Raphan v. U.S.
| Decision Date | 04 April 1985 |
| Docket Number | No. 84-783,84-783 |
| Citation | 759 F.2d 879 |
| Parties | -1154, 53 USLW 2544, 85-1 USTC P 9297 Benjamin RAPHAN and Myrna Raphan, Appellees, v. The UNITED STATES, Appellant. Appeal |
| Court | U.S. Court of Appeals — Federal Circuit |
Farley P. Katz, Dept. of Justice, Washington, D.C., argued for appellant. With him on the brief were Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup and Ann Belanger Durney, Washington, D.C Ralph A. Muoio, Caplin & Drysdale, Chartered, Washington, D.C., argued for appellees. With him on the brief was Jeffrey S. Lehman, Washington, D.C.
Before FRIEDMAN, KASHIWA and MILLER, Circuit Judges.
Appeal from a judgment of the United States Claims Court, 3 Cl.Ct. 457 (1984), holding that: (1) James Buchanan Corporation (JBC) was the agent of Buchanan Apartment Associates (Associates) and Benjamin and Myrna Raphan (Raphan) as partners of Associates are entitled to the tax benefit of losses for 1970 and 1971, and (2) no general partner of Associates had personal liability under a construction loan and therefore each of the partners, including the Raphans as limited partners, is entitled to include the debt on that loan in the tax basis of their partnership interests. We affirm in part and reverse in part.
The principal events and agreements that have led to the present controversy are set forth in the trial court's opinion, 3 Cl.Ct. at 459-60. We list here only those necessary to an understanding of this opinion.
The Pomponio brothers (Pomponios) planned to construct an apartment building to be known as the James Buchanan House (Buchanan House). The Pomponios transferred a 3.5 acre parcel of land to JBC, a corporation owned by the Pomponio family. The cost of and mortgage on that parcel were each $2 million.
JBC entered a contract with Pomponio-owned National Realty & Construction Co., Inc. (National Realty) to construct the building, and obtained a $9.4 million loan commitment for a permanent mortgage effective when construction was complete.
JBC had difficulty obtaining a construction loan, and the lenders of the $2 million loan were pressing for payment. The Pomponios sought a loan from the Tenzer group, a New York law firm (Tenzers). The Tenzers would not make the loan but were interested in an equity investment. It was agreed that Buchanan House would be developed by a basically 50-50 partnership of the Pomponios and the Tenzers to be called Associates. The Tenzers contributed $2 million and the Pomponios contributed the land, subject to the $2 million purchase mortgage, and the construction contract, the value of which was understood to be $2 million.
The Tenzers, which included the Raphans, were active partners in Associates. 1 The Pomponios were co-partners in Associates, the sole owners of JBC, and the sole owners of National Realty.
Royal National Bank (Royal Bank), the lender of the $9.4 million construction loan, charged 14 percent interest, which exceeded Virginia's usury limit for noncorporate borrowers such as Associates. To avoid the usury restriction, JBC was used as the borrower, and JBC and Associates executed an agreement in which JBC: "agree[d] as an agent to hold nominal title to the Property for the benefit of Principal [Associates] for so long as and at such times as the Principal shall request and direct during the course of the construction of the improvements on the Property." The agreement also provided that JBC's "sole function during the existence of this agreement shall be to hold nominal legal title to the Property for the benefit of the Principal under and subject to the Principal's written directions and instructions," and that JBC:
shall have no discretionary authority to exercise any control over the Property or to execute any written instruments in any way relating to the Property except as set forth above, it being expressly understood that Agent [JBC] has no real interest in or duties or responsibilities in * * *
respect to the Property except to perform ministerial tasks at the written direction and instruction of Principal. Agent shall immediately forward to Principal all correspondence or other written materials relating to the Property which Agent receives.
* * *
All sums advanced under the Construction Loan, as well as any other funds received in connection with the construction of the building on the Property shall be delivered to, for the account of, or in accordance with the instructions of Principal. Agent may under no circumstances retain or possess any advances or portion thereof, nor any other funds or portion thereof, and will have no obligation to pay any expenses in connection with its carrying out of its functions and duties under this agreement. All expenses incurred by or for the account of Agent in connection with its carrying out its duties and functions under this agreement shall be paid by Principal.
Finally, it was provided that JBC "shall receive from Principal as compensation for the services to be rendered by Agent hereunder the sum of $1 thousand to be paid upon the completion of construction of the building and the funding of the Permanent Loan." A corporate resolution of JBC limited its authorized activities to holding "bare legal title to the property as agent for * * * [Associates] and to act as agent and nominal title holder" for Associates.
Because the Tenzers perceived substantial risks, it was agreed that $1,925,000 of their $2 million would be converted from a contribution to Associates' capital to a loan to JBC. The loan bore 12.47 percent interest, was secured by a second mortgage on the property, was guaranteed by the Pomponios, and could be converted, after two years, to an equity interest in Associates.
On December 16, 1969: (1) the Tenzers contributed $75,000 for their limited partnership interests and lent JBC $1,925,000, (2) the $2 million total was used to pay the existing mortgage on the land, (3) Royal Bank agreed to lend JBC up to $9.4 million as construction financing, (4) the Pomponios personally guaranteed the $9.4 million loan, and (5) JBC deeded the property to the partnership, which took the property subject to all liabilities, but assumed no other liability.
On January 28 and again on February 15, 1970, Associates deeded the property to JBC, an advance was received from Royal Bank, and JBC deeded the property back to Associates. Those transfers required payment of transfer taxes. To avoid those taxes, the parties in late 1970 transferred title to JBC as "agent".
For convenience, the Tenzers waived their right to sign partnership checks during construction.
In December 1971, JBC permanently transferred the property to Associates. By the fall of 1972, Buchanan House was in default, and the Pomponios and a Sidney Zneimer (an officer of Royal Bank), were investigated by a grand jury. In September of 1972, the Tenzers persuaded the Pomponios to terminate their interest in Associates. After additional investments by the Tenzers, Associates completed the project. It owns and operates Buchanan House.
The Commissioner of Internal Revenue, having determined that losses claimed by Associates were those of JBC, disallowed the share of those losses claimed by the Raphans. The Raphans paid the resulting deficiency and filed claims for refund.
The Raphans sued in the Claims Court for refund of $2,865.65 paid as income tax, interest and penalties, plus accrued interest and costs, for taxable years 1970 and 1971. The government said JBC did not qualify as a true agent under National Carbide Corp. v. Comm'r, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779 (1949), and the losses were therefore those of JBC, not those of Associates. The government further asserted that if the losses were attributable to Associates, the Raphans could not deduct them because they had an insufficient The Claims Court concluded that JBC and Associates were not commonly controlled, and that the agency agreement therefore should be given effect. The Claims Court further concluded that because the Pomponios did not guarantee the loan in their capacity as partners, that guarantee did not prohibit the Raphans from including the losses in the tax basis of their interests.
basis in their partnership interests under the Treasury Regulations in view of the Pomponios' guarantee of the construction loan.
1. Whether the Claims Court erred in determining that JBC was, for tax purposes, a true agent of Associates.
2. Whether the Claims Court erred in determining that the Pomponios' guarantee did not result in any "personal liability" for the loan.
3. Whether the government based its case on evidence obtained in violation of Rule 6(e) of the Federal Rules of Criminal Procedure.
OPINIONIn reviewing findings of fact, this Court is required to apply the clearly erroneous rule. Rule 52(a), Federal Rules of Civil Procedure. See Vaughn v. United States, 740 F.2d 941, 945 (Fed.Cir.1984); Heisig v. United States, 719 F.2d 1153, 1158 (Fed.Cir.1983). We do not find the Claims Court's finding of fact that JBC and Associates were not under common control to have been clearly erroneous.
Generally, the title holder must bear the tax consequences of transactions involving the property. See, e.g., Moline Properties, Inc. v. Comm'r, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943); Harrison Property Management Co. v. United States, 475 F.2d 623, 201 Ct.Cl. 77 (1973), cert. denied, 414 U.S. 1130, 94 S.Ct. 868, 38 L.Ed.2d 754 (1974). Nominal title may be transferred to an agent, allowing the transferor to retain equitable ownership and its tax consequences. See Carver v. United States, 412 F.2d 233, 239-40, 188 Ct.Cl. 202 (1969). However, where the agent and principal are affiliated, it becomes necessary to determine whether a common principal is merely choosing which of two controlled entities it will employ to deal with the...
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