Pozzi v. Comm'r of Internal Revenue, Docket No. 7074-65.
| Decision Date | 28 November 1967 |
| Docket Number | Docket No. 7074-65. |
| Parties | EVERETT POZZI AND LUCY POZZI, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A. D. McNeil, for the petitioners.
Roger A. Pott, for the respondent.
1. For several years prior to 1963 Shamrock had sought to purchase a ready-mix concrete plant and business conducted by petitioners as a sole proprietorship. In 1963 petitioners agreed to sell the properties to Shamrock for $200,000. At that time it was the desire and intention of Shamrock to make a cash payment of the total sales price. The petitioners insisted that the sale be made on an installment payment basis and would not accept cash payment of the total sales price. Thereafter extended negotiations followed between petitioners and Shamrock as to security to be furnished for the unpaid portion of the sales price. In order to comply with the requests and demands of petitioners for making sale of the properties, Shamrock, with participation of petitioners, established a detailed and elaborate escrow arrangement whereby $200,000 was placed in escrow as security for the payment of the sales price which the purchaser was to make in stated installments over a subsequent 10-year period. At the time of the sale and transfer of the properties by petitioners, Shamrock was ready, willing, and able to make payment in full of the total sales price. At that time receipt of the total sales price was available to the petitioners at their command. Held, that the sale of the properties did not constitute a true statutory installment sale.
2. Held, that petitioners have not shown that a deduction of $2,000 taken by them for a payment to public accountants was allowable as an ordinary and necessary business expense or as a reduction of the proceeds received by the petitioners from the sale of their properties.
The respondent has determined a deficiency of $33,664.94 in the income tax of the petitioners for 1963. As a result of concessions made by the petitioners, the only issues for determination are the correctness of the respondent's action (1) in determining that the sale by petitioners of their business and assets did not qualify as an installment sale within the purview of section 453 of the Internal Revenue Code of 1954 and that the gain realized thereon was includable in the income tax return of the petitioners for 1963, and (2) in disallowing as a deduction for an ordinary and necessary business expense an accountants' fee of $2,000.
Some of the facts have been stipulated and are found accordingly.
The petitioners are husband and wife and resided at all times herein material in Novato, Calif. They filed a Federal joint income tax return for the year 1963 with the district director of internal revenue in San Francisco, Calif.
Petitioners owned and successfully operated for a number of years a sole proprietorship doing business as E. Pozzi Co., a ready-mix concrete and associated products business located in Novato, Calif. The accrual method of accounting was employed by petitioners in keeping the books and records of their business and in reporting income (or loss) from the business on the Federal income tax returns filed by them.
For several years prior to 1963, Shamrock Materials, Inc., of San Rafael, Calif., sometimes hereinafter referred to as Shamrock, had sought to purchase the E. Pozzi Co. ready-mix plant and business. Finally, in 1963, petitioners agreed to sell them to Shamrock for $200,000. At the time the petitioners agreed to make such sale, it was the desire and intention of Shamrock to make a down cash payment of the total sales price of $200,000. However, the petitioners insisted that the sale be made on an installment payment basis and would not accept a down cash payment of the total sales price.
Thereafter and since the petitioners desired to sell the business and assets on an installment payment basis, they made a proposal of sale to Shamrock by letter dated August 16, 1963. A copy of that letter is not contained in the record. In response thereto, Shamrock being desirous of purchasing the properties and being aware that petitioners would not sell the properties on the cash basis, replied by letter dated August 22, 1963, as follows:
You have presented to us an offer dated August 16, 1963, to purchase your business. Our board of directors at their regular meeting last night authorized the acceptance of said offer as presented, viz., Shamrock Materials, Inc., a corporation, will purchase all of the assets of E. Pozzi Co. for a total price of $200,000, plus the cost of any inventory on hand at the date of transfer. The purchase price will be paid as follows: (1) $5000 with the delivery of this letter, receipt of which is acknowledged by your signature on a copy of this letter. (2) The sum of $25,000 as an additional down payment to be deposited in a local title company by us prior to September 1, 1963. (3) The balance of $170,000 to be payable over a ten-year period, with 6% interest per annum on the unpaid balance, principal and interest payable in monthly installments so as to amortize the balance over the ten years.
The payment for the inventory is to be deposited in escrow immediately after completing the actual inventory count, said escrow to be established with either our attorneys, Gardner, Riede & Elliott, or an escrow agent agreeable to both of us. This escrow is for the purpose of complying with the laws on the sale of a business and any sales taxes due by reason of the transfer of the assets will be split between us. The cost of the escrow on the sale of the business will also be split.
The title company escrow shall close, as to the real property, as soon as possible and all charges of that escrow will be paid by us, except the revenue stamps on the deed which are normally paid by a seller. Title to the real property shall be free and clear of all encumbrances. To secure the aforesaid balance of $170,000 we shall give back to you a first mortgage on the real property, and a chattel mortgage on the equipment, if you so desire.
Possession of the business shall be given to us on September 1, 1963, or as soon thereafter as possible.
The assets included are all those associated with your business, including, without limitation, the batch plant, real property of one acre, more or less, equipment, office and office equipment, the name E. Pozzi Co., shop and shop equipment and trucks, plus all inventory items.
Since your offer to us was not actually signed, (then) by your, and your wife's, signature on a copy of this letter, we shall then have a binding agreement as to the sale on the terms indicated. But, unless you do so indicate your approval at the time of the presentation of this letter and check, we shall have no agreement.
Following receipt of Shamrock's letter of August 22, 1963, the petitioners signed their agreements thereto on a copy of the letter, subject to the following conditions which Shamrock later accepted:
The above signed subject to the following:
1: Mutual agreement between the Seller and buyer as to the liability for payment of Sales Tax.
2: Security in addition to that mentioned above, to secure Note in the amount of $170,000.00, as deemed adequate by sellers.
E. POZZI CO.
SHAMROCK MATERIALS INC.
By (S) E. POZZI
By (S) LEE R. CECCOTTI, President
(S) LUCY POZZI
Shamrock paid to the petitioners on August 22, 1963, the $5,000 mentioned in the letter of that date. On August 29, 1963, Shamrock deposited an additional downpayment of $25,000 with the Title Insurance & Trust Co., San Rafael, Calif., as mentioned in the letter of August 22, 1963, and in addition, an escrow, identified by No. 74777, was established with that company.
About the end of August 1963, petitioner Everett Pozzi went on a trip to Alaska. Prior to his departure he informed his accountant, J. W. Deaton, that he desired that the sale of the E. Pozzi Co. plant and assets be made on an installment payment basis plan, that security for the note for the unpaid portion of the sales price consist not only of the properties involved in the sale but also of additional security and requested Deaton to determine the character and value of such additional security that Shamrock might offer and its acceptableness. Thereafter Deaton, being of the opinion that marketable securities having a loan value by a bank of $120,000 would constitute adequate additional security, so informed Shamrock's accountant.
Thereafter negotiations, the details of which are not disclosed by the record, were carried on by petitioners and Shamrock which culminated in the execution of a new and final agreement dated October 14, 1963, with petitioners as sellers and E. Pozzi Co., Inc., sometimes hereinafter referred to as Pozzi, Inc., as buyer. Shamrock also signed the agreement as guarantor of the performance of all agreements and conditions thereof to be performed by Pozzi, Inc. Pozzi, Inc., was a new corporation formed prior to October 14, 1963, by the officers and shareholders of Shamrock under the laws of the State of California for the purpose of taking title to the properties in issue. All of the capital stock of Pozzi, Inc., was issued to the shareholders of Shamrock, Lee R. Ceccotti, Mario Ghilotti, and Dino Ghilotti, the president, secretary, and treasurer of Shamrock, respectively, who were also elected to like offices of Pozzi, Inc., by the board of directors of that corporation.
Under the October 14, 1963, agreement petitioners agreed to sell to Pozzi, Inc., the real property and all other assets of the business, and the parties allocated the purchase price of $200,000 as follows:
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¦Automotive equipment ¦$54,900¦
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¦Office equipment...To continue reading
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