SAPPHIRE LANDS, INC. v. Commissioner, Docket No. 1587-70
| Decision Date | 01 February 1973 |
| Docket Number | 1588-70.,Docket No. 1587-70 |
| Citation | 32 TCM (CCH) 82,1973 TC Memo 23 |
| Parties | Sapphire Lands, Inc. v. Commissioner. Garnet Lands, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
de Quincy V. Sutton, for the petitioners. Wm. O. Lynch, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined a deficiency of $21,333.83 in the Federal income tax of Sapphire Lands, Inc., for the year ended November 30, 1967, and a deficiency of $584.35 in the Federal income tax of Garnet Lands, Inc., for the year ended November 30, 1967. The only issue for decision is whether during 1967 the petitioners held certain land primarily for sale to customers in the ordinary course of business.
Some of the facts were stipulated, and those facts are so found.
The petitioners, Sapphire Lands, Inc. (Sapphire), and Garnet Lands, Inc. (Garnet), each had its principal place of business in Metairie, Louisiana, at the time its petition was filed in this case. Each filed its Federal corporate income tax return for the year ended November 30, 1967, with the district director of internal revenue, New Orleans, Louisiana. A taxable or fiscal year of the petitioners will be identified by the calendar year in which it ends.
Joseph Marcello, Sr., died in 1952, and on or after July 1, 1955, a State court ordered that his widow be recognized as the owner of one-half of his property and as the holder of a life estate in the other half of such property. The court also ordered that each of the nine children of Joseph Marcello, Sr., be recognized as the owner of an undivided one-ninth interest in the property which was subject to their mother's life estate. Included is such property was a tract of approximately 183 acres of land located in Jefferson Parish, Louisiana.
In late 1958, such land was surveyed and divided into 9 parcels of approximately 20.333 acres each. Nine new corporations were organized, including (in addition to Sapphire and Garnet) corporations named Gems, Inc., Topaz Lands, Inc., Amethyst Lands, Inc. (Amethyst), Emerald Lands, Inc. (Emerald), Pearl Lands, Inc. (Pearl), Ruby Lands, Inc., and Moonlight, Inc. Such corporations will sometimes be referred to as the Gem corporations. Each of such corporations purchased from Mrs. Marcello, Sr., and her children one of such parcels of land on December 26, 1958. The consideration for the transfer of each parcel was a promissory note for $111,111.11, payable in 10 annual installments and bearing interest at a rate of 6 percent per year. Each note was secured by a first mortgage and a vendor's lien against the particular parcel of land involved, and each was personally endorsed by James J. Culotta, a general contractor and president of the 9 corporations.
According to their charters, the Gem corporations were formed for the purpose of subdividing and developing land, and each purchased its parcel of land with the intent of developing it into a residential subdivision. Development was to proceed from the parcels in the back of the 183-acre tract to those in the front. Since their inception, the corporations have been under common ownership, and from shortly after December 23, 1958, to February 26, 1965, Mr. Culotta and Mr. Joseph Connolly each owned 50 percent of the stock of each of the 9 corporations.
During Mr. Culotta's tenure as president, many proposals for the development of the land held by the corporation were considered. However, due to financial reverses which Mr. Culotta incurred in other developments, he never completed any development of the land. A 16-inch natural gas line and a main water line were located within the boundaries of the land, and discussions were held with local authorities about the possibilities of utilities service being extended to the land by the parish (a Louisiana parish is comparable to a county elsewhere). Subdivision plans and zoning changes were also considered by the corporations, and in 1959, the corporations granted a right-of-way servitude through their land to the local water district. Sometime prior to October 16, 1961, Mr. Culotta acquired land adjacent to that owned by the Gem corporations and extended Claire Avenue, which ran through the acquired land, for the purpose of affording ingress to the land of the Gem corporations. On July 11, 1961, the land owned by Gems, Inc., was subdivided, and on October 16, 1961, 12.25 acres of its land were sold to the Roman Catholic Church of the Diocese of New Orleans for $110,000 in cash. The use of this land for church purposes was contemplated in a plan of subdivision for the entire 183 acres prepared in 1958, and Mr. Culotta believed the presence of a church would be of value in developing the remaining land owned by the corporations. Some of the proceeds of the sale were used to pay the debt owed by the corporations on the 1958 notes to the Marcello heirs.
At the beginning of 1965, the Gem corporations were in default on their debt to the Marcello heirs, and on February 25, 1965, Mr. Culotta resigned as president of the corporations and pledged his stock to Carlos Marcello (Mr. Marcello), the legal representative of the Marcello heirs, as further security for the debt. At this time, Mr. Culotta believed that the corporations were about to sell the remaining approximately 171 acres of land for $1,630,000. Also on February 25, 1965, Mr. Connolly formally surrendered his stock to the corporations and such stock was reissued, in equal portions, to Jefferson D. Hampton II, a son-in-law of Mr. Marcello; Joseph C. Marcello, a son of Mr. Marcello; William J. Robards, a son-in-law of Mr. Marcello; and Michel A. Maroun, a lawyer for the Marcello family. According to the corporate minutes, the consideration for the reissuance of the stock was services performed or to be performed, but apparently no such services were ever performed. Since February 25, 1965, Mr. Hampton has been president of the Gem corporations, but during such time, he generally acted as a representative of the Marcello heirs.
During June 1965, plans for the development of the approximately 171 acres were proceeding, and engineering work preliminary to the submission of an overall subdivision plan was being completed. By this time, arrangements had been made for title insurance in connection with the development of the land, and all necessary title examination work had been done. On July 8, 1965, the Gem corporations borrowed $300,000 from Guaranty Bank and Trust Company (the bank). The loan was secured by collateral mortgages against their land, which were signed by the president of the corporations and by Mr. Marcello as representative of the heirs. The heirs also guaranteed the loan and subordinated their claims against the corporations. The mortgages provided for the release of specific lots, into which the land might be subdivided, upon payment of a designated portion of the mortgage debt. Part of the loan proceeds was intended to be used to pay Federal income tax deficiencies of the Marcello heirs, and at the time that application was being made for the loan, the attorney for the Gem corporations informed the bank that the corporations intended to subdivide and develop the land.
During 1965, the corporations conveyed to the parish the necessary rights-of-way through their land for the extention of Lapalco Boulevard, a major street, and during that year or 1966, the parish authorities raised the funds necessary for the extension of the street and accompanying water and sewer lines. In April or May of 1966, a request for a change in zoning with respect to the land fronting on the north side of Lapalco Boulevard was filed with the office of the planning director of the parish, and on July 5, 1966, the zoning for such land was changed from single-family residential to neighborhood commercial. This rezoning enhanced the value of the petitioners' land, as it encompassed most of the land held by Sapphire and some land held by Garnet.
In June 1967, a plan for resubdivision of the land held by the Gem corporations was completed, and on June 29, 1967, it was approved by the Jefferson Parish Council. Pursuant to such plan, the petitioners dedicated streets in 1967. During 1967, the parish commenced construction of Lapalco Boulevard and a sewerage treatment plant which would serve the land of the corporations. Also during that year, Mr. Marcello, as representative of the heirs, retained the services of a realtor to find a buyer or buyers for the corporations' property. Except as to price, the realtor was given complete discretion in selling the property, and he had the power to sell all or only part of it.
Four sales were arranged by the realtor during 1967. Each sale involved a parcel of land which fronted on the proposed extension of Lapalco Boulevard, and which was not less than 1.5 nor more than 1.9 acres in size, and each was conditioned on the seller's obtaining authority for a resubdivision of the involved parcel. Such resubdivision authority was granted, subject to the condition that the resubdivision was for purposes of sale only and that no development would be permitted unless offsite improvements were made. Two of the sales were made by Sapphire for a total cash consideration of approximately $107,000. The contracts for these sales stated that the utilities to be installed along Lapalco Boulevard would be paid for by the State and that those along another proposed street in the subdivision would be paid for by the purchasers. The other two sales were made jointly by Sapphire and Garnet for a total consideration of approximately $135,000 consisting of approximately $73,700 in cash and the remainder payable in 3 years. One such sale was for $81,900 which included a downpayment of $20,475. Nearly $94,000 of the proceeds from the 4 sales was used to reduce the principal of the $300,000 debt owed to the bank. The bank was not demanding payment...
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