Rubnitz v. Comm'r of Internal Revenue
| Decision Date | 06 January 1977 |
| Docket Number | Docket No. 4313-74. |
| Citation | 67 T.C. 621 |
| Parties | ALAN A. RUBNITZ, RIVA M. RUBNITZ; ROBERT R. KRANDEL, RUTH E. KRANDEL; LELON C. WICHERT, KATHY E. WICHERT; ROY S. AAL, SYRILL AAL; FRANK E. RITCHEY, JR., BETTY R. RITCHEY; MARCO GOODMAN, RUTH M. GOODMAN; SYLVAN GROSS, JACQUELINE GROSS; WILLARD B. ROSS, MARIA ELENA ROSS; AND ASHLAND INVESTMENT CO., INC., PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, a 3 1/2-percent ‘loan fee’ withheld by the lender from the principal amount of a 25-year ‘construction loan’ may not be deducted by the borrower in 1970 when escrow closed (on Dec. 17, 1970) on such loan. Held, further, a 1-percent ‘commitment’ of ‘standby’ fee reflected in a check (dated Dec. 15, 1970) given by the borrower to the lender which was to be credited by the lender against the 3 1/2-percent loan fee, but which was in fact placed in a ‘suspense’ account by the lender and returned to the borrower in early 1971, is similarly not deductible in 1970. David R. Sylva, for the petitioners.
Warren N. Nemiroff, for the respondent.
The Commissioner determined deficiencies in petitioners' income taxes as follows:
+---------------------------------------------------------------------------+
¦Petitioners ¦ ¦Year ¦Deficiencies ¦
+-------------------------------------------+---------+------+--------------¦
¦ ¦ ¦ ¦ ¦
+-------------------------------------------+---------+------+--------------¦
¦Alan A. Rubnitz and Riva M. Rubnitz ¦ ¦1970 ¦$635.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Robert R. Krandel and Ruth E. Krandel ¦ ¦1970 ¦1,039.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Lelon C. Wichert and Kathy E. Wichert ¦ ¦1970 ¦717.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Roy S. Aal and Syrill Aal ¦ ¦1970 ¦4,766.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Frank E. Ritchey, Jr., and Betty R. Ritchey¦ ¦1970 ¦4,428.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Marco Goodman and Ruth M. Goodman ¦ ¦1970 ¦2,417.00 ¦
+-------------------------------------------+---------+------+--------------¦
¦Sylvan Gross and Jacqueline Gross ¦ ¦1970 ¦1,424.50 ¦
+-------------------------------------------+---------+------+--------------¦
¦Willard B. Ross and Maria Elena Ross ¦ ¦1970 ¦1,528.52 ¦
+-------------------------------------------+---------+------+--------------¦
¦Ashland Investment Co., Inc. ¦Sept. 30,¦1971 ¦1,021.98 ¦
+---------------------------------------------------------------------------+
The principal issue is whether a deduction is allowable in 1970 in the computation of petitioners' distributive shares of partnership income for a ‘fee’ charged by a bank in connection with a construction loan made to the partnership.1
The parties have filed a stipulation of facts which, together with the exhibits attached thereto, is incorporated herein by this reference.
The individual petitioners are the following married couples: Alan A. and Riva M. Rubnitz; Robert R. and Ruth E. Krandel; Lelon C. and Kathy E. Wichert; Roy S. and Syrill Aal; Frank E. Ritchey, Jr., and Betty R. Ritchey; Marco and Ruth M. Goodman; Sylvan and Jacqueline Gross; and Willard B. and Maria Elena Ross. Each couple filed a joint return for 1970, and all of them resided in California at the time of the filing of the petition herein. The corporate petitioner, Ashland Investment Co., Inc., had its principal place of business in San Lenadro, Calif., at the time of the filing of the petition herein. It filed a corporate income tax return for its fiscal year ended September 30, 1971.
All petitioners were partners in Branham Associates (Branham), a limited partnership formed in 1970. Petitioner Alan A. Rubnitz (Rubnitz) was the organizer and general partner of Branham.
Branham was organized to construct and operate an apartment complex in San Jose, Calif. For this purpose, the partnership sought to borrow money from various financial institutions. During October 1970, Rubnitz, acting on behalf of the partnership, made arrangements to obtain financing for the project from Great Western Savings & Loan Association (Great Western). The general terms of a loan were agreed upon orally at that time; it was expected that formal documents closing the transaction would be executed approximately 60 days thereafter. The parties have stipulated that the financing thus arranged was a ‘25 year, $1,650,000.00 construction loan.'2
In addition to interest charged at an annual rate over the term of the loan, Branham agreed to pay upon the closing of escrow on the loan a ‘loan fee’ of 3 1/2 percent of the principal amount of the loan. This loan fee amounted to $57,750.
During early December 1970, Great Western agreed to several changes in the terms of the loan. These changes included a reduction in the interest rate to be charged and also an extension—until December 31, 1970—of the deadline for closing the loan. Great Western's loan committee approved these changes—
subject to: 1% non-refundable commitment fee being collected at this time. To be credited to the loan fee when the loan is recorded.
Great Western required this 1-percent fee from Branham to insure that the partnership would proceed to close the loan. Great Western's assent to the changes in the terms of the loan, and its decision to require Branham to tender this 1-percent fee, were communicated to Rubnitz by a letter dated December 7, 1970, which stated in part:
4. A one per cent (1%) standby fee to be placed with this Association. This fee to be credited toward the total fee charged upon closing of escrow.
By a check in the amount of $16,500, dated December 15, 1970, Branham tendered the 1-percent fee to Great Western. By an internal transmittal order dated December 15, 1970, Great Western placed this $16,500 in a ‘suspense account’ subject to the following instruction: ‘This amount (is) to be refunded from suspense account when escrow closes.’
On December 17, 1970, escrow closed on the loan in question; however, no funds were actually disbursed to Branham at that time. Rather the loan proceeds were made available to the partnership only in accordance with the Building Loan Agreement and Assignment of Account No. 76-09117, which provided in part as follows:
The net proceeds3 of this loan * * * are to be placed on a deposit with (Great Western) * * * in a special non-interest-bearing account entitled ‘LOANS IN PROCESS BRANHAM ASSOCIATES, a limited partnership BUILDING LOAN ACCOUNT,’ * * * Subject to the provisions of this agreement, the undersigned * * * hereby irrevocably assign to (Great Western), as security * * * title * * * to said account and all monies to be placed therein * * *. The undersigned acknowledge that they * * * have no right to the monies in said account other than to have the same disbursed by (Great Western) in accordance with this agreement * * *
The agreement further provided that funds were to be disbursed from the account from time to time upon presentation of vouchers in respect of costs incurred in the course of construction. No vouchers were submitted nor were any of the loan proceeds paid out during 1970.
Although the principal amount of the loan was $1,650,000, only $1,592,220 was actually ‘deposited’ in Branham's ‘Loans in Process' account. Most of the $57,780 difference between the $1,650,000 and $1,592,220 figures resulted from the 3 1/2-percent loan fee which Great Western charged Branham. Great Western ‘deducted’ this loan fee from principal of the loan. The rest of the difference, resulted from a ‘Tax Service Fee’ of $20, and from a ‘Credit Report Fee’ of $10, both of which Great Western also ‘deducted’ from the loan principal.4
Before he executed the documents to close the loan, Rubnitz noticed that the $16,500 ‘standby’ or ‘commitment’ fee which Branham and ‘paid’ by its check dated December 15, 1970, had not been credited towards the 3 1/2-percent loan fee. He nevertheless decided to execute the documents as they had been prepared in order to avoid delaying the closing past December 31, 1970. At a time not clearly disclosed by the record, Rubnitz communicated with an official of Great Western who then promised to see that the $16,500 which Branham had deposited was refunded. The $16,500 remained in the ‘suspense account’ through the end of 1970, until it was, by a check dated January 9, 1971, refunded to Branham.
Branham's obligation to repay the loan with interest was evidenced by a promissory note. The terms of this obligation were specified in the note as follows:
December 17, 1970
$1,650,000.00
* * * I promise to pay to
GREAT WESTERN SAVINGS AND LOAN ASSOCIATION * * * the principal sum of ONE MILLION SIX HUNDRED FIFTY THOUSAND AND NO/100—- DOLLARS, with interest from the date hereof on the unpaid principal balance at the rate of 9.0% per annum; principal and interest payable in monthly installments of THIRTEEN THOUSAND EIGHT HUNDRED SIXTY AND NO/100—- dollars each, beginning on the 1st day of March 1972, * * * Each payment shall be credited first on interest then due and the remainder on principal; and interest thereupon ceases upon the principal so credited. Interest shall be paid
during the first 270 days, at 9.0% per annum only on amounts as drawn from the dates drawn; thereafter, at 9.0% per annum on the full amount of the note whether or not all funds have been drawn until the date monthly installments of principal and interest commence as above provided.
Branham did not repay any of the...
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