MARCO S. MARINELLO ASSOCIATES, INC. v. Commissioner
| Decision Date | 25 March 1975 |
| Docket Number | 5639-70.,Docket No. 5612-70 |
| Citation | 34 TCM (CCH) 392,1975 TC Memo 78 |
| Parties | Marco S. Marinello Associates, Inc. v. Commissioner. Marco S. Marinello and Mary S. Marinello v. Commissioner. |
| Court | U.S. Tax Court |
Cornelius J. Moriarty, Jr., 1048.56 Suffolk St., Holyoke, Mass., for petitioners. Willard J. Frank, for respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income taxes of petitioners as follows:1
The issues remaining to be decided are:
1. Whether the corporation realized gain in 1965 as a result of an involuntary conversion.
2. Whether section 10332 permits the deferral or nonrecognition of any gain realized in 1965 or 1966 on such conversion.
3. Whether any portion of a condemnation award was paid for severance damages.
4. Whether certain payments made by the corporation to its sole shareholder constituted repayment of debts and interest thereon, or constructive dividends.
Some of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Marco S. and Mary S. Marinello3 resided in Holyoke, Massachusetts, at the time their petition was filed. Their Federal income tax returns for 1965 and 1966 were filed on the cash basis with the district director of internal revenue, Boston, Massachusetts. Marco S. Marinello Associates, Inc.,4 had its principal place of business at the time its petition herein was filed in Holyoke, Massachusetts. Its accrual basis Federal income tax returns for the taxable years in question were filed with the district director of internal revenue, Boston, Massachusetts.
At all material times, Marinello was president of Associates, and its sole shareholder. Since its incorporation on January 24, 1956, Associates has been engaged in the operation of a golf course and related activities in Holyoke, Massachusetts, first as lessee and subsequently as owner.
Prior to May 5, 1964, the golf course consisted of 18 playing holes and a clubhouse located on approximately 115 acres of land.
On May 5, 1964, the Commonwealth of Massachusetts took a portion of the golf course by eminent domain, for the purpose of constructing an interstate highway. The property taken consisted of a strip of land approximately 300 feet wide, totaling approximately 21 acres. The taking destroyed six of the 18 holes of the golf course, and the line of taking passed through and hence destroyed its clubhouse. The taking also cut off the course's only access to a street.
On or about January 21, 1965, the Commonwealth offered Associates $281,000 as compensation for the damages caused by the taking. The legal effect of such an offer, whether accepted or not, was to foreclose the recovery of interest in a subsequent damage action on any award not in excess of the Commonwealth's offer. Associates elected to accept the offer as payment pro tanto, meaning it retained the right to seek additional damages but could also be required to return part of the award, with interest, if $281,000 exceeded the damages ultimately determined by a court.
The $281,000 settlement was based upon a report by a reviewing appraiser who characterized it as a reasonable measure of "fair market value and/or damages."
Associates received the $281,000 pro tanto payment on or about February 15, 1965. Of this amount, $92,824.92 was paid directly to the Holyoke National Bank in satisfaction of a first mortgage on the corporation's real estate. Some of the pro tanto award was used to repay the amounts carried on the corporate books as accounts and notes payable to Marinello. Associates also invested part of the proceeds in savings certificates.
On or about January 11, 1965, Associates filed a petition for assessment of damages in state court. A jury trial followed. The jury found total damages resulting from the taking in the amount of $368,000, against which the pro tanto payment was applied, leaving a balance of $87,000 plus accumulated interest. Payment of this amount took place on April 5, 1966. The jury award did not allocate any specific sum to severance damages. Associates' adjusted basis in the condemned property was $65,315.20. The adjusted basis of the remaining property of Associates was in excess of $35,000.
As of May 31, 1966, the corporation had reinvested $40,341.18 of the award in eligible replacement property. All of the remaining proceeds were similarly reinvested by May 31, 1967.
During June and July, 1967, Associates borrowed $145,000.00 from Holyoke National Bank. On March 14, 1968, it was granted a mortgage loan by the Small Business Administration in the amount of $250,000.00, of which $144,019.20 was paid directly to Holyoke National Bank in payment of its loan. The proceeds of these loans were used to finance the replacement of the condemned property.
Associates was advised by its accountant, and believed, that it would be entitled to defer recognition of its gain under section 1033 if all the proceeds of the taking were reinvested in replacement property within one year after the close of the taxable year in which it received the final judicial award; that is, by May 31, 1967. The accountant was neither an attorney nor a certified public accountant, and had never held a Treasury card. He based his judgment of the time within which reinvestment was required solely on discussions with an employee of the Massachusetts Department of Public Works and consultation of a commercially published tax service. Although the accountant was aware of Associates' court petition seeking additional damages, he never obtained an estimate of how long the trial was expected to last.
On or about October 14, 1968, an audit of Associates' Federal income tax returns by the Internal Revenue Service was completed. On or about the following January 14, Associates filed an application for extension of the time permitted for replacement of the converted property. The application was denied by the district director, as was the corporation's request for reconsideration.
The organization of Associates followed negotiations between Marinello and the Wyckoff Park Realty Corporation (Wyckoff), at that time the owner of the golf course. On February 9, 1956, Associates and Wyckoff entered into an agreement whereby Associates leased the property at an annual rental of $3,000 for a term of 20 years. Associates was obligated to construct a new clubhouse for the golf course with a value of at least $25,000. It also received an option to buy the property for $60,000. On April 24, 1962, Associates exercised its option to purchase the property. At the time it was acquired, the golf course was in a run-down condition and was not operating at a profit. Marinello intended to turn it into a money-making enterprise.
From its inception, Associates' cash requirements were met with funds received from Marinello. Associates carried on its books an account labelled "Accounts Payable — Marco" representing sums advanced by Marinello at various times from the date of incorporation through May 31, 1960. During the fiscal years ending May 31, 1965 and May 31, 1966, payments totaling $6,629.19 and $7,300.00, respectively, were made by Associates on this account.5
The corporate books also contain an account labelled "M.S. Marinello — Notes Pay." The sums credited to this account, according to the corresponding journal entries, were as follows:
Date Explanation Amount
(undated) to record bonus to Marco
for the year .............. $ 3,600.00
9/30/60 to show Marco's Note in
its own acct. ............. 7,555.00
5/17/62 to record salary for Marco
S. Marinello for the year
of $17,000.00 withholding
$3,400.00 for taxes and
$150.00 for social security
........................... 13,450.00
5/15/63 to record note given
to Marco S. Marinello
for salary for the
year withheld Fed
tax $2,800.00; state
tax $430.50; Soc. Sec
$174.00. Actual salary
gross $14,000.00 .......... 10,595.50
5/ 6/64 to record note given to
M. Marinello for salary
for year6 ............ 12,916.00
Payments aggregating $3,861.06 were made on this account prior to May 31, 1962. The balance in the account on June 1, 1964, was $44,255.44, which sum was paid to Marinello on February 25, 1965. On its income tax returns, Associates deducted the following amounts as compensation paid to Marinello:
Taxable year
ending May 31 Amount
1957-1959 .............. None
1960 ................... $ 3,600
1961 ................... 3,600
1962 ................... 17,000
1963 ................... 14,0007
1964 ................... 17,000
1965 ................... None
1966 ................... 12,000
1967 ................... None
Marinello reported these amounts as income in the indicated years. He received 30-day six percent demand notes of the corporation, which were recorded in its notes payable account.
No interest was paid or accrued on any of these notes until May, 1964. At that time, Associates paid Marinello $1,880.37. A further payment of...
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