Industrial & Agrigrowth Consulting Services, Inc. v. C.I.R., 081688 FEDTAX, 1373-85

Docket Nº:1373-85, 1374-85, 43176-85.
Opinion Judge:SWIFT, JUDGE:
Attorney:Theodore F. Brill, for the petitioners. Vera E. Gilford and Sergio Garcia-Pages, for the respondent.
Case Date:August 16, 1988
Court:United States Tax Court

55 T.C.M. (CCH) 1614




Nos. 1373-85, 1374-85, 43176-85.

United States Tax Court

August 16, 1988

Theodore F. Brill, for the petitioners.

Vera E. Gilford and Sergio Garcia-Pages, for the respondent.

Petitioner deducted the cost of ornamental trees purchased during each of the years 1977 through 1982. HELD: The purchase costs of the trees in issue are capital in nature and therefore are not currently deductible. HELD FURTHER: Petitioner failed to establish that the trees in issue qualify as ‘ young plants‘ under sec. 1.162-12(a), Income Tax Regs.



In these consolidated cases, respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:

Petitioner Industrial & Agrigrowth Consulting Services, Inc.
(docket No. 1373-85)
Additions to Tax, Secs.2
Year Deficiency 6651(a) 6653(a)
1980 $13,997.85 $3,499.46 $699.89
Petitioner Diversified Agronomics Ltd., (docket No. 1374-85)
Additions to Tax, Secs.
Year Deficiency 6651(a) 6653(a)
1980 $118,192.76 $29,548.19 $5,909.64
Petitioners Tyrone Kindor, Diversified Agronomics Ltd.,
and Industrial & Agrigrowth Consulting Services, Inc.
(docket No. 43176-85)
Petitioner Tyrone Kindor
Additions to Tax, Secs.
Year Deficiency 6651(a) 6653(a)(1)* 6653(a)(2) 6654(a)
1978 $ 40,200.70 $10,050.18 $ 2,010.04 - $ 1,268.56
1979 87,705.90 21,926.48 4,385.25 - 3,712.41
1980 160,535.90 40,133.98 8,026.80 - 10,219.87
1981 120,422.10 - 6,021.11 ** -
1982 243,420.51 - 12,171.03 *** -
Petitioner Diversified Agronomics Ltd.
Additions to Tax, Secs.
Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2)
1981 $200,769 $50,192 $10,038 *
1982 184,633 46,158 9,232 **
Petitioner Industrial & Agrigrowth Consulting Services, Inc.
Additions to Tax, Secs.
Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2)
1981 $1,794 $449 $90 *
After concessions, the only substantive issue for decision is the proper treatment for Federal income tax purposes of the costs of ornamental trees purchased by petitioner Diversified Agronomics Ltd. during each of the years in issue. Because this issue pertains only to Diversified Agronomics Ltd., generally references to ‘ petitioner‘ will be to Diversified Agronomics. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioner maintained its principal place of business in Miami, Florida, at the time the petitions in this case were filed. Petitioner was organized in 1977 under the laws of the state of New York and is wholly owned by Tyrone Kindor, also a petitioner in these consolidated cases. Mr. Kindor is petitioner's president and vice president. During the years in issue, petitioner purchased and sold specimen ornamental trees and offered consulting services to the agriculture industry. Petitioner purchased ornamental trees from Fountainhead Nurseries (Fountainhead), a large commercial nursery in Arizona. Petitioner purchased the trees with the stated intention of cultivating and growing the trees until they reached an optimum or more marketable size, at which time petitioner would sell the trees to retirement communities under development in Sun City, Arizona. After purchase by petitioner, the trees remained in the possession of Fountainhead, and petitioner contracted with Fountainhead to maintain and care for the trees until sold by petitioner. Petitioner's books and records with respect to its purchase and sale of trees were maintained on the accrual basis. The chart below indicates the type and number of trees petitioner purchased in each of the years 1977 through 1982, the total purchase price for the trees purchased each year, and the portion of the total purchase price that was to be paid with cash and with recourse and nonrecourse promissory notes.
Date of Type & Number Purchase Cash Promissory Notes
Purchase of Trees Price Paid* Nonrecourse Recourse
Dec. 31, 1977 Queen Palms-1,012 $ 99,074.80 $ 5,000.00 $ 94,074.80 $ -
Dec. 31, 1978 Bottle-1,632 122,400.00 4,000.00 118,400.00 -
Dec. 31, 1979 Sumac-1,625 and
Olive-1,040 199,875.00 3,000.00 - 196,875.00
Dec. 31, 1980 Various-4,476 71,485.60 3,000.00 68,485.60 -
Jan. 2, 1981 Various-4,128 99,074.80 -0- (Credit memo) -
Dec. 31, 1981 Various-22,773 457,741.56 45,774.56 - 441,967.00
Dec. 28, 1982 Various-14,536 241,138.35 24,133.84 - 217,024.51
Payments of principal and interest on the promissory notes generally were due at the end of each year, with interest at either six or nine percent, and with a large balloon payment due on each note at the end of five years. Petitioner's debt obligations with respect to the notes were secured by the trees purchased from Fountainhead. Petitioner made some of the note payments each year on a timely basis. On August 25, 1980, Fountainhead granted petitioner the option to extend the due dates on the 1977 and 1978 promissory notes for up to five additional years at an interest rate of six percent per year. The record is not clear as to whether the balloon payments of principal and interest were ever paid. On December 30, 1983, petitioner executed six promissory notes in favor of Fountainhead extending the due dates on the 1977 through 1982 promissory notes to December 30, 1988. Each new promissory note provided for annual payments over five years at nine percent per year, [3] with a balloon payment on December 30, 1988, of the balance due on the notes. The record is not clear as to the size and maturity of the trees at the time they were purchased by petitioner. Many of the trees were planted in containers, ranging in size from 5 to 15 gallons. Many of the trees were planted in the ground on Fountainhead's property. A number of the trees were six feet in height. The record provides little further specific information concerning the maturity or marketability of the trees at the time of purchase by petitioner. Based on the facts in evidence, however, the trees cannot be regarded as young plants. Although perhaps not yet developed to their optimum size for resale, essentially all of the trees appear to have reached a stage where they were marketable and had resale prices associated with them at the time of purchase by petitioner. The prices at which the trees were sold to petitioner (ranging from approximately $5 to $100 each) were based on the wholesale prices for different types and sizes of trees as set forth in wholesale price catalogs published by the nursery industry that were available to petitioner and Fountainhead. Petitioner and Fountainhead entered into a management agreement each year with respect to the trees sold to petitioner. Under those agreements, petitioner was to lease the land on which the purchased trees were growing, and was to pay Fountainhead a fee for maintaining and cultivating the trees. No specific dollar amount was set forth in the management agreements for these services and no payment schedule was established. It was simply stated that ‘ upon demand by Fountainhead,‘ petitioner would pay Fountainhead a lease payment for the land and a management fee based on full cost reimbursement and a 10-percent commission. In fact, petitioner never made a payment to Fountainhead under the management agreements, and apparently Fountainhead made no demand for payment. During some of the years, Fountainhead or a related company was responsible under the management agreements to market and sell the trees. In December of 1978, a severe freeze occurred in Arizona, killing all 1,012 trees that petitioner had purchased from Fountainhead in 1977. Under the 1977 management agreement with respect to those trees, Fountainhead was to obtain insurance to cover such risk of loss. Apparently, no insurance was obtained. On January 2,1981, Fountainhead sold 4,128 trees to petitioner and gave petitioner a credit in the amount of $99,074.80 in full payment for the 1,012 damaged trees. The amount of the credit was based on petitioner's cost of the 1977 trees that were damaged in the December 1978 freeze. Fountainhead assumed responsibility for the loss to the 1977 trees on the ground that it had negligently maintained the trees in an unsuitable environment. Sometime in 1981, Fountainhead, on petitioner's behalf, sold for $92,756.16 the trees purchased from Fountainhead on January 2, 1981. The record does not indicate the buyer, nor whether the trees were sold as a unit or separately. The net loss incurred on the sale was $6,318.64. On December 23, 1981, petitioner entered on its books and records a receivable due from Fountainhead in the total amount of this sale. Fountainhead, therefore, apparently did not remit the proceeds of the sale to petitioner. Throughout 1981, many of the trees petitioner purchased on December 31, 1980, also were sold. Total sales proceeds with respect to the trees sold was $12,494.35, and on December 23, 1981, petitioner recorded in its books a receivable in the amount of $12,494.35 with respect to these sales. Petitioner, therefore, apparently did not receive any of the proceeds from the sales that occurred in 1981. During...

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