1983 U.S. Tax Ct. LEXIS 49">*49
In 1974, petitioners' partnership purchased three apartment buildings pursuant to a land sales contract. In 1976, the partnership ceased payments under the contract and engaged in several acts intended to effect an abandonment of one of the apartment buildings (the 5th Avenue property). Under the terms of the contract, the sellers had the right in the event of the partnership's default in payment either to bring an action for specific performance or to declare a forfeiture. In March 1977, the sellers elected to declare a forfeiture of the partnership's interest in all three apartment buildings.
81 T.C. 161">*162 Respondent determined deficiencies in petitioners' 1976 Federal income tax as follows:
Petitioners | Deficiency |
Robert A. Daily | |
and Ann P. Daily | $ 5,939 |
Joseph M. Davis | |
and Kay H. Davis | 285 |
Robert W. Wyndelts | |
and Ellen R. Willis | 779 |
After concessions, the issue is whether in 1976 petitioners' partnership sustained an abandonment loss on certain real property.
FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly.
All petitioners resided in Arizona when they filed 1983 U.S. Tax Ct. LEXIS 49">*51 their joint petition herein.
At all relevant times, petitioners were among a group of partners in Uptown Apartment Co., a general partnership engaged in the rental property business in Arizona. Pursuant to a land sales contract dated November 26, 1974, 1 the 81 T.C. 161">*163 partnership purchased three apartment buildings located on three separate parcels of real property for a total purchase price of $ 150,000. That price consisted of $ 6,800 cash, $ 142,000 in monthly principal payments, and the assumption of real property taxes in the amount of $ 1,200. Under the terms of the contract, the sellers had the right in the event of the partnership's default in payment either to bring an action for specific performance or to declare a forfeiture of the partnership's interest.
In 1976, the partnership determined that the cost of maintaining and operating one of the apartment1983 U.S. Tax Ct. LEXIS 49">*52 buildings (herein the 5th Avenue property) exceeded the rental income derived therefrom. 21983 U.S. Tax Ct. LEXIS 49">*53 Consequently, after failing in its attempt to sell the 5th Avenue property, the partnership engaged in several actions intended to effect an abandonment of that property. Accordingly, the partnership evicted tenants, shut off utilities, terminated insurance coverage, stopped maintenance work, nailed shut apartment doors, and ceased payments under the land sales contract. These actions were taken only with respect to the 5th Avenue property; no similar actions were taken on the other two apartment buildings. 3 In December 1976, the partnership attempted to forfeit its interest in all three apartment buildings by offering the sellers a "Deed of Voluntary Forfeiture," but the sellers rejected that offer. In March 1977, however, the sellers declared a forfeiture of the partnership's interest in all three apartment buildings pursuant to a "Notice of Election and Declaration of Forfeiture," and the forfeiture became effective 10 days thereafter.
On its 1976 return, the partnership claimed an abandonment loss with respect to the 5th Avenue property in the amount of $ 38,061, its adjusted basis in the property. Petitioners deducted their distributive share of this loss. In his notice 81 T.C. 161">*164 of deficiency, respondent determined that the partnership was not entitled to an abandonment loss in 1976.
OPINION
The issue is whether in 1976 the partnership sustained a deductible loss with respect to the 5th Avenue property. 41983 U.S. Tax Ct. LEXIS 49">*55 Petitioners argue the partnership abandoned the 5th Avenue property and is therefore entitled to an ordinary loss deduction in 1976. In essence, petitioner's position is that the abandonment in 1976 and the forfeiture in 1977 constitute separate taxable events. 1983 U.S. Tax Ct. LEXIS 49">*54 5 Respondent contends that since the buyers were personally liable for the payments due under the land sales contract, the partnership's attempt to abandon the 5th Avenue property was ineffective. He argues any tax consequences resulting from the economic failure of the transaction must be determined at the time of the later forfeiture. For the following reasons, we hold for respondent.
In
In
Petitioners accurately point out that the instant case is distinguishable from
To reflect concessions and the foregoing,
1. In contrast to a mortgage or trust deed, in a land sales contract the seller retains title to the property until the buyer makes all required payments.↩
2. Although the purchase price was not allocated between the three parcels of real property, the parties have stipulated herein that the 5th Avenue property had a fair market value of $ 45,000 on the date of purchase.↩
3. Since the partnership was "breaking even" on the other two apartment buildings, it continued to operate them throughout 1976 even though by failing to make payments under the land sales contract, the buyers were technically in default with respect to those properties also. As of Dec. 31, 1976, the unpaid balance due under the land sales contract was $ 137,625.33.↩
4. In the event we find there is a deductible loss in 1976, there is no disagreement over the character or amount of that loss. The parties agree the amount of such loss would be $ 38,061, the adjusted basis, and that since the property constituted trade or business property under
5. Petitioners' analysis is as follows: after taking an ordinary loss deduction in 1976 (see note 4
6. Under Arizona law, the terms of a land sales contract can limit the partners' remedies. See
7. Indeed, the fact that the sellers rejected the buyers' attempts in 1976 to forfeit their interest in the 5th Avenue property and the other two apartment buildings suggests that the sellers were contemplating the possibility of instituting an action for specific performance. Moreover, under Arizona law, as under the common law generally, sellers of real property may prevail in actions for specific performance.
8. Although the fair market value of the 5th Avenue property was less than the amount of the payments owed thereon under the land sale contract, thus making it "worthless" to the partnership, clearly the 5th Avenue property would have substantial value to the partnership when such debt was paid off.↩