Stafford v. United States, Civ. A. No. 76-1-VAL.

• Decision Date: 14 June 1977
• Docket Number: Civ. A. No. 76-1-VAL.
• Citation: 435 F. Supp. 1036
• Parties: D. N. STAFFORD and Flora C. Stafford, Plaintiffs, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Middle District of Georgia

435 F. Supp. 1036

D. N. STAFFORD and Flora C. Stafford, Plaintiffs, v. The UNITED STATES of America, Defendant.

Civ. A. No. 76-1-VAL.

United States District Court, M. D. Georgia, Valdosta Division.

June 14, 1977.

Earl T. Berry, of Hansell, Post, Brandon & Dorsey, Atlanta, Ga., for plaintiffs.

John F. Murray and John A. Townsend, Tax Div., Dept. of Justice, Washington, D. C., Edgar W. Ennis, Jr., Asst. U. S. Atty., Macon, Ga., for defendant.

OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

ELLIOTT, Chief Judge.

This is an income tax refund action to recover certain taxes and interest paid by the Plaintiffs for the tax year 1969. In that year D. N. Stafford (hereinafter "Stafford") received an interest in a partnership. Pursuant to Section 721 of the Internal Revenue Code the receipt of a partnership interest in return for property is not subject to tax, but this exclusion does not apply where the partnership interest is received in return for services. The issue here presented is whether Stafford received the partnership interest in return for property (as he contends) or whether he received it in return for services (as the Defendant contends). There does not appear to be any controversy concerning any material fact and the case is before the Court on cross motions for summary judgment.

During the 1960's the corporate officers of the Life Insurance Company of Georgia (hereinafter "LOG") developed a desire to have a hotel built adjacent to the Life of Georgia Tower in Atlanta, which was the home office for LOG. Stafford had been in the business of developing and leasing motels in the southeastern United States for a number of years and his reputation in this regard was known to LOG officers. Stafford entered into negotiations with LOG concerning the development of the hotel. He was acting alone and solely in his own behalf in pursuing these negotiations. In February, 1967 the Finance Committee of LOG authorized negotiations with Stafford and approved in principle the negotiations which had already taken place between the officers of the company and Stafford. In July, 1968 the Executive Vice President of LOG sent Stafford a letter indicating that (1) LOG would grant to Stafford or his designee a net ground lease for a term of thirty years; (2) the lease would obligate Stafford to construct the hotel; and (3) LOG would make a first mortgage loan on the improvements equal to seventy-five percent of the cost of construction at an annual interest rate of 6¾ percent on the first $5,000,000. Within the time specified for acceptance of this proposal Stafford responded by letter indicating his acceptance. LOG intended to be bound by the terms of the offer made to Stafford and Stafford likewise considered himself bound by his acceptance.

Throughout the negotiations for the lease and loan agreement Stafford was not employed by any other person or entity. Although the officers of LOG and Stafford himself contemplated that some entity such as a corporation or partnership would eventually be formed to complete the construction and operate the hotel, yet all of Stafford's efforts were on his own account. It was not until later that additional investors were sought and a partnership formed.

In October, 1968 information was sent out to potential investors who might desire to participate in a limited partnership to build the hotel, it being noted that there would be 19 limited partners and one general partner (Stafford). It was further stated that Stafford would deliver to the partnership the lease, the construction loan and the permanent financing "for what amounts to $100,000 of additional participation".

In January, 1969 a limited partnership known as Center Investments, Ltd. was formed with Stafford as the only general partner. Twenty limited partnership units were sold for $100,000 each, two of which were purchased by Stafford, and a twenty-first unit was issued to Stafford in exchange for the assignment by Stafford to the partnership of the agreement to lease and the loan commitment by LOG as set forth in the July, 1968 letter. The partnership agreement stated that the consideration for that interest was Stafford's contribution of "property worth $100,000". This was the understanding and intent of the partners, and as consideration for this additional partnership interest Stafford did execute an assignment to the partnership of the agreement to lease and loan commitment by LOG. Clearly, the assigned items had considerable value. The lease itself was highly economic, and interest rates had been rising and had even reached 9¾ percent by the time the loan was actually closed. Thus the agreement to lend Five Million Dollars for thirty years at 6¾ percent, alone, had a substantial value.

For his services in...