Hunt v. Comm'r of Internal Revenue
| Decision Date | 27 June 1983 |
| Docket Number | 10913-78.,Docket Nos. 10890-78,10912-78 |
| Citation | 80 T.C. 1126 |
| Parties | D. A. HUNT and ESTATE of ALTHA HUNT (D. A. HUNT, SURVIVING SPOUSE), et al., 1 Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
On Mar. 16, 1973, petitioner-husbands executed a contract to sell KEV, an apartment complex, to S, a corporation, for $2,701,000. On Mar. 26, 1973, petitioner-husbands had outstanding debt against KEV of $1,963,222.69, and a combined basis in KEV of $1,576,410.29. On Mar. 26, 1973, they executed a warranty deed conveying KEV to S, in which they covenanted to continue to pay installments on the outstanding debt; S's president executed (1) a and William J. Hunt and Betty J. Hunt, docket No. 10913-78. vendor's lien note (wraparound note) for $2,541,000, providing for monthly installment payments beginning May 1, 1973, and (2) a purchase money note for $155,000, payable on or before Aug. 1, 1973; S's president executed a deed of trust conveying KEV to a trustee to secure payment of the two notes which he executed on S's behalf. S also made a $5,000 payment to petitioner-husbands.
Held: Sec. 1.453-4(c), Income Tax Regs., does not apply to the transaction.
1. The amount of indebtedness which exceeds basis does not constitute a payment received in the year of sale.
2. The amount of indebtedness included in the “total contract price” (within the meaning of sec. 453(a)(1), I.R.C. 1954) is not limited to such excess amount.
Stonecrest v. Commissioner, 24 T.C. 659 (1955), is followed. Guy W. Johnson, for the petitioners.
Thomas G. Potts, for the respondent.
Respondent determined deficiencies in Federal individual income tax against petitioners as follows:
+--------------------------------------------------------+
¦Docket No. ¦Petitioners ¦Year ¦Deficiency ¦
+------------+-----------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦10890-78 ¦D. A. Hunt and Estate ¦1973 ¦$7,941.89 ¦
+------------+-----------------------+------+------------¦
¦ ¦of Altha Hunt (D. A. ¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦ ¦Hunt, surviving spouse)¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦10912-78 ¦Dewey A. Hunt, Jr., ¦1973 ¦12,267.85 ¦
+------------+-----------------------+------+------------¦
¦ ¦and Marian C. Hunt ¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------+-----------------------+------+------------¦
¦10913-78 ¦William J. Hunt ¦1973 ¦12,678.42 ¦
+------------+-----------------------+------+------------¦
¦ ¦and Betty J. Hunt ¦1974 ¦1,244.67 ¦
+--------------------------------------------------------+
These cases have been consolidated for trial, briefs, and opinion. After concessions by petitioners,2 the issue for decision is whether, under section 453 on the sale of an apartment complex, (1) the amount by which each petitioner-husband's share of the outstanding indebtedness on the apartment complex exceeds his adjusted basis therein constitutes payment received in the year of sale, and (2) the amount of this indebtedness is included in the total contract price only to the extent of this excess.
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions in the instant cases were filed, all the petitioners3 resided in Dallas, Tex. Petitioners D. A. Hunt, Dewey A. Hunt, Jr., and William J. Hunt are father and sons, respectively; they are hereinafter sometimes collectively referred to as “petitioner-husbands.”
From 1965 through about 1971, petitioner-husbands acquired land and other property consisting of an apartment complex known as King Edward Village (hereinafter sometimes referred to as KEV), either in the form of a partnership or a joint venture.
On March 16, 1973, petitioner-husbands executed a contract in which they agreed to sell KEV to Southland Capital Corp. (hereinafter sometimes referred to as Southland) for $2,701,000. KEV is a 267-unit apartment complex located on three tracts of land, totaling about 11.8 acres. The March 16, 1973, contract provides that the $2,701,000 price is payable as follows:
A check dated 3-16-73 for $5,000.00 Cash (which Seller [petitioner-husbands] will deposit with Southwest Land Title Co. upon receipt as part payment, receipt of which is hereby acknowledged by Seller):
1. By the execution of an all-inclusive mortgage in the amount of $2,541,000 to be amortized over 25 years at 8.75% interest with monthly payments of $20,899.73. Said mortgage note will provide a balloon payment at the end of eight years or thereafter at the option of the Seller, if notice to call the balance is given twelve months prior to calling. Said all-inclusive mortgage is to be subject to, but in no wise assuming four existing underlying mortgages as indicated on Exhibit A. Said all-inclusive mortgage may be prepaid after eight years; by the Purchaser [Southland] with a prepayment penalty of 4% of the unpaid balance, declining 1;2 of 1% per year thereafter. [Certain illegible material omitted.]
2. By the execution of a Purchase Money Note, subordinate to the all-inclusive mortgage outlined above, in the amount of $155,000, due and payable four months from the date of closing, together with interest at 8.75% per annum.
3. By the delivery of a guaranty agreement executed by Mr. E. J. Gray, Chairman and major stockholder of Purchaser, guaranteeing the all-inclusive mortgage outlined in paragraph 1 above for the first twelve years only and guaranteeing the Purchase Money Note in its entirety.
On March 26, 1973, several documents were executed by petitioner-husbands and Southland as to the sale of KEV. Petitioner-husbands executed a warranty deed conveying KEV for certain consideration, including execution and delivery of two notes as described in paragraphs 1 and 2 of the March 16, 1973, contract. The sale was subject to the terms and conditions in the warranty deed, which provides in part as follows:
IT IS UNDERSTOOD that prior indebtedness exists against the property hereby conveyed, and Grantee [Southland] accepts this conveyance subject but in nowise assuming to/ the unpaid balances owing thereon, described as follows:
ONE NOTE dated October 3, 1966 in the original principal sum of $530,000.00 executed by W. J. Hunt, Dewey A. Hunt, Jr., and Dewey A. Hunt, Sr., and Bert F. Elsey, Sr.,4 payable to the order of State Mutual Life Assurance Company of America,* * *
ONE NOTE dated May 21, 1968 in the original principal sum of $1,400,000.00 executed by W. J. Hunt, Dewey A. Hunt, Jr., Dewey A. Hunt, Sr., and Bert F. Elsey4 payable to the order of Southern Trust & Mortgage Company;* * *
ONE NOTE dated November 22, 1965 in the original principal sum of $385,000.00 executed by Dewey A. Hunt, Jr., W. J. Hunt, Bert F. Elsey, Sr.,4 and Dewey A. Hunt, Sr., payable to the order of State Mutual Life Assurance Company of America;* * *
AND ONE NOTE dated May 30, 1968 in the original principal sum of $140,000.00 executed by W. J. Hunt, Bert F. Elsey,4 Dewey A. Hunt, Sr., and Dewey A. Hunt, Jr. payable to the order of Lone Star Gas Company;* * *
AND Grantors herein covenant and agree to continue to pay all installments of principal and taxes and insurance interest/accruing thereon as the same shall become due and payable and that should Grantors fail to pay any such installment, or installments as agreed, Grantee has the right to use all sums of money becoming due and payable on the vendor's liens secured hereby with which to cure any such default, or defaults.
* * *
BUT IT IS EXPRESSLY AGREED and stipulated that the Vendor's Lien is retained against the above described property, premises and improvements, until the above described Notes and all interest thereon are fully paid according to their face and tenor, effect and reading, when this deed shall become absolute.
On March 26, 1973, petitioner-husbands had outstanding indebtedness against KEV in the amount of $1,963,222.69. On that date, the combined basis of petitioner-husbands in KEV was $1,576,410.29, allocated to each as shown in table 1:
+-------------------------------+
¦TABLE 1 ¦
+-------------------------------¦
¦ ¦ ¦
+-------------------+-----------¦
¦D. A. Hunt ¦$549,536.95¦
+-------------------+-----------¦
¦Dewey A. Hunt, Jr. ¦518,695.88 ¦
+-------------------+-----------¦
¦William J. Hunt ¦508,177.46 ¦
+-------------------------------+
In payment of the purchase price for KEV, (1) Southland paid $5,000 to petitioner-husbands; (2) Glenn Alexander (hereinafter sometimes referred to as Alexander), in his capacity as Southland's president, executed a $155,000 purchase money note to petitioner-husbands; and (3) Alexander, in his capacity as Southland's president, executed a $2,541,000 vendor's lien note to petitioner-husbands. The vendor's lien note provides in part as follows:
The principal of this note, together with interest, is payable as follows: In monthly installments of $20,899.73 each, including both principal and interest, the first such installment becoming due and payable on the first day of May, 1973, and one installment becoming due and payable on the first day of each and every calendar month thereafter until this indebtedness is fully paid and satisfied; each installment, as and when paid, shall be credited first to accrued interest and the remainder to the principal hereof.
After April 1, 1981, and after the holders hereof shall have...
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