Cappuccilli v. Commissioner
| Decision Date | 28 August 1980 |
| Docket Number | 2208-77,2097-77,5801-77.,Docket No. 2095-77,2207-77,5255-77 |
| Citation | 1980 TC Memo 347,40 TCM (CCH) 1084 |
| Parties | Grace Cappuccilli, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Victor Chini, 915 State Tower Bldg., Syracuse, N.Y., for the petitioners. Kenneth Bersani and John D. Steele, Jr., for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent has determined deficiencies against petitioners for the taxable years 1970, 1971, and 1972 as follows:
Docket
Petitioner No. Year Deficiency
Grace Cappuccilli 2095-77 1970 $ 7,140.13
1971 7,089.58
2208-77 1972 69,974.26
Dorothy Cappuccilli 2097-77 1970 7,422.54
1971 7,467.60
2207-77 1972 71,077.22
Gerald F. and
Caroline Paduano 5801-77 1970 7,590.10
1971 6,486.68
5255-77 1972 59,895.65
The tax year 1975 is also involved for all of the petitioners because of, and to the extent of, a disputed bad debt deduction which resulted in a claimed loss carryback to 1972.2
The issues presented in these cases are: (1) whether respondent properly allocated interest for the years 1970, 1971, and 1972 under section 4823 to the partnership of Cappuccilli, Cappuccilli, & Paduano (CCP or the partnership) from two related corporations on account of mortgage notes held and cash loans made by CCP; (2) whether interest income properly allocated to CCP under section 482 on account of the above-mentioned mortgages and cash loans in 1967, 1968, and 1969 (see Paduano v. Commissioner Dec. 33,097(M), T.C. Memo. 1975-69, affd. mem. 76-1 USTC ¶ 9187 538 F. 2d 312 (2d Cir. 1976), cert. denied 425 U.S. 992 (1976)), may be the subject of a bad debt deduction in either 1972 or 1975; (3) whether the gain which CCP realized pursuant to section 1038, because of its foreclosure of a mortgage in 1972, is ordinary or capital in nature, and, if capital, whether it is long or short term.
Some of the facts were stipulated. The stipulations of facts and stipulated exhibits are incorporated herein by this reference.
At the time the petitions herein were filed, Grace Cappuccilli (Grace) and Dorothy Cappuccilli (Dorothy) resided in Syracuse, New York, and Gerald F. Paduano (Paduano) and Caroline Paduano resided in Sarasota, Florida. Grace, with her husband Peter L. Cappuccilli (Peter), who is not a party to these cases, timely filed joint income tax returns with the North Atlantic Service Center, Andover, Massachusetts, for the taxable years 1970, 1971, and 1972, as did Dorothy and her husband Rocco M. Cappuccilli (Rocco), who is also not a party to these cases, and the Paduanos.
On May 6, 1976, Peter and Rocco each filed separate petitions with the United States District Court for the Northern District of New York, pursuant to Chapter XII of the Bankruptcy Act. Pursuant to section 6871, the District Director of Internal Revenue, Buffalo, New York, assessed income tax deficiencies for the taxable years 1970, 1971, and 1972 against both Peter and Rocco. The deficiencies which were assessed against them are the deficiencies which are the subject of their wives' petitions herein.
In 1954, Peter, Rocco, and Paduano (hereinafter collectively referred to as the developers) formed CCP. Each had a one-third interest in the partnership. CCP was principally engaged in the real estate business in the Syracuse, New York, area. Stonehedge Development Corporation (Stonehedge) was organized on April 8, 1953. The stock of Stonehedge was owned equally by Peter, Rocco, and Paduano from its organization through May 26, 1969. Seneca Sewerage Corporation (Seneca) was organized on April 1, 1961, for the purpose of operating a sanitary sewage treatment plant. The stock of Seneca was owned equally by Peter, Rocco, and Paduano through May 26, 1969. On May 27, 1969, Paduano retired from active participation and ownership in all the corporate and business ventures they had undertaken together, except with respect to the partnership. Subsequently, in 1969, and in all of 1970, 1971, and 1972, the stock of Stonehedge was owned equally by Peter and Rocco, as was the stock of Seneca. The partnership ownership interests remained the same, although Paduano did not take an active part in the operations of CCP.
The general plan of the developers was to have CCP acquire options and purchase individual properties until it had put together a parcel of land which could be developed; CCP would make no efforts to improve or subdivide the parcel but would subsequently sell it, at a profit, to Stonehedge, which would make the necessary improvements, obtain new zoning (if necessary), subdivide the lots, and construct and sell houses or other buildings. The proceeds from these sales would provide Stonehedge with the necessary funds to discharge the obligations which it incurred in acquiring the land from CCP.
CCP also owned other properties for investment purposes, such as a bowling alley, an office building, and other rental properties.
Between 1955 and 1962, Stonehedge developed a community known as Seneca Knolls in the Town of Van Buren, New York. Henderson farm, lying adjacent to Seneca Knolls, was purchased by CCP on March 8, 1960, for $125,460. The farm was sold to Stonehedge on February 20, 1961, in consideration of a cash payment of $28,122.25, the assumption of mortgage obligations totaling $107,605.14, and a note in the amount of $81,000, bearing interest at six percent per annum, secured by a purchase money mortgage, and providing for payment of principal to be made in equal installments plus interest on the first and second anniversaries of the sale.
During the period February 22, 1961, through January 3, 1962, CCP acquired five contiguous farms (hereinafter the Seneca Knolls farms) at a total cost of $320,083.4 The Seneca Knolls farms lay between two previously completed sections of the Seneca Knolls community. CCP anticipated that the Seneca Knolls farms would be sold to Stonehedge (or another developer) who would then subdivide them into lots for individual sale.
Prior to purchasing the Seneca Knolls farms, however, Stonehedge wanted to be relatively certain that the Town of Van Buren would rezone the land for residential lots of the size they desired. Peter and Rocco had contacts with various town officials and were given conflicting signals regarding the zoning request. Nonetheless, in late 1961 and early 1962, their lawyer, James M. Cerio,5 drafted the necessary documents for the Seneca Knolls farms to be transferred to Stonehedge. Cerio brought these documents — a closing statement, mortgage note, mortgage and the deed — with him to a meeting at the developers' offices on January 10, 1962. At that meeting, Peter signed the closing statement, note, mortgage, and deed as president of Stonehedge; Peter, Rocco, and Paduano all signed the deed. During the meeting, while signing the documents, the parties realized that there was a serious question whether the zoning request, with negotiated modifications, would be approved. Consequently, the individuals held up signing the closing statement and concluding the sale until they were reasonably satisfied that the zoning problem would be resolved. Cerio left and Peter placed the documents in the CCP files in the office.6 CCP paid the real estate tax on the properties for 1962.
On December 28, 1962, another meeting was held to close the sale. Checks were written to cover transfer and recording fees, legal fees, and the cash balance due CCP according to the closing statement. Cerio recorded the deed later that day; when the deed was returned after the recording, it was placed in the Stonehedge file. Stonehedge made no payments on the purchase between January 10 and December 28, 1962. The total purchase price for the farms was $1,353,600. Stonehedge was to assume mortgages on the land (from CCP's purchases) totaling $275,170. In addition, it gave CCP a mortgage and non-interest bearing note for $1,075,000 to be paid $75,000 on January 10, 1964, and $100,000 on each successive January 10 until the balance was paid in full. The deed, note, and mortgage retained the January 10, 1962, date reflected in the documents originally prepared for the sale.
After the January 10, 1962, meeting, Stonehedge continued its attempts to get the zoning change. In an application to the Planning Board of the Town of Van Buren in June 1962, Stonehedge stated that the land was "now owned by deed or contract by Stonehedge," and that "prior to development, complete title by deed will be held by the Corporation." Its petition to the Town Board merely made the former statement as did Cerio in his appearance for Stonehedge at an August 16, 1962, hearing on the application.7 Cerio's presentation, as well as the petition to the board, explained that the development planned on the parcel was "in conformity with the developer's master plan of development conceived and laid out prior to the enactment of the present zoning ordinances in 1961."
The Town Board refused Stonehedge's request, so Stonehedge brought an action to compel approval of the rezoning request in August 1963. In its complaint, Stonehedge stated that it "is and at all times hereinafter mentioned was the owner of the Seneca Knolls farms;" that period included the summer of 1962, during which time the rezoning applications were pending.
During all of the taxable years 1970 and 1971, and during the period from January 1 until March 13, 1972, CCP carried two mortgage receiveables on its books and records due from Stonehedge. These mortgages resulted from the sale of the Henderson farm and the Seneca Knolls farms by CCP to Stonehedge. The outstanding...
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