PR Farms, Inc. v. Commissioner
| Decision Date | 15 October 1984 |
| Docket Number | 12046-81,5618-78,12048-81.,Docket No. 5617-78,799-81,12047-81 |
| Citation | 48 TCM (CCH) 1379,1984 TC Memo 549 |
| Parties | P.R. Farms, Inc., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Lawrence V. Brookes and Valentine Brookes, 601 California St., San Francisco, Calif., for the petitioners. Rebecca T. Hill, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax:
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Sec. 6653(a)2
Docket No. Petitioner Year Deficiency Addition to Tax
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5617-78 P. R. Farms, Inc. 1974 $919,027.91 $45,951.40
5618-78 Pat Ricchiuti and 1974 72,826.00 3,641.00
Frances Ricchiuti
799-81 Palomate Packing FYE 1,577.00 —0—
Company, Inc. 1/31/77
12046-81 P. R. Farms, Inc. 1975 309,947.00 15,497.00
1976 166,648.00 8,332.00
1977 42,450.00 2,123.00
12047-81 Pat Ricchiuti and 1975 202,202.00 10,110.00
Frances Ricchiuti 1976 171,240.00 8,562.00
1977 155,124.00 7,756.00
12048-81 Pat V. Ricchiuti 1975 1,314.00 —0—
1977 1,846.00 —0—
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After concessions and various amendments to the pleadings by the parties, the issues for decision are:
(1) whether the proceeds received by General Fruit Sales, Inc. (G.F.S.) from the sales of fruit grown by P.R. Farms, Inc., (P.R. Farms) are includable in P.R. Farms' gross income in the taxable year that G.F.S. received the proceeds or in the following year when G.F.S. remitted the proceeds to P.R. Farms;
(2) whether the interest income earned by G.F.S. on the proceeds retained from the sales of P.R. Farms' fruit is includable in P.R. Farms' gross income;
(3) whether the net proceeds reported by Palomate Packing Company, Inc. (Palomate) from the sales of fruit which it purchased from P.R. Farms are includable in P.R. Farms' gross income;
(4) if the net sales proceeds reported by Palomate are includable in P.R. Farms' gross income, whether the proceeds are taxable to P.R. Farms in the year in which G.F.S. received payment for the fruit or in the following year when G.F.S. remitted the proceeds to Palomate;
(5) whether P.R. Farms is entitled to deduct $16,810 as interest paid to Palomate in 1975;
(6) whether P.R. Farms may deduct the portion of the rental payments made to Palomate which are attributable to commercially non-productive land;
(7) whether P.R. Farms is entitled to deduct $16,964.50, $24,412, and $22,641 in 1974, 1975, and 1976, respectively, as the cost of fruit purchased from Pat V. Ricchiuti;
(8) whether Pat Ricchiuti received a constructive dividend from P.R. Farms in connection with the following items:
(10) whether petitioners P.R. Farms or Pat and Frances Ricchiuti are liable for the addition to tax for negligence or intentional disregard of rules and regulations under section 6653(a).
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners Pat (Pat Sr.) and Frances (Frances) Ricchiuti, husband and wife, and Pat V. Ricchiuti (Pat Jr.), their son, resided at Clovis, California, at the time their respective petitions were filed. Petitioners P.R. Farms and Palomate are California corporations with their principal places of business at Clovis, California.
After receiving his discharge from the United States Army in 1946, Pat St. returned to Clovis, California, to work on his father's 90-acre ranch. The ranch was planted with wine and table grapes at that time and eventually became known as the Home Ranch. The Home Ranch was also known as P.R. Ranch No. 1.
Pat Sr. became the sole owner of the Home Ranch in 1954. Shortly thereafter, he mortgaged the ranch to pay for a home which was built on the frontage of the property. The mortgage proceeds were also used to finance the construction of a packing shed which was located approximately 200 yards from the house. The packing shed was used for packing and storing peaches which had subsequently been planted on the Home Ranch.
During the next few years, Pat Sr. acquired numerous parcels of farmland within the general vicinity of the Home Ranch. Approximately 280 acres of land were purchased by Pat Sr. and subsequently planted with grapes, apricots, nectarines, peaches and plums. Of the land acquired, 240 acres were contiguous and became known as P.R. Ranch No. 2. The remaining 40 acres eventually became known as P.R. Ranch No. 3. All of the fruit grown on these ranches were packed at the packing shed located on the Home Ranch.
In 1963, Pat Sr. and Frances incorporated P.R. Farms. They contributed P.R. Ranch No. 2 and all of the ranch equipment to the corporation as part of its capitalization. In addition, the Home Ranch (with the exception of their personal residence) and P.R. Ranch No. 3 were leased to P.R. Farms.
Between 1964 and 1970 Pat Sr. arranged for the purchase of substantial additional amounts of farmland. The majority of these purchases were made by Pat Sr. as president of P.R. Farms although a few parcels of land were bought by him personally. In 1964, P.R. Farms acquired a 180-acre parcel which became known as P.R. Ranch No. 5. P.R. Farms eventually planted the entire ranch with almonds. In 1965, P.R. Farms purchased 80 acres of land adjacent to the Home Ranch and planted apricots and nectarines on the land. P.R. Ranch No. 4 was purchased by P.R. Farms in 1967. The 310-acre parcel was eventually planted with nectarines, apricots, peaches and almonds.
In 1968, Pat Sr. acquired a 250-acre parcel which became known as P.R. Ranch No. 7. This ranch was planted primarily with almonds.
In 1969, P.R. Farms and Pat Sr. jointly purchased 335 acres of property which became known as the Big Six Ranch. A portion of the ranch was primarily planted with nectarines. The Big Six Ranch also contained a packing area considerably larger than the packing shed located on the Home Ranch. Beginning with the 1970 harvest and until the years at issue, all fruit packing was done at the Big Six Ranch facility. The packing shed at the Home Ranch was converted to an equipment shelter.
By the end of 1973, P.R. Farms owned or leased approximately 1,650 acres of farmland.
In 1965, P.R. Farms began to sell the majority of its fruit through Heggblade and Margolis (H&M), a licensed fruit seller which acted as P.R. Farms' agent on a commission basis. Sometime thereafter (apparently around 1970), H&M was acquired by Tenneco Corporation and became a subsidiary known as H&M Tenneco. Although P.R. Farms continued to sell the majority of its fruit through H&M Tenneco, P.R. Farms became increasingly dissatisfied with the preferential treatment that it perceived other growers to be receiving from H&M Tenneco. Consequently, in 1972, Pat Sr. decided to look for a local seller through which P.R. Farms' fruit could be sold.
At the same time that Pat Sr. initiated his search, G.F.S., a local company which was licensed as a dealer and commission merchant in fruit, was looking for additional lines of fruit to carry. G.F.S. had been formed in 1970 by Anthony Bianco (Bianco) and Angelo G. Papagni (Angelo G.), two local area grape growers. Bianco and Angelo G. were equal shareholders and officers of G.F.S. During its first few years of existence, G.F.S. primarily had sold throughout the United States grapes grown by Bianco and Angelo G.
Pat Sr. and Angelo G. were personally acquainted, since P.R. Farms had previously used Angelo G.'s cold storage facilities to temporarily store its fruit. Upon learning that Pat Sr. was dissatisfied with H&M Tenneco, Angelo G. invited Pat Sr. to join G.F.S. Prior to this invitation Angelo...
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