Sanborn v. Commissioner
| Decision Date | 20 September 1983 |
| Docket Number | 10103-75,1281-78.,1277-78,10105-75,10104-75,1278-78,1279-78,Docket No. 9236-75,10102-75,1280-78 |
| Citation | 1983 TC Memo 579,46 TCM (CCH) 1435 |
| Parties | Ross R. Sanborn and Caroline C. Sanborn, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Paul E. Anderson, for the petitioners. William E. Saul, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal individual income taxes and additions to tax under section 6651(a)2 against petitioners as follows:
_________________________________________________________________________________________________
Addition to Tax
Docket No. Year Deficiency Sec. 6651(a)
_________________________________________________________________________________________________
Ross R. Sanborn and Caroline C. Sanborn 9236-753 1967 $ 3,754.01
1968 6,340.66 $603.44
1970 2,329.45
1281-78 1971 1,114.00
1972 1,853.00
1973 1,937.00
Harold H. Saur and Maribeth M. Saur 10102-75 1967 146.83
1968 9,475.00
1969 358.42
1970 5,410.13
1278-78 1971 3,007.00
1972 7,637.00
1973 9,594.00
Fred W. Greenlaw and Mary T. Greenlaw 10103-75 1968 6,783.07
1969 245.96
1970 5,197.06
1971 6,660.00
1972 14,346.00 717.30
1277-78 1973 13,469.00
Francis J. Jacobus and Ruth A. Jacobus 10104-75 1967 137.14
1968 7,182.70
1969 60.79
1970 3,232.18
1280-78 1971 1,357.00
1972 4,308.00
1973 5,809.00
Donald G. Black and Catherine B. Black 10105-75 1967 2,204.58
1968 8,168.37
1970 6,188.20
1279-78 1971 1,463.00
1972 1,341.00
These cases have been consolidated for trial, briefs, and opinion. The parties have disposed of most of the issues.4 The issues for decision are as follows:
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions in the instant cases were filed — petitioners Ross R. Sanborn (hereinafter sometimes referred to as "Sanborn") and Caroline C. Sanborn, husband and wife, resided in Lafayette, California; petitioners Harold H. Saur (hereinafter sometimes referred to as "Saur") and Maribeth M. Saur, husband and wife, resided in Diablo, California; petitioners Fred W. Greenlaw (hereinafter sometimes referred to individually as "Greenlaw") and Mary T. Greenlaw, husband and wife, resided in Moraga, California; petitioners Francis J. Jacobus (hereinafter sometimes referred to as "Jacobus") and Ruth A. Jacobus, husband and wife, resided in Pioneer, California; and petitioners Donald G. Black (hereinafter somtimes referred to as "Black") and Catherine B. Black, husband and wife, resided in San Rafael, California. Greenlaw and Mary T. Greenlaw are hereinafter sometimes referred to as "the Greenlaws".
Walgro was incorporated on December 7, 1964, under California law. Its primary business is growing and cultivating walnuts and cherries. In January 1965, for its first, short taxable year ending January 31, 1965,5 Walgro filed its election to be taxed as a small business corporation (hereinafter sometimes referred to as "a subchapter S corporation") under subchapter S of chapter 1, and the shareholders as of January 31, 1965, filed their consents thereto.
Walgro's original shareholders and their initial contributions are reflected in table 1.
Table 1
Number of
Shareholder Shares Contribution
Sanborn .......... 1,000 $11,500.00
Saur ............. 1,000 11,500.00
Greenlaw ......... 1,000 11,500.00
Jacobus .......... 1,000 11,500.00
Black ............ 1,000 11,500.00
_____ __________
5,000 $57,500.006
===== ==========
In September 1968,7 Henry L. McIntyre (hereinafter sometimes referred to as "McIntyre") was admitted as a shareholder of Walgro and made a capital contribution of $50,000. In February 1969,8 Fred M. Charles (hereinafter sometimes referred to as "Charles") was admitted as a shareholder of Walgro and made a capital contribution of $30,000. Timely consents to the Walgro's subchapter S corporation election were made by McIntyre and Charles.
On December 30, 1964, the petitioner-husbands, together with their respective wives, and Walgro purchased contiguous parcels, collectively known as the Hartley Island property (hereinafter sometimes referred to as "Hartley Island") from M.E. Biggs and Betty Biggs, for a total consideration of $569,000.009 ($94,833.33 each). All the petitioners leased their respective portions of Hartley Island to Walgro. Hartley Island is located in the Sacramento Valley.
Sometime in early 1965, Walgro purchased a piece of property, known and referred to as the Annex, about one mile south of Hartley Island. Sometime in late 1965, Walgro purchased property known and referred to as the River Ranch, about 10 miles south of Hartley Island. All three pieces of property, Hartley Island, the Annex, and the River Ranch (hereinafter sometimes referred to collectively as "the properties"), are bordered on the west by the Sacramento River. Walgro planted the properties with walnut trees and cherry trees.
During the period beginning on the date of Walgro's incorporation, December 7, 1964, and ending sometime in mid-1967, Walgro borrowed crop loans from the Bank of California (hereinafter sometimes referred to as "the Bank") to pay for expenses in developing its orchards. In the summer of 1967, when Walgro's outstanding indebtedness to the Bank was about $275,000, the Bank notified Walgro that it would no longer finance Walgro after the end of that crop year. Walgro applied for a loan from Wells Fargo to pay off the crop loan debt to the Bank, but Wells Fargo rejected the application.
Sometime in early 1967, Walgro hired Elton Waggener (hereinafter sometimes referred to as "Waggener"), a real estate consultant. Black, as the financial vice-president of Walgro, consulted Waggener to help Walgro solve its financial problems. Waggener led Black to Richard L. Derry (hereinafter sometimes referred to as "Derry"), a realtor. From Derry, Black understood that Harry T. Holgerson, Jr. (hereinafter sometimes referred to individually as "Holgerson"), and Mary E. Holgerson, husband and wife, were interested in entering into a sale-leaseback arrangement with Walgro. Holgerson and Mary E. Holgerson and hereinafter sometimes collectively referred to as "the Holgersons".
Curtis M. Karplus (hereinafter sometimes referred to as "Karplus"), an attorney who represented Walgro during the period of 1967 through 1976, was hired to draft a document to reflect a transaction whereby Walgro sold the properties to the Holgersons and then leased the properties back. Karplus prepared a draft of a general agreement, dated November 1, 1967. This draft provided that the properties would be sold by Walgro for $1,425,150 and that Walgro would have the option to repurchase the properties at some specified price during 1975, 1976, or 1977.
On November 10, 1967, a meeting was held to discuss the proposed transaction and the draft. The following persons attended this meeting: Greenlaw, Black, and Saur (for Walgro); Karplus; Holgerson; Julius N. Stern (hereinafter sometimes referred to as "Stern") acting as tax counsel for Holgerson; Paul Roemer, Holgerson's insurance broker and partner in various real estate investments; Dale H. Kimbell (hereinafter sometimes referred to as "Kimbell"), Holgerson's accountant; and...
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