Sainte Claire Corporation v. Commissioner
| Decision Date | 07 April 1997 |
| Docket Number | Docket No. 5922-95.,Docket No. 5921-95. |
| Citation | 73 T.C.M. 2540 |
| Parties | Sainte Claire Corporation, James F. Boccardo, Tax Matters Person v. Commissioner. Sainte Claire Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Clarence J. Ferrari, Jr. and Lisa I. Caputo, San Jose, Calif., for the petitioners. Lavonne D. Lawson, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
By Notices of Final S Corporation Administrative Adjustment, respondent determined adjustments to the income of Sainte Claire Corporation (Sainte Claire), an S corporation, for the taxable years ended December 31, 1987 and 1988. Respondent also determined deficiencies in Sainte Claire's 1987 and 1988 Federal income tax in the amounts of $23,106 and $717,998, respectively.2 Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues remaining to be decided in the instant case are (1) whether, during 1988, Sainte Claire constructively received the principal amount of a promissory note that it had been given in connection with the sale of certain property or (2) whether St. Claire disposed of the note, which was an installment obligation, within the meaning of section 453B.3
Some of the facts have been stipulated for trial pursuant to Rule 91. The parties' stipulations of fact are incorporated herein by reference and are found as facts in the instant case.
At the time the petitions in the instant case were filed, the principal place of business of Sainte Claire was located in San Jose, California. During the years in issue, Sainte Claire used the cash receipts and disbursements method of accounting.
Sainte Claire was organized pursuant to California law on March 1, 1946, and elected to be an S corporation on December 29, 1986, pursuant to the recommendation of its tax counsel. The corporation's first acquisition was a hotel, and it subsequently acquired other real estate, including ranches and mobile home parks. Its initial shareholders consisted of James F. Boccardo (Mr. Boccardo) and three of his friends and clients, Joseph Perrucci, Frank DiNapoli, and Earl Heple, each of whom held one quarter of its stock. Mr. Heple was killed in a construction accident during the 1950's, Frank DiNapoli died during 1974, and Mr. Perrucci died during 1985. Mr. Heple's interest in Sainte Claire came to be held by Mr. Boccardo's family; the interests in Sainte Claire that had originally been held by Frank DiNapoli and Mr. Perrucci became dispersed among, inter alia, members of their families. At least during 1988, the stock of Sainte Claire was held by the following individuals, members of families, and a trust, in the percentages indicated:
James F. and Lorraine V. Boccardo1 ........................................ 31.25
John H. Boccardo, III ..................................................... 9.375
Leanne C. Boccardo Rees ................................................... 9.375
Patricia Perrucci Melehan ................................................. 6.25
JoAnn Perrucci O'Connell .................................................. 6.25
Angelina Perrucci ......................................................... 6.25
James S. Vaudagna ......................................................... 6.25
DiNapoli Family (7 shareholders) .......................................... 16.145832
FL & EE DiNapoli Trust .................................................... 7.791668
Mulcahy Family (5 shareholders) ........................................... 1.5625
1 Lorraine V. Boccardo was Mr. Boccardo's wife
Mr. Boccardo was one of the original directors of Sainte Claire, and he continued to hold that office subsequently. During the 1960's, Mr. Boccardo, Frank DiNapoli, and Mr. Perrucci managed Sainte Claire's affairs. After Frank DiNapoli's death during 1974, his son, J. Philip DiNapoli (Mr. DiNapoli), became a director of Sainte Claire. After Mr. Perrucci's death during 1985, JoAnn Perrucci O'Connell became a director of Sainte Claire. From 1985 and during all subsequent times relevant to the instant case, the directors of Sainte Claire consisted of Mr. Boccardo, Mr. DiNapoli, and Ms. O'Connell.
From the founding of Sainte Claire, and during all times relevant to the instant case, Mr. Boccardo was its president. Mr. DiNapoli became its secretary after Mr. Perrucci's death and continued to hold that office during all subsequent times relevant to the instant case. Ms. O'Connell was its assistant secretary from 1985 through at least 1995. During relevant times after 1985, Mr. Boccardo would make day-to-day decisions concerning Sainte Claire's affairs but would consult the other board members on decisions of consequence. Sainte Claire's board held periodic meetings, certain of which other shareholders would attend.
During 1968, Mr. Boccardo purchased two prune ranches, known as the Arboga and Gridley ranches, from Sainte Claire. Mr. Boccardo assumed the existing mortgages on the ranches and gave Sainte Claire a promissory note (1968 note) dated November 1, 1968, in the amount of $2,087,500 that bore interest at the rate of 6-1/2 percent per annum, payable semiannually, and that provided for a balloon payment of the principal on or before November 1, 1988. Although the 1968 note stated that it was secured by deed of trust, it was actually unsecured. Mr. Boccardo sold the Gridley ranch during 1975. He sold the Arboga ranch during October 1988 for $5,150,000.
Prior to the time that the 1968 note became due, Mr. Boccardo discussed the possibility of extending it with Mr. DiNapoli, Ms. O'Connell, and others. Mr. Boccardo requested the extension because commitments made by him in connection with his real estate investments had left him short of cash, and he would have been obliged to borrow in order to pay the 1968 note. At the time that the 1968 note was due, Mr. Boccardo, a successful attorney and real estate investor, was worth approximately $50 million and had a substantial income. Mr. Boccardo would have paid the 1968 note had Sainte Claire requested it.
On November 1, 1988, the date the 1968 note matured, a meeting of Sainte Claire's board was held, which was also attended by other shareholders, at which Mr. Boccardo requested that the 1968 note be extended. In consideration of the extension, Mr. Boccardo offered to pay interest on the principal amount at the rate of 9 percent per annum. Mr. Boccardo considered that rate to be more than the rate that Sainte Claire would have received on another investment, such as a certificate of deposit. He also preferred to deal with, and pay interest to, Sainte Claire, a corporation that he partially owned, rather than a third party, such as a bank. Mr. DiNapoli, who had experience in banking, recommended acceptance of Mr. Boccardo's proposal because he considered the interest rate offered to be advantageous to Sainte Claire and Mr. Boccardo to be creditworthy. After discussion by the board and shareholders present, the board unanimously voted to accept Mr. Boccardo's proposal, and that action was reflected in the minutes of the meeting as follows:
WHEREAS, The Promissory Note dated November 1, 1968 in the sum of $2,087,500 executed by James F. Boccardo, has matured, the following Resolution was unanimously adopted:
BE IT RESOLVED, that this Corporation shall renew the Promissory Note in the sum of $2,087,500 to April 1, 1990, at an interest rate of Nine (9) Percent, said note to be executed by James F. Boccardo.
Mr. Boccardo executed an unsecured promissory note (1988 note) dated November 1, 1988, in the amount of $2,087,500 that bore interest at the rate of 9 percent per annum, payable semi-annually, and that provided for a balloon payment of the principal on or before April 1, 1990. Sainte Claire's board met on April 1, 1990, and voted to renew the 1988 note for 1 year. Mr. Boccardo executed a promissory note (1990 note) dated April 1, 1990, that was due on or before April 1, 1991, but that otherwise was made on the same terms as the 1988 note. On April 1, 1991, Sainte Claire's board met and voted to extend the due date of Mr. Boccardo's note to April 1, 1994. Mr. Boccardo executed a promissory note (1991 note) dated April 1, 1991, that was due on or before April 1, 1994, but that otherwise was made on the same terms as the 1990 note.
During 1993, Mr. Boccardo paid Sainte Claire $2,159,562.20, representing payment of the principal of the 1991 note in the amount of $2,087,0004 and interest in the amount of $72,562.20. Also during that year, Sainte Claire distributed the principal payment of $2,087,000 to its shareholders. Sainte Claire reported gain on the sale of the Arboga and Gridley ranches in the amount of $2,087,500 on its 1993 S corporation income tax return.
OPINIONIn the instant case, we must decide whether, during 1988, Sainte Claire constructively received the principal amount of the 1968 note or, alternatively, whether St. Claire disposed of that installment obligation within the meaning of section 453B. If we conclude that either of those events occurred, Sainte Claire would be required to recognize in its 1988 taxable year the gain realized on the sale of the Arboga and Gridley ranches, $2,087,500, which was also the principal amount of the 1968 note. Petitioners do not dispute that, in the event gain from the sale of the ranches must be recognized in Sainte Claire's 1988 taxable year, the provisions of section 1374, as applicable to Sainte Claire, are met with respect to that gain and that tax on that gain would be payable by Sainte Claire.5
The first issue we consider is whether, during 1988, Sainte Claire constructively received the principal of the 1968 note.6 Section 451(a) provides that any item of gross income received by...
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