Opposition — Lomas Santa Fe, Inc. v. Commissioner

Office-Supreme Court, U.S.

FILED

No. 82-1270 MAR Ded 1983

In the Supreme Court ofthe i

Octoper Term, 1982

Lomas SANTE Fe, INC., ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

Rex E. Lee

Solicitor General

Department of Justice

Washington, D. C. 20530

; (202) 633-2217

TABLE OF AUTHORITIES

Cases:

Bell v. Harrison, 212 F.2d 253) .....cceceeeeees

C.G. Sloan & Co. v. Commissioner,

SBTC. BOS wcccccccccccccccccccccccccces 3-4

Century Electric Co. v. Commissioner,

15 T.C. 581, aff'd, 192 F.2d 155, cert. denied,

342 U.S. 954 .ncccccccccccccccccccscccens 4,5

Commissioner v. Moore, 207 F.2d 265 .........

Edinboro Co. v. United States,

224 F. Supp. 301 ..cccccccccccccccccccccces

Fry v. Commissioner, 31 T.C. 522, aff'd,

Be eM ceecncadbcesscddnccsccccateecce

Gist v. United States, 423 U.S. 118 2... ccc eees

Home Trust Co. v. Commissioner,

6S F.2d 532 ..ccccccccccvccccccccccccsveces

Miller v. Commissioner, 68 T.C. 767 ........05+

1220 Realty Co. v. Commissioner,

FEE eG veccccdeccccessveccccccccccece

United States v. Georgia R.R. & Banking,

348 F.2d 278, cert. denied, 382 U.S. 973 ..... 3,4

Statute and regulation:

Internal Revenue Code of 1954, 26 U.S.C.

SE nveda heeds Ge cae scdenherstccensecces

Treasury Regulations on Income Tax

(1954 Code), 26 C.F.R. 1.15802 .......ceeeeees

Iu the Supreme Court of the Hnited States

OcToBER TERM, 1982

No. 82-1270

LOMAS SANTE FE, INC., ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

In this federal income tax case, petitioners! seek review of

the decision below holding that they were not entitled toa

deduction for depreciation claimed with respect to a 40-year

estate for years reserved in a golf course.

‘Lomas Sante Fe Country Club and Norco Landscape & Mainte-

nance Co. are subsidiaries of Lomas Sante Fe, Inc. The three corpora-

tions are jointly liable for any deficiency in their tax for their tax year

ending July 31, 1973, because they filed a consolidated corporate

income tax return. Section 1503(a) of the Internal Revenue Code of 1954

(26 U.S.C.); Treasury Regulations on Income Tax (1954 Code), 26

C.F.R. 1.1502-2. Lomas Sante Fe, Inc. and Lomas Sante Fe Country

Club are referred to as “Lomas” and “Country Club”, respectively.

Norco Landscape & Maintenance Co. is a party only because of its joint

liability for the deficiency (Pet. App. B-2).

2

The pertinent facts may be summarized as follows: In

1964, Lomas began development of a high quality residen-

tial community which was to include country club facilities.

On November 14, 1968, Country Club was organized to

administer the country club facilities, and to hold title to the

various properties used in the club’s operations. On Febru-

ary 11, 1969, Lomas transferred the club facilities to Coun-

try Club, subject to the reservation of a 40-year estate in the

golf course, golf professional shop, existing clubhouse, and

an area planned for a future clubhouse, in exchange for all

of the outstanding shares of Country Club. Lomas calcu-

lated its basis for tax purposes ($855,086) in the estate for 40

years in the golf course and its landscaping by applying an

actuarial valuation factor of .7474275 to the costs of those

assets ($1,151,244) (Pet. App. A-3, B-3 to B-10).

On their consolidated return for the taxable year ending

July 31, 1973, petitioners claimed a depreciation deduction

of $21,377.16 for amortization of the portion of the estate

for 40 years which represented Lomas’ interest in the land

and landscaping making up the golf course. In addition,

petitioners modified the computation of their net operating

loss carryover to the taxable year ended July 31, 1973, by

including an “amortization correction” in the amount of

$21,377.16 for the taxable year ended July 31, 1972. In

determining a deficiency in petitioners’ federal corporate

income tax for the taxable year ended July 31, 1973, the

Commissioner disallowed the depreciation deduction taken

in respect of the estate for 40 years in the golf course, and

eliminated the “amortization correction” from their com-

putation of the operating loss carryover (Pet. App. A-3, B-8

to B-12).

In the tax court proceeding brought by petitioners to

redetermine the deficiencies, the tax court upheld the

Commisioner’s ruling that the golf course properties, prior

to the transfer of the remainder interest to Country Club,

3

were nondepreciable due to their indefinite useful life, and

could not become depreciable by transferring a remainder

interest to a wholly owned subsidiary. In so holding, the tax

court relied on United States v. Georgia R.R. & Banking,

348 F.2d 278 (Sth Cir. 1965), cert. denied, 382 U.S. 973

(1966), which ruled that the taxpayer could not create a

depreciable interest in otherwise nondepreciable stock of

other corporations by distributing a remainder interest to

its shareholders as a dividend and retaining an estate for 26

years in the stock (Pet. App. A-3 to A-4, B-27 to B-33). The

court of appeals affirmed, with one judge dissenting (Pet.

App. A-!I to A-7).

1. The decision below correctly held that petitioners

were not entitled to a depreciation deduction with respect to

the estate for 40 years in the golf course. It is clear that the

real property comprising a golf course (i.e., land, contour-

ing and landscaping) has an indeterminate useful life, and is

not depreciable for tax purposes. See Edinboro Co. v.

United States, 224 F. Supp. 301 (W.D. Pa. 1963); see also

Commissioner v. Moore, 207 F.2d 265, 268-269 (9th Cir.

1953). To be sure, a terminable interest in property having

an indefinite useful life may itself be depreciable, if the

interest is acquired by an investment separate from that

with which the remainder interest is acquired. Gist v.

United States, 423 F.2d 1118 (9th Cir. 1970); Bell v. Harri-

son, 212 F.2d 253, 255 (7th Cir. 1954); 1220 Realty Co. v.

Commissioner, 322 F.2d 495 (6th Cir.1963); Home Trust

Co. v. Commissioner, 65 F.2d 532 (8th Cir. 1933); Fry v.

Commissioner, 31 T.C. 522 (1958), aff'd, 283 F.2d 869 (6th

Cir. 1960). But as the courts below correctly held, a taxpayer

cannot create a depreciable interest in property having an

indefinite useful life by purchasing the fee simple interest

and then dividing his rights by a tax-free transfer of the

remainder interest to a wholly owned corporation. See

United States v. Georgia R.R. & Banking, supra, 348 F.2d

at 287-289; C.G. Sloan & Co. v. Commissioner, 38 T.C.

4

203, 211 (1962). Lomas obviously did not acquire a depreci-

able interest in the golf course by dividing its rights between

an estate for 40 years and a remainder and transferring the

remainder to its wholly owned subidiary.”

Contrary to petitioners’ contention (Pet. 3-5, 9), the deci-

sion below does not conflict with Century Electric Co. v.

Commissioner, 15 T.C. 581 (1950), aff'd, 192 F.2d 155 (8th

Cir. 1951), cert. denied, 342 U.S. 954 (1952). There, the

property involved was a mixture of depreciable and nonde-

preciable assets (i.e., a foundry in which electric motors

were manufactured, a railroad siding, and the underlying

land), most of which were depreciable. The taxpayer, which

had previously owned the property in fee simple, sold it to

an unrelated tax-exempt organization for cash in an

amount less than its basis in the fee, with a leaseback for a

term of 25 to 95 years. 192 F.2d at 158. The issue was

whether the taxpayer's tax basis in the leasehold (i.e., its

basis in the fee simple interest minus the cash received) was

to be depreciated over the useful lives of the assets subject to

the lease rather than over the term of the lease. Jd. at 160.

The court held that taxpayer’s interest was to be depreciated

over the term of the lease, because the interest owned by the

taxpayer was the leasehold, not the separate assets.

2Petitioners attempt (Pet. 8-9) to distinguish Georgia R.R. & Bank-

ing on the ground that there the taxpayer acquired its terminable

interest in the stock by transferring less than the full fee simple interest

to the shareholders, while here Lomas allegedly tranferred the entire fee

and received in exchange all of Country Club’s stock and the 40-year

estate. But the transfer documents make clear that the interest which

Lomas transferred to Country Club was less than the full fee simple, and

that the 40-year estate was a retained interest. Just asin Georgia R.R. &

Banking, Lomas owned the entire fee simple interest in the golf course

facilities prior to the transfer. After the transfer, it had the right to

beneficial use of the property for 40 years, a right which it had before the

transfer. It made no investment in the 40-year estate apart from that

which it made to acquire the fee simple interest.

5

In Century Electric Co., the bulk of the property was

unquestionably depreciable, there was no creation of a

depreciable interest through a gratuitous division of the

property rights comprising the fee simple interest between

related parties, and the only issue was the time period over

which the depreciation was to be taken. Furthermore, the

taxpayer completely divested itself of its fee interest by

transferring the property to an unrelated third party, and

the leaseback interest which it obtained in (partial) consid-

eration for the fee was truly a wasting asset.> See also Miller

v. Commissioner, 68 T.C. 767, 775-779 (1977). None of

these factors is present here.

It is therefore respectfully submitted that the petition for

a writ of certiorari should be denied.

Rex E. Lee

Solicitor General

MARCH 1983

3At the same time that Lomas’ interest in the estate for 40 years was

diminishing in value, there was a corresponding increase in the value of

Country Club’s remainder interest in the golf course. Since Lomas

owned all of the Country Club stock, and since the value of the stock

would increase as the value of Country Club's interest in the golf course

increased, Lomas suffered no economic loss from the expiration of its

40-year estate. This stands in marked contrast with the situation in

Century Electric Co., where the taxpayer would suffer a real loss from

the expiration of the leasehold estate as a consequence of the fact that an

unrelated third party held the fee interest. Here petitioners simply

shifted non-wasting assets from one corporate pocket to another with-

out any overall economic loss from the use of the properties in their

businesses.

DOJ-1983-03