Richard H. And Patsy J. Bramblett v. Commissioner of Internal Revenue
960 F.2d 526 (1992)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The business activities of a corporation are not attributable to its shareholders for tax purposes, and a partnership may sell a capital asset to a related corporation for development without the corporation's development activities converting the partnership's capital gain into ordinary income, provided the corporation is not a sham and has a legitimate business purpose.
Facts:
- On May 16, 1979, four individuals formed the Mesquite East Joint Venture for the stated purpose of acquiring vacant land for investment.
- On June 4, 1979, the same four individuals, with identical ownership percentages, formed the Town East Development Company to develop and sell real estate.
- In late 1979 and early 1980, Mesquite East acquired a total of 264.56 acres of land.
- Prior to the main transaction, Mesquite East made four smaller land sales, three of which were to Town East after Town East had already secured a third-party buyer.
- After consulting with legal and tax advisors, Mesquite East sold its remaining 121 acres to Town East in December 1982 for two promissory notes totaling the land's appraised fair market value of $9,830,000.
- Town East subsequently developed the property and sold most of it to unrelated third parties in eight different transactions.
- Town East did not make payments on the promissory notes to Mesquite East until after it received funds from the third-party sales, and it failed to make all required interest payments.
Procedural Posture:
- The Commissioner of Internal Revenue determined that profits Mesquite East reported as long-term capital gain were actually ordinary income and asserted tax deficiencies against the partners.
- Richard and Beverly Bramblett, partners in Mesquite East, petitioned the United States Tax Court for a redetermination of the deficiencies.
- The Tax Court upheld the Commissioner's deficiencies, ruling that the profits were ordinary income because Mesquite East was in the business of selling land.
- The Brambletts, as appellants, appealed the Tax Court's decision to the United States Court of Appeals for the Fifth Circuit, with the Commissioner as the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Are the real estate development and sales activities of a corporation attributable to a related partnership, which held the land for investment, in order to characterize the partnership's profit from selling the land to the corporation as ordinary income instead of capital gain?
Opinions:
Majority - Judge E. Grady Jolly
No. The development activities of the corporation are not attributable to the related partnership, and therefore the partnership's profit qualifies for capital gains treatment. The court rejected three potential grounds for attributing Town East's activities to Mesquite East. First, applying the seven-factor test from Suburban Realty, the court found it was clearly erroneous to conclude that Mesquite East was directly in the business of selling land, as its sales were infrequent and insubstantial compared to precedent. Second, applying the agency test from National Carbide and Bollinger, the court found no evidence that Town East acted as an agent for Mesquite East; it acted in its own name, retained development profits far exceeding any agency fee, and its relationship was dependent on the common ownership. Third, the court rejected a 'substance over form' argument, holding that the business of a corporation is not ordinarily attributable to its shareholders. Town East was not a sham corporation because it had a legitimate, independent business purpose—insulating the partners from the liabilities of real estate development. Since the corporate form was respected and served a tax-independent purpose, its activities could not be imputed to the partnership.
Analysis:
This decision reinforces the legal principle that taxpayers may structure their business affairs using separate legal entities to achieve favorable tax results, provided those entities are not shams and have legitimate, non-tax-related business purposes. By respecting the corporate form of the development company, the court protected the investment partnership's ability to claim capital gains treatment on its sale. The case provides a significant precedent for real estate investors, clarifying that the activities of a commonly owned developer entity will not automatically taint the investment character of property held by a related seller entity, so long as corporate formalities are observed and a valid business reason, such as liability insulation, exists for the separate structure.
