SPARKS FARM INC. v. Commissioner

• Decision Date: 12 October 1988
• Docket Number: Docket No. 15422-84.
• Citation: 56 TCM (CCH) 464,1988 TC Memo 492
• Parties: Sparks Farm, Inc. and Louise Sparks v. Commissioner.
• Court: U.S. Tax Court

56 T.C.M. (CCH) 464 (1988)

T.C. Memo. 1988-492.

Sparks Farm, Inc. and Louise Sparks v. Commissioner.

Docket No. 15422-84.

United States Tax Court.

Filed October 12, 1988.

Mark J. Klein, 1300 Commerce Tower, Kansas City, Mo., for the petitioners. James E. Cannon, for the respondent.

Memorandum Findings of Fact and Opinion

PARKER, Judge:

By separate notices of deficiency respondent determined deficiencies in petitioners' Federal income tax as follows:

                Petitioners1 Year Deficiencies
                   Louise Sparks     1979 ......... $1,878.49
                                     1980 .........  9,497.52
                   Sparks Farm, Inc. 1979 .........  1,276.65
                                     1980 .........    546.66
                

The issues for decision are:

(1) Whether a corporation, which the individual petitioner incorporated and to which she deeded over a farm for estate planning purposes, is a separate legal entity and taxable for income tax purposes;

(2) If the corporation is a taxable entity, whether the corporation nonetheless acted as the alter ego of or as an agent for the individual petitioner during the years in issue;

(3) Whether the corporation is a legal corporation for Federal tax purposes if it did not comply with some of the Missouri statutory guidelines after its incorporation;

(4) Whether the corporation held bare legal title to the farm as a trustee under a resulting trust for the individual petitioner as the beneficial owner;

(5) Whether the individual petitioner retained a life estate in the farm when she transferred the farm to the corporation;

(6) Whether the individual petitioner as the farm manager is entitled under section 482² to a management fee and a commission from the sale of part of the corporation's land, which amounts would be taxable to her and deductible by the corporation;

(7) Whether the corporation must report as taxable income under section 482 the fair rental value of a residence that the individual taxpayer, as the farm manager, occupied;

(8) Whether the individual petitioner is entitled to interest deductions in 1979 and 1980, and if so the amounts thereof; and

(9) Whether the individual petitioner received constructive dividends from the corporation each year, and if so the amount thereof.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, second supplemental stipulation of facts, and exhibits attached thereto are incorporated herein by this reference.

The individual petitioner, Louise Sparks (Mrs. Sparks), resides at Route 5 Unionville, Missouri. Mrs. Sparks filed Federal income tax returns (Forms 1040) for the taxable years 1979 and 1980 with the Internal Revenue Service Center, Kansas City, Missouri. The corporate petitioner, Sparks Farm, Inc., is a corporation organized and existing under the laws of the State of Missouri with its principal place of business located at Route 5, Unionville, Missouri. Sparks Farm, Inc. filed Federal corporate income tax returns (Forms 1120) for the taxable years 1979 and 1980 with the Internal Revenue Service Center, Kansas City, Missouri.

Upon her husband's death in 1973, Mrs. Sparks inherited a 540-acre farm, called Sparks Farm, located in Putnam County, Missouri. Mrs. Sparks resided on this farm from the time she inherited the property up through the time of the trial. While approximately 150 acres of this farm were suitable for crops, the rest of the land was used as pasture and for timber. The crop acreage was farmed under share-crop arrangements with unrelated third parties, in which the landlord provided all of the lime and some other miscellaneous items,³ and the tenants provided all of the machinery, equipment, fuel, labor, and any other expenses. Crop income was divided equally between the landlord and the tenants. All of the pasture land was rented out for cash.

Shortly after Mrs. Sparks inherited the farm, she began discussing with her attorney, Robert M. Gifford, her concern over the possible estate taxes that her daughter would have to pay on the farm upon Mrs. Sparks' death. Mr. Gifford was with the law firm, Gifford & Simmons, in Green City, Missouri. Mrs. Sparks wanted to save estate taxes for her daughter by making lifetime gifts of interests in this farm to her daughter, Terry Campbell, and to Mrs. Campbell's only child at the time, Nicole Campbell, and any later-born grandchildren.

During the course of several meetings, Mr. Gifford advised Mrs. Sparks that she could reduce the assets in her estate that would be subject to estate taxes by establishing a corporation, transferring the farm to the corporation, and giving lifetime gifts of shares of stock to Mrs. Campbell and the grandchildren from time to time. The record does not establish whether or not Mr. Gifford discussed other alternatives.⁴ Mr. Gifford explained that, through the use of a corporation, Mrs. Sparks could more easily give lifetime gifts of shares of stock to her family than by going through the formality of preparing and recording deeds each time she made a gift of land. Although Mrs. Sparks wanted to make lifetime gifts and believed that the donees would own part of the land through these gifts of shares, she professed to believe that somehow they would not own any of the land until her death.⁵

With the assistance of Mr. Gifford, Mrs. Sparks incorporated Sparks Farm, Inc. in Missouri on August 5, 1977. Up to the time of trial Sparks Farm, Inc. existed as a valid corporation under the laws of Missouri. At the time Mr. Gifford helped Mrs. Sparks set up the corporation, he did not advise Mrs. Sparks as to the income tax consequences of incorporation. Instead, as he does with all of his clients, Mr. Gifford gave no advice on tax matters and recommended that she seek advice from her tax accountant or someone in the tax field with regard to the income tax consequences of incorporation. After incorporating Sparks Farm, Inc. however, Mrs. Sparks did not seek the advice of anyone knowledgeable about income tax. Mrs. Sparks herself is not familiar with the tax laws and has never prepared an income tax return. Mrs. Sparks' individual and Sparks Farm, Inc.'s corporate income tax returns for 1979 and 1980 were prepared by Dale Ream, a paid return preparer from Unionville, Missouri.

From the time Sparks Farm, Inc. was first incorporated to the time of trial, Sparks Farm, Inc. had elected officers, held corporate meetings, maintained minutes of corporate meetings paid its annual franchise taxes, filed annual registration reports, and maintained itself in good standing with the State of Missouri. Sparks Farm, Inc. held its first shareholders' meeting on August 19, 1977 at the law offices of Gifford & Simmons. At the meeting Mrs. Sparks was elected chairman and Mr. Gifford was elected secretary of the meeting. Mrs. Sparks was the sole shareholder at that time and was elected director of the corporation.

The Articles of Incorporation were approved and the Bylaws were adopted at this meeting on August 19, 1977. The Articles of Incorporation enumerated the reasons for forming the corporation, including:

1. To buy, sell, own, handle and deal in generally cattle, livestock and animals of all kind, farm products, fertilizers, and all products and services relating or incidental thereto, at wholesale, retail, or otherwise, and to act as a rancher, farmer, dealer, grower or handler of any and all of the foregoing.

2. To own, hold, manage, encumber, improve, exchange, buy, sell, lease, rent and generally deal in farm real estate and to engage in farming, it being the express intent and purpose that these activities fall within the purview of and be limited by the provisions of Chapter 350 VAMS.

There followed another 12 paragraphs spelling out in great detail the various objects and powers of the corporation, concluding with the following:

15. The foregoing clauses shall be construed both as objects and powers, and it is especially provided that the foregoing enumerated clauses or special powers shall not be held to limit or restrict in any manner the general powers of this corporation.

The Articles of Incorporation for Sparks Farm, Inc. stipulated that the board of directors would consist of two directors and that the corporation's duration would be perpetual. The Certificate of Incorporation noted that the amount of Sparks Farm, Inc.'s authorized shares was 3,000 shares of common stock at $10 par value.

The first meeting of the board of directors of Sparks Farm, Inc. was also held on August 19, 1977. At that meeting Mrs. Sparks was elected chairman and Mr. Gifford was elected secretary of the meeting. Mrs. Sparks was elected president and treasurer while Mr. Gifford was elected secretary of the corporation. At this meeting the officers of Sparks Farm, Inc. were directed to pay the expenses incurred in the organization of the corporation out of corporate funds. A stock certificate was presented to the meeting and adopted as the form for the certificates of stock of the corporation. One qualifying share of stock (Certificate #1) was then issued to Mr. Gifford, canceled and reissued (Certificate #2) to Mrs. Sparks.

A special meeting of the board of directors of Sparks Farm, Inc. was held on September 16, 1977. This meeting was held to approve and adopt a plan to offer 3,000 shares of common stock, amounting to $30,000, for sale under section 1244. However, no stock was ever offered for sale or sold.

On November 11, 1977, Mrs. Sparks conveyed Sparks Farm to the corporation by a General Warranty Deed. In consideration for the conveyance of the farm to the corporation, Mrs. Sparks intended that the 3,000 authorized shares of stock be issued to her. This was never formally accomplished, but Mrs. Sparks as sole shareholder owned all of the shares and dealt with them as her sole property, except for certain shares she later gifted to her daughter and grandchildren.

The General Warranty Deed noted that Mrs. Sparks conveyed...