Hensel Phelps Const. Co. v. C.I.R., s. 81-1326

• Decision Date: 31 March 1983
• Docket Number: Nos. 81-1326,81-1625,s. 81-1326
• Citation: 703 F.2d 485
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: 83-1 USTC P 9270 HENSEL PHELPS CONSTRUCTION COMPANY, Petitioner-Appellant and Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee and Cross-Appellant.

Page 485

703 F.2d 485

83-1 USTC P 9270

HENSEL PHELPS CONSTRUCTION COMPANY, Petitioner-Appellant and Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee and Cross-Appellant.

Nos. 81-1326, 81-1625.

United States Court of Appeals Tenth Circuit.

March 31, 1983.

Robert S. Rich, Denver, Colo. (Herrick K. Lidstone and Albert Theodore Powers, Denver, Colo., with him on brief) of Davis, Graham & Stubbs, Denver, Colo., for Hensel Phelps Const. Co. Terry L. Fredricks, Washington, D.C. (John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup and Robert T. Duffy, with him on brief), Dept. of Justice, Washington, D.C., for the C.I.R.

Before BARRETT, McKAY and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

Hensel Phelps Construction Company appeals a decision of the United States Tax Court affirming the Commissioner's determination of a deficiency against it for its tax year ending May 31, 1974. The court held that Hensel Phelps received a partnership interest in that year in exchange for services and failed to include the value of that interest in its taxable income. The court established the amount to be included at $239,151. See Hensel Phelps Construction Co., 74 T.C. 939 (1980). Hensel Phelps challenges the decision of the Tax Court, arguing: (1) the court erred in determining that the partnership interest was received in the tax year ending May 31, 1974 instead of in the prior year; (2) even if the partnership interest was received in the tax year ending May 31, 1974, the court erred in finding that it was received in exchange for services rather than for the taxpayer's capital contribution to the partnership; and (3) even if the interest was received in exchange for services, the court erred in determining the amount to be included in taxable income by failing to take into account the taxpayer's capital contribution.

This case involves the formation of a partnership, Cherry Creek Plaza Associates, by Hensel Phelps and three individuals, Louis Bansbach, Peyton Perry, and Donald Macy. In May 1972 Bansbach, Perry, and Macy entered into an agreement to purchase some undeveloped land. After some negotiation, Hensel Phelps and the three individuals agreed to study the feasibility of constructing an office building on the land. This agreement was reduced to writing in a letter dated July 6, 1972, which provided that the individuals would contribute the land and Hensel Phelps would contribute its contractor's fee for the construction of the office building. The letter targeted October 10, 1972 as the date by which a joint venture agreement should be executed and provided for reimbursement of Hensel Phelps for its out-of-pocket expenses plus 10% for overhead if "we elect to terminate this letter of intent" before that date.

Hensel Phelps and the individual owners of the land began to select and hire engineers, architects, and consultants for the study and planning of the office building. They sought construction financing from General Electric Credit Corporation, and received a loan proposal from that company on April 27, 1973. The proposal was addressed to Cherry Creek Plaza Associates, described as a general partnership. The next written agreement between Hensel Phelps and the three individuals concerning the arrangements for the office building was a letter dated May 3, 1973. It stated that the parties "will proceed at once to form an appropriate entity, probably a limited partnership," to which Hensel Phelps would contribute its contractor's profit and overhead for the building and the individuals would contribute their equity in the land; profits and losses would be shared 50% by Hensel Phelps and 50% by the individuals. The letter also provided that Hensel Phelps would continue to advance all expenses and that if satisfactory financing was not obtained or the building not constructed, Hensel Phelps would be reimbursed 110% of its out-of-pocket expenses from the profits derived from the sale of the land. Hensel Phelps then entered into a contract for the construction of the office building with Cherry Creek Plaza Associates, described as a limited partnership. This contract purported to be effective May 1, 1973, although it appears that it was not actually executed until after August 10, 1973. Construction on the office building began and Hensel Phelps entered into various subcontracts and purchase agreements before June 1, 1973.

The loan commitment was obtained and accepted in July 1973. In August 1973 Hensel Phelps, the three individuals, and a corporation formed by the three individuals--Bansbach, Perry & Macy, Inc. (BPM)--signed a limited partnership agreement. By that agreement BPM and Hensel Phelps were equal sharing general partners and Hensel Phelps and the three individuals were limited partners. The individuals agreed to contribute their equity in the land and Hensel Phelps, in its capacity as a limited partner, agreed to advance the first $300,000 cash required by the partnership. The agreement provided that the partnership would reimburse the individuals for their initial investments and carrying costs in the land. Hensel Phelps was to receive 50% of the profits...