Estate of Broadhead v. Commissioner
| Decision Date | 07 September 1972 |
| Docket Number | 1340-68.,1836-66,728-68,Docket No. 5127-65 |
| Citation | 1972 TC Memo 195,31 TCM (CCH) 951 |
| Parties | Estate of Sam E. Broadhead (Deceased), S. Norris Broadhead and Paul E. Broadhead, Executors, and Virdie Cox Broadhead, et al. v. Commissioner. |
| Court | U.S. Tax Court |
deQuincy V. Sutton, Lamar Hotel, Meridian, Miss., for the petitioners. James D. Burroughs and Joel Gerber, for the respondent.
Memorandum Findings of Fact and Opinion
The trial of these cases was held in Tuscaloosa and Birmingham, Alabama, before Commissioner James M. Gussis of this Court. His report, which contains findings of fact, was submitted to the Chief Judge. With relatively minor variations we have adopted the findings of fact made by the trial commissioner and they are set forth below.
Respondent determined deficiencies in the petitioners' Federal income tax and additions to tax for the years 1961 through 1965 as follows:
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Docket Income Tax Additions
Petitioners No. Year Deficiency to Tax
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Estate of Sam E. Broadhead, Deceased, S. Norris
Broadhead and Paul E. Broadhead, Executors
and Virdie Cox Broadhead ..................... 5127-65 1961 $222,249.73
1836-66 1962 2,952.48 $ 442.872
1963 228,145.73 57,036.432
1340-68 1964 209,846.81 10,492.343
1965 1,913.17 468.802
Paul E. and Sherry Broadhead .................. 728-68 1965 595.33 29.773
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In docket No. 5127-65 the respondent in an amendment to his answer filed on January 15, 1969, claimed an additional deficiency in petitioners' Federal income tax for 1961 in the amount of $795,579.49 (or a total deficiency in income tax for that year in the amount of $1,017,829.22).
The remaining issues in docket Nos. 5127-65, 1836-66 and 1340-68 are: (1) Whether petitioners realized a gain of $1,205,564.76 from the sale in 1961 to Ark Investments, Inc., of (a) the Togo Island property, (b) certain timberland in Arkansas, and (c) certain timber rights known as the Pickthorn Lease; (2) whether petitioners are entitled to elect to report on the installment method any gain realized by them on the sale of property to Ark Investment, Inc., in 1961; (3) whether petitioners may revoke an election made by them in 1965 to utilize the provisions of section 1038 of the Code; (4) whether the gains realized by petitioners from the sales of property in 1961 and 1963 are taxable as ordinary income or as long-term capital gains; (5) whether $468,930.01 received by petitioners in 1963 resulting from their assignment of an installment note plus accrued interest constituted a sale or disposition under the provisions of section 453(d) of the Code; (6) whether petitioners are entitled to a deduction for certain business losses in the amount of $528,170 in the year 1964; (7) determination of the correct basis to be used in computing gain on the sale of the Avoyelles tract, the Togo Island (Louisiana) property and the Sturgis property in 1963; (8) whether petitioners are liable for the addition to tax in the year 1964 under section 6653(a) of the Code; (9) whether petitioners understated their capital gains for the year 1964 in the amount of $11,761.62; (10) whether petitioners are entitled to deduct in 1965 the amount of $6,813.74 paid to creditors of Broadhead Drilling Company; and (11) whether petitioners are liable for additions to tax in 1965 under section 6651(a) of the Code.
The only remaining issue in docket No. 728-68 is whether petitioners are liable for additions to tax in 1965 under section 6651 (a).
It has been stipulated in docket No. 1836-66 that there are no deficiencies in petitioners' income tax for the year 1962 and that petitioners did not incur any net operating loss in that year. Respondent has conceded that the petitioners in docket No. 1836-66 are not liable for additions to tax in the year 1963 under section 6651(a). Additional concessions made by the parties can be given effect in the Rule 50 computations.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto, as well as the supplemental stipulation of facts, are incorporated herein by this reference. In addition, the facts in the related cases, docket Nos. 844-68 and 3710-69, have been considered by the Court.
During the taxable years involved herein and prior to Sam E. Broadhead's death on February 6, 1965, he and his wife Virdie Cox Broadhead were residents of Meridian, Mississippi. S. Norris Broadhead and Paul E. Broadhead are executors of the Estate of Sam E. Broadhead, and at the time the petitions in docket Nos. 5127-65, 1836-66 and 1340-68 were filed, the executors and the surviving spouse were residents of Meridian, Mississippi.
Sam E. Broadhead and his wife filed their joint Federal income tax returns for the years 1961, 1962 and 1963 with the district director of internal revenue, Jackson, Mississippi. The Estate of Sam E. Broadhead and the surviving spouse filed a Federal income tax return for the year 1964 with the district director of internal revenue, Jackson, Mississippi, and they filed a Federal income tax return for the year 1965 with the southeast service center, Chamblee, Georgia, on November 16, 1966.
Paul E. and Sherry Broadhead, husband and wife, were residents of Meridian, Mississippi at the time the petition in docket No. 728-68 was filed. They filed a joint Federal income tax return for the year 1965 with the district director of internal revenue, Jackson, Mississippi.
Petitioners in docket Nos. 5127-65, 1836-66 and 1340-68 were previously involved in litigation before this Court concerning income taxes for the years 1956, 1958, 1959 and 1960. Estate of Broadhead v. Commissioner 68-1 USTC ¶ 9249, 391 F. 2d 841 (C.A. 5, 1968), affirming a Memorandum Opinion of this Court Dec. 27,834(M). Some of the issues decided in the previous case are dispositive of certain of the issues in the present cases.
Gain from sale to Ark Investments, Inc.
From 1939 to at least the year 1951, Broadhead was engaged in sawmill operations in Clarke County, Mississippi. In subsequent years until about 1960, he acquired substantial timberlands in Mississippi, Arkansas, North Carolina and Louisiana. During these years he sold timberlands, some of which he subsequently repossessed.
Ark Investments, Inc., was formed by Herbert Frederick, Sr., who was president of the corporation. Robert McGill was vice president of the corporation as well as a stockholder. In order to obtain his interest in the corporation, McGill endorsed a $10,000 note on behalf of Frederick. About the year 1952, McGill had obtained a real estate broker's license in Baton Rouge, Louisiana, and was continuously engaged as a real estate broker through the year 1962 or 1963. At Frederick's request, McGill, early in 1961, discussed with Sam E. Broadhead the sale to Frederick of certain Broadhead properties. Negotiations involving the sale of the Broadhead properties continued for a period of approximately four months.
On May 18, 1961, Broadhead sold the following properties to Ark Investments, Inc., for a total amount of $2,850,000: (1) Togo Island consisting of 6,740 acres (6,100 acres located in Louisiana and 640 acres located in Mississippi); (2) 36,000 acres of Arkansas timberland; and (3) timber rights on 4,000 acres of Arkansas land known as the Pickthorn Lease. The deed transferring these properties to Ark Investments, Inc., was dated May 25, 1961. The properties were subject to a first mortgage of $1,400,000 held by Connecticut General Life Insurance Company, which mortgage was assumed by Ark Investments, Inc. Broadhead received $25,000 in cash (option money), three promissory notes in the total amount of $125,000 to cover the balance due as a down payment, and an installment note for $1,300,000 for the balance payable in 15 annual installments, with interest at the rate of six percent payable semi-annually. The three promissory notes for the balance due as a down payment were due on July 1, 1961 ($5,000), August 16, 1961 ($5,000), and May 16, 1962 ($115,000). The first annual installment of $86,666.66 on the $1,300,000 note was payable one year after the date of the agreement.
In connection with the acquisition of the Broadhead properties by Ark Investments, Inc., Frederick studied timber cruises which were prepared and made available to him. Prior to the execution of the deed on May 25, 1961, but after an option had been executed, Frederick and McGill made efforts over a two week period to locate purchasers for the timber on the properties. Frederick was unable to find any buyers for the timber.
Ark Investments, Inc., defaulted on its obligation during the year 1961 and Broadhead received only $3,911.67 toward the down payment and interest due. Broadhead paid the obligation due to Connecticut General Life Insurance Company in 1962 of principal in the amount of $121,600 and interest in the amount of $49,617.55. In January 1963, Broadhead paid the installment due to the insurance company in 1963 of principal and interest in the total amount of $160,156. In January 1964, Broadhead made a further principal payment to Connecticut General Life...
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