Melvin v. Comm'r of Internal Revenue
| Decision Date | 12 January 1987 |
| Docket Number | Docket Nos. 9325-83,9451-83. |
| Citation | 88 T.C. No. 5,88 T.C. 63 |
| Parties | MARCUS W. MELVIN AND MARILYN E. MELVIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMARCUS W. MELVIN, M.D., P.C., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Medici, a partnership in which petitioner Marcus W. Melvin was a general partner, invested in a limited partnership. In payment for its limited partnership interest, Medici made a $35,000 cash downpayment and agreed to make additional capital contributions in the amount of $70,000. The obligation to make the additional capital contributions was reflected by a $70,000 recourse promissory note given to the limited partnership. The limited partnership obtained a $3,500,000 recourse loan from a bank. To secure the bank loan, the limited partnership pledged to the bank, among other things, the $70,000 recourse promissory note the limited partnership received from Medici. HELD, Marcus was not at risk within the meaning of sec. 465, I.R.C. of 1954, with respect to the portion of the $3,500,000 bank loan that exceeded his pro rata share thereof. Other issues decided. Kevin P. O'Connell and Ted A. Johnson, for the petitioners.
Randall E. Heath, for the respondent.
In timely statutory notices of deficiency, and in an amended answer in docket No. 9325-83, respondent determined deficiencies in petitioners' Federal income tax liabilities, as follows:
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¦ ¦Taxable year ¦ ¦
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¦Petitioners ¦ending- ¦Deficiency¦
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¦Marcus W. and Marilyn E. Melvin - docket No. 9325-83¦Dec. 31, 1979¦$21,340 ¦
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¦Marcus W. Melvin, M.D., P.C. - docket No. 9451-83 ¦June 30, 1979¦744 ¦
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The issues for decision are: (1) The extent to which petitioner Marcus W. Melvin was at risk under section 465 1 with respect to a recourse obligation of a limited partnership; (2) whether the individual petitioners herein properly may be charged with additional income with respect to their personal use of automobiles owned by the corporate petitioner herein: and (3) whether the corporate petitioner is entitled to deduct its cost of providing the automobiles for the personal use of petitioners Marcus W. Melvin and Marilyn E. Melvin.
These cases were consolidated for trial, briefing, and opinion. All of the facts have been stipulated, and these cases were submitted under Rule 122, Tax Court Rules of Practice and Procedure. The pertinent facts are summarized below.
Marcus W. Melvin and Marilyn E. Melvin are husband and wife and resided in Portland, Oregon, at the time of filing their petition in docket No. 9325-83. Marcus operates a medical practice through a professional corporation organized under the laws of Oregon entitled Marcus W. Melvin, M.D., P.C. At the time it filed its petition herein, the corporation's office was located in Portland, Oregon. Marcus and Marilyn are officers and employees of the professional corporation, and Marcus also is the sole shareholder and director thereof.
In 1979, Marcus and his brother, Kenneth E. Melvin, formed a general partnership under the laws of Oregon by the name of Medici Film Partners (‘Medici‘). The purpose of the partnership was to invest in motion pictures. Marcus owned a 71.4286-percent interest in Medici and Kenneth owned a 28.5714-percent interest in Medici. Profits and losses of Medici were allocated between Marcus and Kenneth on the basis of their respective partnership interests. Marcus contributed $25,000 in cash and Kenneth contributed $10,000 in cash to Medici upon its formation.
In December of 1979, Medici entered into a subscription agreement with ACG Motion Picture Investment Fund (‘ACG‘), a California limited partnership, under which it agreed to purchase a .872466-percent limited partnership interest in ACG. ACG was one of several limited partnerships organized by an individual named Michael Leone to acquire and distribute motion pictures. Michael Leone and American Cinema Group, Inc., were the general partners of ACG. A total of 73 limited partners invested in ACG. The limited partnership agreement of ACG provided that all rights and responsibilities of the general and limited partners of ACG would be governed by California law.
The purchase price agreed to by Medici for its interest in ACG was $105,000, to be paid by a $35,000 cash downpayment and a deferred capital contribution reflected by a $70,000 recourse promissory note. Medici paid the downpayment and gave to ACG the $70,000 promissory note called for in the subscription agreement. The $70,000 promissory note bore simple interest at nine percent per annum, and principal payments were due thereon by Medici in five equal annual installments of $14,000, plus interest, the frsSt of which was due in 1981.
As a general partner of Medici, Marcus' share of the $35,000 cash downpayment paid by Medici to ACG was $25,000, and his share of the $70,000 recourse promissory note Medici gave to ACG under the subscription agreement was $50,000. Because of the general partnership interest Marcus owned in Medici and the limited partnership interest Medici owned in ACG, the effective share of the profits and losses of ACG to which Marcus was entitled was .6232 percent and, for purposes of the issues in this case, Marcus may be treated as a limited partner of ACG.
With regard to each limited partner's recourse obligation to pay the cash downpayment and the deferred capital contributions due under the subscription agreement, the ACG partnership agreement provided as follows:
6.1 CAPITAL CONTRIBUTIONS OF LIMITED PARTNERS. * * * Payment of the capital contribution shall be made as follows; $50,000, or a fraction or multiple thereof according to the number of Interests or fractions thereof purchased, by certified, cashier's or bank check upon execution and delivery of the Subscription Agreement, together with the delivery of a promissory note for $100,000, or multiple or fraction thereof in accordance with the number of Interests or fractions thereof purchased, in favor of the Partnership, bearing interest at 9% per annum, payable over 60 months in five equal annual installments.
Also with regard to the deferred capital contributions and the limited liability of the limited partners for the debt obligations of the partnership, the ACG partnership agreement provided as follows:
6.3 LIMITED LIABILITY. A limited partner shall not be bound by, or personally liable for, any expenses, liabilities or obligations of the Partnership, except as provided in the Act. No Limited Partner shall be required or obligated by the Partnership or any Partner to make further capital contributions of any kind whatsoever to the capital of the Partnership beyond those for which he is obligated pursuant to Section 6.1 hereof * * *
and
10.1 No Limited Partner shall be personally liable for any of the debts of the Partnership or any of the losses thereof, HOWEVER, THE AMOUNT COMMITTED BY HIM TO THE CAPITAL OF THE PARTNERSHIP and his interest in Partnership assets shall be SUBJECT TO LIABILITY THEREFOR. * * * [Emphasis added.]
On or about December 14, 1979, ACG obtained a $3,500,000 recourse loan from the London Branch of the First National Bank of Chicago. Simple interest accrued on the bank loan at a floating market rate, 2 and the principal amount of the loan was payable in full on or before December 14, 1981. Interest payments were due quarterly. As security for the $3,500,000 loan, ACG pledged to the First National Bank of Chicago substantially all of its assets, including the recourse promissory notes it had received from its limited partners reflecting their respective obligations to make the deferred capital contributions. The combined face amount of the promissory notes of the limited partners that ACG pledged to the bank as collateral on the $3,500,000 bank loan totaled $8,023,400. Medici's $70,000 promissory note to ACG was among those notes that were pledged as collateral on the bank loan.
The loan agreement between ACG and the bank specified that the recourse promissory notes of the limited partners of ACG (reflecting the limited partners' obligations to make deferred capital contributions) were to be physically transferred to the bank in order to protect the bank's security interest in the notes. The relevant language from the loan agreement provided as follows:
(1) The Promissory Notes shall be deposited with the Bank or at such other place as shall be designated by the Bank and held, in either case, to the sole order of the Bank. Without in any way reducing, affecting or derogating from the Charge hereby created in favour of the Bank, the parties acknowledge that the Bank shall in its absolute discretion and without reducing or affecting its other rights hereunder, be entitled to direct Limited Partners to make payments as they fall due under the Promissory Notes to ACG 1979 and not to the Bank, if the Charge shall at the time of such payment be then valid and existing.
On December 31, 1979, ACG agreed to purchase from American Cinema Productions, Inc., a feature-length motion picture entitled ‘The Octagon.‘ The purchase price of $9,000,000 for the film was to be paid by ACG with a $3,500,000 cash downpayment and a $5,500,000 nonrecourse promissory note bearing simple interest at 10 percent per annum. ACG paid the $3,500,000 cash downpayment out of the proceeds of the loan from the First National Bank of Chicago.
During the 1979 short taxable year of ACG,...
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