Norman v. Commissioner
| Decision Date | 27 May 1987 |
| Docket Number | 8398-77,7362-77,9052-77,6463-79,6466-79,Docket No. 7361-77,9330-78,9392-79.,6462-79,6464-79,8399-77,9053-77,6465-79 |
| Citation | 53 TCM (CCH) 905,1987 TC Memo 265 |
| Parties | James G. Norman, et al. v. Commissioner. |
| Court | U.S. Tax Court |
John H. MacVey, 8401 Connecticut Ave., Chevy Chase, Md., for the petitioners. Cynthia J. Mattson, for the respondent.
Memorandum Findings of Fact and Opinion
These consolidated cases result from a series of determinations by respondent with respect to real estate transactions engaged in by petitioner Aleksandrs V. Laurins and various partnerships and corporations that he controlled. The tax years before the Court are 1973, 1974, and 1975. The specific petitioners, docket numbers, years, deficiencies, and additions to tax appear in Appendix A attached hereto.
At the outset, we must state that these cases have been particularly vexatious to the Court. Difficulties were encountered in getting the parties to stipulate evidence and in arriving at a trial date. Petitioners must bear most, and probably all, of the responsibility for these difficulties. The trial itself was lengthy by the standards of this Court. In addition, approximately 400 exhibits were introduced and 35 issues, not including alternative issues, were presented for our consideration. The issues are almost entirely factual in nature. One suspects that petitioners deliberately made the transactions as complex as possible to serve their own purposes. Understandably, respondent's opening brief was 357 pages long, containing detailed proposed findings of fact. Petitioners failed to make proposed findings of fact in the form prescribed by Rule 151(e)(3),2 and this oversight was clearly not helpful to their cause. In this opinion, we have done our best to straighten out what can only be described as a maze of massive proportions. Having said this, we turn our attention to the task at hand.
After concessions by respondent, the issues for decision are (1) whether the income from the sales of ownership interests in an apartment building known as Fairfax West Apartments in 1973 and 1974 is attributable to petitioner A.V. Laurins & Co., Inc. (AVL); (2) whether the income from the sales of ownership interests in an apartment building known as the Chancellery Cooperative in 1973 and 1974 is attributable to a partnership known as Wyoming Associates; (3) whether the income from the sales of ownership interests in an apartment building known as Wisconsin Apartments in 1975 is attributable to a corporation known as Wisconsin Avenue Associates, Inc. (Wisconsin); (4) whether petitioner Aleksandrs V. Laurins (Aleksandrs) received from AVL in 1973 a constructive distribution of property with a fair market value of $396,000; (5) whether Aleksandrs received from Wisconsin in 1974 a constructive distribution of property with a fair market value of $200,000; (6) whether a partnership known as Pleasant Hill Associates is entitled to claim losses from an apartment building known as the Pleasant Hill Road Apartments; (7) whether Aleksandrs is entitled to deduct a loss in 1973 from a partnership known as Sundown Associates (Sundown); (8) whether respondent properly disallowed certain losses claimed by Sundown in 1974 and 1975; (9) whether a subsidiary of petitioner Consolidated Western Investors, Inc. (CWI), known as Aries Information Systems, has additional income in 1975 as the result of receiving prepaid cash proceeds pursuant to long-term service contracts; (10) whether respondent properly disallowed a deduction taken in 1975 by petitioner Real Estate Equity Management, Inc. (Real Estate, Inc.), for a claimed management and consulting expense; (11) whether a subsidiary of CWI known as Real Development Management, Inc., is entitled to an interest deduction in 1975 for interest accrued on a note payable to a related partnership; (12) whether a subsidiary of CWI known as Metropolitan Mortgage Bankers, Inc. (MMB), is entitled to a bad debt deduction in the amount of $34,326.79 in 1975; (13) whether a subsidiary of CWI known as E.F. Shelley and Co., Inc. (EFS Company), is entitled to claim a loss on the CWI 1975 consolidated Federal income tax return that arose during a period prior to EFS Company's affiliation with CWI; (14) whether MMB has ordinary income in 1975 in the amount of $181,436 resulting from a loss recaptured upon the worthlessness of EFS Company's stock; (15) whether CWI is liable for an addition to tax pursuant to section 6651(a)(1) for the taxable year 1975; (16) whether CWI is liable for an addition to tax for negligence pursuant to section 6653(a) for the taxable year 1975; (17) whether a partnership known as Co-op Mortgage Investment Associates (Co-op) has unreported note discount income in 1973 and 1974; (18) whether Co-op has additional income in 1974 from the sale of certain notes; (19) whether principal payments on certain notes constitute income to Co-op in 1973 and 1974; (20) whether Co-op is entitled to deduct a note discount expense in the amount of $6,351.74 in 1974; (21) whether Co-op improperly reported its note discount income in 1975; (22) whether Aleksandrs has unreported income in 1973 in the amount of $72,000; (23) whether Aleksandrs is entitled to deduct a claimed "syndication expense" in the amount of $37,221 in 1973; (24) whether respondent properly disallowed $988 of a $1,988 short-term capital loss claimed by Aleksandrs in 1973; (25) whether Aleksandrs has dividend income in 1974 and 1975 in the amounts of $10,232 and $92, respectively; (26) whether Aleksandrs is entitled to deduct a $7,060 loss from gold futures trading in 1975; (27) whether Aleksandrs is entitled to deduct a transfer tax in the amount of $1,547 in 1974 that was paid in connection with his purchase of a personal residence; (28) whether AVL is entitled to deduct a claimed note discount expense in the amount of $6,365 in 1974; (29) whether AVL is entitled to deduct a claimed debt reduction expense in the amount of $20,339 in 1974; (30) whether Real Estate, Inc., is entitled to deduct a claimed investment reserve expense in the amount of $15,000 in 1974; (31) whether petitioner Charlene Baden (Charlene) is entitled to a charitable contributions deduction of $1,200 in 1975; (32) whether Charlene is liable for an addition to tax for negligence pursuant to section 6653(a) for the taxable years 1974 and 1975; (33) whether petitioner LAV Shell Co., Inc., is liable for an addition to tax for negligence pursuant to section 6653(a) for the taxable year 1974; (34) whether Real Estate, Inc., is liable for an addition to tax for negligence pursuant to section 6653(a) for the taxable year 1975; and (35) whether Aleksandrs is liable for an addition to tax for fraud pursuant to section 6653(b) for the taxable years 1973, 1974, and 1975.
Some of the facts have been stipulated and are so found. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference.
Appendix B attached hereto lists the petitioners by name, the places of residence of the individual petitioners and the principal places of business of the corporate petitioners at the time they filed their petitions herein, and the offices of the Internal Revenue Service where the petitioners filed their Federal income tax returns for the years in question.
In late September of 1972, petitioner Aleksandrs V. Laurins (Aleksandrs) began negotiating with National Mortgage Corporation (NMC) for the purchase of Fairfax West Apartments (Fairfax West), a 72-unit apartment building located in Fairfax, Virginia. Aleksandrs' plan was to have petitioner A.V. Laurins & Company, Inc. (AVL),3 a corporation that Aleksandrs formed in 1971, renovate the Fairfax West apartment units and sell them to the public at a profit.
On October 30, 1972, Aleksandrs and AVL entered into an agreement (the nominee agreement) which provided that Aleksandrs would receive the income from the sale of Fairfax West to the Fairfax West Apartment Owners Association (FWAO), a non-profit, non-stock, homeowners' cooperative corporation that Aleksandrs formed in 1972 for the purpose of taking title to Fairfax West.4 The nominee agreement further provided that AVL would "bear all costs to rent and sell the Mutual Ownership Contracts and *** would receive all income from rental and sales, which is attributable to the Mutual Ownership Contract." Also on October 30, 1972, AVL entered into a sales contract with NMC whereby NMC agreed to sell and AVL agreed to purchase Fairfax West. The sales contract provided that AVL would pay $40,000 in cash at the time of settlement, execute and deliver to NMC a promissory note for $60,000, and take title to the property subject to existing financing.
On January 1, 1973, in anticipation of its acquisition of Fairfax West, FWAO employed AVL to manage its affairs and assigned to AVL for sale to the public the ownership interests in Fairfax West, which were represented by 72 mutual ownership contracts.5 Also on January 1, 1973, FWAO executed a promissory note to AVL in the amount of $1,127,520 (the wrap note), which was secured by a deed of trust on Fairfax West (the third deed of trust). It was expected that each purchaser of a mutual ownership contract would execute a promissory note to FWAO in an amount equal to the purchaser's pro rata share of the wrap note, and the third deed of trust required FWAO to assign these promissory notes to the holder of the wrap note. The third deed of trust also required the holder of the wrap note to make all payments on the first and second deeds of trust out of payments received on the wrap note.
On January 2, 1973, instead of conveying Fairfax West to AVL as provided in the sales contract, NMC conveyed Fairfax West to FWAO for $40,000 in cash, a $60,000 promissory note secured by a deed of trust on Fairfax West (the second deed of trust), and...
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