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Joyce Ann Cirelli, et al., Cirelli v. CommissionerDocket Nos. 14917-82, 14918-82, 14919-82, 14963-82, 14991-82, 14992-82, 15244-82February 28, 1984, Filed
United States Tax Court *103
Decisions will be entered under Rule 155 .C's five children formed a "partnership" which leased equipment and a yacht to C corporation, a construction contractor.
Held , the partnership is a "sham," whether viewed under thesec. 704(e), I.R.C. 1954 , regulations or the test inCommissioner v. Culbertson , 337 U.S. 733 (1949)Held, further , the "partnership's" property will be treated, for Federal tax purposes, as being owned by C corporation.Held, further , expenses relating to the yacht are not deductible, since the yacht was acquired and used for C's personal purposes.Held, further , constructive dividends to C from C corporation determined.Howard Levinton Steven K. Fedder John F. Dean , for the respondent.Tannenwald,Judge .TANNENWALD*335 Respondent determined the following deficiencies in petitioners' Federal income taxes:
Petitioners Docket No. Year Deficiency Joyce Ann Cirelli 14917-82 1973 $ 129.74 1974 171.44 1975 1,723.54 Lucia Ann Cirelli 14918-82 1973 129.74 1974 320.11 1975 1,546.55 Mary Cirelli 14919-82 1973 129.74 1974 321.00 1975 1,545.14 Jack Leone 14963-82 1975 2,387.15 and Barbara Leone John Cirelli 14991-82 1975 $ 1,964.60 Charles J. Cirelli 14992-82 1975 25,995.20 and Martha C. Cirelli Charles J. Cirelli 15244-82 1975 25,087.86 & Son, Inc. *105 *336 The principal issue for decision is whether a partnership composed of Charles J. and Martha C. Cirelli's five children is valid for Federal income tax purposes for 1975. *106 individual petitioners resided, and the corporate petitioner had its principal place of business, in Maryland when they filed their petitions herein.
Joyce Ann Cirelli, Lucia Ann Cirelli, Mary Cirelli, Barbara Leone, and John Cirelli (the children) are the children of Charles J. and Martha C. Cirelli. Jack Leone (Leone) is Barbara's husband. During 1972 through 1974, Charles J. Cirelli (sometimes referred to hereafter as Cirelli) owned 100 percent of Charles J. Cirelli & Son, Inc. (the Cirelli corporation or the corporation); in 1975, Cirelli owned 96 percent and Clayton Miller owned the remaining 4 percent. Cirelli served as the corporation's president.
The Cirelli corporation was, during 1972 through 1975, a general contractor engaged primarily in the construction of buildings for State and local Governments. The corporation reported taxable income of $ 32,166.44 in 1972, $ 33,747.54 in 1973, $ 120,464.56 in 1974, and $ 93,081.01 in 1975. The Cirelli *337 corporation's working capital at the end of each year, i.e., current assets less current liabilities, increased as follows for the years 1970 through 1975:
Increase in Percentage increase Year Working capital working capital in working capital 1970 $ 102,782 1971 223,870 $ 121,088 118% 1972 456,535 232,665 104 1973 464,567 8,032 2 1974 843,622 379,055 82 1975 2,247,586 1,403,964 166 *107 On or about August 1, 1972, Barbara Leone, John Cirelli, Joyce Ann Cirelli, and Martha C. Cirelli, as custodian for Lucia Ann and Mary Cirelli, signed an agreement creating C Equipment Co. (the partnership), a partnership under Maryland law. *108
Aug. 1, 1972 Jan. 1, 1975 Barbara Leone 20 22 John Cirelli 17 20 Joyce Ann Cirelli 15 18 Mary Cirelli 11 13 Lucia Ann Cirelli 7 9 Neither Cirelli nor his wife was a partner in C Equipment Co. in an individual capacity. The partnership agreement provided that a partner could dispose of his or her partnership interest subject to the other partners' right of first refusal to purchase the interest at 3 times the offering partner's interest *338 in the partnership's book value. *109 only to the Cirelli corporation; the alleged business reason for the corporation's entering into these leases was to improve its bonding capacity. The "purchases" and "leases" by the partnership extended only to a portion of the equipment used by the Cirelli corporation. At all times during the taxable years at issue, the corporation itself owned the construction equipment.
No other business was conducted by the partnership during these years.
The partnership's property was always under the physical control of the Cirelli corporation; the partnership did not own or lease any premises where heavy equipment could be stored and did not own equipment capable of transporting such equipment. The partnership lacked the ability to acquire unsolicited business, as it had no telephone listing in its own name and did not hold itself out to others as being engaged in the equipment leasing business.
The partnership's leasing activities generated the following taxable income between 1972 and 1975: $ 5,288 in 1972, $ 16,824 in 1973, $ 35,197 in 1974, and $ 36,773 in 1975. *110 unexplained, 1-time distribution of $ 2,500 to Barbara in 1975.
*111 Cirelli viewed his role in the partnership as "advisory * * * because they [the children] were young at the very beginning"; *339 he received no income from the partnership for his services. According to Cirelli, his oldest child, Barbara, was "basically" the partner with "principal authority" for partnership decisions. *112 Partnership "meetings" were "held" at the Cirelli residence during the Sunday evening meal, at which time Cirelli "presented" his children with his views, which were never objected to, on what the partnership should do. Nevertheless, Cirelli in fact had total control over the partnership's affairs. He negotiated every sale to the partnership; he determined what the market rental rate was on each piece of equipment owned by the partnership; he signed every partnership check between 1972 and 1975 *340 *113 price $ 20,763) to the partnership for the very loader contracted for by the Cirelli corporation 8 days earlier. On August 22, 1972, the Milton James Co. paid the Cirelli corporation $ 4,082.28 for the loader it originally traded in. On the same day, the partnership paid the Milton James Co. $ 4,082.28, presumably out of funds loaned to it by Cirelli (see p. 337
supra ) and financed the balance of the loader's purchase price. *114 On December 27, 1972, a lease with purchase option on a Mustang loader s.n. 10521 was entered into in the partnership's name with the Free State Equipment Co. (Free State). During 1973, the partnership paid Free State $ 5,200 under the lease and then exercised the purchase option and acquired clear title to the loader by making a final payment, in December 1973, to Free State of $ 476.20. Under a month-to-month verbal agreement, the Cirelli corporation paid the partnership $ 520 per month (or $ 6,760 for the 13-month period of December 1972 through December 1973) for use of this loader, which it could have purchased outright for over a thousand dollars less.On September 8, 1973, the Cirelli corporation entered into a contract to purchase an office condominium in Florida so that the corporation would have an office for the branch it was starting in Florida. Cirelli later decided to have the partnership purchase the condominium. Consequently, at some point, the partnership acquired the property. *115 price plus interest; payments on the note were to be made "upon mutual agreement between the holder and maker of this note." The *341 partnership's records indicate that payments on the note were made at a monthly rate of $ 522.70. The condominium was rented to the corporation for $ 500 per month.
On May 13, 1974, the Cirelli corporation transferred to the partnership a Lull 7C Lift, which it owned, for $ 5,500 payable on account. The partnership traded in this lift for a Mustang loader s.n. 11292, which it rented to the corporation. The corporation paid the partnership $ 750 per month from May 13, 1974 through 1975, for the use of the loader. The partnership made no payment to the corporation on the $ 5,500 account payable in 1974; this*116 account was apparently paid off in July 1975 (after the corporation had paid the partnership almost twice that amount for the loader's use).
On August 31, 1974, the partnership acquired from the corporation a Melrose 600 Bobcat for $ 2,500, which was paid for on October 28, 1974. The corporation paid $ 750 per month rent from September 1974 through December 1975 (or a total of $ 12,000) for use of the Bobcat.
In 1975, while Cirelli was in Florida, he purchased a yacht (named by him the "Lady C"), which was being sold in a "distress sale," because it "looked like a good buy" and could be used in a yacht chartering service. On April 4, 1975, a corporate employee made a $ 5,000 deposit by corporate check on the "Lady C." The partnership's books indicate that on April 15, 1975, its cash account was debited by a $ 50,000 receipt from the Cirelli corporation *117 The yacht was sailed by Cirelli and others to Annapolis, Md., and docked at Cirelli's residence. *342 ULTIMATE FINDINGS OF FACT
C Equipment Co. was a sham and consequently not a valid partnership for Federal income tax purposes.
The yacht "Lady C" was not owned and*118 operated for profit but for the personal benefit of Charles J. Cirelli.
OPINION
We must first determine whether C Equipment Co. was a valid partnership for Federal income tax purposes in 1975. Respondent argues that we should focus on Cirelli's control over the partnership and, applying the doctrine of substance over form, reject Cirelli's attempt to direct the corporation's income to his (lower tax bracket) children.
Rule 142(a) . *119 Neither party disputes the fact that capital was a material income-producing factor in the ownership and leasing of equipment such as is involved herein.Section 704(e)(1) provides:SEC 704. PARTNER'S DISTRIBUTIVE SHARE.
(e) Family Partnerships --
(1) Recognition of interest created by purchase or gift. -- A person shall be recognized as a partner for purposes of this subtitle if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person.
section 704 is inapplicable "because it does not provide for allocation of income to persons who are not members of the Partnership. The Corporation is not a member of the Partnership, and thus,sec. 704 can not be invoked to reverse the alleged 'conduit' from the Corporation to the Partnership." Petitioners thus apparently contend that *343 respondent is attempting to use the regulations undersection 704(e) to allocate income to a nonpartner, i.e., the corporation, something he can do only by utilizing section 482 (allocation of income and deductions among taxpayers), a section respondent*120 has not relied upon herein.section 704(e) is directly applicable (an issue which we therefore need not decide). *121 He merely argues, and we agree, that the factors set forth insection 704(e) can be used as guides for determining whether a valid partnership existed. Moreover, we are satisfied that, irrespective of any direct or indirect use ofsection 704(e) , the doctrine of substance over form has a pervasive application which cuts across any specific provision of the Code. SeeGoldfine v. Commissioner , 80 T.C. 843">80 T.C. 843section 704(b) );Holladay v. Commissioner , 72 T.C. 571">72 T.C. 571649 F.2d 1176">649 F.2d 1176 (5th Cir. 1981) (same).sec. 704(e) ) is a factual issue to be determined from the totality of the circumstances.Sec. 1.704-1(e), Income Tax Regs. ;Ginsberg v. Commissioner , 502 F.2d 965">502 F.2d 965Pflugradt v. United States , 310 F.2d 412">310 F.2d 412Ketter v. Commissioner , 70 T.C. 637">70 T.C. 637605 F.2d 1209">605 F.2d 1209 (8th Cir. 1979). Family partnerships must be closely scrutinized by the courts, since the family relationship "so readily lends itself to paper arrangements having little or no relationship to reality."Kuney v. Frank , 308 F.2d 719">308 F.2d 719Commissioner v. Culbertson , 337 U.S. 733">337 U.S. 7332 C.B. 458">1951-2 C.B. 458 , *344 485-486; H. Rept. 586, 82d Cong., 1st Sess. 32-34 (1951),2 C.B. 357">1951-2 C.B. 357 , 380-381; W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, par. 14.01 (1977) (hereinafter McKee). "Mere shams" will not be recognized for Federal tax purposes.Spiesman v. Commissioner , 28 T.C. 567">28 T.C. 567260 F.2d 940">260 F.2d 940 (9th Cir. 1958);*123Fiore v. Commissioner , T.C. Memo. 1979-360636 F.2d 1208">636 F.2d 1208 (3d Cir. 1980).Two preliminary matters need to be addressed. First, petitioners argue that the formation of the partnership had a business purpose -- to establish an entity from which the Cirelli corporation could lease equipment; by leasing rather than purchasing equipment, so the argument goes, the Cirelli corporation could improve its working capital and thereby increase its bonding capacity. We find the bonding capacity argument meritless. In many of these transactions (for example, the Mustang loader s.n. 10521 and the Melrose 600 Bobcat), the corporation's bonding capacity suffered more from leasing the property, because the corporation paid more in the first year to rent the equipment than it would have cost to purchase (or keep) it. Moreover, even in those instances in which the corporation's bonding capacity may have been improved vis-a-vis purchasing the property directly, the amount of cash saved was insignificant when compared to the corporation's existing bonding capacity (see pp. 336-337
supra ) and could not have*124 been a good-faith reason for the transactions.We recognize that, in applying
section 704(e) , the test may no longer be "whether the parties acted in good faithwith a business purpose in joining together to conduct the partnership business." (Emphasis added.) SeePflugradt v. United States, supra at 415section 704(e) , it is a relevant factor to be taken into account in determining whether the parties herein joined together in good faith. See p. 348infra . This is particularly true where, as is the case herein, the petitioners have placed great emphasis *345 on the presence of such a purpose. *125 The second preliminary matter concerns petitioners' contention that, since the partnership agreement provided that each partner had the right to sell his or her interest in the partnership, we must find that each partner in fact owned his or her capital interest. Petitioner's position is not valid. InKetter v. Commissioner, supra Pflugradt v. United States, supra at 417and the trusts' rights under the partnership agreement to liquidate their interests , the controls retained by Ketter and the manner in which the partnership conducted its business required that the trusts not be recognized undersection 704(e) as owners of the partnership interests. See70 T.C. at 648 .The regulations under
section 704(e) list a series of factors to be considered in determining whether a partner is, in fact, the real owner of a capital interest in the partnership. The factors to be considered, which are illustrative rather than exhaustive (Ketter v. Commissioner, supra sec. 1.704-1(e)(2), Income Tax Regs. *346 The critical fact in this case is the absolute control Cirelli exercised over every *127 aspect of the partnership and its business. Notwithstanding the provision in the partnership agreement (and Cirelli's testimony) that Barbara was the partnership's managing partner, the facts clearly indicate that Cirelli, rather than any of his children, controlled C Equipment Co. to the point where the Cirelli children cannot be viewed as partners in the company.
Cirelli's testimony that he merely offered advice to his children and that they made the partnership (management) decisions is simply not borne out by the record. The idea to form the partnership was Cirelli's. He was the person who determined that the corporation needed a piece of equipment and that the partnership should acquire it. It appears from the record that, at least in the instance of the yacht, *128 ever exercised any independent judgment. Since every piece of construction equipment purchased by the partnership was continuously rented by the Cirelli corporation
*129 Cirelli's control over the property after it was purchased is also important. The partnership never leased its property between 1972 and 1975 to anyone other than the Cirelli corporation; indeed, Cirelli would never have caused the partnership to acquire property he did not anticipate the corporation would have a continuing use for. Moreover, the *347 partnership lacked the ability to store or transport its equipment and hence could not take possession of equipment no longer needed by the corporation, store the equipment, or transport it to other possible lessees.
The manner in which the partnership's business was conducted is also indicative of the children's status as nonpartners. Petitioners have presented no evidence that the children participated in any of the transactions between C Equipment Co. and those who sold or financed the property purchased by the partnership. Statements which Cirelli might have made to these persons, most of whom he had previously dealt with in his capacity as president of the Cirelli corporation, to the effect that he was acting as an agent for a partnership composed of his children, would be insufficient, in and of themselves, to establish*130 that the children in fact owned interests in the partnership; such a simple requirement would, in this case, elevate form over substance.
Fiore v. Commissioner, supra supra ) and by the fact that the general check ledger was kept by his secretary.The final factor which persuades us that Cirelli completely controlled the partnership was Cirelli's inability, on the witness stand, to keep his or his corporation's actions separate from the partnership's actions. For example, Cirelli testified, in discussing the partnership's problems with renting out the *348 condominium after the corporation moved out, that "
we had to appear in court and -- well, they, you know, had to appear." (Emphasis added.) Similarly, in a classic Freudian slip, Cirelli testified that "we [the corporation] have leased our own equipment -- I mean leased equipment from C Equipment Company." Such confusion would not have occurred if the children had exercised sufficient control over the partnership to justify treating them as owning their partnership interests.We are satisfied that, under the guidelines articulated in the regulations*132 under
section 704(e) , petitioners have failed to establish that C Equipment Co. was a valid, existing partnership during the years at issue.Ketter v. Commissioner, supra .Commissioner v. Culbertson , 337 U.S. at 742and acting with a business purpose intended to join together in the present conduct of the enterprise." (Emphasis added.) ComparePoggetto v. United States , 306 F.2d 76">306 F.2d 76supra at par. 14.02. See alsoCarriage Square, Inc. v. Commissioner , 69 T.C. 119">69 T.C. 119section 704(e) are equally applicable in applying this test. Moreover, in the context of the foregoing language fromCulbertson , the absence of business purpose has independent significance. See pp. 342-345supra .The long and the short of the matter is that petitioners have not carried their burden of *133 proof that the Cirelli children joined together in good faith to form C Equipment Co. (the
Culbertson test) or ever acquired ownership interests in the partnership (thesec. 704(e) test by analogy). Accordingly, we find that the partnership was a sham, i.e., nothing more than a conduit for the corporation created out of paper concepts and operated by Cirelli on behalf of the corporation in a manner which simply consisted of carrying on the business of the corporation as if such concepts did not exist. SeeKuney v. Frank, supra at 720The net result of the foregoing is that the property "owned" by the partnership will for tax purposes be treated as owned by the corporation. As a consequence, the "rentals" paid by the corporation to the partnership for use of its own property cannot qualify under section 162 as ordinary and necessary *349 business expenses. infra) will be allowed to the*134 corporation, as respondent has done in the corporation's deficiency notice. Additionally, we note, at this point, that petitioners have presented no evidence to sustain the deduction by the corporation of $ 4,640.37 for auto and truck expenses and travel and entertainment expenses. Accordingly, the disallowance of that deduction is sustained. See also note 2
supra .*135 We turn now to the questions in respect of the yacht expenses. In his deficiency notices to the partners of C Equipment Co. respondent disallowed the deduction of $ 10,853 for yacht expenses, including depreciation. In his deficiency notice to the corporation, respondent disallowed $ 6,500 rental expense. In his deficiency notice to the Charles Cirellis, respondent included $ 9,813 of the yacht expenses as constructive dividends from the corporation. *136 questions: (a) Was the yacht used in a trade or business of the corporation, and (b) have the requirements of *350 section 274(a) been satisfied, since the yacht was, at best, an entertainment facility (see
Ashby v. Commissioner , 50 T.C. 409">50 T.C. 409The yacht was never advertised as being available for charter. It was never "chartered" by anyone other than Cirelli or the corporation. There is no evidence that there was any bona fide objective that the chartering service which was allegedly contemplated would be profitable, and the record indicates that in 1975 the operation of the yacht produced a substantial loss. *137 appears, those occasions could have involved personal use by Cirelli or members of his family. In light of the foregoing and based upon our evaluation of the record as a whole, we are satisfied that petitioners have not carried their burden of proof that the yacht was acquired for any purpose other than the personal benefit of Cirelli.
Challenge Manufacturing Co. v. Commissioner , 37 T.C. 650">37 T.C. 650International Artists, Ltd. v. Commissioner , 55 T.C. 94">55 T.C. 94Transport Manufacturing & Equipment Co. v. Commissioner , 434 F.2d 373">434 F.2d 373International Trading Co. v. Commissioner , 275 F.2d 578 (7th Cir. 1960)American Properties, Inc. v. Commissioner , 28 T.C. 1100">28 T.C. 1100262 F.2d 150">262 F.2d 150 (9th Cir. 1958);Ashby v. Commissioner, supra ; Carter v. Commissioner , T.C. Memo. 1978-202645 F.2d *351 784 (9th Cir. 1981) . *139 We must next determine whether any of the funds transferred from the corporation to the partnership are taxable to Cirelli as constructive dividends. Respondent determined in the deficiency notice that the $ 9,813.24 in yacht expenses, the $ 18,946.92 in cash disbursements by C Equipment Co. to the children, *140 It is clear that a distribution need not be to a shareholder to be taxable as a constructive dividend; the distribution need only be for the shareholder's benefit.Engineering Sales, Inc. v. United States , 510 F.2d 565">510 F.2d 565Hardin v. United States , 461 F.2d 865">461 F.2d 865Sparks Nugget, Inc. v. Commissioner , 458 F.2d 631 (9th Cir. 1972)Jack's Maintenance Contractors, Inc. v. Commissioner , 703 F.2d 154">703 F.2d 154We have already determined that the yacht served little, if any, business purpose but, rather, was utilized for the Cirelli family's personal enjoyment. Consequently, the yacht expenses determined by respondent to be constructive dividends are taxable to Cirelli.
United Aniline Co. v. Commissioner , 316 F.2d 701 (1st Cir. 1963)Challenge Manufacturing Co. v. Commissioner, supra .United Aniline Co. v. Commissioner, supra at 703Challenge Manufacturing Co. v. Commissioner, supra at 663International Trading Co. v. Commissioner , T.C. Memo. 1958-104275 F.2d 578">275 F.2d 578 (7th Cir. 1960). In view of our holding that the partnership was a sham, the amounts of cash distributed to the children constitute constructive dividends to Cirelli (see note 29supra ).Engineering Sales, Inc. v. United States, supra ; Hardin v. United States, supra ; Sparks Nugget, Inc. v. Commissioner, supra .Decisions will be entered under Rule 155 .Footnotes
1. Cases of the following petitioners are consolidated herewith: Lucia Ann Cirelli, docket No. 14918-82; Mary Cirelli, docket No. 14919-82; Jack Leone and Barbara Leone, docket No. 14963-82; John Cirelli, docket No. 14991-82; Charles J. Cirelli and Martha C. Cirelli, docket No. 14992-82; Charles J. Cirelli & Son, Inc., docket No. 15244-82.↩
2. Charles J. and Martha C. Cirelli have not argued, other than in their petition to this Court, that a $ 200 deduction for safety shoes and equipment disallowed by respondent was properly deducted; no evidence was presented on this matter. Consequently, we find that the Cirellis have either conceded this issue or failed to carry their burden of substantiating this deduction.↩
3. Our references in this opinion to C Equipment Co. as "the partnership" are for convenience only and should not be interpreted as recognizing the partnership's validity for Federal tax purposes. The same is true with respect to references such as "sale," "purchase," "acquire," "lease," and "rent" or variants thereof.↩
4. The right of first refusal would be waived if the partnership interest was conveyed to the partner's parents, surviving spouse, descendants, and/or a charitable corporation controlled by any of them.↩
5. The partnership reported total income of $ 7,004.95 and total deductions of $ 1,717.37 ($ 475.83 in finance charges, $ 1,235.89 in depreciation, and $ 5.65 in bank charges) in 1972; total income of $ 22,613.08 and total deductions of $ 5,789.58 ($ 1,596.88 in finance charges and $ 4,192.70 in depreciation) in 1973; total income of $ 44,764.65 and total deductions of $ 9,567.42 ($ 2,775.10 in finance charges, $ 163.28 in taxes, $ 6,306.04 in depreciation and $ 323 in insurance) in 1974; total income of $ 63,102.85 and total deductions of $ 26,329.78 ($ 1,040 in rent, $ 4,438.89 in finance charges, $ 2,383.48 in taxes, $ 5,720.12 in repairs, $ 10,566.55 in depreciation, and $ 2,180.74 in other deductions) in 1975.↩
6. Distributions for Federal and State taxes and for education for each partner for each year are as follows:
↩ Year Total Barbara John Joyce Ann Lucia Ann Mary 1972 0 0 0 0 0 0 1973 Federal $ 338 0 $ 101 $ 79 $ 79 $ 79 State 10 $ 10 0 0 0 0 1974 Federal 2,478 660 1,168 260 130 260 State 1,023 340 289 88 218 88 Education 4,092 0 3,821 271 0 0 1975 Federal 7,883 1,200 1,702 1,764 1,601 1,616 State 4,479 2,100 663 610 551 555 Education 4,085 0 3,155 930 0 0 7. The partnership agreement provided that Barbara, as managing partner, had authority to make all decisions relating to the management and affairs of the partnership in the ordinary course of business. Major decisions, such as the sale of partnership equipment, required the consent of partners with partnership interests totaling more than 50 percent.↩
8. Petitioners contend that Cirelli did not have exclusive authority over the partnership bank account. The only evidence of record, aside from the fact that Cirelli signed all checks, is testimony of Leone that he acquired signing authority some time between 1976 and 1978. Petitioners have not carried their burden of proof with evidence to support their contention.
Rule 142(a), Tax Court Rules of Practice and Procedure.↩ 9. The partnership maintained no other books and records, except for summaries needed to complete partnership tax returns. These summaries, which were "supervised" by Barbara, were submitted to the accountant hired by the Cirelli corporation to do its corporate tax returns, who then prepared the partnership returns at no charge to either the partnership or the corporation.↩
10. The balance was financed, through the Milton James Co., with Commercial Credit Equipment Co. During 1972 through 1975, the Milton James Co. was not primarily concerned with a construction equipment purchaser's creditworthiness so long as the buyer put 25 percent down on the equipment, because the resale market for those products was such that the equipment could easily be resold for the amount owed.↩
11. No documentation of such purchase by the partnership was ever presented to this Court. A closing statement dated Dec. 6, 1973, listed the buyer as "Cirelli." A closing statement of the later sale of the condominium dated May 12, 1978, listed C Equipment Co. as the seller.↩
12. It appears from the testimony of Cirelli that this amount was intended to be a loan from the corporation and that it was subsequently repaid, but the record is unclear as to if and when such repayment occurred.↩
13. Cirelli charged the partnership $ 1,040 in 1975 for dockage fees.↩
14. The partnership charged the corporation $ 5,000 for 20 rentals and charged Cirelli $ 1,500 for 6 rentals.↩
15. It is unclear from the record what rent was charged and if or how the partnership acquired title to this property.↩
16. In
Snyder v. Westover , 217 F.2d 928">217 F.2d 928217 F.2d at 932↩ .17. All Rule references are to the Rules of Practice and Procedure of this Court, and all section references are to the Internal Revenue Code of 1954 as amended and in effect during the years at issue.↩
18. See
Foster v. Commissioner , 80 T.C. 34">80 T.C. 3419. See, however,
Ketter v. Commissioner , 70 T.C. 637 (1978)605 F.2d 1209">605 F.2d 1209↩ (8th Cir. 1979).20. We are confirmed in our approach by the legislative history of
sec. 704 's predecessor, which focused on whether a "partner" is the "real owner" of the partnership interest and states that "The amendment leaves the Commissioner and the courts free to inquire in any case whether the donee or purchaser actually owns the interest in the partnership which the transferor purports to have given or sold him. Cases will arise where the gift or sale is a mere sham." S. Rept. 781, 82d Cong., 1st Sess. 39 (1951),2 C.B. 458">1951-2 C.B. 458 , 486; H. Rept. 586, 82d Cong., 1st Sess. 33 (1951),2 C.B. 357">1951-2 C.B. 357 , 381. See alsoSpiesman v. Commissioner , 260 F.2d 940">260 F.2d 94028 T.C. 567">28 T.C. 567↩ (1957).21. Technically, the business purpose asserted by petitioners was that of Cirelli and the corporation. But we think that, if such purpose existed, it could properly have been imputed to the children.↩
22. The only evidence that the partners may have been consulted in advance about the yacht's purchase is the vague testimony of John Cirelli, which appears inconsistent with the implications of Charles Cirelli's testimony about purchasing the yacht at a distress sale while he was in Florida.↩
23. The condominium was apparently rented to others after the Cirelli corporation closed its business efforts in Florida. However, problems with the tenants developed, and it was decided in 1978 to sell the condominium rather than deal with clients who paid their bills less promptly than the Cirelli corporation. The only other piece of nonconstruction property purchased by the partnership was the yacht, which was chartered in 1975 only by Cirelli (both for personal and allegedly "corporate" uses, see pp. 350-351
infra↩ ).24. Similarly, permitting the simple execution of a partnership agreement and the opening of a partnership checking account to control would elevate form over substance.↩
25. We would simply note that had we found a valid partnership for tax purposes, petitioners would still have had to overcome the argument that the rent was nondeductible because the sale-leasebacks should not be recognized for tax purposes. While some of the transactions may not have been sale-leasebacks in the technical sense of the term, the interrelationships between the corporation, the partnership, and the outside party were sufficiently entangled and the bonding capacity argument so meritless that we might well have found, had we been called upon to do so, that the Cirelli corporation purchased the properties from the outside parties, sold them to the partnership, and then leased them back but that the sales and leasebacks should not be recognized for tax purposes. See generally
Shaffer Terminals, Inc. v. Commissioner , 16 T.C. 356">16 T.C. 356194 F.2d 539">194 F.2d 539 (9th Cir. 1952);Perry v. United States , 520 F.2d 235">520 F.2d 235Carroll v. Commissioner , T.C. Memo. 1978-173Shaffer Terminals, Inc. v. Commissioner, supra ; Armston v. Commissioner , 12 T.C. 539">12 T.C. 539W. H. Armston Co. v. Commissioner , 188 F.2d 531">188 F.2d 531↩26. The only yacht expense that was disallowed to the partnership and not determined by respondent to be a constructive dividend to Cirelli was the $ 1,040 dock rental expense paid to Charles and Martha Cirelli which had already been included in their income.↩
27. The partnership charged the Cirelli corporation $ 5,000 and Cirelli $ 1,500 for use of the yacht (see note 32
infra↩ ) and claimed deductible yacht expenses of $ 10,853 ($ 5,508 for repairs, $ 842 for insurance, $ 247 for gasoline, $ 1,040 for dock rent, and $ 3,216 for depreciation).28. See also
Progressive Engineering, Inc. v. Commissioner , T.C. Memo. 1975-82Hofmann Bros. Realty Corp. v. Commissioner , T.C. Memo. 1963-320Bruce v. Commissioner , T.C. Memo. 1956-96Sprott v. Commissioner↩ , a Memorandum Opinion of this Court, dated Feb. 17, 1953, relied upon by petitioners, are clearly distinguishable on their facts.29. Respondent limited his assertion of a constructive dividend for 1975 (the only year before us in respect of Cirelli and his wife), to this amount, although his theory that the partnership was a sham might have supported an assertion of a constructive dividend in the total amount paid by the corporation to the partnership. The amount asserted is represented by the payments by the partnership in 1975 for taxes and the education of the children and the $ 2,500 to Barbara. See p. 338
supra↩ .30. These expenses, which were listed in two groups (auto and truck expenses and travel and entertainment expenses) in the corporation's deficiency notice, were listed in Charles and Martha Cirelli's deficiency notice only as travel and entertainment expenses.↩
31. Given the basis for our conclusion as to the purpose of the acquisition and operation of the yacht, we have no need to apply the rule that a disallowance of expenses under sec. 274 does not necessarily result in a constructive dividend.
Foster v. Commissioner , 80 T.C. 34">80 T.C. 3432. At a fair rental of $ 250 per day (see note 14
supra↩ ), Cirelli would have had to use the yacht on only 40 occasions to have had the fair rental exceed the $ 9,813 expenses charged to him as a constructive dividend. That number of occasions is not so large as to make it unlikely that, on the basis of the record herein, the yacht would have been used that frequently by him. We note that Cirelli was "charged" $ 1,500 by the partnership for the use of the yacht on six occasions. However, the record does not show that such amount was in fact paid by Cirelli during 1975. Under these circumstances, Cirelli is not entitled to any credit for the $ 1,500 against the yacht expenses being charged to him as a constructive dividend.33. See also
Lasker v. Commissioner↩ , a Memorandum Opinion of this Court dated Jan. 23, 1952.
Document Info
Docket Number： Docket Nos. 14917-82, 14918-82, 14919-82, 14963-82, 14991-82, 14992-82, 15244-82
Judges： Tannenwald
Filed Date： 2/28/1984
Precedential Status： Precedential
Modified Date： 11/14/2024