Calcutt v. Comm'r of Internal Revenue
| Decision Date | 13 July 1988 |
| Docket Number | Docket No. 26418-86 |
| Citation | 91 T.C. No. 2,91 T.C. 14 |
| Parties | JAMES K. CALCUTT AND JUNE B. CALCUTT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In Calcutt v. Commissioner, 84 T.C. 716 (1985) (Calcutt I), petitioners, representing themselves without an attorney, failed to satisfy their burden of proving they were entitled to an increase of basis in the stock of a subchapter S corporation. In this case (Calcutt II), involving the same issue for a later year, petitioners, represented by an attorney, submitted additional evidence in the form of testimony not presented in Calcutt I.
HELD: The decision in Calcutt I, holding that corporate debts to third parties guaranteed by a shareholder do not lead to an increase in the shareholder's basis in his subchapter S corporation stock, constitutes a judgment on the merits. HELD FURTHER: Petitioners are collaterally estopped by the decision in Calcutt I from relitigating the same substantive issue in Calcutt II. Commissioner v. Sunnen, 333 U.S. 591 (1948). HELD FURTHER: The case of Selfe v. United States, 778 F.2d 769 (11th Cir. 1985), does not constitute a change or development in controlling legal principles which renders collateral estoppel inapplicable here. Estate of Leavitt v. Commissioner, 90 T.C. 206 (1988), followed. HELD FURTHER: There were no special circumstances in Calcutt I which render collateral estoppel inapplicable here. HELD FURTHER: Petitioners' guarantee of a loan to a subchapter S corporation may not be treated in substance as a loan to the corporation. Ronald B. Rubin, for the petitioners.
Deborah Y. Clark, for the respondent.
This case was assigned to Special Trial Judge Lee M. Galloway pursuant to the provisions of section 7456(d) of the Internal Revenue Code (), and Rules 180 et seq. 1 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below.
Respondent determined a deficiency of $3,701 in petitioners' 1982 Federal income tax together with an addition to tax under section 6651(a)(1) of $925 for 1982. After concessions by petitioners, 2 the remaining issue for decision is whether, for purposes of claiming net operating loss deductions under section 1374, petitioners are collaterally estopped by a prior decision of this Court from asserting that they are entitled to increase their adjusted basis in subchapter S corporation stock as a result of personally guaranteeing a third party loan made to such corporation. If we find that the doctrine of collateral estoppel does not bar petitioners from litigating respondent's determination of the 1982 deficiency, we must decide whether petitioners in this proceeding have sustained their burden of proving a claimed increased adjusted basis in subchapter S corporation stock.
Some of the facts have been stipulated and are so found. This reference incorporates the stipulation of facts and the attached exhibits.
Petitioners, husband and wife, resided in Ellicott City, Maryland, at the time their petition herein was filed. Petitioners timely filed a joint Federal income tax return for 1982 with the Internal Revenue Service Center, Philadelphia, Pennsylvania.
The factual background relevant to the issues herein is essentially the same as that involved in our decision reported as Calcutt v. Commissioner, 84 T.C. 716 (1984) (Calcutt I). 3
Petitioners and William and Pamela Hershfeld (the Hershfelds) desired to own and operate their own delicatessen. On September 21, 1977, petitioner James Calcutt made a $5,000 earnest money deposit to purchase a delicatessen located in Baltimore, Maryland. In October 1977, Fairfax Savings and Loan Association, Inc. (Fairfax) issued a commitment letter to petitioners and the Hershfelds for a $210,000 loan to finance the purchase of the delicatessen. The terms of Fairfax's loan commitment required petitioners and the Hershfelds to secure the loan by: (a) a mortgage on the delicatessen (land and buildings); (b) a security interest in all of the delicatessen's personal property; and (c) a mortgage on the personal residences of the petitioners and the Hershfelds.
On November 16, 1977, petitioners and the Hershfelds incorporated Uptown-Levy, Inc. (Uptown or the corporation), under the laws of the State of Maryland for the purposes of owning and operating the delicatessen. The initial capitalization of Uptown was $5,000. Upon incorporation and for all pertinent years, the petitioners owned 50 percent of the corporation as did the Hershfelds. 4 For all pertinent years, Uptown's shareholders duly elected to have the corporation taxed pursuant to subchapter S of the Internal Revenue Code of 1954. A timely Form 1120S (United States Small Business Corporation Income Tax Return) was filed for the year 1982.
On December 13, 1977, Fairfax loaned the corporation $210,000 to finance its purchase of the delicatessen. Although the original terms of the commitment letter required Fairfax to make the loan to petitioners and the Hershfelds individually, the loan was made to the corporation at the shareholders' request and for their convenience. On that same day, the corporation executed a promissory note in favor of Fairfax for the amount of the loan. A mortgage covering the delicatessen realty and the corporation's inventory, fixtures, licenses, machinery, and accounts receivable secured the note. The mortgage also covered the personal residences of the shareholders. Petitioners and the Hershfelds also executed an agreement making themselves personally liable on the note. 5
Fairfax did not make less than fully-secured business loans in 1977. Fairfax's policy was to make loans only when the value of the collateral was in excess of the amount of the loan. Fairfax appraised the delicatessen's land, building, fixtures, and machinery at $215,040. Fairfax made the loan based on this valuation. In 1977, the equities (fair market value of residence minus senior mortgage) in the personal residences of petitioners and the Hershfelds were approximately $53,254 and $42,000, respectively.
Due to poor business, Uptown encountered financial difficulties almost from its inception. On at least six occasions during the period 1979 to 1985, Uptown was late in making its loan payments. The shareholders were forced to make capital contributions in 1979 and 1980. In 1982, the corporation took out a $22,000 loan from Willie Crofoot. Despite these difficulties and threats by Fairfax to institute foreclosure, Uptown satisfied its arrearages on all occasions. All payments on the loan were made out of Uptown's operating account.
In Calcutt I, 6 by notice of deficiency dated July 20, 1983, the Commissioner determined, among other adjustments, that in 1981 the petitioners' claimed net operating loss deduction exceeded their allowable basis in the corporation's stock under section 1374. Consequently, the Commissioner disallowed part of petitioners' net operating loss deduction resulting in an income tax deficiency for 1981. 7
Petitioners filed a timely petition for a redetermination of the deficiencies with the Tax Court. Their petition alleged that the Commissioner's determination with respect to the 1981 net operating loss deduction was in error. The Hershfelds also filed a petition in the Tax Court after receiving a notice of deficiency containing similar adjustments for the same taxable years.
The dockets in Calcutt I were consolidated for trial and the case was tried in the Tax Court on October 2, 1984, before Judge Mary Ann Cohen. At the trial, petitioners proceeded pro se and the Hershfelds were represented by attorney Edward S. Margolis.
During trial, the parties introduced into evidence most of the documents used in the loan transaction. Mr. Margolis argued that the loan entitled Uptown's shareholders to an increased basis in their corporate stock. In so arguing, he made the following points: (1) Fairfax looked to the shareholders for repayment of the loan; (2) the shareholders were guarantors and co-makers of the promissory note; (3) the shareholders' equity in their residences provided a means to increase their basis in their corporate stock; and (4) the substance, as opposed to the form, should determine the tax consequences of the loan transaction. However, no loan officer or other representative of Fairfax testified at the trial.
Petitioners contended that the provisions of section 465 also made the loan includable in the basis of the shareholders' stock. Towards the end of trial, the Court informed the parties that section 465 had no bearing in determining a shareholder's basis in subchapter S corporation stock. The court then directed the parties to submit post-trial, seriatim briefs.
Neither petitioners nor the Hershfelds submitted any briefs, however. After inquiries by the Tax Court, Mr. Margolis advised the Court that petitioners and the Hershfelds did not intend to file a brief. Because Mr. Margolis had not entered his appearance on behalf of petitioners, 8 the Court ordered petitioners and the Hershfelds to show cause why these cases should not be dismissed under Rule 123(b) for their failure to properly prosecute or to comply with the Rules of the Court. Neither petitioners nor the Hershfelds appeared at the hearing nor did they file any response to the Court's order.
On April 15, 1985, we issued our opinion in the case, holding that petitioners and the Hershfelds failed to sustain their burden of proof with regard to the net operating loss deduction issue, i.e., the taxpayers in Calcutt I failed to show that their respective bases in the subchapter S corporation should be increased to reflect a bank loan made directly to the corporation. As a result of our decision, petitioners' adjusted basis in...
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