72 T.C. 294">*295 The Commissioner determined deficiencies in the petitioner's Federal income taxes as follows:

The parties have settled or conceded certain adjustments. The issues left for decision are: (1) Whether a guaranteed payment within the meaning of section 707(c) of the Internal Revenue Code of 1954¹ made by a partnership engaged in a trade or business is deductible even though it does not meet the requirements of section 162(a); (2) whether certain guaranteed payments were ordinary and necessary expenses or capital expenditures; (3) whether1979 U.S. Tax Ct. LEXIS 125">*129 grapevines are "tangible personal property" within the meaning of section 179 and therefore eligible for the additional first-year depreciation allowance provided by such section; and (4) what is the fair market value of certain grapevines.

72 T.C. 294">*296 FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioner, Sidney Kimmelman, a.k.a. Sydney Omarr, maintained his legal residence in Santa Monica, Calif., at the time he filed his petition in this case. He filed his Federal income tax returns for 1970, 1971, and 1972 with the Office of the Internal Revenue Service at Ogden, Utah.

Occidental Land Research (OLR) is a general partnership formed by William R. Decker and John Decker (the Deckers) in 1969. Since then, OLR has been active in real estate syndications in the areas of Ontario, Calif., and Cucamonga, Calif., and has organized approximately1979 U.S. Tax Ct. LEXIS 125">*130 75 limited partnerships for such purpose. In 1977, OLR was a general partner in at least 44 partnerships, 37 of which held land improved by grapevines. Prior to 1969, the Deckers were also active in real estate endeavors.

Occidental Construction Co., Inc. (OCC), was organized by the Deckers in 1963. From 1963 to 1968, OCC was engaged primarily in real estate development -- building and promoting residential housing. After 1968, OCC ceased its real estate development activities and, except for its involvement in real estate syndication, was essentially a dormant corporation. However, just prior to trial, OCC again became actively engaged in real estate development.

During portions of 1971 and 1972, the petitioner was a limited partner in five limited partnerships (the partnerships): Devore Rochester, Ltd. (Devore); Redwood Baseline, Ltd. (Redwood); Rochester Seventh Street, Ltd. (Rochester Seventh); Rochester Eighth Street, Ltd. (Rochester Eighth); and Sultana Baseline, Ltd. (Sultana). OLR is the general partner in Devore, Redwood, Rochester Seventh, and Rochester Eighth. Richard Blindell, who was a salesman for OLR at one time, is the general partner in Sultana. OCC performed1979 U.S. Tax Ct. LEXIS 125">*131 the same services for all five partnerships, and Sultana was operated in the same manner as the limited partnerships in which OLR was the general partner; therefore, in describing the operations of the partnerships, a reference to OLR in its capacity as a general partner will include Mr. Blindell.

During the late 1960's and early 1970's, there was a marked increase in the consumer demand for wine, and such increased 72 T.C. 294">*297 demand, together with generally favorable economic conditions, combined to create a boom in the wine industry. To meet the new demand for wine, thousands of acres of land, especially in northern California, were being purchased and converted to vineyards.

At the same time that vineyards were being developed in northern California, vineyards in southern California, especially in the Ontario-San Bernardino area, were suffering serious setbacks. A combination of smog, adverse weather conditions, industrial encroachment, and land speculation had seriously reduced the number of acres devoted to vineyards and diminished the productivity of the remaining acreage.

The Deckers were aware of the declining fortunes of the vineyards in the Ontario-San Bernardino area. 1979 U.S. Tax Ct. LEXIS 125">*132 Relying on their years of experience in real estate, they believed that much of the land devoted to vineyards in this area was in the path of industrial or residential development in the not-so-distant future. In their view, these unproductive vineyards represented a sound investment opportunity; such land could be purchased at reasonable prices, held for several years, and then sold at appreciated prices for industrial or residential purposes.

In time, the Deckers became involved in syndicating investments in real estate in the Ontario-San Bernardino area through limited partnerships. By 1971, the Deckers, through OLR and OCC, had organized approximately 33 limited partnerships which had invested in real estate. In addition, they had established a standard procedure, or modus operandi, for handling such investments.

In a typical syndication handled by OLR, the Deckers, acting through OCC, located the land to be purchased and then negotiated on behalf of OCC for its purchase. It was their belief that conducting negotiations through OCC, a real estate development corporation, offered certain psychological advantages over conducting their business through OLR, a real estate investment1979 U.S. Tax Ct. LEXIS 125">*133 business. Once the desired real estate had been identified, a team of experts employed by either OCC or OLR proceeded to make the necessary arrangements for OCC to purchase the land. For example, a civil engineer was hired to survey the land and to search the title to the land. A title insurance company insured title to the land. An accounting firm was retained to establish and maintain the books and records for 72 T.C. 294">*298 the new enterprise. In addition, a "banking connection" was used to set up the deeds of trust executed by OCC in connection with the purchase. One express condition of the deeds of trust was the following:

It is a specific stipulation of this Deed of Trust that the grape vines on the real property described herein are hereby considered personal property and are EXCLUDED FROM THE SECURITY GIVEN HEREON; further that the Trustor herein has a right to remove, destroy or relocate any and all said vines.

Finally, an escrow agent was used to handle the actual purchase. Each member of the team was paid a fee for his services.

At or around the same time, OLR issued a prospectus for the limited partnership. In the typical prospectus, the purchase of the real estate1979 U.S. Tax Ct. LEXIS 125">*134 by the limited partnership was described as "an outstanding opportunity for investment." Also, it was "the general intention of the partnership to hold the property for approximately three to five years unless previously resold at a profit." The factors which the prospectus emphasized to promote investment all pointed to the resale of the land in the future for industrial or residential purposes. In addition, the Deckers prepared a limited partnership agreement.

At the time OLR and OCC performed most of these services, the particular limited partnership to which the land would be ultimately transferred was not yet organized. OCC in effect acted as a nominee for parties to be named later.

OCC purchased the land on varying terms. Generally, a small downpayment was required. In addition, OCC executed a deed of trust with respect to the remainder of the purchase price. Subsequently, OCC resold the real estate to a limited partnership for exactly the amount it had paid for it. The limited partnership assumed the deed of trust and executed a promissory note. In addition, OLR was paid a "general partner fee" which varied with the cost of the real estate. The attorney retained by 1979 U.S. Tax Ct. LEXIS 125">*135 OCC and OLR was paid a separate fee, and OCC and OLR did not receive a broker's fee or other real estate commission upon the sale of the various parcels to the limited partnerships.

Generally, if the land was improved by grapevines, OLR attempted to negotiate a lease with a local vineyard operator. In a typical lease, the partnership received a percentage of gross receipts from grape sales, and the lessee incurred and paid all of the expenses of maintaining the vines. However, OLR was not 72 T.C. 294">*299 always successful in leasing all of its syndicated properties which were improved by grapevines. The partnerships were obligated to pay the real property taxes.

The partnerships involved in this case are typical of the land syndications organized by OLR. Each was organized toward the end of the petitioner's taxable year. Summarized below is information regarding the date the partnerships were formed and the date OCC transferred the real estate to them:

For each of the1979 U.S. Tax Ct. LEXIS 125">*136 partnerships, William Decker allocated the purchase price between the land and the vines based on general observations; he had no established criteria for making such allocations. A "general partner fee" was charged the partnerships by the general partner equal to approximately 10 percent of the sum of the purchase price of the land and such fee (10-percent fee). Summarized below is the acreage, purchase price, allocation of the purchase price to land and vines, and the 10-percent fee for each of the partnerships:

The downpayment paid by the partnerships varied between 2 and 10 percent of the purchase prices. Each partnership also agreed to pay to the general partner a yearly management fee of 1 percent of "the original purchase price."

The partnerships met with varying degrees of success in their efforts to1979 U.S. Tax Ct. LEXIS 125">*137 lease the vineyards. The grape production on Devore and Redwood was insufficient to produce a profit, and therefore, those vineyards could not be leased. The maintenance of those 72 T.C. 294">*300 vineyards varied with the availability of funds, though many of the vines were living at the time of trial.

The grape production on Rochester Seventh and Rochester Eighth was sufficient by 1974 to lease the properties. While these vineyards have been maintained adequately since 1974, they produced no income for the limited partnerships prior to 1974, and thereafter, any such income to the partnerships was de minimis.

The Sultana vineyards did not generate any income, but they also did not generate any expenses for the partnership; the partnership agreed with a local vineyard operator that he could have the grapes if he would maintain the vines.

The partnerships were not concerned, however, with the inability of the vineyards to generate current income, because they did not purchase the properties for that purpose. With respect to the vines, the partnerships were merely concerned with keeping them alive. Most of the vines involved herein were planted around the turn of the century.

At about 1979 U.S. Tax Ct. LEXIS 125">*138 the same time as the Deckers became involved in real estate syndications, they also became interested in whether grapevines could be transplanted. They were fully aware of the fact that the thousands of acres of new vineyards in northern California were uniformly established by planting slips. A "slip" is a joint cut from a mature vine, which is permitted to sprout in a nursery and is then transplanted; it generally requires 5 years for a slip to become a mature vine. In addition, they knew that transplanting mature vines was unheard of in the wine industry. It was uncertain whether grapevines could be successfully transplanted because of their tap roots, which extended vertically into the ground for several feet. It was equally unclear whether a transplant program was economically feasible, whether the equipment to successfully carry out a major transplant program existed, and what would be the mechanics or logistics of such a program. Yet, they believed that if a transplant program could be conducted successfully, new vineyards could be established much more quickly than by the planting of slips.

After awhile, the Deckers contacted viticulturists and ranchers to get their views1979 U.S. Tax Ct. LEXIS 125">*139 on the matter. Then, they conducted time and labor studies, the results of which they converted into pro forma costs. From an economic standpoint, they considered each varietal available for transplantation to be of equal economic 72 T.C. 294">*301 value because they believed that the price and productivity of the various varietals were inversely related. They also decided to transplant the vines only when they were dormant, which occurred from around September to March each year. The vines were to be transplanted bare-rooted, i.e., completely removed from the soil. All of the vines would be transplanted from vineyards in the Ontario, Calif., area to northern California.

In February 1972, the Deckers transplanted 65 vines in a single row on land they had rented for that specific purpose in northern California. However, these vines did not fare very well. Many of them were damaged, though it was not clear whether a frost subsequent to the transplant, or the transplant itself, caused the damage. The cost of the transplant far exceeded the Deckers' estimates. In February 1973, the Deckers extended the row by transplanting an additional 40 vines.

In February 1974, the Deckers used the1979 U.S. Tax Ct. LEXIS 125">*140 knowledge acquired from the earlier two transplants to transplant 4 acres of vines in the Fresno, Calif., area. During their first year, the vines produced approximately the same quantity of grapes as they produced in the Ontario area, which was 2 to 4 tons per acre. However, in the second year, they produced 6 to 8 tons of grapes per acre. These grapes were never harvested commercially. Again, the actual cost of the operation exceeded the estimates.

In late 1974 and early 1975, the boom in the wine industry ended. Though demand for wine continued strong, the supply of grapes far exceeded the available crushing capacity, so the price of grapes declined. As a consequence, there was no longer a need for additional vineyards. In view of the economic conditions, OLR postponed further experimentation with and consideration of its transplant program.

On their Federal returns for the years at issue, the partnerships deducted the 10-percent fee and claimed depreciation and an investment credit on the value of the vines as determined by the Deckers. Two of the partnerships also claimed additional first-year depreciation on such vines. In his Federal income tax returns for the years1979 U.S. Tax Ct. LEXIS 125">*141 at issue, the petitioner reported his distributive share of the partnerships' income and losses. After an audit of the partnership returns, the Commissioner determined that the value of the vines should be reduced, resulting in a reduction in the allowable depreciation and investment credit, and that the 10-percent fee was not deductible. In the notice of 72 T.C. 294">*302 deficiency issued to the petitioner, the Commissioner made corresponding adjustments in the petitioner's distributive shares of partnership income and losses.

For purposes of the notice of deficiency, the Commissioner determined that the grapevines had the following values:

At the trial, the Commissioner presented the testimony of an expert witness who concluded that some of the vines had a different value than that determined by the Commissioner in his deficiency notice. Accordingly, the Commissioner adopted the values found by his expert and now maintains that the grapevines had the following values:

1979 U.S. Tax Ct. LEXIS 125">*142 OPINION

The first issue for decision is whether guaranteed payments under section 707(c) from the partnerships to OLR are currently deductible by the partnerships without regard to the requirements of sections 162 and 263.

Section 707(c) provides:

SEC. 707(c). Guaranteed Payments. -- To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and section 162(a) (relating to trade or business expenses).

The petitioner argues that the payments at issue are guaranteed payments under section 707(c) and, as such, are automatically deductible by the partnerships irrespective of whether they are capital expenditures under section 263. The parties agree that 72 T.C. 294">*303 the fee is a guaranteed payment within the meaning of section 707(c), but it does not follow that such payment is automatically deductible.

In Cagle v. Commissioner, 63 T.C. 86">63 T.C. 86 (1974), affd. 539 F.2d 409">539 F.2d 409 (5th Cir. 1976), the same issue was squarely1979 U.S. Tax Ct. LEXIS 125">*143 presented to and decided by this Court. After reviewing the legislative history of section 707(c), the Court observed that the pre-1954 treatment of transactions between partners and partnerships was confused and that to eliminate such confusion, Congress decided to employ in the 1954 Code the entity, rather than the aggregate, approach to such transactions. (63 T.C. 86">63 T.C. 93-94.) We further stated at pages 94-95:

Section 707(c) states that for the purposes of sections 61(a) and 162(a) only shall payments to a partner for services, to the extent determined without regard to the income of the partnership, be considered as made to one who is not a member of the partnership. Clearly section 707(c) itself does not require that any guaranteed payment be automatically deductible under section 162(a). Rather, its import is that such a payment for services may qualify as a section 162(a) expense of the partnership since the entity theory of partnerships is employed therein to allow that result * * *

If we were to allow a section 162(a) deduction in the case of a partner's rendering services to his partnership which are capital in nature, it would be the only1979 U.S. Tax Ct. LEXIS 125">*144 instance that such a deduction would be allowed for a capital expenditure. We see no reason why employment of the entity theory of partnerships in this facet of partnership taxation should require the automatic deductibility of guaranteed payments and hence make such a holding an anomaly in tax law as far as capital expenditures are concerned. * * *

[Emphasis in original.]

Our decision in Cagle was appealed to, and affirmed by, the Court of Appeals for the Fifth Circuit.

Since Cagle, there has been no change in the law which would support a different result. To the contrary, section 707(c) was amended by section 213(b)(3) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1547, to clarify that guaranteed payments under section 707(c) must meet the requirements under both sections 162 and 263. In the committee reports accompanying the bill which eventually became the Tax Reform Act of 1976, our decision in Cagle was expressly approved and endorsed by the House Ways and Means Committee and the Senate Finance Committee, both as a statement of what the law was prior to 1976, and as a statement of what the law should be. S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 130-132;1979 U.S. Tax Ct. LEXIS 125">*145 H. Rept. 94-658 (1976), 1976-3 C.B. (Vol. 2) 695, 812-814.

72 T.C. 294">*304 After carefully considering the petitioner's arguments, we conclude that they are merely repetitious of those raised, fully considered, and rejected by us and the Fifth Circuit in Cagle. A reading of the legislative history of section 707(c) shows clearly that Congress was concerned with the question of whether to adopt the entity or aggregate approach to the treatment of partnerships for purposes of determining how to treat a guaranteed payment. In that legislative history, Congress made clear that it was adopting the entity approach and pointed out the consequences of that approach, including the fact that the payment would be deductible by the partnership if it constituted a business expense. There is absolutely no indication that Congress intended to depart from the well established distinction between ordinary and necessary business expenses and capital expenditures, and we are altogether confident that if Congress had wished to make capital expenditures deductible, it would have done so clearly. Accordingly, we conclude that Cagle was correctly decided, and we shall adhere1979 U.S. Tax Ct. LEXIS 125">*146 to and follow our holding in that case.

Next, we must decide whether the 10-percent fees are currently deductible or are capital expenditures. The petitioner argues the fees are ordinary and necessary business expenses and therefore deductible, whereas the Commissioner argues the fees were incurred in connection with organizing and syndicating the partnerships and therefore are capital expenditures.

Section 162 generally allows deductions for ordinary and necessary business expenses. Under section 263, capital expenditures are not deductible. Though the line separating ordinary business expenses from capital expenditures is not always clearly marked, it is generally true that the term "business expense" includes only those expenditures which are a part of the current cost of operating the business. "When, however, an expenditure is made for the acquisition of an asset the useful life of which will extend beyond the year in which cost is incurred, such expenditure is considered as a capital item, and is not generally deductible as a business expense." ( Cagle v. Commissioner, 539 F.2d at 415.) Sec. 1.263(a)-1 and 2, Income Tax Regs.

Expenditures incurred1979 U.S. Tax Ct. LEXIS 125">*147 in connection with the organization and syndication of limited partnerships are capital in nature and, therefore, not currently deductible. 63 T.C. 86">Cagle v. Commissioner, 72 T.C. 294">*305 ; Meldrum & Fewsmith, Inc. v. Commissioner, 20 T.C. 790">20 T.C. 790, 20 T.C. 790">807 (1953), affd. 230 F.2d 283">230 F.2d 283 (6th Cir. 1956). ² As part of the Tax Reform Act of 1976, section 709 was enacted to deal with such fees. Section 709(a) expressly provides that syndication fees are not deductible and that, except as provided by section 709(b), organization fees are not deductible. Section 709(b) allows a partnership to elect to amortize and deduct over a period of not less than 60 months its capital expenditures incurred in organizing the partnership. S. Rept. 94-938, supra; H. Rept. 94-658, supra. Such provision parallels the election available to corporations under section 248. However, section 709(b) applies only to organization fees paid or incurred in taxable years beginning after December 31, 1976. Tax Reform Act of 1976, Pub. L. 94-455, sec. 213(f)(3), 90 Stat. 1549.

1979 U.S. Tax Ct. LEXIS 125">*148 In deciding whether the 10-percent fees are ordinary and necessary business expenses or capital expenditures, we must look to the nature of the services performed by OLR. The petitioner bears the burden of proving the fees are currently deductible (Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933)), and he has failed to carry such burden.

The evidence presented by the petitioner is wholly unconvincing. He summarizes the services performed by OLR as:

the assumption by the General Partners of the responsibility to each limited partner in connection with his investment and for the establishment of operating procedures related thereto, including collection of rents from leases of vines, collection from partners of contributions, deposit in bank accounts and payments of obligations, supervision of the bookkeeping functions once initially established by the accountants and thereafter fulfilled by the issuance of annual reports and tax returns.

However, the fees at issue ranged from $ 8,888.89 to $ 22,778, and it is very unlikely that they were paid for such minor administrative services, especially since 1979 U.S. Tax Ct. LEXIS 125">*149 a management fee of 1 percent of the purchase price was deemed sufficient for such services in subsequent years. ³ The petitioner attempts to explain the size of the 10-percent fee by arguing that, during the first year, OLR performed substantial other services in addition to those performed in connection with organizing and syndicating the 72 T.C. 294">*306 partnerships, and that such other services exceeded those in subsequent years. Yet, the evidence does not reasonably support such position, especially since all of the partnerships were organized toward the end of the petitioner's taxable year, and the 10-percent fee was 10 times the management fee paid in subsequent years. Finally, the evidence presented by the petitioner is singularly vague regarding exactly what services were performed by OLR.

On the other hand, the evidence strongly suggests that, in fact, the 10-percent fees were paid to OLR for organizing1979 U.S. Tax Ct. LEXIS 125">*150 and syndicating the partnerships. OCC and OLR performed substantial services in connection with the organization and syndication of the partnerships. OCC located and inspected the land. It also searched the title, conducted the negotiations, and ultimately purchased the land. At the same time, OLR was advertising, circulating prospectuses, paying large fees and commissions, and incurring other expenses promoting the investment and locating potential investors. In addition, OLR prepared the partnership agreements, and OCC handled the escrow accounts and the deeds of trust. Most of these services were performed before the partnerships were organized, and OCC and OLR received no fees or commissions for their services other than the 10-percent fees. Under these circumstances, we must conclude that the 10-percent fees were costs of organization and syndication, and as such, they must be capitalized. ⁴

1979 U.S. Tax Ct. LEXIS 125">*151 The next issue for decision is whether the grapevines are "tangible personal property" within the meaning of section 179(d) so that the partnerships are entitled to elect additional first-year depreciation with respect to such vines. Section 179(a) provides, in general, that in the case of section 179 property, a "reasonable allowance" for depreciation within the meaning of section 167(a) includes, at the election of the taxpayer, an allowance of 20 percent of the cost of the property in the first 72 T.C. 294">*307 taxable year for which depreciation is allowable with respect to such property.

The term "section 179 property" is defined in section 179(d)(1), which provides:

(1) Section 179 property. -- For purposes of this section, the term "section 179 property" means tangible personal property --

(A) of a character subject to the allowance for depreciation under section 167,

(B) acquired by purchase after December 31, 1957, for use in a trade or business or for holding for production of income, and

(C) with a useful life (determined at the time of such acquisition) of 6 years or more.