Marcello v. C.I.R., 111864 FEDTAX, 93913

Docket Nº:93913, 2654-62, 2653-62, 2380-63.
Opinion Judge:DAWSON, Judge:
Attorney:deQuincy V. Sutton, for the petitioners. Robert S. Leigh, for the respondent.
Case Date:November 18, 1964
Court:United States Tax Court

23 T.C.M. (CCH) 1847 (1964)

T.C. Memo. 1964-299




Nos. 93913, 2654-62, 2653-62, 2380-63.

United States Tax Court.

November 18, 1964

deQuincy V. Sutton, for the petitioners.

Robert S. Leigh, for the respondent.


DAWSON, Judge:

Respondent determined the following deficiencies and additions to income taxes of the petitioners:

Docket Additions to Tax, I.R.C. 1954

Petitioner Number Year Deficiency Sec. 6651(a) Sec. 6653(a)

Carlos and Jacqueline 93913 1956 $14,142.19

Marcello 1957 27,333.19

1958 49,446.49

1959 30,840.86 $3,084.09

Vincent and Sadie 2653-62 1958 23,522.36 $1,176.12

Marcello 1959 13,735.55 686.78

Salvador J. Marcello 2654-62 1958 19,786.79 989.34

Salvador J. Marcello 2380-63 1959 4,399.08 219.95

Petitioners, Carlos Marcello, Jacqueline Marcello, Vincent Marcello, Sadie Marcello, and Salvador Marcello, will be sometimes identified by their given names. The parties made certain concessions during the trial and on brief which will be given effect in the Rule 50 computations. The issues remaining for decisions are: (1) Whether petitioners realized taxable gain in 1959 with respect to the sale of an undivided interest in inherited real estate and, if so, in what amount; (2) whether Carlos and Vincent understated their distributive shares of the net income of Jefferson Music Company, a partnership, for the years 1956, 1957, 1958, and 1959 with respect to Carlos and 1958 and 1959 with respect to Vincent; (3) whether Carlos and Salvador understated their distributive shares of the net income of the Town and Country Motel, a partnership for the years 1956, 1957, 1958, and 1959 with respect to Carlos and for the years 1958 and 1959 with respect to Salvador; (4) whether Carlos and Jacqueline are entitled to treat a gain realized upon the sale of their personal residence under the provisions of section 1034, Internal Revenue Code of 1954; [2] (5) whether Carlos and Jacqueline are entitled to certain itemized deductions for the years 1956 through 1959 for unreimbursed expenses, interest payments, attorney fees, bad debts, and depreciation on building improvements; (6) whether Vincent and Sadie are entitled to certain itemized deductions for the years 1958 and 1959 for unreimbursed business expenses; (7) whether Salvador is entitled to certain itemized deductions for the years 1958 and 1959 for business expenses, charitable contributions, and interest; (8) whether Carlos and Jacqueline are liable for an addition to tax under the provisions of section 6651(a) for 1959; and (9) whether Vincent and Sadie and Salvador are liable for additions to tax under the provisions of section 6653(a) for the years 1958 and 1959. FINDINGS OF FACT. Some of the facts have been stipulated and are so found. Carlos and Jacqueline, husband and wife, reside at 577 Woodvine, Metairie, Louisiana. Vincent and Sadie, husband and wife, reside at 28 Smithvoy Drive, Gretna, Louisiana. Petitioners filed their joint income tax returns for the years involved with the district director of internal revenue at New Orleans. Salvador resides at 527 Jefferson Park Avenue, Metairie, Louisiana, and he filed his individual income tax returns for 1958 and 1959 with the same office. Issue 1. Succession Property On July 1, 1955, Louisa Farrugia Marcello (hereinafter called Louisa), the widow of Joseph Marcello, Sr., and her nine children filed a petition in the District Court in and for the Parish of Jefferson, State of Louisiana, in connection with succession of the property of Joseph Marcello, Sr., deceased. That court ordered that Louisa be recognized as the surviving spouse in the community of the deceased, Joseph Marcello, Sr., entitled as such to the ownership of one-half or nine-eighteenths of the property left by the deceased and to a usufruct interest in the other one-half or nine-eighteenths of the decedent's property. The court also ordered that the nine children be recognized as the sole heirs of their deceased father and that each child was entitled to the ownership of an undivided one-eighteenth interest in the property left by the deceased subject to the usufruct vested in the mother. Louisa was born on February 6, 1893. Joseph Marcello, Sr., died in 1952. Included in the inheritance was a certain parcel of land, consisting of approximately 183 acres, designated as Tracts Nos. 9 and 10, Oakdale, Subdivision, Section ‘ C,‘ Jefferson Parish, State of Louisiana (hereinafter called Tract C). Tract C was valued for estate purposes at $40,000. On December 26, 1958, Tract C was sold in nine separate parcels of approximately 20.333 acres each by Louisa and the nine children. The purchasers were nine newly organized corporations in which the sellers had no interest. The names of the purchasing corporation were Gems, Inc., Pearl Lands, Inc., Amethyst Lands, Inc., Emerald Lands, Inc., Sapphire Lands, Inc., Garnet Lands, Inc., Topaz Lands, Inc., Ruby Lands, Inc., and Moonlight, Inc. Each of these corporations, organized under the laws of the State of Louisiana, had been initially capitalized for $10,000. After the sales, James J. Culotta, a residential real estate developer and builder and owner of all the stock of the nine corporations, transferred 50 percent of the shares in each corporation to Joseph Connolly, who had participated in prior residential construction developments with Culotta. James J. Culotta transferred the 53 percent stock interests in the nine corporations to Joseph Connolly on the promise and understanding that Joseph Connolly would be responsible for raising the necessary financing for the proposed residential development of Tract C. No other consideration was exchanged. Another development project in which James J. Culotta and Joseph Connolly had joint interests about the time of the sale of Tract C to the nine corporations had failed. Each of the newly organized corporations gave, as total consideration, a negotiable promissory note, dated December 26, 1958, in the principal amount of $111,111.11. Each note was secured by special mortgage and vendor's lien in the appropriate deed of sale for the respective 20.333 acres conveyed to such corporation. Each note was signed in the name of the appropriate corporation by ‘ James J. Culotta, President.’ Each note provided that payments were to be made in ten annual installments of $11,111.11 commencing on December 26, 1959. Each note also provided that payments would be made by the respective corporation to the order of Bearer, $111,111.11, for value received, with interest payable monthly at the rate of 6 percent per annum until paid. The notes also included provisions as to the makers and endorsers' waiver of presentment for payment, demand notice of nonpayment and protest. The notes further provide for non-waiver of rights by any delay in the exercise of such rights. The notes were in default from the due date of the first payment with respect to principal and interest. Except in one instance, which will be described hereinafter, no payment has been made on these notes. Each note also bears the personal endorsement of James J. Culotta. The acts or deeds of credit sale were signed for the grantors by Carlos J. Marcello, individually, and as agent and attorney-in-fact for Louisa, Vincent J. Marcello, Peter J. Marcello, Pascal J. Marcello, Joseph Marcello, Jr., Anthony J. Marcello, Salvador J. Marcello, Marry M. Loria, and Rose M. Badalamenti. The power of attorney was dated December 22, 1958, and it appointed Carlos J. Marcello as the true and lawful agent and attorney-in-fact for the mother and the other eight children. Carlos J. Marcello was given the power to sell and deliver, with all legal warranties, Tract C to any person or persons, firms, or corporation or corporations, for such price and on such terms and conditions as he might deem fit and proper. Each of the deeds of sale includes a provision that the purchaser agrees, in the event the promissory note is not paid at maturity, that it shall be lawful for the vendor, or any holder or holders of the note, to cause the property to be seized and sold without demand or service of notice of demand for payment or of notice of procedure and without appraisement, to the highest bidder, payable in cash; and that the purchaser confesses judgment in favor of the vendor or any future holder or holders of the note. Each of the acts of sale includes the provision that partial release of any one or more of the lots into which the property will be subdivided will be granted by the vendors upon payment towards the balance due on the above-described note of a sum proportionate to the ratio which the lot or lots sought to be released shall bear to the total number of lots into which the property is to be subdivided. Each act also provides that in order to facilitate the development of the property, or for the construction of streets and/or offsite improvements, the vendors will do all and whatsoever may be necessary in order to subordinate the vendor's lien and mortgage therein granted to any mortgage and/or building contract made by the purchaser for the purpose of construction financing of such development. On November 4, 1959, 10 months after the sale of Tract C, the nine notes were pledged on behalf of the Marcello family and their...

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