Lakeside Garden Developers, Inc. v. Commissioner
| Decision Date | 13 September 1976 |
| Docket Number | 6034-73.,Docket No. 6035-73 |
| Parties | Lakeside Garden Developers, Inc., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Robert O. Rogers, The 400 Bldg., 400 Royal Palm Way, Palm Beach, Fla., for the petitioners. Curtis O. Liles, III, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in the income tax of petitioners in the following amounts:
Kenneth A. Murry and Helen J. Murry—
Docket No. 6034-73
Year Ended Deficiency § 6651(a) § 6653(a)
12/31/66 ... $27,924.56 ..........
12/31/67 ... 41,217.84 ..........
12/31/68 ... 55,090.85 ..........
Lakeside Garden Developers, Inc.—
Docket No. 6035-73
6/30/66 ... $54,009.60 ..........
6/30/67 ... 98,252.27 ..........
6/30/68 ... 79,556.65 $19,889.16 $3,977.83
6/30/69 ... 23,863.60 5,965.90 1,193.18
As a result of the agreement by the parties, the sole issue to be considered for decision at this time is whether Lakeside Garden Developers, Inc., realized additional income under section 612 from the sale of condominium residential units represented by the obligation, which the purchasers of those units were required to assume, to pay rentals under a 99-year lease for so-called recreational facilities which had been erected by Lakeside Garden Developers, Inc., and transferred to its stockholders. Depending upon the decision of the Court with respect to that issue, a further hearing may be necessary to determine the nature and amount of such income and the extent to which taxable to the shareholders of Lakeside Garden Developers, Inc.
Some of the facts have been stipulated. Such stipulations and the exhibits attached thereto are incorporated herein by this reference.
During the taxable years in question, Kenneth A. Murry and Helen J. Murry were husband and wife having their principal place of residence at 2200 Lake Drive, Delray Beach, Florida. They filed a joint individual Federal income tax return, Form 1040, for each of the calendar years 1966, 1967 and 1968, with the Southeast Service Center of the Internal Revenue Service at Chamblee, Georgia.
During the taxable years in question, Lakeside Garden Developers, Inc., hereinafter called Lakeside, was a corporation having its principal place of business at 7340 South Military Trail, Lake Worth, Florida. For each of the fiscal years ending June 30, 1966, through June 30, 1969, it filed a United States corporation income tax return, Form 1120, with the Southeast Service Center of the Internal Revenue Service at Chamblee, Georgia.
Mr. Kenneth A. Murry had extensive experience in the construction industry. He entered into an agreement with Mr. Elias Breath and Mr. Harry W. Topal, who were to contribute the necessary capital to organize a corporation and to build and to sell condominium apartments. Pursuant to such agreement, on April 22, 1965, they caused Lakeside to be incorporated. Pursuant to the articles of incorporation, there were authorized 100 shares of common stock, of which 45 shares were issued to Kenneth A. Murry, 45 shares were issued to Elias Breath, and 10 shares were issued to Harry W. Topal. In January 1966, Harry W. Topal died and 5 of his shares were purchased by Mr. Murry and the other 5 shares were purchased by Mr. Breath, whereupon each became the owner of 50 shares of the 100 authorized and outstanding shares of Lakeside.
On May 22, 1965, Mr. Murry entered into a contract to acquire a parcel of land on which Lakeside was to construct the apartments. After a mortgage commitment was obtained, Lakeside took title to the land. The development plan contemplated the construction of 11 apartment buildings, to be sold as condominiums, clustered around a common recreational facility. It was further contemplated that the recreation facility would be held by the stockholders of Lakeside and leased to the condominiums under a 99-year lease, with all maintenance and other expenses incident thereto to be paid as a part of the condominium expenses. In other words, the owners of the recreational facilities would lease such facilities to the condominium owners under a 99-year net lease at a specified rent. The complex was to be known as "Lakeside Point Gardens."
The first condominium apartment building was nearing completion in January 1966. At a special meeting of its board of directors held on January 19, 1966, Lakeside was authorized to convey to Mr. Murry and Mr. Breath the specific real property on which the recreational facilities were being constructed. On January 27, 1966, Lakeside conveyed such property for a stated consideration of $6,000, receiving two notes in the amount of $3,000, one of which was executed by Mr. Murry and the other by Mr. Breath. At the same time, Mr. Murry and Mr. Breath each gave a note to Lakeside for one-half of the cost of the improvements on said properties, amounting to a total of $62,213.61, dated November 14, 1966.
On January 27, 1966, Lakeside also submitted a declaration of condominium for the first condominium building which was nearing completion. Simultaneously, Mr. Murry and Mr. Breath, individually, entered into a 99-year lease with the condominium owners association for this building whereby that association acquired a nonexclusive right to use the recreational facilities in exchange for a stated rental. The condominium owners association was comprised of the owners of all the units in the apartment building. At the time the 99-year lease was entered into, the owner of such units was Lakeside.
Periodically through the next three calendar years, each of the other ten condominium apartment buildings at the Lakeside Point Gardens complex, together with the land on which it was situated, was submitted to condominium ownership. Simultaneously with the submission of each building to condominium ownership, the condominium owners association for each building (Lakeside) entered into a long-term lease with Mr. Murry and Mr. Breath, giving that association a nonexclusive right to use recreational facilities in exchange for a stated payment. Each lease provides, in part, as follows:
24. LESSEE DOES NOT HAVE EXCLUSIVE RIGHT OF POSSESSION. This lease does not grant to the Lessee the exclusive right of possession to the demised premises. The Lessee understands and agrees that the Lessor shall have the right to make and enter into similar lease arrangements with others, including corporations or apartment house projects under the condominium or cooperative format, and said Lessee will have equal rights to the possession, use and occupancy of the demised premises and each and every part thereof. Notwithstanding the fact that the Lessor may contract with other lessees for the possession, use and occupancy of the demised premises, as above set forth, the obligation to pay the rent in the sum provided and specified hereinabove in this lease and any of the other obligations due and to become due hereunder shall continue as the sole obligation of the Lessee herein, its successors and assigns, without diminution, reduction or abatement because of the leasing to other lessees of the demised premises, or for any cause or reason whatsoever, and the liability for the payment of rent and any of the other obligations due and to become due hereunder may not be avoided by waiver of the use, enjoyment or abandonment of the leased premises or any part thereof.
The members of each condominium owners association were the owners of the condominium apartment units to which that association related. At the time each 99-year recreational lease was executed, Lakeside owned all of the units.
Mr. Murry and Mr. Breath constituted two of the first three directors of each condominium owners association. Additionally, Mr. Murry was president of each association and Mr. Breath was vice-president and secretary-treasurer.
For the fiscal years ending June 30, 1966, through June 30, 1969, Lakeside was engaged in selling condominium units at the Lakeside Point Gardens complex. As part of the sale of an individual unit, the purchaser was required to execute a retail purchase agreement for the purchase of his condominium unit. In purchasing an individual unit, the purchaser acquired an interest in a proportionate part of the real property on which the condominium building was constructed.
To purchase a condominium unit at the Lakeside Point Gardens complex, the purchaser was required to pay a stated sales price for the unit as well as assume certain obligations under the declaration of condominium for the particular building in which the purchaser was purchasing a unit, including an obligation for a proportionate share of the 99-year recreation lease which the condominium owners association for that particular building had entered into with Mr. Murry and Mr. Breath. These obligations were set forth in the purchase agreement. No one could purchase a condominium unit at the Lakeside Point Gardens development without assuming these obligations.
The recreation area leased by the condominium owners association under the 99-year recreation lease was part of the common elements of the Lakeside Point Gardens development. The maintenance and operation of the common elements, including the recreation facilities, was the responsibility of the condominium owners associations and was a common expense. The common expenses included the expense of administration, maintenance, operation, repair and replacement of the common elements including the premises leased by the condominium owners association under the 99-year recreation lease.
A purchaser of the condominium unit at Lakeside Point Gardens agreed to be bound by the declaration of condominium and the 99-year recreation lease. As such, he agreed to be liable for his proportionate share of...
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