## Facts

- Individual taxpayers were partners in Heritage Village Apartments Co., formed to develop and operate a multi-phase apartment complex in New York.
- To obtain construction and permanent financing at interest rates not available to individuals/partnerships under state usury limits, the partners caused a related corporation, Heritage Village, Inc., to be formed and used in the financing structure.
- Parcel 1 of the project land was deeded to the corporation in late 1967, and the corporation entered the principal construction loan and mortgage for phase 1, including a $2.1 million building loan.
- Additional financing commitments and mortgages for later phases and parcels were also undertaken in the corporation’s name; the corporation executed loan documents and engaged in related financing activities.
- The corporation obtained insurance in its own name and participated in loan modifications and consolidations during the years at issue.
- The partnership executed a formal partnership agreement and conducted day-to-day business operations, and the agreement contemplated that title to a parcel could be held by a “corporate nominee” for the partnership’s benefit.
- Corporate formalities were thin: no stock issuance, no meetings or minutes, and the corporation’s federal returns reported no income, loss, assets, or liabilities and described its activity as a nominee corporation.
- In 1970, after substantial development, the parcels were deeded from the corporation back to the partnership; the corporation was later dissolved.
- For 1968 and 1969, the partnership reported net operating losses from the project and the partners claimed pass-through loss deductions; the Commissioner disallowed them, asserting the losses belonged to the corporation.

## Issues

1. Whether net operating losses from the apartment project were attributable to the partnership (and deductible by the partners) or to the related corporation that held title and executed financing arrangements.
2. Whether the corporation could be disregarded for federal tax purposes as a mere nominee or conduit despite holding legal title and being the borrower/mortgagor on major financing.

## Decision

- The Tax Court held that the corporation was not a mere nominee whose existence could be ignored for federal tax purposes.
- The court attributed the net operating losses for 1968 and 1969 to the corporation, not the partnership.
- The partners were not entitled to deduct the project losses as pass-through partnership losses, and decisions were entered for the Commissioner.

## Legal Principles

- A corporation is ordinarily respected as a separate taxable entity unless it is shown to be a sham or otherwise unreal for tax purposes.
- Minimal corporate formalities and a “nominee” label do not control when the corporation holds legal title, is the contracting party on substantial debt, and performs real functions in the transaction structure.
- When property ownership and key financing obligations are placed in a corporation’s name, the tax results (including operating losses) generally follow that form.

## Conclusion

Because the corporation held title, incurred and documented major financing obligations, and conducted related activities central to the project during the years at issue, the Tax Court treated it as a separate taxable entity and assigned the apartment-project losses to the corporation, preventing the partners from claiming those losses on their individual returns.


Strong v. Comm’r, 66 T.C. 12 (1976)