39 T.C.M. (CCH) 311
TROY V. POST AND EMMA L. POST, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
Nos. 7404-74, 2333-77.
United States Tax Court
October 4, 1979
W. John Glancy, H. Robert Powell, G. Russell Mortenson, for the petitioners.
Raymond L. Collins, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In these consolidated cases the respondent determined deficiencies in petitioners' Federal income taxes as follows:
| Docket No.
|| $ 440,055.00
Concessions having been made,
the following issues remain for our decision: (1) Whether the investment of petitioner Troy Post in the stock of Tropo, S.A. de C.V. (Tropo) in the amount of $12,959,117.36 was worthless on December 31, 1970. (2) Whether petitioners are entitled to deduct in 1971 advances totaling $5,623,128.68 made to Tropo and Tres Vidas en la Playa, S.A. de C.V. (Tres Vidas) as ordinary and necessary business expenses, business bad debts or nonbusiness bad debts. (3) Whether petitioners are entitled to deduct in 1972 advances totaling $4,535,852.69 to Tropo and Tres Vidas as ordinary and necessary business expenses, business bad debts or nonbusiness bad debts. (4) Whether, for purposes of net operating loss carrybacks for the years in issue, petitioners are entitled to deduct in 1973 and 1974 advances totaling $2,939,145.27 and $715,939.45, respectively, to Tropo and Tres Vidas as ordinary and necessary business expenses, business bad debts or nonbusiness bad debts. (5) Whether interest payments made by petitioner Troy Post in 1971 in the amount of $753,071.93 on debt obligations of Tropo and Tres Vidas are deductible on petitioners' 1971 Federal income tax return. (6) Whether a payment in the amount of $1,000,000 to Investors Overseas Services, Ltd. in connection with the settlement of litigation may be deducted in 1972 as interest paid or as a worthless bad debt. (7) Whether consultant fees of $61,000 and $100,000 paid by petitioner Troy Post in 1969 and 1972 to Club Corporation of America are deductible as ordinary and necessary business expenses. (8) Whether interest paid by Tres Vidas to Club Corporation of America in 1972 and 1974 was properly deductible by petitioners. (9) Whether certain legal and other fees totaling $279,579.02 paid by petitioner Troy Post during 1972 are deductible by petitioners as an ordinary and necessary business expenses. (10) Whether worthless loans totaling $420,000 made by petitioner Troy Post in 1968 to Preston Towers, Ltd. are deductible as a business or nonbusiness bad debts in 1969. (11) Whether petitioner Troy Post realized long-term capital gain in the amount of $247,390.64 rather than ordinary income on the 1972 sale of his equity in certain mortgage notes to The Company, Ltd. (12) Whether petitioners are entitled to deduct $122,790.84 in 1972 as a guarantor loss. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners Troy V. Post (hereinafter petitioner) and Emma L. Post, husband and wife, were residents of Dallas, Texas, when their petitions were filed in these consolidated cases. Their joint Federal income tax returns, and some amended returns,
for the calendar years 1969 through 1975 were filed with the Internal Revenue Service Center in Austin, Texas. Facts Relating To Issues 1 Through 4 In 1965, petitioner, as Chairman of the Board of Directors of Braniff Airways (Braniff), visited Mexico and acquired permission from the Mexican government to allow Braniff to fly to Acapulco, Mexico. Following procurement of flight routes for Braniff, petitioner entered into a joint venture with former President Aleman of Mexico to build the first new hotel in Acapulco since the nineteen fifties. Upon completion of the hotel, petitioner embarked upon an ambitious plan to build in Acapulco the finest private country club in the world. Petitioner initially envisioned a fashionable country club fronting on the Pacific Ocean, built from the finest and most costly materials and filled with only the ‘ elite’ of the world. Quality would be stressed over cost and an environment would be created that would encourage communication, relaxation, and recreation among the elite that petitioner described as the Fortune 500 executives. Petitioner, who had reached his peak in the business world, would in effect be the host at this exclusive club. To carry out his plan, petitioner purchased in 1966 or 1967 approximately 750 acres of land located 18 miles south of Acapulco at a cost of $2,000,000. The property had a beachfront extending five miles along the coast of the Pacific Ocean. The Acapulco International Airport was located in close proximity to the property and a modern highway connected the property to downtown Acapulco, which by car or taxi was a thirty minute ride. At that time certain provisions in the Constitution of Mexico prohibited direct ownership by non-Mexican citizens of real property that lay adjacent to the coast of Mexico. In an effort to accommodate petitioner the Mexican government indicated that a foreigner could legally avoid this prohibition by holding shares of a Mexican corporation which in turn would hold shares in a Mexican subsidiary which would hold actual title to the land located in the prohibited zone. Petitioner obtained a legal opinion from a prominent Mexican law firm that this two tier corporate arrangement was proper. To effect his ownership of the property, in March 1966, petitioner organized Tropo, a Mexican limited liability stock company. In 1967 Tropo acquired all of the outstanding stock of Inmobiliaria Tropo S.A. de C.V. (Inmobiliaria Tropo) and Inmobiliaria Helix S.A. de C.V. (Inmobiliaria Helix), limited liability stock corporations organized under the laws of Mexico. Inmobiliaria Tropo held title to approximately 577 acres of land on which petitioner planned to build his club, which was to be named Club-Tres Vidas. Inmobiliaria Helix held title to the adjacent 117 acres. In 1968, a third Tropo subsidiary corporation, Tres Vidas, was organized. This subsidiary was to hold title to the Club-Tres Vidas and its recreational facilities. In 1968, petitioner sold his 3,173,000 shares of Great America Corporation to Ling-Temco-Vought, (LTV). In exchange, petitioner received LTV debentures with a face amount of $95,190,000 (due in 1988 and paying 5 percent interest) and stock warrants valued at $13,326,600. Upon receipt of the debentures, petitioner sold approximately 10 percent in the open market and received approximately 60 percent of their face value. In January 1968, petitioner obtained the services of Club Corporation of America (CCA) to build the country club. When CCA was retained, petitioner envisioned a resort consisting primarily of a large and elaborate clubhouse, two surrounding golf courses, tennis courts, and limited facilities for overnight guests. However, after one year of construction and acting on the advice of his advisor Bruce Leadbetter (Leadbetter), petitioner substantially expanded the scope of the resort complex. The original number of 68 rooms was increased to 300. Petitioner had expanded Club-Tres Vidas from a private country club with limited overnight facilities into a resort complex accommodating overnight guests. The dramatic expansion of the original plans greatly increased the building costs. To carry out the expanded plan, petitioner dismissed CCA and retained the services of one of the largest construction companies in the world, the Henry C. Beck Company (Beck). Petitioner informed Beck that the project had to be completed prior to Christmas 1969, so the resort could open for the 1969-70 winter tourist season. In an effort to meet the 11 month deadline, cost overruns and chaos were the norm rather than the exception. Petitioner insisted, however, that the planned high level of quality construction be maintained. Petitioner recognized that the Club would not be economically viable unless the surrounding properties owned by Tropo's subsidiaries were developed. Such development, in the form of hotels and condominiums would provide the Club with sufficient traffic to limit or reverse the anticipated operating losses. Moreover, petitioner hoped that the Club would act as a catalyst for land value appreciation in the properties held by Tropo's subsidiaries for sale for subsequent condominium and hotel development. With a view to the large scale development of Tropo real properties, petitioner recognized that third party financing would be both necessary and desirable. moreover, petitioner did not wish to continue to completely finance the Club personally. Thus, in January 1969, Leadbetter, acting on behalf of petitioner and Tropo and its subsidiaries, contacted Investors Overseas Services (IOS) as a likely financier. At the commencement of negotiations IOS was one of the world's largest mutual fund companies. The negotiations with IOS concluded with an agreement in late 1969 that petitioner and IOS would engage in a joint venture to build hotels, condominiums, and a Mexican village (shopping, restaurants, and discos) adjacent to the Club-Tres Vidas on properties owned by Tropo's subsidiaries. In addition, $15,000,000 would be made available for the expansion, operation, and refinancing of Club-Tres Vidas. To finance the planned projects IOS agreed to market an $18,750,000 bond issue which would be debt obligations of Tropo secured by the Club-Tres Vidas. Additionally IOS...