Long v. Comm'r

• Decision Date: 20 November 2014
• Docket Number: No. 14–10288,14–10288
• Parties: Philip LONG, Petitioner–Appellant, v. COMMISSIONER OF IRS, Respondent–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

772 F.3d 670

Philip LONG, Petitioner–Appellant

v.COMMISSIONER OF IRS, Respondent–Appellee.

No. 14–10288

United States Court of Appeals, Eleventh Circuit.

Nov. 20, 2014.

Philip Long, Castleton, VA, pro se.

Karen G. Gregory, Gilbert Steven Rothenberg, U.S. Department of Justice, William J. Wilkins, Chief Counsel–IRS, Washington, DC, for Respondent–Appellee.

Before TJOFLAT, WILSON, and JORDAN, Circuit Judges.

Opinion

PER CURIAM:

Philip Long appeals the United States Tax Court's final order and decision on his petition for redetermination of deficiency brought under 26 U.S.C. § 6213(a). Long argues that the Tax Court erred by concluding that the $5.75 million Long received from the assignment of his position as plaintiff in a lawsuit constituted taxable ordinary income, rather than long term capital gains. Long also argues that the Tax Court erred by concluding that Long's $600,000 payment to Steelervest, Inc. (Steelervest) did not qualify as a deductible expense. Long further argues that the Tax Court erred by concluding that Long presented insufficient evidence of unaccounted legal fees.

I.

In October 2007, Long filed a federal income tax return for 2006, reporting a taxable income of $0. In September 2010, the Internal Revenue Service (IRS) served Long with a notice of deficiency, which indicated that Long had a taxable income of $4,145,423 and had incurred $1,430,743 of tax liability in 2006. Long filed a pro se petition in the Tax Court seeking a redetermination of his deficiency on the grounds that he properly reported his taxable income and that the IRS made several errors in calculating his cost of goods and gross receipts. The IRS's answer denied any error in the notice of deficiency.

In October 2011, Long and the IRS executed a stipulation of facts and exhibits, as required by the Tax Court, which the IRS supplemented three times thereafter. According to the stipulated facts, from 1994 to 2006, Long, as sole proprietor, owned and operated Las Olas Tower Company, Inc. (LOTC), which was created to design and build a luxury high-rise condominium called the Las Olas Tower on property owned by the Las Olas Riverside Hotel (LORH). LOTC never filed any corporate income tax returns and did not have a valid employer identification number. Instead, Long reported LOTC's income on his Schedule C of his individual tax return.

From 1997 to 2003, Long also owned Alhambra Brothers, Inc. (Alhambra), which was created to build a different luxury condominium in Ft. Lauderdale, Florida. To facilitate the building of the condominium, Alhambra formed Alhambra Joint Ventures (AJV) with Steelervest, a company owned by Henry J. Langsenkamp, III.

In 1995, Steelervest entered into a contract to loan funds to LOTC for the development of Las Olas Tower. In November 2001, Steelervest purchased Long's interest in AJV, and, as part of the deal (the AJV Agreement), Steelervest agreed to forgive the loans previously issued to LOTC. As part of the same deal, Long agreed to pay Steelervest $600,000 in the event that Long sold his interest in the Las Olas Tower project, or twenty percent of the net profit resulting from the development of the Law Olas Tower project.

In 2002, Long, negotiating on behalf of LOTC, entered into an agreement with LORH (the Riverside Agreement) whereby LOTC agreed to buy land owned by LORH for $8,282,800, with a set closing date of December 31, 2004. LORH subsequently terminated the contract unilaterally and, on March 26, 2004, LOTC filed suit in Florida state court against LORH for specific performance of the contract and other damages. LOTC won at trial, and on November 21, 2005, the state court entered judgment in favor of LOTC, and ordered LORH to honor the Riverside Agreement and proceed with the sale of the land to LOTC within 326 days from the date of entry of the final judgment. LORH appealed the judgment.

In August 2006, during the appeals process for the Riverside Agreement litigation, Steelervest and Long renegotiated the terms of the AJV Agreement, and, in a new agreement (the Amended AJV Agreement), Long agreed to pay Steelervest fifty percent of the first $1.75 million, up to a maximum of $875,000, of monies received by Long as a result of the Riverside Agreement litigation. On September 13, 2006, Long entered into an agreement with Louis Ferris, Jr. (the Assignment Agreement), whereby Long sold his position as plaintiff in the Riverside Agreement lawsuit to Ferris for $5,750,000. While the Amended AJV Agreement arguably entitled Steelervest to $875,000, Steelervest agreed to receive $600,000 and release all rights to pursue collection under the Amended AJV Agreement.

At the April 11, 2012 Tax Court trial, Long began his testimony by arguing that the $600,000 payment to Steelervest was a deductible business expense, not a non-deductible loan repayment. Long insisted that the $600,000 paid to Steelervest could not have been a debt repayment, because all debts were extinguished by the AJV Agreement.

Long also testified that he began the Las Olas Tower project in 1995 when he had the idea to build a luxury condominium in a prime real estate market. Long claimed he intended to coordinate the development of the Las Olas Tower project, and sought funding from his business partner and friend, Langsenkamp. Long explained that he spent thirteen years working on the Las Olas Tower project, and, in the end, he was able to sell his right to build the project.

Next, Long proffered a letter from his attorneys as evidence of $238,343.71 in unaccounted legal fees, but the Tax Court refused to admit the letter as inadmissible hearsay. The Tax Court then afforded Long the opportunity to continue the trial so that Long could find the appropriate documentation regarding his legal fees and present witnesses to properly authenticate those documents. Long stated, however, that he was going to “give up” and “concede” the issue of unreported legal fees because he had no way of getting admissible evidence before the Tax Court in a timely fashion.

On cross-examination, Long testified that he was the developer of the Las Olas Tower project, and his role was to design the property with an architect, obtain local government approval for the project, and merchandise the property. Long provided promotional material to potential clients, worked with clients to execute contracts, and received deposits for approximately twenty percent of Las Olas Tower's sixty to ninety proposed condominium units. Long worked full-time as the developer for the project.

After Long's testimony, the IRS called John McCrory, Steelervest's and Langsenkamp's attorney, who testified that AJV and the Ft. Lauderdale condominium project were losing enterprises, and Langsenkamp's only hope of making money was to have the loans Steelervest gave to LOTC repaid out of profits from the Las Olas Tower project. The purpose of the AJV Agreement was to cancel the notes issued to LOTC, and transfer Long's indebtedness to profits from the Las Olas Tower project. Essentially, the $600,000 was a substituted obligation for the cancelled promissory notes.

At the end of the trial, Long stated that his sole objection to the IRS's calculation of his 2006 tax liability was that his $600,000 payment to Steelervest was a deductible business expense, not a loan repayment. Long also reiterated that he agreed to give up on the additional legal fees. The IRS then noted its objection to Long's characterization of his 2006 income as capital gains.

Long stated in his post-trial brief that he should not have withdrawn his claim regarding unaccounted legal fees, and argued that the IRS improperly omitted $238,544 of deductible legal expenses from his 2006 tax return. Additionally, the $600,000 payment to Steelervest did not constitute a loan repayment because the controlling documents indicated that the AJV Agreement eliminated all of Long's debt. Long also asserted that his income from the Assignment Agreement constituted the sale of an asset, and, therefore, his tax return should be completed using the long term capital gains method.

The IRS stated in its post-trial brief that the $600,000 payment to Steelervest must have been a debt repayment because Steelervest was not a participant in a joint venture with LOTC. The IRS also argued that the $5,750,000 received by Long from the Assignment Agreement constituted ordinary income, not capital gains. Specifically, Long received $5,750,000 in lieu of future ordinary income payments, and, therefore, that money should be counted as ordinary income under the “substitution for ordinary income doctrine.” See Comm'r v. P.G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958). Additionally, Long was not entitled to an increased legal fee deduction because, at trial, he presented no evidence demonstrating his entitlement to an increased deduction, and, regardless, he affirmatively abandoned the issue.

The Tax Court rejected Long's arguments and found him liable for a tax deficiency of $1,430,743. First, the Tax Court determined that Long's concession regarding the deductibility of additional legal fees amounted to a binding stipulation that he was not entitled to an increased deduction. Moreover, even if Long had not conceded the issue, he did not present sufficient evidence at trial demonstrating his entitlement to an enhanced legal fee deduction. Second, based on factors enumerated in previous published Tax Court decisions, the Tax Court concluded that the AJV Agreement did not create a joint venture between Steelervest and LOTC, and, therefore, the entire $5.75 million payment Long received for his position in the Riverside Agreement litigation constituted non-deductible, taxable income attributable to Long, including the $600,000 that Long subsequently paid to Steelervest. Finally, the Tax Court, treating LORH's land as the putative capital asset, found that Long intended to sell the land to a developer and concluded that the applicability of the capital...