties subject to nonrecourse indebtednesses in excess of Guest's adjusted bases in the properties to the temple. The temple directed Guest to deed the properties to persons to whom the temple arranged to sell the properties. Held, Guest made a charitable gift of the properties to the temple. Held, further, the gift was complete in the year Guest conveyed deeds to the properties to the temple's purchasers. Held, further, the gift of the properties to the temple is a bargain sale to the extent the nonrecourse indebtednesses exceeded Guest's adjusted bases in the properties. Held, further, Guest's adjusted bases for calculating gain on the bargain sale of the properties are determined under sec. 1011(b), I.R.C. 1954. Held, further, the value of Guest's charitable contribution determined. Don Scott DeAmicis, for the petitioners.
David M. Brandes, for the respondent.
Respondent determined deficiencies in petitioners' income tax as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1968 ¦$82,843.65 ¦
+------+-------------¦
¦1969 ¦249,982.10 ¦
+------+-------------¦
¦1970 ¦229,412.30 ¦
+--------------------+
Due to concessions of the parties, the only issues remaining for determination are: (1) Whether petitioners made a completed gift to a charity of certain parcels of real property or whether petitioners gave the proceeds from the sale of the properties; (2) whether petitioners' charitable contribution was made in 1969 or 1970; and, (3) assuming petitioners made a gift of the properties, (a) whether petitioners realized gain to the extent the outstanding mortgages encumbering the properties exceeded petitioners' adjusted basis in the properties at the time of the gift, and (b) the amount of charitable contribution petitioners are entitled to under section 170.1
Some of the facts have been stipulated and are found accordingly.
Winston F. C. Guest (petitioner) and Lucy C. Guest,2 husband and wife, resided in Palm Beach, Fla., at the time they filed their petition in this case.
In 1959, petitioner purchased two groups of properties (the properties) known as the Sandringham Properties and the Aberdeen Properties. Petitioner acquired the Sandringham Properties for $31,500 cash and took the properties subject to nonrecourse mortgages of $1,962,000. The Aberdeen Properties were acquired for $36,000 cash and were subject to a nonrecourse mortgage of $1,027,000.
At the time petitioner acquired the properties, he also purchased the outstanding shares of Sandringham Properties, Inc., for $250, and the outstanding shares of Aberdeen Properties, Inc., for $250. Sandringham Properties, Inc., was solely liable on the mortgages encumbering the Sandringham Properties, and Aberdeen Properties, Inc., was solely liable on the mortgage encumbering the Aberdeen Properties.3
The Sandringham Properties are located in the States of Pennsylvania, Illinois, and Missouri. H.R.B.-Singer, Inc., held a long-term lease on the Pennsylvania property, and Singer Sewing Machine Co. held long-term leases on the Illinois and Missouri properties. (H.R.B.-Singer, Inc., and Singer Sewing Machine Co. will be referred to collectively as Singer.) Singer guaranteed the mortgages encumbering the Sandringham Properties. The Aberdeen Properties are located in the States of Delaware, Washington, Pennsylvania, and Oregon, and various Kinney Shoe Store corporations held long-term leases on them. G. R. Kinney Corp., the parent of the lessees, guaranteed the mortgage encumbering the Aberdeen Properties.
The leases on the various Aberdeen Properties are essentially identical in form, and the leases covering the several Sandringham Properties are also very similar.
The leases covering the Aberdeen Properties were for 25-year terms renewable at the lessee's option for 4 terms of 5 years each. Under the terms of the leases, the lessees were required to pay all taxes and maintenance costs and to maintain fire, casualty, and liability insurance on the premises. In addition, the lessees were required to pay monthly rentals. Each lessee, provided it is not in default, has the option to terminate its lease by offering to purchase the property anytime after the end of the sixth year for a price established in the lease plus interest and accrued rents. The total purchase price provided for in the leases for all five Aberdeen Properties on December 27, 1969, was $644,857.97. The outstanding balance of the mortgage on December 31, 1969, was $649,307.
The Aberdeen leases were assigned to the St. Louis Union Trust Co. and an individual as trustees. Under the terms of this assignment, all rentals were paid to the trustees who, in turn, paid the monthly mortgage payments and other expenses (e.g., trustees' fees). The balance was then paid to petitioner.
The mortgage agreement encumbering the Aberdeen Properties had two special features. First, the repayment schedule called for a “balloon” payment at maturity equal to 5 percent of the original balance of the mortgage. Second, the mortgage agreement also contained a “kicker” provision calling for an additional payment to the mortgagee at maturity equal to 20 percent of the original amount of the mortgage. In lieu of this “kicker” payment, the mortgagor had the option of conveying to the trustees all of its interests in the Aberdeen Properties. The trustees would then be directed to sell the Aberdeen Properties and distribute one-half of the proceeds to the owners of the mortgage notes and the remaining proceeds to the mortgagor.4
The Sandringham leases were for terms of either 23 years and 2 months or 25 years, renewable at the lessee's option for six terms of 5 years each. Under the terms of the leases, the lessees were required to pay all taxes and maintenance costs and to maintain fire, casualty, and liability insurance on the premises. In addition, the lessees were required to pay monthly rentals. At various times during the lease periods, the lessees, provided they were not in default, had the right to offer to purchase the leased premises and the option to purchase the leased premises for a price which, depending on the lease and whether the purchase was pursuant to an offer or an option, was either (i) an amount established in the lease, or (ii) an amount equal to the then-appraised value of the land plus a percentage of the original cost of the buildings on the premises at the time of the purchase, or (iii) an amount equal to the then-appraised value of the land plus a fixed dollar amount set forth in the lease. The right to offer to purchase and the option to purchase are complicated provisions which led to disputes between the lessees and petitioner's successor-lessor. The total offer-to-purchase price on January 1, 1970, for all of the Sandringham Properties was $1,358,351.98. The outstanding balance of the mortgage on December 31, 1969, was $1,366,650.
The Sandringham leases were assigned to the Mellon National Bank & Trust Co. and an individual as trustees. Under the terms of these assignments, all rentals were paid to the trustees who, in turn, paid the monthly mortgage payments and other expenses (e.g., trustees' fees). The balance was then paid to petitioner.
Petitioner's net cash flow from the properties approximated $2,700 per year. 5
Petitioner's initial basis in the Sandringham Properties was $1,993,500; $18,000 allocated to land and $1,975,500 to improvements. Petitioner's adjusted basis in the Sandringham Properties on December 31, 1969, was $1,049,829; $18,000 allocated to land and $1,031,829 to improvements.
Petitioner's initial basis in the Aberdeen Properties was $1,063,000; $324,627.75 allocated to land and $738,372.25 to improvements. Petitioner's adjusted basis in the Aberdeen Properties on December 31, 1969, was $566,385; $276,823 allocated to land and $289,562 to improvements.6
Petitioner's total adjusted bases in the properties on December 31, 1969, was $1,616,214 and the total outstanding indebtedness on the properties was $2,015,957.
During the course of his ownership of the properties, petitioner took deductions on his tax returns of $1,283,752 for depreciation attributable to the properties. By 1969, petitioner no longer reported losses on his returns attributable to the Sandringham properties. (That is, the depreciation, interest, trustees' fees, and related expenses no longer exceeded rental income.) The Aberdeen Properties reached this point in 1966.
Petitioner traditionally makes various charitable gifts around the Christmas season. In December, petitioner asked his tax attorney to suggest possible charitable gifts and recipient charitable organizations. Petitioner's attorney recommended that petitioner contribute the properties to Temple Emanu-el of Yonkers (the temple). Petitioner had never visited the temple. In a letter dated December 15, 1969, petitioner informed the temple that he was contributing the properties to it. The letter stated:
I am happy to inform you that I am contributing to you certain properties which I own, in order that they may be used to further your aims and principles.
* * *
This gift to Temple Emanu-el is made without any restrictions, and the properties may be held by you for the production of current income, or may be sold at any time as you may determine. I have instructed my attorneys to prepare deeds transferring record ownership to you, and they await your instructions in this matter.
In a December 17, 1969, letter from Milton Hecht, the chairman of the temple's finance committee, the temple accepted petitioner's gift:
On behalf of Temple Emanu-el, I wish to thank you for your generous donation of the eight properties listed in...
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