42 T.C.M. (CCH) 1467
MILBREW, INC. AND AMBER LABORATORIES, A WHOLLY OWNED SUBSIDIARY; MARTIN BERNSTEIN AND RUTH BERNSTEIN; ESAU ACE BERNSTEIN AND EVA BERNSTEIN; NORMAN N. BERNSTEIN AND FREIDA D. BERNSTEIN; MELVIN BERNSTEIN AND SHARON BERNSTEIN; SHELDON BERNSTEIN AND ESTELLE BERNSTEIN; LEONARD D. BERNSTEIN; JUDITH R. BERNSTEIN; JAMES E. BERNSTEIN; DAVID B. BERNSTEIN; JODI L. BERNSTEIN; RICHARD N. BERNSTEIN; BRADLEY A. BERNSTEIN; LYNN C. BERNSTEIN; MARCY B. BERNSTEIN; MARY BERNSTEIN DIAMOND; HOWARD I. BERNSTEIN AND BARBARA BERNSTEIN; HOWARD I. BERNSTEIN; DAVID J. CUNNINGHAM AND MARY J. CUNNINGHAM, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
No. 4349-76.
United States Tax Court
October 19, 1981
1. Martin and Ace Bernstein purchased a manufacturing plant in Juneau, Wisconsin, for $524,236. Approximately 20 months later the plant purportedly was sold to NVST, a partnership consisting of all of the Bernstein petitioners for $3,000,000. No cash was paid at the time of the " sale" and less than $140,000 (designated as interest) was paid by NVST with respect to the " ‘ purchase" over the ensuing 4 years. Held, no bona fide sale occurred and the depreciation deductions claimed by NVST, based upon its purported " cost" of $3,000,000, are disallowed.
2. Held, deductions for " interest" payments by NVST with respect to its " indebtedness" in connection with the purported purchase of the Juneau plant disallowed.
3. Held, amounts deducted by Milbrew, Inc., for rental payments for use of the Juneau plant and equipment were unreasonable; respondent's determination sustained as to the rent deduction allowable to Milbrew.
4. Held, NVST is not entitled to the investment credit on certain equipment which it acquired for lease because the sec. 162, I.R.C. 1954, operating expenses with respect to the equipment did not exceed 15 percent of the rental income received with respect to the equipment.
5. Held, petitioners have failed to prove that a $9,000 " commitment fee" paid to obtain a mortgage loan was a deductible interest expense rather than a payment for services which must be amortized over the life of the loan.
6. Ace and Martin Bernstein each held 25-percent interests in an apartment building which was sold in 1973 at a net gain. At settlement, the sellers received a check which was eventually endorsed over to another party for the acquisition of an interest in another apartment project. Held, this transaction does not qualify as a tax-free exchange of like-kind property under sec. 1031, I.R.C. 1954, because the sellers received cash for their property.
7. NVST owned certain equipment which it held for rental income. NVST purportedly " sold" the equipment to EMMNS, a joint venture consisting of the five general partners of NVST (who jointly held 33.5 percent of NVST). The " selling price," which equaled NVST's book value of the equipment, was paid solely with unsecured notes of EMMNS. Thereafter EMMNS began claiming depreciation deductions at a rate greater than that previously used by NVST. Held, the purported " sale" by NVST to EMMNS was a sham, created solely to increase depreciation deductions to the five general partners of NVST. Depreciation deductions claimed by EMMNS disallowed.
8. Held, petitioners have failed to prove that NVST had a greater depreciable basis in certain properties than that determined by respondent.
9. Petitioners computed depreciation on certain investment real estate properties, using the component method. Held, petitioners have proved the allocable costs and useful lives of the several components for some of those properties; respondent's adjustments to costs and useful lives of components of buildings depreciated by petitioners on the component method sustained for the remaining properties.
10. Held, respondent's increase in income of partners of NVST for their respective portions of a deduction claimed by NVST for " accrued interest" on partners' capital accounts sustained.
Garr W. Steiner, John C. Lapinski, E. Ace Bernstein, and Howard I. Bernstein, for the petitioners.
Robert E. Dallman, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FEATHERSTON, Judge:[1]
The following deficiencies are at issue:
| Name |
Years |
Per Statutory Notice |
Increase Per Amendments To Answer |
| Esau Ace and Eva Bernstein |
1972 |
$ 28,908.73 |
$ 6,203.11 |
| Martin and Ruth Bernstein |
1972 |
42,274.92 |
8,110.41 |
| Melvin and Sharon Bernstein |
1972 |
22,758.89 |
2,658.90 |
| Norman N. and Freida D. Bernstein |
1972 |
22,773.78 |
2,661.37 |
| Sheldon and Estelle Bernstein |
1972 |
22,779.12 |
2,637.54 |
| David J. and Mary J. Cunningham |
1972 |
9,895.96 |
-0- |
| Mary Bernstein Diamond |
1972 |
1,287.72 |
195.00 |
| James E. Bernstein |
1972 |
1,726.23 |
186.94 |
| David B. Bernstein |
1972 |
1,895.02 |
186.92 |
| Jodi L. Bernstein |
1972 |
1,731.02 |
186.93 |
| Howard I. Bernstein |
1972 |
1,363.50 |
192.06 |
| Howard I. and Barbara Bernstein |
1973 |
1,853.59 |
358.67 |
| Leonard D. Bernstein |
1972 |
1,912.67 |
186.93 |
| Judith R. Bernstein |
1972 |
1,710.29 |
186.92 |
| Marcy B. Bernstein |
1972 |
2,952.46 |
337.75 |
| Lynn C. Bernstein |
1972 |
2,888.21 |
330.63 |
| Bradley A. Bernstein |
1972 |
1,923.40 |
193.74 |
| Richard N. Bernstein |
1972 |
1,852.37 |
186.93 |
| Milbrew, Inc. and Amber Laboratories, Inc. |
1972 |
140,115.70 |
-0- |
| Totals |
1972 |
$310,749.99 |
$24,642.08 |
| |
1973 |
$425,745.04 |
$45,714.27 |
Petitioners also claimed various overpayments in their amended petition but have not stated the amount of tax involved in those overpayments. Due to concessions by the parties, the issues remaining for decision are: 1. Whether the transfer of real and personal property located at 330 Mill Street, Juneau, Wisconsin (the Juneau plant) to NVST Co. (NVST) was a bona fide sale for tax purposes; and, if so, was the sale price set at the property's fair market value; 2. Whether payments made by NVST in connection with the Juneau plant transfer qualify as deductible interest payments; 3. Whether Milbrew properly claimed deductions for rent payments made to NVST for use of the Juneau plant; 4. Whether NVST is entitled to investment credits for 1972 and 1973 for the purchase of certain equipment; 5. Whether a commitment fee paid to obtain a mortgage is a deductible interest expense; 6. Whether the sale and purchase of interests in apartment projects by Ace and Martin Bernstein qualify for tax free treatment under section 1031;
[2] 7. Whether the purported sale of equipment by NVST to EMMNS was a bona fide transaction for tax purposes; 8. Whether respondent correctly determined NVST's depreciable basis in certain properties; 9. Whether respondent correctly determined the useful life of certain real property; 10. Whether the partners of NVST are entitled to a deduction claimed by NVST as " accrued interest." FINDINGS OF FACT Petitioner, Milbrew, Inc. (Milbrew), is a Wisconsin corporation with its principal place of business in Wisconsin. It filed its Federal income tax returns for 1972 and 1973 with the Internal Revenue Service Center, Milwaukee, Wisconsin. Amber Laboratories, Inc. (Amber), wholly owned by Milbrew, is also a Wisconsin corporation. For the years 1972 and 1973, Amber was included, as a consolidated subsidiary, in the Federal income tax returns filed by Milbrew. Petitioners Martin Bernstein (hereinafter Martin) and his wife, Ruth; Esau Ace Bernstein (hereinafter Ace) and his wife, Eva; Melvin Bernstein and his wife, Sharon; Norman Bernstein and his wife, Freida; Sheldon Bernstein and his wife, Estelle; David Cunningham and his wife, Mary; are residents of Wisconsin. Each couple timely filed joint Federal income tax returns for 1972 and 1973 with the Internal Revenue Service Center, Milwaukee, Wisconsin. Petitioner Howard Bernstein, a resident of Wisconsin, filed his 1972 individual income tax return with the Internal Revenue Service Center, Milwaukee, Wisconsin. For 1973 he filed a joint return with his then wife, Barbara, also a Wisconsin resident, with the Milwaukee Service Center. Petitioner Mary Bernstein Diamond resided in Ohio when she filed her petition. She filed Federal income tax returns for 1972 and 1973 with the Internal Revenue Service Center, Cincinnati, Ohio. Petitioners James E. Bernstein, David B. Bernstein, Jodi L. Bernstein, Leonard D. Bernstein, Judith R. Bernstein, Marcy B. Bernstein, Lynn C. Bernstein, Bradley A. Bernstein, and Richard N. Bernstein are residents of Wisconsin, and they filed Federal income tax returns for 1972 and 1973 with the Internal Revenue Service Center, Milwaukee, Wisconsin. NVST is a limited partnership, organized under Wisconsin law, consisting of the following partners (listed by family group):
[3]
| Name |
Relationship |
Capital |
Percentage |
(as of 1/1/69) |
Partner |
| Ace Bernstein |
Husband/father |
$2,500.00 |
6.67 |
54 |
General |
| Eva Bernstein |
Wife/mother |
2,500.00 |
6.67 |
49 |
Limited |
| Marcy Bernstein |
Child |
1,250.00 |
3.33 |
14 |
Limited |
| Lynn Bernstein |
Child |
1,250.00 |
3.33 |
11 |
Limited |
| Martin Bernstein |
Husband/father |
2,500.00 |
6.67 |
49 |
General |
| Ruth Bernstein |
Wife/mother |
2,500.00 |
6.67 |
48 |
Limited |
| Sue Ann Weller |
Child |
1,250.00 |
3.33 |
21 |
Limited |
| Janet Lee Frenz |
Child |
1,250.00 |
3.33 |
19 |
Limited |
| Norman Bernstein |
Husband/father |
2,500.00 |
6.67 |
46 |
General |
| Frieda Bernstein |
Wife/mother |
2,500.00 |
6.67 |
? |
Limited |
| Howard Bernstein |
Child |
833.33 |
2.22 |
17 |
Limited |
| Leonard Bernstein |
Child |
833.33 |
2.22 |
14 |
Limited |
...
