White v. C.I.R.

• Decision Date: 20 April 1993
• Docket Number: No. 92-9005,92-9005
• Parties: -1648, 93-1 USTC P 50,273 Matthew R. WHITE and Jill White, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 657

991 F.2d 657

71 A.F.T.R.2d 93-1648, 93-1 USTC P 50,273

Matthew R. WHITE and Jill White, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 92-9005.

United States Court of Appeals, Tenth Circuit.

April 20, 1993.

Craig F. McCullough (L.S. McCullough, with him on the brief), of Callister, Duncan & Nebeker, Salt Lake City, UT, for petitioners-appellants.

Annette M. Wietecha, Atty., Tax Div., Dept. of Justice, Washington, DC (James A. Bruton, Acting Asst. Atty. Gen., and Ann B. Durney, Atty., Tax Div., Dept. of Justice, Washington, DC, with her on the brief), for respondent-appellee.

Before KELLY and SETH, Circuit Judges, and ALLEY, District Judge. ^*

SETH, Circuit Judge.

The issue raised on this appeal is whether the Commissioner of the Internal Revenue Service, in his notice of deficiency, correctly assessed taxes against the general partners of a Utah limited partnership. Appellants Matthew R. White and Jill White, general partners of M & J Investment Company, a limited partnership in Utah, appeal the judgment of the United States Tax Court sustaining an assessment by the Commissioner of the Internal Revenue Service for a deficiency in tax payments for the years 1982, 1983, 1984 and 1986. We affirm.

Appellants raise three issues on appeal. Appellants first contend that the Tax Court erroneously ruled that the amounts paid by the partnership for construction of a house were distributions to the partners and thus taxable to the extent they were in excess of the partners' bases. Second, Appellants argue that the Tax Court erred in ruling that the statute of limitations did not prevent assessments for 1984. Finally, Appellants contest the Tax Court's holding that Appellants were liable for additional tax for substantial understatement of income under I.R.C. § 6501.

A large portion of the facts in this case were stipulated to and submitted by the parties to the Tax Court. Appellants purchased a tract of undeveloped land in 1979. Although the legal title to the land was held by the Jill White Family Trust, the parties have stipulated that for purposes of this appeal, Appellants will be considered as having purchased the land in their individual capacities. In 1981, Appellants formed the M & J Investment Company as a Utah limited partnership. Appellants were general partners, each with a five percent interest, and their four children, through a custodian, were limited partners holding the remaining ninety percent interest. The partnership held both business and personal assets.

In 1982, construction of a house began on the tract. The partnership contributed part of the money needed for construction, and ultimately provided fifty-nine percent of the cost. In August 1983, Appellants borrowed $300,000 from Zions First National Bank to finance their share of the construction costs. Appellants personally conveyed a security interest in the entire property to secure the loan. The loan was subsequently refinanced twice, with some additional funds being borrowed by Appellants, and each time a deed of trust was executed by Appellants personally giving the bank a security interest in the entire property.

On December 31, 1983, Appellants signed a "deed" purporting to convey an interest in the property to the partnership. The deed did not however contain a description of the property and was never delivered or recorded. In our view it had no significant effect.

The IRS audited Appellants' income tax returns for the years 1982, 1983, 1984, and 1986, and issued a statutory notice of deficiency. The Commissioner determined that the amounts paid by the partnership during the years at issue for construction of the house constituted distributions under I.R.C. § 731 and were unreported capital gain to Appellants to the extent the amounts exceeded Appellants' bases. The Commissioner further imposed additions to the tax owed pursuant to I.R.C. § 6661, for substantial understatement of income tax, and pursuant to I.R.C. § 6651(a)(1), for failure to timely file the 1982 tax return.

In December 1989, following the Commissioner's notice of deficiency, Appellants executed a quitclaim deed conveying a fifty-nine percent interest in the property to the partnership.

Appellants first contest the finding that the expenditures by the partnership for the construction of the house constituted distributions to Appellants. The resolution of this issue hinges on whether the partnership actually acquired an interest in the property when it expended funds for the construction of the improvements. This is basically a factual question, and the findings of the Tax Court will not be set aside unless clearly erroneous. Estate of Holl v. Commissioner, 967 F.2d 1437, 1438 (10th Cir.); United States v. California Eastern Line, 348 U.S. 351, 75 S.Ct. 419, 99 L.Ed. 383; 26 U.S.C. § 7482(a); Fed.R.Civ.P. 52(a).

Appellants contend that they had an agreement with the partnership in which the partnership would expend funds for construction of the house in exchange for an undivided interest in "the property." They rely on two sections of the Utah Code to support their argument.

Under the Utah Code, "[u]nless the contrary intention appears, property acquired with partnership funds is partnership property." Utah Code Ann. § 48-1-5 (1992). Further, partnership property can be held in the name of a general partner. Utah Code Ann. § 48-1-7 (1992). Appellants interpret these provisions to mean that since partnership funds were expended for the construction of the house, the house is partnership property, even if the title remains in the names of Appellants. We agree with the Tax Court that this interpretation ignores the question as to whether the partnership actually acquired any property.

Appellants owned the real property in question in their individual capacities prior to the formation of the partnership. Thus, they were not holding the property for the partnership, because it was not yet formed. Generally, improvements on land become part of the real property. See Utah Code Ann. § 57-1-1(3) (1990) ("real property" includes all fixtures and improvements on land). The house became part of the property to which Appellants held the title.

Under the Utah Code the partnership, either in and of itself or by a partner for the partnership, had to acquire property with partnership funds in order for it to be partnership property. Since Appellants held title to the property, they had to transfer an interest in the property to the partnership in order for the partnership to have an interest. In accordance with the Tax Court, despite Appellants' expressed intentions, such an interest was not transferred.

The Tax Court relied on several facts indicating that Appellants treated the property as wholly a personal asset instead of owned in part by them, and in part by the partnership, and we agree. These facts include that Appellants were able and did convey the entire property to the bank to secure a loan to Appellants as individuals but made no conveyance to the partnership; that Appellants deducted the full amount of real estate taxes paid; that Appellants paid no rent to the partnership for the use of the property and did not include the value of the housing in their income tax returns.

We have reviewed the record and agree that the Tax Court's determination was supported by substantial evidence. Although Appellants testified that they intended for the partnership to have an interest in the property, this intention was not effectuated by Appellants' actions.

Appellants additionally argue that if the partnership did not acquire an interest in the property, the payments for the...