U.S. v. Stafford

• Decision Date: 19 March 1984
• Docket Number: No. 82-8738,82-8738
• Citation: 727 F.2d 1043
• Parties: 84-1 USTC P 9316 UNITED STATES of America, Plaintiff-Appellee, v. D.N. STAFFORD and Flora C. Stafford, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1043

727 F.2d 1043

84-1 USTC P 9316

UNITED STATES of America, Plaintiff-Appellee, v. D.N. STAFFORD and Flora C. Stafford, Defendants-Appellants.

No. 82-8738.

United States Court of Appeals, Eleventh Circuit.

March 19, 1984.

William B.B. Smith, Atlanta, Ga., for defendants-appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Michael L. Paup, Chief, Appellate Section, Stanley S. Shaw, Jr., Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Middle District of Georgia.

Before ANDERSON and CLARK, Circuit Judges, and DUMBAULD ^*, District Judge.

R. LANIER ANDERSON, III, Circuit Judge:

Taxpayers DeNean and Flora Stafford appeal the district court's summary judgment in favor of the government on their refund action for allegedly overpaid taxes. The refund action involves the Staffords' 1969 tax return, in which they did not account for their receipt of a limited partnership interest valued at $100,000. The taxpayers argue that the partnership share qualified for nonrecognition treatment under I.R.C. Sec. 721(a) because it was received in "exchange" for "property" they contributed to the partnership. ¹ The district court held that nonrecognition was not available because the taxpayers' contribution of a letter of intent to the partnership did not meet the exchange and property requirements of the statute. We conclude that the district court applied an improper legal standard and under the proper legal test several issues should have been decided in favor of the taxpayers. With regard to additional issues, we conclude that genuine issues of fact remain such that summary judgment for the government was inappropriate. We therefore reverse and remand.

I. HISTORY OF THE CASE

The commercial transaction that underlies the current tax dispute has been discussed in previous opinions. See Stafford v. United States, 435 F.Supp. 1036 (M.D.Ga.1977), rev'd, 611 F.2d 990 (5th Cir.1980), on remand, 552 F.Supp. 311 (M.D.Ga.1982). Nevertheless, the resolution of this case requires a detailed analysis of the facts. We therefore discuss the relevant aspects of the transaction.

Throughout the 1960's, DeNean Stafford worked as a real estate developer, often in projects involving hotel property. At least two of Stafford's projects had used financing from the Life Insurance Company of Georgia ("LOG"). The business relationship between Stafford and LOG had taken various forms depending on the project. The hotel development involved in the present case, however, was somewhat unique.

In the early 1960's, LOG acquired property in Atlanta and constructed its corporate headquarters. LOG also owned the land adjacent to the headquarters, which at the time was undeveloped. LOG officials, in particular Mr. H. Talmadge Dobbs, who was then an executive vice president and member of the finance committee, approached Stafford and began negotiations for construction of a hotel complex on the unused land. In February of 1967, the LOG finance committee officially authorized continued discussions with Stafford on the hotel development. ²

Negotiations between Stafford and LOG led to a July 2, 1968, letter from Mr. Dobbs to Stafford, setting forth the numerous points of agreement as of that date and additional details in need of future resolution. In particular, the letter promised 6 3/4% interest on the loan financing for the hotel and it specified lease terms; both the interest rate and lease terms were very favorable to Stafford given then existing market conditions. ³ Mr. Dobbs sent additional correspondence to Stafford on July 3, 1968, indicating that the favorable conditions described in the July 2 letter would be open for Stafford's consideration for a period of 60 days. ⁴

Under the terms of the July 2 letter, Stafford or his designee were to provide 25% equity for the hotel development. With letter in hand, Stafford contacted attorneys and business acquaintances and investigated the formation of a limited partnership to provide that equity share. On August 30, 1968, he responded to the LOG letter of July 2, accepting the general terms set forth in the letter and proposing further negotiation on additional details. ⁵

On October 30, 1968, Mr. A.F. Irby, a business associate of Stafford's, contacted potential investors with a draft of a limited partnership agreement and details regarding the proposed development. The letter stated:

You will note in this file that Mr. Stafford is delivering the lease, which is highly economic, the construction loan and the permanent financing to the partners for what amounts to $100,000 of additional participation. The cost in the open market of procuring these three items would be in excess of $250,000 * * *

The Life of Georgia will supply all of the construction funds but will require that $2,000,000 of equity be invested prior to their own advancement of construction monies.

When you consider the fact that this is a very favorable tax arrangement, that the permanent loan is for 30 years at an interest of 6 3/4% and that the cost of the development is at least $1,500,000 less than it would be under ordinary circumstances this would appear to be an excellent deal.

In January of 1969, Stafford and a number of investors formed Center Investments, Ltd., a Georgia limited partnership, to pursue the development. Stafford was designated the sole general partner. He purchased two $100,000 shares and received a third limited partnership share for contributing to the partnership the letter of intent and the agreement with LOG contained therein. ⁶ In all, the partnership sold 20 units for $100,000 each, which together with the unit Stafford received for his capital contribution made a total of 21 units. Some eighteen months later, the partnership voted to amend the partnership agreement to provide Stafford a salary for his duties as general manager.

By mid-1970 the necessary capital had been raised and plans for the hotel development were set and approved. LOG and Center Investments executed formal lease and loan documents. The hotel project had expanded to a 550 room facility. This expansion, and unforeseen construction problems, had escalated the cost to over $9,000,000. LOG increased the amount of its loan to $7,127,500, but it substantially abided by the terms set forth in the July 2, 1968, letter to DeNean Stafford. LOG maintained the 6 3/4% interest rate on the first $5,000,000 it loaned to Center Investments. (The remaining $2,127,500 was financed at 9 3/4% interest, the market rate in 1970). LOG and Center Investments also followed the formula set forth in the July 2 letter as the method for calculating lease payments. These terms had become even more favorable to Center Investments than when first proposed, owing to changed market conditions.

On their 1969 joint federal tax return, the Staffords did not report as income their receipt of the third partnership share. ⁷ The Commissioner audited that return and determined that the Staffords should have treated the partnership share as compensation for services that Stafford rendered to the partnership in negotiating and developing the investment. The Commissioner thus concluded that the nonrecognition principles of Sec. 721 did not apply to the third partnership share and assessed a deficiency of $64,000 plus interest. The Staffords paid the assessment and filed a claim for a refund.

After the Internal Revenue Service denied the refund claim, the taxpayers filed the present action in January of 1976. In 1977, after considering summary judgment motions by the government and the Staffords, the district court granted summary judgment to the Staffords on grounds that the taxpayers' 1969 receipt of the third limited partnership share qualified for nonrecognition treatment under I.R.C. Sec. 721. Stafford v. United States, 435 F.Supp. 1036 (M.D.Ga.1977). The former Fifth Circuit reversed, Stafford v. United States, 611 F.2d 990 (5th Cir.1980), and remanded for resolution of an underlying factual dispute.

On remand, the parties supplemented the record in a June 24, 1981, evidentiary hearing. The district court, after considering cross-motions for summary judgment, granted summary judgment in favor of the government. Stafford v. United States, 552 F.Supp. 311 (M.D.Ga.1982). The taxpayers appealed to this court.

II. ISSUES ON APPEAL AND STANDARD OF REVIEW

The issues we now consider are easily stated. We must determine the proper tax characterization of the third partnership interest Stafford received. As was the situation when this case was last on appeal, we also consider the narrower issue of whether the district court properly granted a summary judgment.

With regard to this narrower issue, we cannot affirm the district court's summary judgment unless there are no remaining disputes of material fact: [W]here ... the parties disagree as to the facts and take inconsistent legal theories, the mere filing of cross-motions for summary judgment does not warrant the entry of such judgment. Vetter v. Frosch, 599 F.2d 630, 632 (5th Cir.1979); Schlytter v. Baker, 580 F.2d 848, 849 (5th Cir.1978); .... [T]o justify entry of summary judgment here the government must have borne the heavy burden of demonstrating that there is no dispute as to any material facts with the evidence and all inference drawn therefrom viewed in the light most favorable to the taxpayers .... On review we apply the same standard.

Shook v. United States, 713 F.2d 662, 665 (11th Cir.1983). We conclude that the government has not met this high burden.

III. EXCHANGE AND PROPERTY REQUIREMENTS

To qualify for nonrecognition treatment on the receipt of a partnership share, the partner must establish that he made a contribution of "property" in "exchange" for that share. I.R.C. Sec. 721(a). Contrary to the district court's holding that the exchange and property requirements were not met, we conclude that these issues should have...