Peilte v. Comm'r of Internal Revenue (In re Estate of Delman)
| Citation | 73 T.C. 15 |
| Decision Date | 09 October 1979 |
| Docket Number | Docket No. 6220-77. |
| Parties | ESTATE of JERROLD DELMAN, DECEASED, SIDNEY PEILTE, ADMINISTRATOR, et al., 1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Equipment Leasing, in which petitioners were general partners, purchased equipment for a price of $1,284,612 by nonrecourse financing. When the equipment was subsequently repossessed, its fair market value was $400,000, Equipment Leasing's adjusted basis in the property was $504,625.80, and the outstanding balance of the nonrecourse financing was $1,182,542.07. Held, the gain realized by Equipment Leasing upon the repossession was the amount by which the balance of the nonrecourse financing exceeded the adjusted basis. Held, further, under sec. 1245, I.R.C. 1954, the gain realized is characterized as ordinary income. Held, further, recognition of the gain realized may not be deferred under secs. 108 and 1017. Donald G. Sutherland and Alan H. Lobley, for the petitioners.
Elsie Hall, for the respondent.
Respondent determined deficiencies in the Federal income taxes of petitioners for the taxable year 1973 as follows:
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¦Petitioners ¦Deficiency ¦
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¦ ¦ ¦
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¦Estate of Jerrold Delman, deceased, Sidney Peilte, administrator¦$9,574.16 ¦
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¦Joseph Kroot and Rochelle Kroot ¦27,984.00 ¦
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¦Meredith Nicholson and Elizabeth C. Nicholson ¦7,655.00 ¦
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¦Gary Ruben and Irene Ruben ¦35,495.00 ¦
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¦Alan I. Klineman and Dorothy C. Klineman ¦39,724.00 ¦
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¦James Klineman and Elaine Klineman ¦9,577.00 ¦
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¦Sam Solotkin and Lillian Solotkin ¦5,684.68 ¦
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¦Louis F. Cohen and Marcia Cohen ¦508.00 ¦
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¦Robert A. Rose and Phyllis Rose ¦27,415.45 ¦
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¦Edgar S. Joseph and Natalie Joseph ¦59,919.00 ¦
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¦Abe J. Miller and Ida Miller ¦55,209.00 ¦
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¦Stanley E. Leopold and Phyllis J. Leopold ¦8,730.00 ¦
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The issues for our decision are: (1) Whether the petitioners, general partners in Equipment Leasing Co., realized gain in the amount of $677,916.27 when partnership equipment purchased by nonrecourse financing was repossessed by the vendor; (2) if gain was realized, whether pursuant to section 1245 2 the gain must be recognized as ordinary income; and (3) whether recognition of any gain realized may be deferred under sections 108 and 1017 by reducing the basis of other property held by the partnership.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Jerrold Delman, who was residing in Las Vegas, Nev., at the time of his death on November 21, 1976, filed his individual income tax return for the taxable year 1973 with the Internal Revenue Service Center, Memphis, Tenn. Sidney Peilte, administrator of the Estate of Jerrold Delman, maintained his legal residence in Las Vegas, Nev., at the time the petition in this case was filed.
All other petitioners, except Sam and Lillian Solotkin, filed joint income tax returns for the taxable year 1973 with the Internal Revenue Service Center, Memphis, Tenn. Sam and Lillian Solotkin filed a joint income tax return for the taxable year 1973 with the Internal Revenue Service Center, Chamblee, Ga. The residences of the individual petitioners at the time the petition was filed in this case were as follows: Joseph Kroot, Carmel, Ind.; Rochelle Kroot, Indianapolis, Ind.; Meredith and Elizabeth C. Nicholson, Golf, Ill.; Gary and Irene Ruben, Carmel, Ind.; Alan I. and Dorothy C. Klineman, Carmel, Ind.; James and Elaine Klineman, Indianapolis, Ind.; Sam and Lillian Solotkin, North Miami Beach, Fla.; Louis F. and Marcia Cohen, Indianapolis, Ind.; Robert A. and Phyllis Rose, Indianapolis, Ind.; Edgar S. and Natalie Joseph, Indianapolis, Ind.; Abe J. and Ida Miller, Indianapolis, Ind.; Stanley E. and Phyllis J. Leopold, Indianapolis, Ind.
Rochelle Kroot, Elizabeth C. Nicholson, Irene Ruben, Dorothy C. Klineman, Elaine Klineman, Lillian Solotkin, Marcia Cohen, Phyllis Rose, Natalie Joseph, Ida Miller, and Phyllis J. Leopold are parties to this action solely because they filed returns with their respective husbands. Accordingly, any reference to petitioners will not include the foregoing individuals.
In early spring 1968, Howard Zuckerman and Steven Miller approached petitioner Robert A. Rose, a partner in the Indianapolis law firm of Klineman, Rose & Wolf (hereinafter KRW), to discuss the organization and financing of a corporation to produce television shows.
Howard Zuckerman and Steven Miller had made an extensive preliminary study on the marketability of a mobile television van, which was a television production facility housed in a semitrailer truck. They had consulted with an accounting firm concerning the amount of funds needed to organize the new entity and to begin operations. They were advised that a minimum of $125,000 would be required. The funds invested were to be used to provide a 5-percent downpayment on a mobile television van facility prepared by Ampex Corp. (hereinafter Ampex). Negotiations for the purchase of the mobile van for $895,000 were then underway. In addition, the invested funds were to be used to provide for other capital improvements and initial working capital until the corporation's operations could become self-sustaining.
The original plan proposed by the accounting firm was to conduct the business as a corporation in which investors would invest partly in capital stock and partly in subordinated debentures. This plan was unacceptable to prospective investors for several reasons. First, the venture was a highly speculative one. Second, the purchase money obligation remaining on the equipment bought from Ampex would be considerable since only 5 percent of the $895,000 purchase price was to be paid as a downpayment. Third, by investing funds solely in a corporation, the investors would have no individual ownership rights in the equipment if the corporation were unsuccessful. Finally, the investors were unwilling to invest all their funds in an enterprise in which the two operators, Howard Zuckerman and Steven Miller, would have no monetary investment. To overcome these objections, a compromise plan to form two entities to operate the enterprise was reached. The compromise plan provided first for the organization of a corporation in which the investors would receive an aggregate of 80 percent of the stock and in which Howard Zuckerman and Steven Miller would receive 20 percent of the stock. Second, a partnership would be formed in which the investors were to receive 75 percent and KRW was to receive 25 percent of the partnership interests.
On May 22, 1968, a general partnership was formed under Indiana law to do business under the name of Equipment Leasing Co. (hereinafter partnership A). The following amounts were contributed as capital or loaned to partnership A by the partners:
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¦Name ¦Capital ¦Loan ¦
+--------------------------+---------+-------¦
¦ ¦ ¦ ¦
+--------------------------+---------+-------¦
¦Abe J. Miller ¦$375 ¦$19,625¦
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¦Joseph Kroot ¦125 ¦6,875 ¦
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¦Edgar S. Joseph ¦300 ¦15,700 ¦
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¦Gary Ruben ¦300 ¦15,700 ¦
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¦Sam Solotkin ¦75 ¦3,925 ¦
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¦Robert A. Rose, as nominee¦75 ¦3,925 ¦
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¦Meredith Nicholson ¦50 ¦2,350 ¦
+--------------------------+---------+-------¦
¦Jerrold Delman ¦125 ¦6,875 ¦
+--------------------------+---------+-------¦
¦Stanley E. Leopold ¦100 ¦4,900 ¦
+--------------------------+---------+-------¦
¦Robert A. Rose, as nominee¦500 ¦0 ¦
+--------------------------+---------+-------¦
¦Total ¦2,025 ¦79,875 ¦
+--------------------------------------------+
The partners of partnership A held the following interests in the profits and losses thereof:
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