Gulfstream Land & Dev. Corp. v. Comm'r of Internal Revenue

• Decision Date: 22 January 1979
• Docket Number: Docket No. 479-77
• Citation: 71 T.C. 587
• Parties: GULFSTREAM LAND and DEVELOPMENT CORPORATION and SUBSIDIARIES, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

71 T.C. 587

GULFSTREAM LAND and DEVELOPMENT CORPORATION and SUBSIDIARIES, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 479-77

United States Tax Court

Filed January 22, 1979.

Gulfstream's wholly owned subsidiary, Gulfstream Republic, owned a 50-percent interest in one joint venture; Gulfstream's wholly owned subsidiary, Gulfstream University, owned a 50-percent interest in another joint venture. Both joint ventures were formed to develope and improve land, to build homes on the land, and to sell the homes. Gulfstream Republic exchanged its joint venture interest for that of Gulfstream University's co-venturer, thereby making Gulfstream Republic and Gulfstream University co-venturers in the same joint venture, each having a 50-percent interest therein. Respondent determined a deficiency in income tax because petitioners reported no gain on the exchange transaction. Petitioners moved for partial summary judgment, contending that the exchange was described by sec. 1031(a), I.R.C. 1954, and merited nonrecognition treatment. Held, although this exchange of joint venture interests meets the requirements of sec. 1031(a), petitioners' motion is denied because a question of material fact, namely whether the underlying assets of the joint ventures are stock in trade or other property held primarily for sale, must be resolved in order to decide whether the exchange 1031(a). Estate of Meyer v. Commissioner, 58 T.C. 311 (1972), affd. 503 F.2d 556 (9th Cir. 1974), followed. Jules I. Whitman and Thomas E. Doran, for the petitioners.

Alan Summers, for the respondent.

OPINION

GOFFE, Judge:

The Commissioner determined deficiencies in the Federal income tax of petitioners for the taxable years ended September 30, 1973, and September 30, 1974, in the respective amounts of $272,354 and $2,183,413. We have this matter before us on petitioners' motion for partial summary judgment.¹

Two issues are presented:

(1) Whether any material facts are in issue so as to preclude a decision on the substantive issue; and

(2) Whether the exchange of an interest in one joint venture for an interest in another joint venture qualifies for nonrecognition treatment pursuant to section 1031(a), I.R.C. 1954,² where both joint ventures were formed to develop and improve land, to build homes on the land, and to sell the homes.

Pursuant to Rule 121, Tax Court Rules of Practice and Procedure, petitioners filed an affidavit with exhibits in support of their motion. Petitioners' affidavit and the pleadings contain the facts used for the purpose of this motion. Rule 121(b), Tax Court Rules of Practice and Procedure. Relevant facts from petitioners' affidavit and the pleadings follow.

Petitioners filed a consolidated return for the taxable year ended September 30, 1974, with the Office of the Internal Revenue Service, Chamblee, Ga. The controversy with which this motion is concerned involves three of the corporations which were party to such return, namely Gulfstream Republic Properties, Inc. (hereinafter Gulfstream Republic), Gulfstream University, Inc. (hereinafter Gulfstream University), and their common parent corporation, Gulfstream Land & Development Corp. (hereinafter Gulfstream). Gulfstream, a Delaware corporation, had its principal office in Plantation, Fla. and owned 100 percent of the outstanding shares of both Gulfstream Republic and Gulfstream University during the taxable year in issue. Gulfstream is a publicly held corporation and its stock is listed and traded on the American Stock Exchange.

In June 1971, Republic Properties, Inc., which is a Florida corporation unrelated to petitioners, and Gulfstream entered into an agreement whereby Gulfstream agreed to sell to Republic Properties, Inc., a one-half interest in approximately 300 acres³ of land located in Plantation, Fla. Pursuant to the same agreement, Republic Properties, Inc., and Gulfstream each agreed to transfer their respective one-half interests in those 300 acres to a joint venture later designated the Nob Hill Co. Proceeding within the terms and conditions of the joint venture, Gulfstream assigned its entire interest in the Nob Hill Co. to its wholly owned subsidiary, Gulfstream Republic. Most prominent among the terms and conditions of the joint venture were these two: (1) That the joint venturers (2) that the joint venturers agreed to share equally in the profits and losses. Neither joint venturer's potential liability was limited and no other characteristics of a “limited partnership” were evident.

In June 1972, All Seasons Development Corp., which is a Florida corporation unrelated to petitioners, and Gulfstream entered into an agreement whereby Gulfstream agreed to sell to All Seasons Development Corp. a one-half interest in approximately 216 acres of land located in Plantation, Fla. Pursuant to the same agreement, All Seasons Development Corp. and Gulfstream each agreed to transfer their respective one-half interests in those 216 acres to a joint venture later designated the Plantation Hills Co. Proceeding within the terms and conditions of the sales agreement, Gulfstream transferred its entire interest in the Plantation Hills Co. to its wholly owned subsidiary, Gulfstream University. Most prominent among the terms and conditions of the joint venture were these two: (1) That the joint ventures agreed to contribute capital in equal amounts; and (2) that the joint venturers agreed to share the profits in the same proportion as they contributed capital,⁴ and to share the losses equally. Neither joint venturer's potential liability was limited and no other characteristics of a “limited partnership” were evident.

Republic Properties, Inc., and All Seasons Development Corp. were both controlled by the same individual. His corporations agreed to manage the development and construction and sale functions related to both joint ventures.

Under the agreement which created the Nob Hill Co., no terms specified the type of development contemplated. Under the agreement which created the Plantation Hills Co., the following development was contemplated:

1. The one hundred seventeen (117) acres zoned for single family residence shall be completely developed within four (4) years after the date of the closing as provided herein;

2. The sixty-eight (68) acres zoned for townhouses shall be completely developed within five (5) years after the date of the closing as provided herein;

3. The thirty-one (31) acres zoned for multiple dwelling shall be completely developed within seven (7) years after the date of the closing as provided herein.

The Nob Hill Co. and Plantation Hills Co. joint ventures were formed to engage in the trade or business of developing and improving land acreage in Plantation, Fla., building primarily single-family residential homes thereon and selling the improved lots and homes to buyers. Prior to July 18, 1974, the Nob Hill Co. had improved lots and had built and sold homes to buyers. The Plantation Hills Co. had improved lots and had obtained building permits for building homes thereon, but by July 18, 1974, had not built any homes.

On July 18, 1974, Gulfstream Republic exchanged its joint venture interest in the Nob Hill Co. for the joint venture interest of All Seasons Development Corp. in the Plantation Hills Co. Following the July 18 exchange, Gulfstream Republic and Gulfstream University were co-venturers in the Plantation Hills Co., and Republic Properties and All Seasons Development Corp. were co-venturers in the Nob Hill Co.

On their return for the taxable year ended September 30, 1974, petitioners reported no gain or loss from the exchange of joint venture interests described above.⁵ Respondent disapproved petitioners' treatment of the exchange, classified the exchange as a taxable transaction in which gain was recognized, and determined a deficiency in income tax.

Respondent bases his determination on three contentions: (1) The parenthetical language of section 1031(a) was drafted to preclude the exchange of interests in a business organization from qualifying for nonrecognition treatment; (2) this exchange of partnership interests cannot qualify under section 1031 because of the nature of the underlying partnership assets; and (3) section 741 requires without exception to section 1031(a) that gain be recognized upon the sale or exchange of an interest in a partnership. Petitioners counter each of respondent's arguments and contend that Estate of Meyer v. Commissioner, 58 T.C. 311 (1972), affd. 503 F.2d 556 (9th Cir. 1974) (hereinafter Meyer ), controls the outcome of this case and requires a decision that the exchange of joint venture interests qualifies for nonrecognition treatment pursuant to section 1031(a).

This Court addressed itself to facts similar to those found in the instant case when Meyer was decided. Messrs. Meyer, Sr. and Jr., were equal partners in a California partnership. They each exchanged portions of their interests in such partnership for interests in a California limited partnership. Meyer, Sr., exchanged a general partnership interest for a limited partnership interest; Meyer, Jr., exchanged a general partnership interest for a general partnership interest. Both partnerships had as their principal activities the ownership and operation of rental apartments in the San Francisco area.

Petitioners argued that the exchanges met the requirements for nonrecognition set by section 1031(a); respondent argued that they did not meet those requirements. Specifically, respondent argued that the partnership interests involved in the exchanges were choses in action and thus within the parenthetical exclusion of section 1031(a). With respect to the exchange of the general partnership interest for the limited partnership interest, respondent argued that the like-kind requirement was violated.

We held that Meyer, Jr.‘s exchange of a general partnership interest for a general partnership interest qualified for...