Noble v. Comm'r of Internal Revenue
| Decision Date | 08 November 1982 |
| Docket Number | 9180-79.,Docket Nos. 9179-79 |
| Citation | 79 T.C. 751 |
| Parties | JOHN B. NOBLE, JR., and SUSAN S. NOBLE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTJAMES W. RUTLAND, JR., and LUCILE H. RUTLAND, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Noble and Rutland, shopping center developers, maintained checking accounts for each shopping center under development with their construction lender. The construction lender made disbursements of all loan proceeds to Noble and Rutland, although, under construction loan agreements, it was entitled to charge interest on the construction loans in favor of itself directly against loan proceeds and thereafter treat such charges as disbursements of loan proceeds. Noble and Rutland drew checks payable to the construction lender for commitment fees and interest as they became due. Held, commitment fees representing interest were not “paid,” within the meaning of sec. 163, I.R.C. 1954, when Noble and Rutland drew checks payable to the construction lender. Franklin v. Commissioner, 77 T.C. 173, 184 (1981), revd. on other grounds683 F.2d 125 (5th Cir. 1982), followed. Held, further: Interest was “paid” for purposes of sec. 163. Neither the construction lender's unexercised right to discount the construction loan nor its right to setoff under Alabama law, which would become operative only when a depositor's debt became past due, restricted Noble's and Rutland's control over the disbursed proceeds. Held, further: Noble and Rutland negotiated separate construction and permanent loans. Wilkerson v. Commissioner, 70 T.C. 240, 261-262 (1978), revd. on another issue 655 F.2d 980 (9th Cir. 1981), and Lay v. Commissioner, 69 T.C. 421, 435-436 (1977), distinguished. The commitment fees representing interest on the various construction loans, accordingly, are deductible at the time of the fundings of the respective permanent loans. Held, further, construction loan legal fees are to be amortized ratably over the period of the construction financing. James M. Scott, for the petitioners.
Jillena A. Warner, for the respondent.
In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income taxes:
+-------------------------------------------------------+
¦Docket No. ¦Petitioners ¦Year ¦Deficiency ¦
+------------+----------------------+------+------------¦
¦9179-79 ¦John B. Noble, Jr., ¦1974 ¦$48,723.84 ¦
+------------+----------------------+------+------------¦
¦ ¦and Susan S. Noble ¦ ¦ ¦
+------------+----------------------+------+------------¦
¦9180-79 ¦James W. Rutland, Jr.,¦1974 ¦9,063.30 ¦
+------------+----------------------+------+------------¦
¦ ¦and Lucile H. Rutland ¦1975 ¦24,021.06 ¦
+-------------------------------------------------------+
Concessions having been made by the parties, the issues remaining for our decision are: (1) Whether petitioners John B. Noble, Jr. (Noble), and James W. Rutland, Jr. (Rutland), “paid” certain interest charges and fees representing interest within the meaning of section 163(a)1when they issued checks in satisfaction of such interest charges and fees to the First National Bank of Montgomery (F N B) (2) if the charges and fees are not considered to have been paid when such checks were issued, whether they must be amortized over a 23-year financing period; and (3) whether petitioners John B. Noble, Jr., and Susan S. Noble must amortize “construction loan legal fees” in the amount of $6,349.25 over a 23-year financing period.
Some of the facts have been stipulated. The stipulation of facts, the supplemental stipulation of facts, and the exhibits attached to each stipulation are incorporated herein by this reference.
At the time of the filing of their petitions herein, Mr. and Mrs. Noble and Mr. and Mrs. Rutland resided in Montgomery, Ala. Each couple filed a joint Federal income tax return for the year 1974 with the Internal Revenue Service, Chamblee, Ga.
Noble and Rutland both keep their books on the cash basis.
In the early 1970's, Noble was the sole proprietor of J. Noble Construction Co. The company engaged in construction of shopping centers, schools, hospitals, and the like. At that time, Rutland was employed by Alabama Farm Bureau. In connection with such employment, he was responsible for “a lot [of] shopping center development.” Noble was the general contractor on several of the shopping center jobs managed by Rutland. In 1972, Noble and Rutland decided that they would “join forces” to develop shopping centers for themselves.
During 1974 and 1975, Noble and Rutland each owned a one-half interest in the following shopping centers, which were in various stages of development:
Background on Financing of Shopping Centers
After finding a suitable location for a shopping center and contacting prospective tenants, Noble and Rutland would enter into an oral understanding with F N B2for a construction loan relative to the proposed center. They would also contact Jackson Co. (Jackson), a mortgage broker, for assistance in obtaining permanent financing for the proposed center.
Noble and Rutland engaged in separate negotiations for construction loans from F N B and for permanent loans. Since F NB could not make a construction loan for a period longer than 3 years, it required Noble and Rutland to secure a permanent loan that would be funded within that time. Otherwise F N B was uninterested as to the terms of the permanent loans negotiated by Noble and Rutland. A permanent lender is likewise not concerned about the identity of the construction lender, since a permanent lender is not obligated to, and will not, fund its loan until construction is completed and the terms contained in its commitment letter have been satisfied.
After arranging for both a construction loan and a permanent loan for a proposed center, Noble and Rutland entered into a triparty agreement. A triparty agreement is an agreement between the two lenders and the borrower. It consists of three separate documents: a note, a mortgage, and an agreement to assign. Detailed descriptions of the pertinent provisions contained in the agreements to assign and the notes follow later in these findings of fact. By using a triparty agreement, a permanent lender gains added assurance that if the rate of interest charged by permanent lenders were to decrease significantly between the time when it issues its commitment letter and the time when construction of a project is completed, the borrower would not borrow from another lender. The agreement gives this additional confidence to the permanent lender because once it is executed, the permanent lender has not only the borrower's promise to incur the debt, but it, in effect, also has the construction lender's promise that it will not allow anyone else to fund the permanent loan.
F N B was the construction lender for each of the shopping centers listed on pages 753-754. For each construction loan, Noble and Rutland entered into a separate agreement with F N B. The loan agreements were standard forms used by F N B. Section 4 of each agreement provides that proceeds of the loan are “to be advanced from time to time” for specified expense items, including construction interest and a commitment fee.3 Section 4 further provides as follows:
Elsewhere in this Agreement it is provided that advances from loan proceeds for construction costs and other amounts payable to the general contractor pursuant to the terms of the construction contract between Borrower and the general contractor shall be payable to the general contractor alone. It is agreed that interest on the construction mortgage loan of Borrower in favor of Lender shall be charged directly against loan proceeds, and such charges shall constitute disbursement of loan proceeds hereunder. Nothing herein contained, however, shall mitigate Borrower's obligation to pay to Lender on demand said interest if Lender has exercised its option hereafter provided for to make no further advances of loan proceeds.
Although Noble and Rutland were not required by F N B to deposit construction loan proceeds in accounts at F N B, they chose to maintain a separate bank account for each shopping center at F N B. A separate account was kept for each center to facilitate accounting for the costs of each project. Nevertheless, when Noble and Rutland needed to transfer funds out of one project's account in order to pay liabilities incurred relative to construction of another project, they would do so. F N B knew that Noble and Rutland were using funds borrowed for one project to pay for costs of other projects.
Despite the above-quoted provisions of the construction loan agreements, F N B disbursed all loan proceeds to Noble and Rutland, without withholding any amounts for fees and interest. Noble and Rutland deposited the loan proceeds in the shopping centers' accounts at F N B. They then drew checks on the shopping centers' accounts for the interest and the commitment fees when they were due. The parties have stipulated that the comitment fees paid 4 to F N B represent interest charged by F N B.
The parties have submitted an exhibit (Joint Exhibit 6-F) summarizing the deposits to each shopping center's account and the amounts withdrawn from each shopping center's account to pay interest and fees and to advance funds to other shopping centers' accounts....
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