Sorrell v. Commissioner
| Decision Date | 21 July 1987 |
| Docket Number | 33653-83.,Docket No. 33652-83 |
| Citation | 53 TCM (CCH) 1362,1987 TC Memo 351 |
| Parties | Gordon S. Sorrell, Jr. and June M. Sorrell v. Commissioner. |
| Court | U.S. Tax Court |
Henry H. Hutchinson and Shapard D. Ashley, 57 Adams Ave., Montgomery, Ala., for the petitioners. Linda J. Wise, for the respondent.
Memorandum Findings of Fact and Opinion
On August 30, 1983,2 respondent determined the following deficiencies and addition to tax for petitioners' taxable years ended 1977 and 1978:
Addition to Tax
Year Tax Sec. 6651(a)(1)3
1977 ............ $ 6,364.48 --
1978 ............ 10,569.11 $1,584.88
After concessions4 the issues for decision are:
Some of the facts have been stipulated and are found accordingly. Gordon S. Sorrell and June M. Sorrell are individuals who resided in Huntsville and Birmingham, Alabama, respectively, at the time the petitions in this case were filed. June M. Sorrell is a party because she filed jointly with Gordon S. Sorrell in 1977.
During 1977 and 1978 Mr. Sorrell held general and limited partnership interests in five Alabama limited partnerships named Pepper Tree, Ltd., Bayou Bend, Ltd., Woodmere Apartments, Ltd., Stonebridge, Ltd., and Skyland Hills, Ltd. Each partnership was formed to develop and operate a residential apartment complex in either Mobile, Montgomery, or Tuscaloosa, Alabama. The projects were financed with Federal Housing Authority (FHA) insured mortgages pursuant to section 221(d)(4) of the National Housing Act or Section 8 of the United States Housing Act of 1937.5
Mr. Sorrell was also president and controlling shareholder of Southern Housing Partnerships, Inc. (SHP) during these years. SHP, an Alabama corporation engaged in the business of acquiring, developing, syndicating, and managing improved and unimproved real estate, was the managing general partner of each of the earlier referenced partnerships.
The primary dispute in this case involves depreciation deductions each partnership claimed for the various components of the apartment complexes. In determining depreciation deductions the partnerships uniformly assigned the following useful lives to the components:
LifeAssets (in years)
Structures .................................. 33 1/3
Insulation, doors
windows and drywalls ...................... 20
Plumbing and electrical ..................... 15
Roofing, heating and air conditioning
cabinets, specialities, and land
improvements .............................. 10
Carpets, drapes, appliances, painting
furniture, and fixtures ................... 5
In the notice of deficiency for the year ended December 31, 1978, respondent determined that the useful lives of certain of the components were not accurate and made adjustments accordingly. Respondent disallowed petitioners' share of the partnerships' losses attributable to depreciation deductions based on inaccurate useful lives. In preparation for trial both parties secured experts who determined different useful lives than those set forth in the partnership tax returns and the deficiency notice. Petitioners and respondent now claim that the correct useful lives of the various components are those as determined by their respective experts.6
(1) Pepper Tree, Ltd. Pepper Tree, Ltd. was formed on October 1, 1977, for the purpose of developing Pepper Tree Apartments, a 208-unit apartment complex in Mobile. The original sponsors and developers of the project were James E. Ladner, an experienced builder and developer in the Mobile area, and Ladner Construction Company, Inc. (Ladner, Inc.), a residential construction company managed by Ladner. Mr. Sorrell, SHP, Ladner, Inc., and Mr. Ladner were general partners of the partnership in 1978.
Constructed in 1977 and 1978, the apartment buildings are two-story wood-framed structures built on concrete slabs. Exterior walls are stained-wood (masonite) with a one-inch thick band around the perimeter at the second floor level. The roof is asphalt shingled on a plywood deck and the exterior stairs and handrails to the second floor are constructed of pine or fir. Each apartment has central air conditioning and heating, wall-to-wall carpeting, self-lined drapes, and a kitchen equipped with range, refrigerator, and garbage disposal. Included in the complex are two accessory buildings with laundry and maintenance facilities, a cabana, a rental office building, a large swimming pool, a small wading pool, and a clubhouse.
Pepper Tree is located on University Blvd. between Airport Boulevard and Cottage Hill Road, near the University of South Alabama. The private placement memorandum for Pepper Tree, Ltd. provided that the complex would be located "in one of Mobile's fastest growing areas."
Following the initial rent-up period, Pepper Tree was managed by Ladner Investment. In 1980 and 1981 the complex was managed by King-Meade Management Corporation, and Dalcor Management Group took over in 1983.
In 1981 the project's maintenance operation was rated satisfactory by HUD. At that time the complex was in need of exterior painting; lawns and plantings needed some additional attention; screens needed replacing; and some repairs were needed in individual apartments. Some air conditioning compressors were replaced as needed that year, as were carpeting and doors. In addition over $7,000 was spent on lumber and materials to repair outside staircases.
In 1983 many more external features of the complex were in need of correction. Wood used to construct exterior stairwells was rotting and some balconies needed replacing where supporting members were rotting; some siding panels had warped due to improper construction methods; some roofs had been damaged by storms and normal wear, and some were sagging due to improper support beams; gutters were in need of repair or replacement; and the asphalt paving was deteriorating in places.
The interiors of the apartments were also in need of repair. Carpets were worn and needed replacing, and walls and ceilings needed painting and repair.
Pepper Tree, Ltd. spent $42,000 for necessary capital improvements in the first quarter of 1983, including new carpets, drapes, dishwashers, a new wooden fence, and exterior and interior paint. In May 1983, over $7,000 more was spent on carpet replacement, and efforts were taken to improve the physical appearance of the project including painting the exterior of ten buildings; repairing all stairways and balconies; installing a new project sign; refurbishing 30 units, including new carpet, paint and wallpaper; refurbishing the office building; repairing the pool and installing a new pool fence; and installing fences around the garbage dumpsters.
The apartment complex was sold in 1983.7 Since the sale extensive remodeling work has been done by the new owners. The exterior has been repainted and the entire complex was relandscaped. The roof structure has been reinforced, stairways and balconies replaced, and the pavement as been resurfaced. Carpets and draperies have been replaced as has resilient flooring, and each apartment is being repainted with each change in occupancy.
(2) Bayou Bend, Ltd. Bayou Bend, Ltd. was formed on October 1, 1977, to develop Bayou Bend Apartments, a 104-unit complex located in Mobile which was financed with a 40-year mortgage insured by FHA. As with Pepper Tree, Ladner, Inc. was the contractor on the project and Ladner Investment Company was contracted to manage the rental of the apartments. Mr. Sorrell SHP, Ladner, Inc. and Mr. Ladner were general partners in 1978.
The complex was constructed in 1977 and 1978 near the intersection of Brille Road and Dauphin Island Parkway, in South Mobile. The offering memorandum for the project provides that the site is well located, with interstate access, numerous neighborhood shopping facilities, churches, schools, and office facilities close by. The apartment buildings are two-story wood-frame structures built on concrete slabs. Exterior walls are stained-wood (masonite) siding with a one-inch thick band around the perimeter at the second floor level. Interior walls are stud-wall construction with gypsum board. The buildings have wood decks and steps from the second floor. The roof is asphalt shingled on plywood deck.
Each apartment unit has central air conditioning and heating, wall-to-wall carpeting, self-lined drapes, and a kitchen equipped with a range, refrigerator, and garbage disposal. The complex includes two accessory buildings with laundry and maintenance facilities, a rental office, a swimming pool, a pier designed to accommodate 14 individual boats, a boat launching ramp, and a fenced boat storage area.
In 1981 Bayou Bend requested approval of expenditures of over $5,000 for the replacement of drapes and exterior repairs to buildings, including steps and balconies. In 1984 HUD inspectors found the complex maintenance operation unsatisfactory, and reported five pages of needed corrections with an estimated total repair cost of $57,895. At that time the facia, corner board, window trim, and horizontal band trim on all buildings had deteriorated; the hard-board siding was in very poor condition due to insufficient paint coverage and nailing; there was evidence of water leakage; window trim needed repair; gutters had pulled away from facia; the asphalt was deteriorating in parking areas throughout the project; railings, stairs, and porches were in very poor condition; lawn areas were in very poor condition; exterior painting was needed; carpet replacement in several units was...
To continue reading
Request your trial