Appeal from a decision of the Tax Court, Cynthia Hall, Judge, ruling that appellants were not entitled to deduct net operating losses incurred with respect to property owned by their corporations. The decisions of the Tax Court are affirmed in all parts except that the case is remanded to the Tax Court so that it may amend its mathematical computation of deductions allowed to appellants in accordance with this opinion.
Before: MULLIGAN, OAKES and GURFEIN,*fn* Circuit Judges .
MULLIGAN, Circuit Judge :
This is an appeal from a decision of the Tax Court, Cynthia Hall, Judge, 38 T.C.M. 358 (1979). The facts, most of which were stipulated by the parties, are set forth in detail in Judge Hall's opinion. For the purposes of this appeal, they may be summarized as follows.
Appellants*fn1 or their wholly-owned corporations formed two partnerships, P. Santin, J. & E. Ogiony, A. Stangl -- Joint Venture in 1966 ("Garden Partnership") and Losson Gardens Company in 1969, for the purpose of building rental apartments on certain pieces of underdeveloped real estate in Cheektowaga, New York. They were unable to obtain financing for the projects because the market interest rate at that time for nonresidential mortgage financing exceeded the maximum chargeable to individual borrowers under the usury laws of New York.*fn2 Corporations, however, may not interpose a defense of usury in New York. N.Y. Gen. Obligations Law § 5-521 (McKinney 1978). Therefore, appellants utilized two corporations, Garden Village Builders, Inc. ("Garden Corporation") and Losson Gardens, Inc. ("Losson Corporation"),*fn3 as corporate signatories in order to obtain the commercial loans necessary to develop the apartment projects.
The partnership transferred title to the parcels of land they intended to develop to the corporations, which then became the mortgagors of record. For most of the time throughout the financing period, the corporations retained title to those parcels. However, the corporations' shareholders intended that the corporations should be merely financing vehicles. Accordingly, the corporations transferred all draws on the mortgage loans, either by check or endorsement, to the partnerships. Moreover, the partnerships received all rental income from and paid all expenses incurred in the construction and operation of the apartment projects.
On their individual federal tax returns, the partners claimed their distributive shares of the net operating losses reported by the partnerships on their information returns. These were disallowed by appellee, the Commissioner of Internal Revenue ("Commissioner"), on the ground that the losses could only be claimed by the corporations.
The Tax Court below held that neither Garden Corporation nor Losson Corporation could be disregarded for federal tax purposes. Noting that the instant case is virtually indistinguishable from Strong v. Commissioner, 66 T.C. 12, aff'd on the opinion below, 553 F.2d 94 (2d Cir. 1977), Judge Hall ruled that the individual partners were not entitled to deduct their distributive shares of the net operating losses incurred with respect to the apartment complexes. We agree and reaffirm the holding of the Tax Court in Strong that "income from property must be taxed to the corporate owner, and will not be attributed to the shareholders, unless the corporation is a purely passive dummy or is used for a tax-avoidance purpose." 66 T.C. at 22. Neither exception to the rule in Strong exists here. Strong v. Comm'r, supra, at 22-25; see Moline Properties, Inc. v. Comm'r, 319 U.S. 436 (1943).
Appellants also argue that the Commissioner's denial of their claimed deductions is an arbitrary and capricious application of Section 482 of the 1954 Internal Revenue Code. Section 482 provides inter alia that the Commissioner may apportion deductions between organizations owned or controlled directly or indirectly by the same interests in order to clearly reflect the income of such businesses.*fn4 Appellants argue that since the partnerships were the taxable entities which financed and built the apartment projects, the individual partners should be entitled to deduct their allocable shares of the operating losses.
This contention has no merit since the record is clear that the Commissioner did not invoke section 482 in denying appellants' deductions. The statutory notices do not mention the statute. Rather, the Commissioner relied on the principle that the corporations, as owners of the property, were the proper parties to claim the deductions. We agree with the Tax Court that there is no reason in this case to depart from the general rule that courts will not look behind the statutory notice in order to ascertain which provisions the Commissioner relied upon in making his determination. Branerton Corp v. Comm'r, 64 T.C. 191, 200 (1975); Greenberg's Express, Inc. v. Comm'r, 62 T.C. 324, 327 (1974). We are fortified in this conclusion by the responses of the Commissioner to interrogatories in which he repeatedly denied that his determination had been based on section 482.
The Tax Court allowed the individual partners certain deductions for business expenses which were solely attributable to property owned by the partnerships. Appellee points out that the Tax Court made a mathematical error in calculating Garden Partnership's share of the interest on the purchase obligation paid in 1967 to Sereth Properties, Inc., the seller of the real estate on which the partnership's apartment complex was located. The appropriate deduction is $4,520.82, rather than $2,728.42, which the Tax Court computed.
We find appellants' remaining arguments to be without merit. Accordingly, the decisions of the Tax Court are affirmed in all parts except the case is remanded to the Tax Court so that it may amend its mathematical computation of deductions allowed to appellants in accordance with this opinion.
OAKES, Circuit Judge (concurring):
I concur in Judge Mulligan's opinion. The record does not support appellant's contention that the Commissioner in his discretion invoked Section 482 in denying the deductions.*fn1 Neither the Commissioner's 30-day letter nor his 90-day letter (statutory Notice of Deficiency) cited any specific provisions of the Code, let alone Section 482. The Commissioner apparently based his decision on the principle that the corporations, as owners of the property, were the proper parties to claim the deductions; ...