Unvert v. Comm'r of Internal Revenue

• Decision Date: 08 August 1979
• Docket Number: Docket No. 8690-76.
• Citation: 72 T.C. 807
• Parties: ALLEN D. UNVERT and CATHERINE R. UNVERT, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

72 T.C. 807

ALLEN D. UNVERT and CATHERINE R. UNVERT, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 8690-76.

United States Tax Court

Filed August 8, 1979.

In his income tax return for 1969, petitioner deducted $54,500 as interest paid on indebtedness incurred to purchase real property. In 1972, the interest payment was refunded. After the statute of limitations on assessments for 1969 had run, respondent determined that the refund was taxable to petitioner in 1972. Held, in the light of all the facts, petitioner had a duty to treat the transaction consistently in both 1969 and 1972, and the interest refund is taxable in the latter year under the tax benefit rule. Donn Kemble and Joseph LaTorre, for the petitioners.

Kenneth G. Gordon, for the respondent.

FEATHERSTON, Judge:

Respondent determined a deficiency of $44,405 in petitioners' Federal income tax for 1972. The issue for decision is whether $54,500 received in 1972 as a refund of prepaid interest which was claimed and allowed as a deduction in petitioners' 1969 income tax return is taxable in the later year.

FINDINGS OF FACT

Petitioners Allen D. Unvert and Catherine R. Unvert, husband and wife, ¹ were legal residents of Newport Beach, Calif., at the time their petition was filed. They filed their joint Federal income tax return for 1972 with the District Director of Internal Revenue for the District of Los Angeles, Fresno, Calif.

Petitioner Allen D. Unvert (petitioner) is a physician. In late 1969, concerned about the rate of taxation on the income from his medical practice, petitioner requested Walter P. Gribben (Gribben), an attorney, to suggest investments which would serve as tax shelters. Gribben referred petitioner to John B. Halverson (Halverson), an acquaintance of both men and a law school classmate of Gribben. In mid-December 1969, petitioner telephoned Halverson, then president of U.S. Financial Corp.,² and Halverson told petitioner he would make inquiries on the latter's behalf. Having heard nothing further from Halverson, petitioner again telephoned him on December 30, 1969. They agreed to meet the next day in San Diego to discuss an investment opportunity.

On the afternoon of December 31, 1969, petitioner met with Halverson as well as with Robert M. Walters, a founder and the chairman of the board of U.S. Financial Corp., and David G. Leaverton (Leaverton), house counsel. He was informed of an opportunity to purchase 16 condominium units in a large building owned by U.S. Financial Corp.; these units were identified on a list shown petitioner at the meeting. The representatives of U.S. Financial proposed that petitioner purchase the units on a contract of sale. The amount of the purchase price would be loaned petitioner by U.S. Financial.³

According to U.S. Financial, it was anticipated that most of the units would be sold during the following year. Sales prices were expected to be in an aggregate amount which would exceed the sales price to petitioner, thus enabling him to pay off the loan to U.S. Financial and to realize a profit as well.

Petitioner was informed that by writing a check for prepaid interest on the loan, he would secure an interest deduction for 1969. Petitioner agreed to these terms. At the meeting, petitioner gave the others a personal check in the amount of $54,500 payable to U.S. Mortgage. On the check he indicated that the payment was to serve as prepaid interest on the loan of the purchase price of the condominiums. He was given a receipt for the payment.⁴ Due to the late hour of the meeting, the representatives of U.S. Financial informed petitioner that the various documents related to the transaction could not be prepared until the following year. Petitioner made no objection and left the meeting with the belief that he had entered into a contract for the purchase of the condominium units.

During March 1970, petitioner became concerned that he had received no documentation of the condominiums purchase from U.S. Financial. He was reassured by Gribben that the documentation would be forthcoming and by John Leventis (Leventis), petitioner's accountant, that his check was adequate proof of the existence of the contract. To compute depreciation, Leventis telephoned U.S. Financial to confirm the purchase price. On his tax return for 1969, petitioner deducted as prepaid interest $54,500 and as depreciation on the units $1,239.58.

Having made several telephone calls to representatives of U.S. Financial to request the documents relating to the purchase, petitioner wrote Halverson a letter dated April 23, 1970, in which he expressed his concern at the delay in receiving documents “regarding the contractual relation we entered at the end of 1969.” He asked for information and proposed a meeting to resolve possible difficulties. Under cover of a letter dated June 16, 1970, Leaverton forwarded to petitioner copies “of the proposed documentation.” By a letter dated December 23, 1970, Gribben suggested that Halverson meet with petitioner about the “substantial amount of documentation remaining to be done.”

When preparing his 1970 income tax return, petitioner was still concerned at his failure to receive documentation and an accounting of the 1969 transaction. By a letter dated March 24, 1971, he asked Halverson for information and indicated he would be willing to discuss any problems at a meeting. He informed Gribben of this letter by a letter dated the same day. After telephone calls made by petitioner and Leventis yielded no results, the two met with Halverson and Leaverton in mid-1971. At this meeting, petitioner was informed that the condominium units had not been sold and that U.S. Financial had not decided how to arrange the bill of sale.

By a letter dated August 9, 1971, Leaverton informed Gribben that:

My client, Swan Constructors, Inc., hereby agrees to purchase your client Dr. Dale Unvert's position in the above-referenced condominium units on or before December 1, 1971 for the sum of $54,000 cash (less any cash theretofore received by Dr. Unvert by reason of such investment), upon the demand of Dr. Unvert.

In a letter to petitioner dated September 1, 1971, the controller of U.S. Financial, Gary L. Fitzgerald, enclosed a promissory note, a contract of sale and purchase, and a management agreement, which were designed to document the December 31, 1969, transaction. He requested that petitioner execute the documents and return them. He indicated that he would then return “the completely executed documents” to petitioner. In the letter, he refers to a letter written by Leaverton to Gribben, apparently that of August 9, 1971, which he terms a “letter of indemnification.”

By a letter dated September 20, 1971, Gribben forwarded to Leaverton a promissory note in the amount of $50,000 and an executed copy of the management agreement, both of which were signed by petitioner. As he indicates in the letter, the promissory note is dated December 31, 1969; Gribben states that “it is clear that this Promissory Note evidenced part of the original purchase price.” He mentions that he has asked petitioner to sign the contract of sale and purchase agreement, which petitioner “unfortunately neglected to sign.” He further refers to Leaverton's statement in the August 9, 1971, letter that Swan Constructors, Inc., would purchase petitioner's interest in the condominiums.

In August or September 1971, petitioner and his accountant met with U.S. Financial's in-house accountant. When informed by the accountant that “the deal (would) be consummated” only if petitioner invested an additional $55,000, petitioner refused. At this point, petitioner asked Gribben to represent him in obtaining a refund of the original investment from U.S. Financial.

Petitioner believed until at least April 15, 1972, that he owned the condominiums. He also believed that during 1970 and 1971 some of the condominiums were leased under the management agreement and that some were sold and others substituted by U.S. Financial. On his 1970 and 1971 income tax returns, he deducted losses connected with the investment.

On or about May 1, 1972, following a series of contacts by Gribben in person, over the telephone, and by letter, which included a threat of legal action, petitioner received a personal check from Walters in the amount of petitioner's December 31, 1969, check. Petitioner informed Leventis of his receipt of the money.

On August 14, 1972, Revenue Agent Gerald Lenning (Lenning) contacted petitioner concerning an audit of petitioner's 1970 and 1971 income tax returns. October 11, 1972, Lenning met with Leventis with regard to the audit. At the meeting, Lenning gave Leventis a documented request for additional information about several items on the return, including petitioner's deductions related to U.S. Financial. Despite repeated requests for information, neither petitioner, Leventis, nor Gribben supplied any information to Lenning about the U.S. Financial transaction. Leventis supplied Lenning with information on other items.

On or about June 7, 1973, Lenning first obtained information on the U.S. Financial transaction from the San Diego Office of the Internal Revenue Service. On July 11, 1973, Lenning informed Leventis of his position that petitioner's purchase of the units was never completed. Leventis disagreed with Lenning. Petitioner's representatives did not comply with requests for more information on the transaction submitted by Lenning on July 23, 1973, July 30, 1973, September 28, 1973, and December 21, 1973.⁵ In August 1973, Lenning issued to petitioner a revenue agent's report on or about October 15, 1973, petitioners filed their 1972 income tax return, on which they did not report the $54,500 received in 1972.

OPINION

Because petitioner received a “tax benefit” from the deduction of the $54,500 as interest on his 1969 return, he is, in respondent's view, required to include that amount in his income for 1...