Jackson v. Commissioner
| Decision Date | 14 October 1981 |
| Docket Number | Docket No. 3369-79. |
| Citation | 42 TCM (CCH) 1413,1981 TC Memo 594 |
| Parties | Donald A. Jackson, Jr. and Marilynn Jackson v. Commissioner. |
| Court | U.S. Tax Court |
Eliot S. Nahigian, for the petitioners. Carol K. Muranaka, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in petitioners' Federal income taxes:
Year Amount
1973 ................ $6,770
1974 ................ 987
The issues for decision are (1) whether to grant petitioners' oral motion to dismiss one of the issues in this case, (2) whether the petitioners realized any taxable gain on the transfer of a joint venture interest to a corporation owned by petitioner Donald Jackson in 1973, (3) whether the petitioners are entitled to deduct certain rental expenses for their Shell Beach condominium in the years 1973 and 1974, and (4) whether respondent correctly decreased petitioners' allowable deduction for medical expenses under section 213.1
Some of the facts have been stipulated by the parties and are found accordingly.
Donald A. Jackson, Jr. and Marilynn Jackson (petitioners) are husband and wife, who resided in Fresno, California, at the time they filed their petition in this case. Petitioners filed their joint Federal income tax returns for the years 1973 and 1974 with the Internal Revenue Service in Fresno, California.
Donald A. Jackson (hereinafter called Jackson or petitioner) is, and was during the times of the events in question, an attorney with and partner to the law firm of Kimble, MacMichael, Jackson & Upton of Fresno, California. At the time of trial his field of specialization was in the area of taxation.2
Jackson owned a 50 percent interest in a joint venture with Living Environments, Inc. (LEI). The stock of LEI was controlled by Louis F. Del Castillo (hereinafter Del Castillo). The joint venture was formed in 1972 to construct the Castle View apartments (Castle View) in Atwater, California, and to pursue certain other activities.
On September 15, 1972, Del Castillo and Jackson signed a promissory note for a short-term gap loan from the Wells Fargo Bank of Fresno, California. The loan was arranged through Sonnenblick-Goldman, mortgage brokers. The loan was to pay capital costs of the joint venture not covered by other financing. Payments on this note were made by the joint venture. On December 31, 1972, the balance owed was $49,900. This amount was reflected as a liability of the joint venture on its 1972 partnership return. The entire amount borrowed from the Wells Fargo Bank was paid in 1973 by the joint venture.
Jackson initiated a device whereby his wholly owned corporation, Housing Specialties, Inc. (hereinafter called HSI), would act as his agent in business transactions. HSI was a previously-existing corporation involved in several of Jackson's other real estate ventures as well. The agency relation allegedly was created in order for HSI, and not Jackson, to appear on the records of the joint venture as a joint venturer. In this way Jackson attempted to avoid the appearance of personal competition with his law firm's clients, many of whom were in the construction business.
An agency agreement, dated October 11, 1972, was drawn up between Jackson as "undisclosed principal" and HSI as agent. Petitioner continued to conduct business matters, but now signed his name as president of HSI, the agent for Jackson, the "undisclosed principal."
Agent-HSI and LEI then secured a "permanent and construction" loan in the amount of $795,000 from Gibraltar Savings and Loan Association of Beverly Hills, California. This loan was secured by a Deed of Trust dated October 11, 1972, and was signed by Del Castillo, as president of LEI and Jackson, as president of HSI. In conjunction with the loan, both corporations (agent-HSI and LEI) were parties to a Loan Settlement Statement, Impound Authorization, Insurance Authorization, and Certification Statement. In addition, Jackson personally guaranteed the loan. All these documents were signed on October 11, 1972. In a formal joint venture agreement between Jackson and LEI signed on November 17, 1972 the Gibraltar loan was recognized to be "on behalf of the joint venture."
On the 1972 partnership tax return the Gibraltar loan was included as a liability of the joint venture, and the joint venture reported a loss of $36,222.51. Under the joint venture agreement losses and profits were to be shared equally. Thus, $18,111.26 was the partner's share allocated to Jackson, and he claimed a corresponding loss on his individual tax return. This loss consisted of the following joint venture expenses:
Administrative Charge Paid ............. $ 2,000.00
Bank Service Charges ................... 10.57
Insurance .............................. 1,800.00
Legal .................................. 4,000.00
Loan Fees .............................. 27,825.00
Taxes — Merced County ............ 441.94
Merced Irrigation District ............. 130.00
Miscellaneous Expense .................. 15.00
__________
Net Loss ............................. $36,222.51
There was no indication of the joint venture relationship on either the Gibraltar or the Wells Fargo loans. Although the joint venture was in existence, at least to the extent of planning for the Castle View project, the Wells Fargo note was executed before November 17, 1972, when the joint venture agreement was signed. The Wells Fargo note was not amended to reflect the joint venture's existence.
Certain sections of the joint venture agreement described the relationship of the joint venturers to each other and to the joint venture itself. Section 1.17 of the agreement concerned capital accounts of each joint venturer. It stated, in part, that the Wells Fargo loan was for the purpose of financing the joint venture and that:
all such sums contributed to the Joint Venture shall constitute capital and shall be repaid to WELLS FARGO BANK prior to the distribution to a Joint Venturer or any principal shareholder or employee of the Joint Venturer of any income or net profits or any other amounts whatsoever * * *
The next section, dealing with income accounts for the joint venture, explained that "each Venturer's share of any net loss of * * * the Joint Venture and profits * * * received * * * shall be charged to his income account unless the Venturers agree to charge such loss to their capital accounts." A debit balance in an income account becomes "an obligation of the Venturer to the Joint Venture."
Withdrawal of a venturer was permitted under this agreement, with the stipulation that liabilities with respect to financing were not to be reduced absent specific agreement. Any legal fees were to be paid to petitioner's law firm, which was retained to represent the joint venture.
Section 1.26 of the agreement provided: "This Agreement shall be binding on the parties hereto, their respective stockholders, successors and assigns."
In addition, responsibilities of each joint venturer were mapped out carefully in the agreement. Each venturer was given considerable managerial discretion under the agreement, although Jackson was primarily in charge of obtaining loans for their project. He was to establish initial contact with lenders, assist in the preparation and submission of loan packages and applications, supervise closing of the loans, and prepare documents connected with closings. LEI's only specifically enumerated duty with respect to loans was to negotiate changes with the lender, if required. General responsibilities of both venturers included "obtaining a feasibility letter or loan commitment" and "preparation of documents for lenders."
According to Exhibit A attached to the joint venture agreement, the joint venturers were to contribute fifty percent of all capital required for the project. The Gibraltar loan was acknowledged to be on behalf of the joint venture by the following statement in Exhibit A of the joint venture agreement:
The parties hereto acknowledge and recognize that the loan commitment obtained by SONNENBLICK-GOLDMAN on behalf of the Joint Venture was obtained in favor of LIVING ENVIRONMENTS, INC. and HOUSING SPECIALISTS, INC. Because the parties hereto do not wish to disturb the loan in any manner, the loan will be left in its present form and all bank accounts and documents of record will be left in a form consistent with the loan which will generally show title to the property, bank accounts and loan documents in the name of LIVING ENVIRONMENTS, INC. and HOUSING SPECIALISTS, INC. Emphasis supplied.
On January 3, 1973, Jackson assigned his one-half interest in the joint venture to HSI, and the October 11, 1972 agency relationship between HSI and Jackson was abolished.3 Part of the statement of assignment states:
DONALD A. JACKSON as holder of a fifty percent (50%) interest in a joint venture of LIVING ENVIRONMENTS, INC. and DONALD A. JACKSON hereby assigns, transfers, and conveys to HOUSING SPECIALISTS, INC. all of his right, title and interest in said joint venture as of January 1, 1973. Emphasis supplied.
The assignment was unanimously accepted by the board of directors of HSI at a special meeting held on January 22, 1973. The minutes of this meeting indicate that Jackson considered the transaction a complete termination of his individual interest and a contribution to HSI's capital, as follows:
MR. JACKSON explained that he was concerned that the present arrangement worked out in October of 1972 was not providing him with sufficient anonymity and that he therefore wanted to completely sever his individual relationship with the joint venture and transfer his interest to the corporation as of January 1, 1973. He explained that he was making a contribution to the capital of the corporation and was not requesting that any...
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