Strong v. Comm'r of Internal Revenue
| Decision Date | 05 April 1976 |
| Docket Number | Docket Nos. 2173-74— 2175-74,2206-74— 2208-74. |
| Citation | 66 T.C. 12 |
| Parties | WILLIAM B. STRONG AND CONSTANCE L. STRONG, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners, in connection with an apartment complex to be constructed and operated by them as partners, formed a corporation to obtain financing at a rate of interest in excess of the limit imposed by State law on loans to individuals. Title to the property was transferred to the corporation which executed the various documents relating to the financing and engaged in other related activities. Held, the corporation was not merely a nominee whose existence could be ignored for tax purposes and the net operating losses during the years at issue were its losses and not those of the partnership. Robert V. Hunter, for the petitioners.
Bernard R. Baker III, for the respondent.
Respondent determined the following deficiencies in these consolidated cases:
+----------------------------------------------+
¦Docket No. ¦1965 ¦1966 ¦1968 ¦1969 ¦
+------------+------+------+---------+---------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------+------+------+---------+---------¦
¦2173-74 ¦0 ¦0 ¦$6,402.96¦$4,725.61¦
+------------+------+------+---------+---------¦
¦2174-74 ¦0 ¦0 ¦1,946.00 ¦520.00 ¦
+------------+------+------+---------+---------¦
¦2175-74 ¦0 ¦0 ¦929.95 ¦361.17 ¦
+------------+------+------+---------+---------¦
¦2206-74 ¦0 ¦0 ¦491.57 ¦178.33 ¦
+------------+------+------+---------+---------¦
¦2207-74 ¦0 ¦0 ¦1,057.10 ¦613.00 ¦
+------------+------+------+---------+---------¦
¦2208-74 ¦$1,333¦$573 ¦2,691.00 ¦9,534.49 ¦
+----------------------------------------------+
At issue is whether net operating losses from the construction and operation of an apartment complex were those of a partnership or its controlled corporation.
Some of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
All of the petitioners are individuals who filed joint Federal income tax returns for the years 1968 and 1969 with the Internal Revenue Service Center at Andover, Mass. At the time the petitions were filed, Victor L. and Coral E. Alger, Frederic B. and Helen P. Adler, William B. and Constance L. Strong, and Colburn A. Jones resided in Delmar, N.Y.; Patricia L. Jones resided in Syracuse, N.Y.; Paul W. And Mabel E. Henninger resided in Castleton, N.Y.; and Fred W. and Agnes K. Pollman resided in Phoenix, Ariz. The parties have stipulated that any appeal in these cases ‘shall be taken in the United States Court of Appeals for the Second Circuit at New York, New York.’
Prior to September 1967, Colburn A. Jones, William B. Strong, Victor L. Alger, Frederick B. Adler, Fred W. Pollman, and Paul W. Henninger agreed to form Heritage Village Apartments Co., a partnership, for the purpose of developing an apartment complex to be known as the Heritage Village Apartments. The partners understood at that time that financing in the amount necessary to develop the apartments was not available to individuals because of the limitations on interest charges in the New York usury Statute. They understood that corporations were not subject to these limitations, and that financing might be available to a corporate borrower. Accordingly, Heritage Village, Inc., a corporation owned by the partnership (hereinafter referred to as the corporation), was formed in September 1967 in anticipation of its use to obtain loan commitments. Jones was named as president and Robert V. Hunter as secretary of the corporation. The certificate of incorporation contained a broad and unqualified statement of purposes and authorized the issuance of 200 shares of capital stock without par value.
In october 1967, certificates of partnership were filed by the partners on behalf of Heritage Village Apartments Co. (hereinafter the partnership).
In August 1967, before either the partnership or the corporation was formed, a commitment for a permanent mortgage loan was obtained from the Bronx Savings Bank (hereinafter Bronx). This loan was to bear interest at6 3/4 percent and was to be secured by an 18 (later 19) building apartment project. The commitment letter was addressed to ‘Heritage State Farm Corp. c/0 Mr. Colburn A. Jones.’
4 The apartment project was to be constructed in three phases on separate parcels of land. By letter dated December 8, 1967, Chemical Bank New York Trust Co. (hereinafter Chembank) made a commitment to loan the corporation $2,100,000, bearing annual interest of 7 percent, for the purpose of constructing the first phase, known as ‘parcel 1.’ Among other things, the letter required that Jones and his wife personally guarantee the mortgage note. The partnership as ‘owner’ had previously contracted with Heritage-state Farm Corp. (hereinafter the contractor) to construct the apartments on parcel 1.
On December 18, 1967, the partners entered into a formal partnership agreement. Among other things,2 the agreement provided that Strong, Adler, Henninger, and Alger, as partners in Strong & Co., were to transfer certain real property designated ‘parcel 1’ ‘to the partnership or its nominee.’ It also provided that:
It is agreed that title to the aforesaid Parcel may be held by a corporate nominee for the benefit of the partnership, it being the intention of the parties hereto that at all times the real and beneficial owner of the said Parcel shall be the partnership.
6. Construction on Parcel 1— The parties hereto agree that Jones shall have and is hereby granted the authority on behalf of the partnership (through a nominee corporation, if determined by Jones and Strong) to negotiate for and enter into a Construction Loan Agreement, first or subordinate mortgage financing and related instruments * * * to finance the construction of the apartment units and related improvements on Parcel No. 1.
Jones agrees to guarantee such construction loan in the event that the lending institution shall request.
Promptly upon execution of this Agreement the partnership shall enter into a Construction Agreement with Heritage-State Farm Corp., a New York corporation, the sole shareholder of which is Jones and/or his spouse. * * *
Such construction * * * shall be in accordance with plans and specifications which shall be prepared on behalf of the partnership * * *
9. Authorized Signatures on Behalf of Partnership: The joint signatures of Jones and Strong shall be required on all deeds by the partnership, on any Construction Loan Agreement and on any bond and mortgage executed by or on behalf of the partnership.
All documents hereinafter referred to as executed by the corporation were signed only by Jones, as president.
Also on December 18, 1967, the members of Strong & Co. entered into a separate agreement whereby Strong, Adler, Henninger, and Alger would convey real property, known as parcels 2 and 3, to the partnership. That agreement stated that it was an amendment to the partnership agreement and contained language similar to the above-quoted portions of the partnership agreement in respect of the conveyance to the partnership or its nominee and the holding of title by a corporate nominee for the benefit of the partnership. It also provided for the reconveyance of parcels 2 and 3 to the aforementioned named individuals under certain circumstances. On August 21 and December 18, 1969, the partnership agreement was twice amended in respects not material herein. The August 21, 1969, agreement constituted a restatement thereof to admit Flannigan (see n. 2 supra) and incorporated the previously agreed-upon provisions relating to parcels 2 and 3; the corporation was not a party to this agreement.
A deed transferring parcel 1 from Strong, Adler, Henninger, and Alger to the corporation pursuant to the partnership agreement was executed on December 27, 1967, and recorded on January 8, 1968. Parcels 2 and 3 were deeded to the partnership and the deeds recorded in January 1968.
A building loan agreement and mortgage respecting parcel 1 between the corporation as mortgagor and Chembank as mortgagee was executed on December 29, 1967, and recorded on January 8, 1968. Paragraph 4(e) of the agreement provided:
4. Representations and Warranties. Borrower represents and warrants to Lender that:
(e) If Borrower purports to be a corporation, (i) it is a corporation duly organized, existing and in good standing under the laws of the state in which it is incorporated, * * * (iii) it has the corporate power, authority and legal right to carry on the business now being conducted by it and to engage in the transactions contemplated by this Agreement, the Note and the Mortgage, and (iv) the execution and delivery of and the carrying out of the transactions contemplated by this Agreement, the execution and delivery of the Note and the Mortgage, and the performance and observance of the provisions of all the foregoing, have been duly authorized by all necessary corporate and stockholder actions of Borrower and will not conflict with or result in a breach of the terms or provisions of any existing law or any existing rule, regulation or order of any court or governmental body or of the Certificate of Incorporation or the By-laws of Borrower.
The agreement also recited that the corporation was the owner of the mortgaged property, and provided that it could not be assigned by the borrower without the consent of the lender and that any assignment in violation of this provision was an event of default. The agreement also included the following.
8. (c) Borrower shall furnish to Lender from time to time upon request (i) financial statements of Borrower, (ii) details relating in any manner to the financial condition of Borrower, and (iii) budgets and revisions of...
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