Odend'hal v. Comm'r of Internal Revenue
| Decision Date | 28 March 1983 |
| Docket Number | 3066-79,6107-80,6228-80,244-80,2627-80,8554-78,6108-80.,5780-79,2275-80,Docket Nos. 8553-78 |
| Parties | FORTUNE ODEND'HAL, JR., and GLORIA P. ODEND'HAL, et al.,1 v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners are 7 of 10 co-tenants of commercial real estate. The purchase price for the co-tenants' interests was $4 million, which included a $3,920,000 nonrecourse loan from the seller. Held: The fair market value of the co-tenants' interests did not exceed $2 million upon acquisition. The $4 million purchase price and the $3,920,000 nonrecourse amount unreasonably exceeded the value of the co-tenants' interests. Accordingly, petitioners may not include the nonrecourse amount in depreciable basis, nor may they deduct interest paid on the nonrecourse amount because the nonrecourse amount did not constitute an actual investment in the property or genuine indebtedness. Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir. 1976), affg. 64 T.C. 752 (1975), followed. Scott P. Crampton and James Dewey O'Brien, for the petitioners.
Carolyn Parr, for the respondent.
Respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax in these consolidated cases:
+-------------------------------------------------------------------------------+
¦Docket No. ¦Petitioner(s) ¦Year ¦Deficiency ¦Sec. 6651(a)2addition to tax ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦Fortune ¦ ¦ ¦ ¦
¦8553-78 ¦Odend'hal, Jr.,¦1973 ¦$42,709.00 ¦ ¦
¦ ¦Gloria P. ¦ ¦ ¦ ¦
¦ ¦Odend'hal ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦8554-78 ¦Fortune ¦1974 ¦45,086.00 ¦0 ¦
¦ ¦Odend'hal, Jr. ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦3066-79 ¦William J. ¦1973 ¦32,918.00 ¦$6,221.00 ¦
¦ ¦Cassidy ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦and Clotilda G.¦1974 ¦32,950.00 ¦0 ¦
¦ ¦Cassidy ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦ ¦1975 ¦9,540.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦5780-79 ¦Fortune ¦1975 ¦37,374.00 ¦5,606.00 ¦
¦ ¦Odend'hal, Jr. ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦2275-80 ¦Dean L. Mann ¦1975 ¦17,722.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦and Beverly D. ¦1976 ¦22,307.00 ¦0 ¦
¦ ¦Mann ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦2446-80 ¦Ivan V. Magal ¦1975 ¦10,652.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦and Leah R. ¦1976 ¦14,885.00 ¦0 ¦
¦ ¦Magal ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦2627-80 ¦Larry M. ¦1975 ¦16,395.00 ¦0 ¦
¦ ¦Stanton ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦and Esther M. ¦1976 ¦20,757.00 ¦0 ¦
¦ ¦Stanton ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦ ¦1977 ¦22,991.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦6107-80 ¦Robert M. Allen¦1975 ¦21,277.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦Frances D. ¦1976 ¦22,677.00 ¦0 ¦
¦ ¦Allen ¦ ¦ ¦ ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦ ¦1977 ¦19,436.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦6108-80 ¦Charles C. Yu ¦1975 ¦20,796.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦and Marie S. Yu¦1976 ¦17,488.00 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦ ¦ ¦1977 ¦19,470.12 ¦0 ¦
+------------+---------------+------+------------+------------------------------¦
¦6228-80 ¦Fortune ¦1976 ¦35,361.00 ¦7,072.20 ¦
¦ ¦Odend'hal, Jr. ¦ ¦ ¦ ¦
+-------------------------------------------------------------------------------+
The following issues remain for our decision after concessions by the parties: (1) Whether petitioners are entitled to depreciation, rental, and interest deductions associated with their interests in a warehouse complex located in Cincinnati, Ohio, in an amount greater than the income generated by the property; (2) a determination of the useful life of the depreciable property; (3) whether petitioners Yu, docket No. 6108-80, and Stanton, docket No. 2627-80, must adjust the income as reported during the base period years for income averaging purposes; (4) whether petitioner Odend'hal is liable for section 6651(a) additions to tax in docket Nos. 5780-79 and 6228-80; and (5) whether petitioners are entitled to attorneys' fees.
Some of the facts have been stipulated. The stipulations and attached exhibits are incorporated herein by reference.
Petitioners resided in the following areas when they filed their petitions in these cases:
+---------------------------------+
¦Petitioner ¦Residence ¦
+------------+--------------------¦
¦ ¦ ¦
+------------+--------------------¦
¦Odend'hal ¦Virginia ¦
+------------+--------------------¦
¦Cassidy ¦Virginia ¦
+------------+--------------------¦
¦Allen ¦Virginia ¦
+------------+--------------------¦
¦Yu ¦Virginia ¦
+------------+--------------------¦
¦Mann ¦Maryland ¦
+------------+--------------------¦
¦Magal ¦Maryland ¦
+------------+--------------------¦
¦Stanton ¦District of Columbia¦
+---------------------------------+
I. Kroger Property Issues
The primary issues in this case concern petitioners' participation in a real estate venture. The real estate consists of 10 buildings located on 5.8 acres of land in Cincinnati, Ohio (the property). The Kroger Co. (Kroger) occupies the property and uses it to prepare products for distribution to its chain of supermarkets. The property has ready access to interstate highways and has its own railroad siding.
The buildings were constructed between 1926 and 1949. The buildings contain an area in excess of 700,000 square feet. The buildings have been well maintained. They continue to provide adequate facilities for warehousing and processing.
Several transactions involving the property which occurred prior to petitioners' 1972 acquisition are important in this case. Accordingly, we make findings regarding these transactions before our findings regarding petitioners' acquisition.
Kroger owned the land and the buildings until 1951. On July 1, 1951, Kroger sold the property under a sale-leaseback arrangement to the Union Central Life Insurance Co. (Union Central) for $5 million. Union Central paid the $5 million in cash.
Union Central leased the land and buildings back to Kroger (the Kroger Lease) for 25 years for an annual rental of $325,200. This rental provided a 4.5-percent yield and a complete return of Union Central's investment over the 25-year primary term of the lease. The rental was payable in monthly increments of $27,100.
The agreement also gave Kroger four renewal options, each for a 5-year period. Rentals for the first two renewals were $100,000 per year, payable at $8,333.33 a month. Rentals for the last two renewals were $75,000 per year payable at $6,250 a month. Thus, Union Central's right to repossession of the property would be postponed until July 1996.
The lease was a net-net-net lease. Kroger had responsibility for taxes, insurance, utilities, and maintenance for the property for the primary term and for each of the renewal periods.
Union Central's deed to the property and the Kroger Lease were recorded during July 1951.
On November 29, 1956, Union Central sold a small unimproved piece of the property to Gromarco, Inc., a Kroger subsidiary, for $3,000. The Kroger Lease was amended at...
To continue reading
Request your trial
-
Waddell v. Comm'r of Internal Revenue
...occur despite the absence of personal liability.‘ See also Odend'hal v. Commissioner, 748 F. 2d 908, 913 (4th Cir. 1984), affg. 80 T.C. 588 (1983). Because of the potential abuse that inheres in the allowance of deductions in excess of the cash investment, the courts have endeavored to test......
-
Thomas v. Comm'r of Internal Revenue (In re Estate of Thomas)
...of the property or the nonrecourse liability was substantially in excess of the property's fair market value. See, e.g., Odend'hal v. Commissioner, 80 T.C. 588 (1983), affd. 748 F.2d 908 (4th Cir. 1984); Brannen v. Commissioner, 78 T.C. 471 (1982), affd. 722 F.2d 695 (11th Cir. 1984); Estat......
-
Roe v. Commissioner
...the promissory note must reflect a genuine debt. Estate of Franklin v. Commissioner, 544 F.2d at 1049; Odend'hal v. Commissioner Dec. 39,992, 80 T.C. 588, 604-605 (1983), affd. on this issue 84-2 USTC s 9963 748 F.2d 908 (4th Cir. 1984), cert. denied 471 U.S. ___ (1985). Second, the questio......
-
Calloway v. Comm'r of Internal Revenue
...to repay and a reasonable prospect of repayment. See Odend'hal v. Commissioner, 748 F.2d 908, 912 (4th Cir.1984), affg. 80 T.C. 588, 1983 WL 14812 (1983). Events that occur after that time are immaterial to this initial characterization. See Lebowitz v. Commissioner, 917 F.2d 1314, 1318 (2d......