Wheeler v. Commissioner
| Decision Date | 07 June 1978 |
| Docket Number | Docket No. 6482-73. |
| Citation | 37 TCM (CCH) 883,1978 TC Memo 208 |
| Parties | Richard O. Wheeler and Betty P. Wheeler v. Commissioner. |
| Court | U.S. Tax Court |
Fenelon Boesche, 1300 NBT Building, 320 S. Boston Ave., Tulsa, Okla. and James Littleton Daniel, for the petitioners. G. Phil Harney, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in petitioners' joint Federal income tax:
Year Deficiency
1968 ................ $68,999.26
1969 ................ 94,607.93
In an amendment to the answer the Commissioner asserted an alternative deficiency of $140,783.76 for the year 1968 should this Court find a certain stock transaction to be taxable in that year rather than in the taxable year 1969. This alternative deficiency for 1968 would result in a reduced deficiency for the year 1969.
Certain concessions having been made, the issues remaining for our decision are:
(1) whether certain stock, debentures and a note received by petitioner Richard O. Wheeler in the taxable year 1968 constituted compensation for services or a distributable portion of joint venture capital gain;
(2) whether restrictions on the stock received prevented income realization in the year of receipt;
(3) the fair market value of the stock, if any, on the date of receipt;
(4) the fair market value of the debentures and the note on the date of receipt; and
(5) whether petitioners, by amendment to their petition, made a timely election under section 1304(a)1 of the Internal Revenue Code to have the benefits of the income averaging provisions apply.
Some of the facts have been stipulated. The stipulation of facts along with attached exhibits are incorporated herein by this reference.
Petitioners, husband and wife, resided in Tulsa, Okla., at the time of filing their petition herein. The filed joint Federal income tax returns for the calendar years 1968 and 1969 with the Internal Revenue Service Center in Austin, Tex. Since Betty P. Wheeler is a party hereto solely by reason of having filed joint income tax returns with her husband for the years in issue, Richard O. Wheeler alone will hereafter be referred to as the petitioner.
In 1958 petitioner went into the real estate development and construction business building warehouses, churches, and small shopping centers. In some of these real estate projects petitioner had an ownership interest in the property being developed and in others he did not.
It was in early 1961 that petitioner first met Ainslie Perrault. Although Mr. Perrault had no experience as a real estate developer, he was a very successful businessman, having owned a variety of business interests. Petitioner sought out Mr. Perrault to obtain financing for a project petitioner was contemplating. At that time petitioner had an option to purchase a tract of land and a lease commitment from National Cash Register Company for a building to be constructed on the land. What petitioner needed from Mr. Perrault was the front money necessary to exercise the option. Mr. Perrault agreed to provide the funds in return for a 50 percent interest in the project. Petitioner thereafter took title to the land in his name and followed through with the construction and leasing of the building. The project ultimately proved successful.
The next project in which the parties joined involved remodeling the Skelly Oil Building. This time Perrault initiated the project and requested that petitioner join forces with him. Perrault again offered to finance the project if petitioner would agree to remodel and acquire tenants for the building. The parties agreed to divide the profits on a 90 percent — 10 percent basis. The building was remodeled, leased, and eventually sold to the Franklin Realty Company in Philadelphia at a profit.
After these two successful ventures, Perrault and petitioner decided to seek other projects that were larger in scope. In 1962 a general oral agreement was entered into under which Perrault was to provide the necessary front money for the projects and petitioner was to undertake to carry them through the financing, construction and occupancy phases. The essential term of the agreement was that profits would be divided 75 percent to Perrault and 25 percent to petitioner after Perrault recovered his investment plus a 6 percent interest factor. Petitioner was also to receive a salary of $700 per month (later raised to $1,000) as part of the agreement. Perrault was to absorb overall losses incurred on the projects undertaken; however if an individual project ran a loss while the venture was operating at a profit, the loss was to be shared in the profit ratio previously indicated. The association between petitioner and Perrault was a marriage of capital and know-how.
Subsequent to this general arrangement between the principals, they began to look for new ventures. It was agreed that Perrault would hold legal and record title as nominee in order to protect his investment in the projects. However, petitioner and Perrault held themselves out as co-owners for the years during which the oral agreement and a later written agreement were in effect.
In 1965 petitioner and Perrault confirmed their 1962 verbal agreement in writing. Petitioner requested the written agreement for several reasons. Prior to 1965 Mr. Perrault had been represented by petitioner's brother, presumably as his attorney. As a result, petitioner felt safe with a verbal agreement. However, petitioner's brother died and petitioner thereafter felt a written agreement was necessary to protect his interest in the projects. Also Perrault was in his middle or upper sixties at that time and petitioner felt he would be better protected with a written agreement. While petitioner was not totally satisfied with the agreement as written, he felt he had lost much of the earlier leverage which he had in his bargaining position due to the death of his brother. He, therefore, felt compelled to accept the agreement as written by Perrault because his alternatives were to proceed on the basis of the oral agreement or walk off, neither a satisfactory alternative.
Under the agreement, petitioner and Perrault undertook six real estate projects. In 1965 the first of these projects was sold at a profit. Petitioner reported his share of the joint venture capital gain as gain from the sale of a capital asset. He has consistently reported gain from the sale of the projects in this manner. It is this manner of reporting the gain from the sale of three of the projects in the years 1968 and 1969 to which respondent objects.
The projects sold in 1968 were the Camelot Inn, the Mansion House, and the University Club Tower. Perrault and Wheeler handled all of these projects similarly. In the case of the Camelot Inn, for example, it was petitioner who suggested the site to be acquired and that a motel be erected. Perrault agreed that it would be a good project so the site was acquired using Perrault's funds. Petitioner's duties with respect to the projects included supervising construction, hiring subcontractors to do the specialty work, approving payrolls, making payments for materials, approving change orders, and approving interim payments to subcontractors. Additionally, in the cases of the Mansion House and the University Club Tower which were financed through an F.H.A. guarantee, it was petitioner who had sole responsibility for developing the final figures necessary to obtain the financing. Petitioner also performed a number of duties jointly with Perrault, such as selecting the architects for the projects and obtaining permanent financing for the Camelot Inn. Subcontracts were mutually agreed upon before signing, which either Perrault or Wheeler had the authority to do.
Petitioner did not report any current operating revenues nor did he deduct any expenses with respect to the projects on his Federal income tax returns for the years in issue. Rather, during the period of years that the projects were operated under the Perrault-Wheeler arrangement and before the properties were sold, Perrault reported all the current operating income and deducted all the expenses with respect to the projects. Upon sale of the properties, the profit reported by Perrault was the gain on the sale of the projects reduced by petitioner's 25 percent share, that is, petitioner's share was taken off the top.
After completion of the projects, and a brief period of operation, the Camelot Inn, University Club Tower, and Mansion House were sold to the Kin-Ark Oil Company on May 23, 1968, in exchange for Kin-Ark Oil Company stock and debentures.
Kin-Ark Oil Company was a small conglomerate whose stock was traded on the American Stock Exchange. Average trading volume for the stock was approximately 10,000 shares per month. The company had incurred losses in each of the three years preceding the year of sale.
Petitioner's share of the sale proceeds was 32,029 shares of unregistered Kin-Ark Oil Company stock which was subject to an investment letter restriction, unregistered Kin-Ark Oil Company convertible debentures,2 and a note from the University Club of Tulsa in the face amount of $37,500.3 As part of the agreement Kin-Ark Oil Company was to use its best efforts to effect registration of the stock within approximately eight months after consummation of the sale. The stock was eventually registered sometime in early 1969.
Petitioner reported the proceeds in 1968 as his share of joint venture capital gain, and not as compensation for services. Although the stock which he received traded on the American Stock Exchange at a mean price of $5.875 per share on the date of receipt, petitioner reported the stock as having a value of $2.15 per share on that date. Petitioner subsequently sold that same stock in April 1969 for approximately $7.39 per share. Similarly, while the...
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