Long v. Comm'r of Internal Revenue
| Decision Date | 29 October 1981 |
| Docket Number | 17528-79.,Docket Nos. 17522-79 |
| Citation | 77 T.C. 1045 |
| Parties | ARTHUR E. and SELMA LONG, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTDAVE and BERNETTE N. CENTER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners Long and Center were 50-percent owners in a Texas partnership, L, and a Georgia joint venture, V, with essentially the same group of taxpayers owning the remaining 50 percent. Both L and V's principal asset at the date of the exchange was mortgaged rental real estate located in or near Atlanta, Ga. Petitioners exchanged their 50-percent interest in L for the other 50-percent interest in V with the result that they owned 100 percent of V and none of L. Held, the exchange of partnership interests qualifies as a like-kind exchange under sec. 1031(a), I.R.C. 1954. Held, further, the entire amount of gain realized was recognized under sec. 1031(b) due to an excess of liabilities relieved which constitutes money received under sec. 1031(d). Held, further, the basis of the partnership interest received is increased by the full amount of gain recognized as provided under sec. 1031(d). Held, further, the remaining issues of the amount of the minimum tax under sec. 56(a) and whether petitioners are entitled to income averaging are to be resolved by the parties under Rule 155. William E. Frantz, for the petitioners.
Lourdes M. DeSantis, for the respondent.
Respondent determined deficiencies of $91,323 and $10,658 for the calendar years 1975 and 1976, respectively, in the Federal income tax of Arthur and Selma Long and deficiencies in the amount of $153,443 and $4,761 for the calendar years 1975 and 1976, respectively, in the Federal income tax of Dave and Bernette Center.
After concessions by the parties, the issues for decision are: (1) Whether the exchange of an interest in a Texas general partnership for an interest in a Georgia joint venture qualifies for nonrecognition treatment under section 1031(a), I.R.C. 1954;1 (2) if the exchange does fall within section 1031(a), whether gain should be recognized to the extent of the nonqualifying property received in the exchange as provided in section 1031(b); (3) if gain is recognized, whether the basis of the property received should be increased by the full amount of the gain recognized pursuant to section 1031(d); and (4) whether petitioners are liable for the minimum tax imposed on tax preference items for the taxable year 1975 under section 56(a) and whether they are entitled to income averaging for the taxable year 1976.
Some of the facts have been stipulated and are found accordingly.
Arthur and Selma Long (husband and wife) and Dave and Bernette Center (husband and wife) were residents of the State of Georgia at the time of the filing of their petitions in this case. Each of these couples filed joint Federal income tax returns for the calendar years 1975 and 1976 with the Internal Revenue Service Center in Chamblee, Ga.
Arthur Long and Dave Center (petitioners) were successful executives employed in Atlanta, Ga., during the years relevant to this case. Each petitioner kept his books and records on the cash basis for the years here in issue.
During the years 1974 and 1975, petitioners were members of a Texas partnership, known as Lincoln Property Co. No. Five of Atlanta, Ga. (Lincoln Property), which owned property in the Atlanta, Ga., area. The principal place of business of Lincoln Property was located in Atlanta, Ga. The partnership kept its books and records and filed its income tax returns on the cash basis method of accounting, using a calendar year. It filed its Forms 1065, U.S. Partnership Return of Income, for the calendar years 1974 and 1975 with the Internal Revenue Service Center, Chamblee, Ga.
During the years 1974, 1975, and 1976, petitioners were members of a Georgia joint venture, known as Venture Twenty-One, which owned property in Atlanta, Ga. The principal place of business of the joint venture was located in Atlanta, Ga. The joint venture kept its books and records and filed its income tax returns on the cash basis method of accounting, using a calendar year. It filed its Forms 1065 for the calendar years 1974, 1975, and 1976 with the Internal Revenue Service Center, Chamblee, Ga.
The Lincoln Property partnership was a general partnership formed on September 30, 1965, by the Robert T. Crow Trust (Trammell Crow, trustee), Ewell G. Pope, and Frank C. Carter for the purpose of engaging in the business of acquiring and holding for investment real property located in the cities of East Point and Atlanta, Ga. In early 1966, the partners began making plans to develop the property owned by the partnership and on January 10, 1966, the Citizens & Southern National Bank (Citizens & Southern) agreed to lend the partners $232,000 in proportion to their interests in the Lincoln Property partnership. On August 12, 1966, Citizens & Southern, on the basis of an application filed by the parties, approved a construction and mortgage loan in the amount of $1,500,000 to Lincoln Property. The proceeds of the loan were to be used in the construction of the Franciscan Apartments which consisted of a 160-unit garden apartment complex comprised of two-story buildings plus a separate clubhouse. Trammell Crow guaranteed the payment of that portion of the loan outstanding in excess of $1,200,000.
On August 18, 1966, the partners, Trammell Crow, trustee, Pope, and Carter entered into a construction loan agreement with Citizens & Southern for the financing of the construction of the Franciscan Apartments complex. This agreement provided, among other things, that permanent financing would be obtained from Teachers Insurance & Annuity Association of America (Teachers Insurance) upon completion of the apartments.
After additional financing from Teachers Insurance had been arranged and all rights had been transferred to Teachers Insurance from Citizens & Southern, the partners, on November 1, 1967, agreed with Teachers Insurance to consolidate the deeds and the notes outstanding on the Franciscan Apartments into a consolidated loan in the amount of $1,875,000 to be held by Teachers Insurance. The document executed, entitled “First Supplement to Security Deed,” stated that an additional parcel of land was conveyed to Teachers Insurance as security for the debt, and certain terms and conditions of the mortgage were amended. In paragraph 6, the agreement stated that notwithstanding any prior provision to the contrary, in the event that Teachers Insurance should take action to collect the indebtedness due, it was to first foreclose on the secured property. If that was insufficient to pay the indebtedness, Trammell Crow was personally liable only to the extent that the foreclosure price plus the balance of the debt exceeded $1,500,000. Otherwise, there was no personal liability on the part of Crow, Pope, or Carter.
On December 18, 1967, Citizens & Southern approved a construction loan in the amount of $1,275,000 to Trammell Crow, trustee, Pope, and Carter for the purpose of constructing phase III of the Franciscan Apartments. Under the terms of the agreement, Teachers Insurance was to accept the responsibility for the permanent financing upon the completion of phase III of the apartments. As of December 18, 1967, phases I and II of the Franciscan Apartments consisted of 200 completed apartments. As of January 15, 1968, the principal amount of the mortgage held by Teachers Insurance on the Franciscan Apartments was $3,150,000.
During early 1968, petitioners were looking for investment opportunities and the Lincoln Property partnership was brought to their attention by Herb Dickson, who at that time was executive vice president of Citizens & Southern. The apartment complex appeared to petitioners to be an excellent investment because the apartments had a waiting list of over a year in length and the Lincoln Property partners represented that they would guarantee petitioners a stated cash flow each year.
On or about April 5, 1968, petitioners invested $275,000 each in the Lincoln Property partnership. On April 5, 1968, they executed an Amended Partnership Agreement of Lincoln Property along with Crow, Pope, and Carter. The amended partnership agreement (agreement) provided that after the combined contribution of $550,000 of Long and Center, the capital account of each partner would be as follows: Crow, $550,000; Pope, $275,000; Carter, $275,000; Long, $275,000; and Center, $275,000. The agreement also stated that—-
The parties agree that the combined capital accounts of partners Crow, Pope, and Carter will be equal to the total of the combined accounts of partners Long and Center by January 1, 1970. If this equalization has not taken place on or before December 31, 1969, on January 1, 1970 such equalization shall be deemed to have taken place.
The agreement provided that partners Long and Center were to each receive a minimum guaranteed payment of $27,500 per year from June 1, 1968, to March 1, 1974, and $13,750 from June 1, 1974, to March 1, 1983. Similar guaranteed payments were to be made to Crow, Pope, and Carter. After January 1, 1970, all cash flow in excess of the guaranteed payments and all profits and losses of the partnership were to be distributed to the partners in proportion to their partnership interests which were as follows: Crow, 25 percent; Pope, 12.5 percent; Carter, 12.5 percent; Long, 25 percent; and Center, 25 percent. Partners Crow, Pope, and Carter also jointly and severally agreed that if there were insufficient cash flow in any year, to pay the full guaranteed payments to partners Long and Center, they would contribute sufficient funds to the partnership to enable the payments to be made, with Crow, Pope, and Carter contributing 50 percent, 25 percent, and 25 percent, respectively. The agreement stated that “Such...
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