Brown v. Commissioner

• Decision Date: 12 June 1986
• Docket Number: Docket No. 15981-84.
• Citation: 51 TCM (CCH) 1171,1986 TC Memo 239
• Parties: Bruce and Joanne Brown v. Commissioner.
• Court: U.S. Tax Court

51 T.C.M. (CCH) 1171 (1986)

T.C. Memo. 1986-239.

Bruce and Joanne Brown v. Commissioner.

Docket No. 15981-84.

United States Tax Court.

Filed June 12, 1986.

Towner S. Leeper and David Leeper, 661 Mesa Hills, El Paso, Tex., for the petitioners. David W. Johnson, for the respondent.

Memorandum Findings of Fact and Opinion

KÖRNER, Judge:

Respondent determined a deficiency in petitioners' Federal income tax in the amount of $194,326, and an addition to tax under section 6653(b)¹ against petitioner Bruce Brown in the amount of $98,424 for the taxable year ended December 31, 1978.

The issues presented for decision are: (1) Whether the period of assessment of the tax due for petitioners' taxable year ended December 31, 1978, expired prior to May 15, 1984, the date on which respondent issued the notice of deficiency; (2) whether petitioners are entitled to a claimed casualty loss in the amount of $364,900; (3) whether petitioners are entitled to an interest expense deduction in the amount of $15,000; (4) whether petitioners are entitled to a depreciation deduction in the amount of $13,496; (5) whether petitioners are entitled to an investment tax credit in the amount of $9,097, including a claimed investment tax credit carryback from 1979 to 1978 in the amount of $4,405; and (6) whether respondent has established by clear and convincing evidence that any underpayment of income tax was due to petitioner Bruce Brown's fraud with intent to evade tax under section 6653(b).

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulations of fact, and exhibits attached thereto are incorporated herein by this reference.

Bruce Brown ("Bruce" or "petitioner") and Joanne Brown ("Joanne") were husband and wife and residents of El Paso, Texas at the time the petition herein was filed. Bruce and Joanne filed a joint Federal income tax return for their taxable year ended December 31, 1978. The 1978 return was received by the Internal Revenue Service Center in Austin, Texas, on May 21, 1979.

I

Petitioner was born on a farm in Alabama. He had been involved in the custom brokerage business since 1954. He owned all the stock of Brown's Refrigerated Warehouse, Inc., a public refrigerated warehouse located in El Paso, Texas. Petitioner also imported Mexican cattle, invested in feedlot operations, and operated a meat-packing plant and a food-processing company. Petitioner had no experience, however, in cattle ranching.

The A Bar A Ranch, subsequently known as the Cinco B Ranch, comprised approximately 1,166 acres of land located in Bandera County, Texas. In 1978, approximately 640 acres ("the 640-acre tract") were owned by the Estate of Isabel M. Anderson; her son, E.M. Anderson, Jr. ("Anderson"), owned approximately 526 acres ("the 526-acre tract")². Anderson was the executor of his mother's estate.

By letter dated June 19, 1978, Bruce apprised his attorney, Bates Belk, that he was planning to acquire the above-mentioned tracts. Bruce wanted to exchange the 526-acre tract for other property in a tax-free transaction, if possible. The 640-acre tract was to be acquired by the PBJ Trust (see infra). Petitioner stated in his letter that "Neither transaction will take place without the other," and that if the tax-free exchange was not feasible he would still try and buy the property.

The Estate of Isabel M. Anderson sold the 640-acre tract to Calvin Wallace for $284,000 and, on June 30, 1978, Wallace sold the said 640-acre tract to the PBJ Trust for $384,600. The PBJ Trust was created on September 1, 1977, pursuant to the terms of a trust agreement executed by petitioners. Bruce was the trustee and petitioners' children were the beneficiaries of the PBJ Trust.

By letter dated June 14, 1978, from Bruce to Anderson, Bruce requested a lease with an option to purchase the 526-acre tract ("lease-option agreement"). The said proposed agreement provided as follows, in pertinent part:

I am very interested in purchasing your property, but at this time I would prefer to lease all of the same with an option to purchase it. Considering the usefulness of the improvements and fixtures, and the value of the land and the location for both agricultural and other uses, the following offer to lease is made.

Lease

For a solid two (2) years, beginning on the date when you accept this entire offer (and which offer shall be void if not accepted by the close of business on June 30th, 1978) I will pay to you the sum of TEN THOUSAND & NO/100 ($10,000.00) DOLLARS per year as lease or rent for the land and improvements. That is, I obligate myself to pay you $20,000.00 for the 2-year period, payable $5,000.00 now, and $5,000.00 semiannually thereafter until all of the rent is paid. In addition I will pay for insurance on all buildings, and maintain $100,000/$300,000 liability coverage at my expense.

While I will require immediate right to possession of the premises (I will want to move my horses in, have employees resident on the premises and have exclusive right to otherwise use and occupy the premises and improvements) you may be assured that if I don't keep the improvements up, or if I overgraze the land, destroy growing timber, alter any improvements or otherwise permit deterioration or waste of the premises without your written consent, you can kick me off by all lawful means. You will have the right to inspect at all reasonable times.

Option

During the period that I keep the terms of my lease, I will also have the exclusive option to purchase the real estate and improvements for the sum of SEVEN HUNDRED FIFTY THOUSAND & NO/100 ($750,000.00) DOLLARS, payable as later set forth. For this option I will pay you $65,000.00, $32,500.00 now, and $32,500.00 on or before December 30, 1978, with the understanding that if I don't make the December option payment, I will lose the option and the money I have paid on it.

On the other hand, I will have the right to exercise the option at any time, so I may decide to do this on or before the second payment date. If so, I will deposit $32,500.00 with the title company you select as earnest money; and this option will then become a contract of sale performable within sixty days after I exercise the option. Of course, I will continue in possession under the above lease and continue to pay rent up to the date of closing. Also when the deal is closed the money I have paid for the option (or deposited as earnest money) will be credited on the cash part of the purchase price.

So long as the option exists as an option, time is of the essence, and my failure to perform will result in loss of all money paid for the option.

In order to exercise the option, I will be required to give you sixty days notice by certified or registered mail, return receipt requested at the address which you show below your name. You will then have that period of time to execute and deliver to me a deed with general covenants of warranty conveying fee simple title to said land subject only to utilities easements and liens for the unpaid part of the purchase price. At the time when you deliver the deed you will also obtain for my benefit a guaranty title for $750,000.00 containing no exceptions other than those printed in the form and those permitted in the deed.

In such case the closing may be earlier than sixty (60) days and at any time after you have given my sic ten (10) days written notice by registered or certified mail at my address shown below. At closing I will deliver the balance of the down payment, my promissory note for the deferred part of the purchase price, and my deed of trust additionally securing its payment.

The total down payment is $150,000.00, and my note will be for the balance, bearing interest at 9.25%, payable in ten (10) consecutive equal annual installments of principal plus accrued interest beginning one year after the date of closing. Said note shall provide for 10% interest on matured and unpaid items, for acceleration of maturity upon default of any installment, and for reasonable attorney's fees if placed in the hands of an attorney for collection after maturity, or if collected through any court proceedings.

* * *

Tendered herewith is my check for $37,500.00, $5,000.00 being the first rental payment and $32,500.00 the first option payment. If you find this acceptable, please sign in the space provided below, and attach a correct legal description. If you desire to place a value on your house and 3 to 4 acres, please do so and that will not be regarded by me as a change in the agreement. However, this offer must be accepted no later than the 30th of June, 1978.

Petitioner tendered his check dated June 26, 1978, in the amount of $37,500, to Anderson with the lease-option agreement. The check was drawn on Bruce's account at the Bank of El Paso and was payable to Darrell Lochte, Escrow. A notation on the check indicated that the payment was made for "581 sic Acres, A-Bar-A, 6 Months Lease Purchase." Darrell Lochte was Anderson's attorney.

By letter dated June 30, 1978, Anderson accepted petitioner's lease-option proposal. Anderson further stated that should Bruce find an opportunity to use the 526-acre tract in a tax-free exchange, he would agree to a cancellation of the lease-option agreement, "provided only that I receive the same amount of money on the same terms which I would receive under your offer if it were fully performed." Enclosed with the letter was the lease-option agreement, signed by Anderson. In accordance with its provisions, Anderson attached a correct legal description of the property to the agreement.

Bruce's check, dated June 26, 1978, in the amount of $37,500 was deposited into Lochte's escrow account at the First National Bank of Kerrville on July 5, 1978. On July 12, 1978, Lochte wrote a check, in the amount of $37,500, payable to Anderson. The recited purpose on the check was "Bruce W. Brown Lease-Option Agreement." The said...