Erickson Post Acquisition, Inc. v. Commissioner
| Decision Date | 22 July 2003 |
| Docket Number | Docket No. 8218-00. |
| Citation | 86 T.C.M. 111 |
| Parties | Erickson Post Acquisition, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined deficiencies in petitioner's Federal income tax of $18,946 for 1996 and $1,719 for 1997.
The issue for decision is whether $175,000 petitioner received from Amoco Oil Co. (Amoco) in 1996 is deferred income under section 61(a), as respondent contends, or a loan excluded from income, as petitioner contends.1
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
When the petition in this case was filed, petitioner maintained its principal office in Stillwater, Minnesota. Petitioner was incorporated under the laws of the State of Minnesota on July 13, 1994. During the years at issue, and at all times subsequent thereto, Richard Zimmerman (Mr. Zimmerman) and his wife, Janet Zimmerman (Mrs. Zimmerman), each owned 50 percent of petitioner's issued and outstanding common stock. Mr. Zimmerman served as president and Mrs. Zimmerman as vice president. Mr. Zimmerman is primarily responsible for management of the day-to-day operations of petitioner's business activities. Since the date of incorporation, petitioner's principal business has been the ownership and operation of two gasoline stations/convenience stores in Stillwater, Minnesota—one at 14738 North 60th Street (the 60th Street property) and the other at 2500 West Orleans Street (the Orleans Street property). During 1996, petitioner remodeled the structure and completed improvements to the exterior areas of the 60th Street property.
In early 1996, petitioner began exploring an arrangement with a major brand oil company. Mr. Zimmerman contacted representatives of Amoco and two other companies to solicit proposals for petitioner's gas station at the 60th Street property. Mr. Zimmerman received offers from all three. In evaluating the proposals by the three oil companies, Mr. Zimmerman considered the companies' proposed up-front cash advances, equipment contributions, gallonage rebates, and brand name strength. Mr. Zimmerman selected Amoco because it offered the most up-front money, and he believed that Amoco had the strongest brand recognition.
Amoco and petitioner entered into a dealer supply agreement dated March 11, 1996, that provided for petitioner's purchase and sale of Amoco products at the 60th Street property for a 5-year period commencing July 1, 1996, and ending June 30, 2001. The dealer supply agreement was accompanied by a number of other documents that Amoco and petitioner executed on or about the same date, including an equipment and sign loan agreement, a dealer/jobber credit card contract, an electronic dealer delivery plan, an electronic authorization, an image leadership contract, and a Clean Air Act rider.
Mr. Zimmerman executed a document entitled "Unlimited Guarantee", dated May 29, 1996, pursuant to which he guaranteed petitioner's indebtedness to Amoco. Mr. Zimmerman did not receive any compensation or other consideration from petitioner in connection with the "Unlimited Guarantee".
Petitioner and Amoco executed a rider to the dealer supply agreement dated June 5, 1996. The rider contained additional matters not contained in the supply agreement, including an option (in favor of petitioner) to renew the initial 5-year term for two successive 5-year periods.
Amoco agreed to provide petitioner with certain equipment and improvements, as well as a cash payment of $175,000 characterized as a "loan". Amoco sent the $175,000 to petitioner on or about June 18, 1996.
Mr. Zimmerman executed a promissory note dated July 1, 1996, evidencing petitioner's obligation to repay the $175,000.2 The promissory note provided for the repayment of $175,000 over 10 years in annual installments of $17,500 plus interest at the rate of 6 percent per annum. The first installment was due June 30, 1997. The note further provided that the annual installment was to be deemed paid (i.e, the installment amount was forgiven), provided the dealer supply agreement and the rider remained in full force and effect on the due date of the installment.
Mr. Zimmerman also executed, on petitioner's behalf, a mortgage security agreement and an assignment of rents dated July 1, 1996 (the mortgage). The mortgage secured petitioner's obligation to repay the Amoco advance with a lien on the 60th Street property. The mortgage provided that in the event of a transfer of the 60th Street property, at Amoco's election, all sums secured by the mortgage would become immediately due and payable. The mortgage further provided that, in the event a transfer occurred and Amoco did not elect acceleration of the debt, then the transferee would be deemed to have assumed all of petitioner's obligations under the mortgage.
Although the mortgage stated that it constituted a "second" priority lien on the property, it indicated that it was "superior to any and all other liens." Further, there were no other mortgages on the property. The mortgage was recorded with the Office of County Recorder, Washington County, Minnesota, on August 26, 1996.
Amoco's business practice was to enforce the collection of a promissory note made by a dealer/borrower if the dealer defaulted on the note. When a dealer abandoned a station, sold the station, or had significant financial trouble, Amoco routinely took steps to collect the outstanding balance of any loan.
Amoco did not place any restrictions on petitioner's use or application of the Amoco advance. Petitioner used the Amoco advance for the following expenditures:
(a) Approximately $120,000 for the purchase and/or installation of multiproduct pumps, card readers, interior counters, exterior canopy lighting, and floor tiling;
(b) $50,000 to Lake Elmo Bank, Lake Elmo, Minnesota, for principal and interest on a mortgage on the Orleans Street property; and
(c) approximately $1,000 for wall tiling in the deli area of the gas station/convenience store at the Orleans Street property.
Neither petitioner nor Amoco terminated the dealer supply agreement, and none of the early termination events specified in the rider occurred through the first 5-year term. Petitioner has not repaid Amoco any portion of the Amoco advance.
Amoco's records indicate that it issued Forms 1099 to "Richard Zimmerman, Stillwater Amoco" for 1996 and 1997 for the respective amounts of $10,208.31 and $4,374.99. However, the IRS has no record of any Forms 1099 being issued by Amoco to petitioner, Mr. Zimmerman, and/or Stillwater Amoco for 1996 and 1997.
Petitioner recorded the $175,000 Amoco advance on its books as "Amoco/Deferred Income". Each month, petitioner reduced the "Amoco/Deferred Income" account balance by $1,458.33. This amount was determined by dividing $175,000 by 120 months. Petitioner did not record on its books any amount for interest accruing on the Amoco advance.
Petitioner timely filed its Forms 1120, U.S. Corporation Income Tax Return, for the taxable years 1996 and 1997. On Schedule L, Balance Sheets per Books, attached to petitioner's 1996 Form 1120, petitioner reported $164,792 of the Amoco advance as a liability representing deferred income. On the 1996 Form 1120, petitioner reported the credited $10,208 payment in connection with the Amoco advance as other income. On the 1996 return, petitioner reported a 1996 net operating loss of $91,654 and a net operating loss carryover from 1995 of $38,317, resulting in a $129,971 net operating loss carryover to 1997.
On Schedule L, Balance Sheets per Books, attached to petitioner's 1997 Form 1120, petitioner reported $147,292 of the Amoco advance as a liability representing deferred income. On the 1997 Form 1120, petitioner reported the $17,500 credited payment as other income and described the payment as miscellaneous income from the store. On the 1997 return, petitioner reported taxable income of $28,963 before net operating loss deduction and a net operating loss carryover deduction of $28,963 from the available $129,971 net operating loss carryover from 1995 and 1996. As a result, petitioner reported no taxable income for 1997.
Petitioner's 1996 and 1997 Forms 1120 do not include any interest expense or interest income from the crediting of the annual installments on the Amoco note.
In the notice of deficiency issued to petitioner, respondent determined that the Amoco advance was income to petitioner in 1996. As a result of that determination, respondent increased petitioner's income for 1996 by $164,792 and decreased petitioner's income by $17,500 for 1997. Respondent also adjusted petitioner's 1996 income to reflect the $38,317 net operating loss carryover from 1995, resulting in taxable income of $34,821 for 1996 and eliminating any net operating loss carryforward to 1997. The adjustments for 1997 resulted in taxable income of $11,463 for that year.
OPINIONGross income includes income from whatever source derived. Sec. 61(a). Income is defined as "undeniable accessions to wealth, clearly realized" by a taxpayer over which the taxpayer has "complete dominion". Commissioner v. Glenshaw Glass Co. [55-1 USTC ¶ 9308], 348 U.S. 426, 431 (1955). If there is no clearly realized accretion to wealth resulting from a transaction, then there is no income from the transaction. Martin v. United States [98-2 USTC ¶ 50,889], 159 F.3d 932, 935 (5th Cir. 1998).
Generally, proceeds of a loan do not constitute income to a borrower because the benefit is offset by an obligation to repay. United States v. Rochelle [67-2 USTC ¶ 9694], 384 F.2d 748, 751 (5th Cir. 1967) (citing James v. United States [61-1 USTC ¶ 9449], 366 U.S. 213, 219 (1961)); Arlen v. Commissioner [Dec. 28,559], 48 T.C. 640, 648 (1967). Loans do not result...
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