Bramblett v. Commissioner

960 F.2d 526 (5th Cir. 1992)

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Nature of the Case

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Facts

On May 16, 1979, William Baker, Richard Bramblett, Robert Walker, and John Sexton formed the Mesquite East Joint Venture. Baker, Bramblett, Walker, and Sexton had respective 50%, 22%, 18%, and 10% interests in the joint venture. On June 4, 1979, the same four individuals formed Town East Development Company, a Texas corporation, for the purpose of developing and selling real estate in the Mesquite, Texas area. The shareholders' interests in Town East mirrored their interests in Mesquite East. In late 1979 and early 1980, Mesquite East acquired 180.06 acres of land from Bramco, a corporation of which Bramblett was the sole shareholder. Mesquite East acquired 84.5 acres of land from an unrelated third party, bringing its acquisitions to a total of 264.56 acres. Mesquite East made four separate sales of its acquired land. In three of the four instances, Mesquite East sold the property to Town East, which then developed it and sold it to third parties. In each of these instances, prior to the time Town East purchased the property from Mesquite East, it already had a binding sales agreement with the third party. In the fourth transaction, Mesquite East sold property directly to Langston R & B Financial Joint Venture No. 1. Mesquite East's gross profit on these four transactions was $68,394.80 and it reported this amount as ordinary income on its 1981 partnership tax return. Town East still owned 121 acres. In 1982, Baker, acting as trustee, entered into five contingent contracts of sale for portions of this property. In December 1982, Mesquite East sold the property to Town East in exchange for two promissory notes totaling $9,830,000.00, the amount an appraiser determined to be the fair market value of the land. The notes provided for an interest rate of twelve percent per annum on the unpaid balance and an annual principle payment of $1.5 million. Town East proceeded to develop the property and sold most of it to unrelated third parties in eight different transactions. Town East made no payments on the notes until after the property had been sold to third parties. Town East paid the entire principal amount by the end of 1984, but it did not make the required interest payments. Mesquite East claimed its profits from this sale as long-term capital gain on its 1983 and 1984 partnership tax returns. The IRS (D) held they were ordinary income and asserted deficiencies. The Tax Court agreed with D. The sale of land was the business of Mesquite East, and the profits were ordinary income. The tax court stated that this was true whether the business was conducted directly or through Town East. The tax court noted that the businessmen were owners in proportionate shares of the joint venture, the corporation was formed less than a month after the joint venture, the corporation routinely entered into contracts of sale to third parties before buying the property from the joint venture, the corporation made no payments to the joint venture until funds were received from third parties, the corporation did not make the required interest payments and the corporation only developed land that it bought from the joint venture. It held that evidence of the corporation's activities and their correlation with activities of the joint venture is proof of the nature of the business of the joint venture. The business of the joint venture was the sale of land and that the resulting gains should be taxed as ordinary income. Ps appealed.