Walter v. C.I.R.
| Decision Date | 15 January 1985 |
| Docket Number | Nos. 83-1782,83-1795,s. 83-1782 |
| Citation | 753 F.2d 35 |
| Parties | -743, 85-1 USTC P 9138 H. Calvin and Anne F. WALTER, Billy Joe and Barbara H. Guess, Tom T. Pace, Jr. and Estate of Nancy H. Pace, Deceased, Tom T. Pace, III, Robert J. English, Roy A. Wedekind, Jr. and Rhys G. Claiborne (83-1782); Morgan Brown Ayres, Jr. and Cynthia Ann Ayres, Campbell Wallace, Jr. and Joan E. Wallace, Morgan B. Ayres and Patricia M. Ayres, William R. and Marie Banks, Donald L. Jackson, Thomas M. and Murray O. Ayres, Jack T. and Eugenia C. Bush, W. Zane and Darlene Daniel (83-1795), Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Leslie Shields, argued, Kramer, Johnson, Rayson, McVeigh & Leake, Knoxville, Tenn., for petitioners-appellants in both cases.
Joel Gerber, Acting Chief Counsel, Internal Revenue Service, Washington, D.C., Glenn L. Archer, Jr. [Lead Counsel], Michael L. Paup, Gary R. Allen, Gayle P. Miller, argued, Chief App. Sect., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee in both cases.
Before EDWARDS and JONES, Circuit Judges, and PHILLIPS, Senior Circuit Judge.
This action is a consolidation of fifteen separate appeals; therefore, the appellants 1 are numerous. They are Mr. and Mrs. Morgan B. Ayres, Jr., H. Calvin Walter, Billy Joe Guess, Tom T. Pace, Jr., Campbell Wallace, Jr., William R. Banks, Glen R. Clairborne, Thomas M. Ayres, Roy Wedekind, Jr., Jack T. Bush, W. Zane Daniel. Misters Donald L. Jackson, Tom T. Pace, III, and Robert J. English are also appellants. All of the appellants appeal the Tax Court's decision which disallowed certain deductions for depreciation and expenses incurred or paid by appellants' partnership during the period from January 10, 1975 to October 28, 1975. Two of the appellants, Mr. and Mrs. Walters, also appeal the Tax Court's decision, which assessed an additional tax under 26 U.S.C. Sec. 6651(a)(1) (1954) for willfully neglecting to timely file their joint return. Upon consideration of the issues presented by this appeal, we affirm.
Some of the facts of this case are undisputed because they were established by stipulation. While we summarize those facts, a more thorough statement of the case may be found in the opinion of the Tax Court, Morgan Brown Ayres, Jr. et al. v. Commissioner, T.C. Memo. 1983-202 [83-202 P-H Memo TC].
On January 10, 1975 Glen Claiborne, H. Calvin Walter, Tom Pace, Sam Mars, Pat Fultz (the Claiborne Group), and Westwood Developers Inc. (Westwood) executed a hybrid agreement entitled "Agreement of Purchase and Sale of Real Estate and Limited Partnership Agreement." The agreement was hybrid because it combined a real estate sales contract with a partnership contract. The partnership contract provided that the members of the Claiborne Group would be limited partners and that Westwood, as trustee for Northshore Center Operating (NCO), would be the general partner of Northshore Associates, Ltd. (Northshore Ltd.). The sales contract provided that Westwood, as trustee for NCO, would sell and Northshore Ltd. would purchase a 75% undivided interest in a group of three office buildings (the Complex), which were equitably owned by NCO and legally owned by Westwood.
The sales contract also provided for an abatement of principal or interest upon the occurrence or existence of several conditions. Those conditions included (1) NCO's failure to construct a fourth office building (Northshore IV), (2) less than 92.5% occupancy of the Complex, and (3) the filing of a foreclosure action against any property owned by Northshore Ltd. The sales contract further established that NCO had to demonstrate that it could pay $1,400,000 in outstanding debts that could encumber the title to the Complex.
By May, 1975 the Complex's occupancy rate reached the required 92.5%. By October 6, 1975, the Complex's clouded title was cleared. On or about October 11, 1975, the condition concerning the construction of Northshore IV was waived. Subsequently, NCO obtained several loans ($800,000 from Hamilton National Bank of Knoxville; $600,000 from Valley Fidelity Bank of Knoxville; $63,500 from a company denominated Masada-Brunswick) that were to be used to repay the $1,400,000 in outstanding debts.
On October 27, 1975, Claiborne drew checks payable to banks that had loaned funds to NCO. On October 28, 1975, the deed of trust for the Complex, which referred to a $1,625,000 purchase money mortgage that had been executed by Claiborne between January 10, 1975 and October 28, 1975, was notarized. On October 29, 1975, the deed was recorded. Between November 17, 1974 and January 7, 1975, Claiborne drew four more checks, which were made payable to Northside Ltd.
Ending on December 22, 1975 and beginning on October 17, 1975, Northshore Ltd. admitted eleven of the appellants as limited partners. On July 2, 1976, Northshore Ltd. recorded a certificate of limited partnership and listed all of the appellants as limited partners.
For the calendar year of 1975, Northshore Ltd.'s income tax return showed an ordinary loss of $896,611.31, but its amended return reduced that loss to $830,826. Each appellant claimed a deduction for a proportionate share of the losses incurred by Northshore Ltd. for operation of the Complex from January 10, 1975 through December 31, 1975. The Commissioner, however, disallowed that portion covering January 10, 1975 to October 28, 1975 (300 days) and allowed that portion covering October 28, 1975 (65 days) until the end of the taxable year. The Commissioner's rationale was obvious: NCO incurred the expenses and depreciation from January 1, 1975 to October 28, 1975 and appellants incurred the expenses and depreciation beginning on October 28, 1975. Consequently, the Commissioner assessed appellants' deficiencies and sent notices to that effect.
H. Calvin Walter signed and filed on or before April 15, 1976 Form 2688, which requested May 15, 1976 as the extended filing date for his joint Federal income tax return for 1975. Walter, however, believed that he was signing and filing Form 4868, which would have automatically extended his filing date to June 15, 1976. Based upon that belief, Walter listed June 14, 1976 on his office diary as the due date for filing his 1975 tax return. Consequently he mailed the return in an envelope postmarked June 14, 1976 to the Memphis Internal Revenue Service Center, which received it on June 15, 1976. Subsequently, the Commissioner sent the Walters a notice of deficiency which indicated that they were assessed an additional tax of $774.32 pursuant to 26 U.S.C. Sec. 6651(a)(1) (1954).
All of the appellants requested that the Tax Court review the Commissioner's disallowance of deductions for a proportionate share of the losses incurred by Northshore Ltd. for its operation of the Complex from January 10, 1975 through December 31, 1975. Mr. and Mrs. Walter also requested review of the Commissioner's decision that they had no reasonable cause to delay filing their return. The Tax Court, however, decided that the Commissioner correctly disallowed the deductions because Northshore Ltd. acquired beneficial ownership of the Complex on or after October 28, 1975. The Tax Court also decided that the Commissioner correctly assessed Mr. and Mrs. Walters an additional tax because they had no reasonable cause to delay filing of their return. Consequently, the Tax Court affirmed the Commissioner's decisions.
Courts of Appeals have exclusive jurisdiction to review decisions of the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. Sec. 7482. In a civil action tried without a jury a district court's findings of fact are not to be set aside unless they are clearly erroneous. F.R.Civ.P. 52(a). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); Kennedy v. Commissioner, 671 F.2d 167 (6th Cir.1982). Findings of ultimate fact which result from the application of legal principles to subsidiary facts are subject to de novo review, as are the Tax Court's conclusions of law. See Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134, 143 (6th Cir.1983).
The Tax Court did not determine when Northshore Ltd. was formed. Instead, it assumed that Northshore Ltd. had been formed on or before October 28, 1975 and, then, determined when equitable ownership of the Complex passed from NCO to Northshore Ltd. The Tax Court and the appellants agreed that under Tennessee Natural Gas Lines v. Commissioner, 71 T.C. 74, 83 (1978) beneficial ownership passes when sufficient benefits and burdens of ownership pass. In the context of the instant case, NCO's equitable ownership would have passed to Northshore Ltd. when Northshore Ltd.'s ownership attributes in the Complex outweighed NCO's...
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