Sundance Ranches, Inc. v. Commissioner
| Decision Date | 21 November 1988 |
| Docket Number | Docket No. 34439-83. |
| Parties | Sundance Ranches, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Alfred R. Westfall, 1020 Mission St., S. Pasadena, Calif., and Gregory A. Wedner, for the petitioner. Lynda B. Taylor, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies of $418,533, $788,717, and $716,009 in petitioner's corporate Federal income taxes for 1977, 1978, and 1979, respectively. Respondent also determined additions to tax for fraud under section 6653(b)1 in the amounts of $209,266, $394,358, and $358,004, respectively. After a partial trial, respondent conceded the additions to tax for fraud.
The primary issue in this case is whether petitioner is taxable on income from certain land sales or was merely effecting such sales as the agent of a grantor trust known as Sundance Ranches. If we conclude that petitioner was taxable on income from the land sales, we must decide whether petitioner is entitled to report that income under the installment sale method.
This case was consolidated for trial with that of William Malis (Malis) and Sharon Malis, docket No. 33747-83. Adjustments to the liability of the taxpayers in docket No. 33747-83 included disallowance of losses from land sales claimed by Malis as a grantor of the Sundance Ranches grantor trust. After partial trial, the parties agreed to resolve between themselves the amount of income received from land sales during the years in issue and the amount of deductions for substantiated expenses. Docket No. 33747-83 was severed for resolution of unrelated issues after the parties agreed that our determinations in this case would also bind the grantors of the Sundance Ranches trust.
If we decide that petitioner was merely an agent of the grantor trust and was not taxable on the income in question, we must decide whether Malis is required to report his ratable share of trust income and expenses consistent with his own method of accounting, i.e., the cash method, pursuant to sections 671 through 677 and the regulations thereunder.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner was incorporated on or about April 26, 1974, as an Oregon corporation. At all material times, Gary Clawson (Clawson) was the president and sole shareholder of petitioner. Petitioner's principal office at the time of filing the petition was in Bend, Oregon.
On or about January 10, 1972, Clawson as buyer entered into a written contract to purchase from Cameron Cliff (Cliff) as seller approximately 2,700 acres of land constituting a producing ranch in Deschutes County, Oregon. The total purchase price was $325,000, with a $40,000 cash down payment. The balance of $285,000 was to be paid in annual installments of $20,357.14, credited first to accrued interest and then to reduction of principal.
The written contract between Cliff and Clawson included the following provision:
Because Clawson intended to subdivide the property, a deed release clause was incorporated into the contract. The deed release clause provided that the seller would issue a deed upon payment of an amount equal to 32 percent of a minimum selling price of $800 per acre. The contract also gave to the seller the right to foreclose and declare the entire unpaid balance immediately due and payable in the event of the buyer's default.
Commencing in 1972, Clawson subdivided lots and sold them to individual purchasers, paying Cliff $250 per acre and receiving a deed pursuant to the deed release clause. Clawson, however, had problems making timely payments under the contract and was consistently delinquent. Cliff considered foreclosing against Clawson.
On September 19, 1977, Cliff and Clawson executed an Amendment to Contract of Sale. The amendment provided in pertinent part:
Exhibit "B" contained a legal description of the property known as Sundance Meadows, which consisted of approximately 900 acres of the 2,700 acres that had been the subject of the 1972 contract.
Cliff executed a warranty deed in favor of Clawson, dated September 20, 1977, and recorded with the Deschutes County Recorder's office on September 21, 1977. The consideration stated in the warranty deed from Cliff to Clawson was $100,000.
On September 22, 1977, Clawson transferred Sundance Meadows to petitioner, and the warranty deed reflecting this transfer was recorded with the Deschutes County Recorder's office on September 27, 1977. The consideration stated in the warranty deed from Clawson to petitioner was $100,000, although petitioner did not pay Clawson anything for the property.
Starting in about 1974, Clawson sought financing in order to subdivide the Sundance Meadows property. Clawson met Malis through Clawson's father-in-law, George Rowland, in 1974, and gave Malis a copy of a prospectus for the proposed Sundance Meadows undivided interest development. Malis was an attorney. He discussed the project with one of his clients, Robert Grant (Grant), and Grant's financial advisor, Robert Graves.
On or about November 7, 1974, Malis and Grant executed a Memorandum of Trust and Association in which they agreed to provisions including the following:
1. Business
To voluntarily associate themselves in the respective capacities, as hereinafter set forth, for the purpose of conducting the general business of ranching, recreational land sales and such kindred lines as may pertain to the same.
2. Name
The name of the Trust and Association shall be SUNDANCE RANCHES.
3. Term
This Trust and Association shall commence on the execution of this Agreement and shall continue until revoked by ROBERT A. GRANT, dissolved by mutual agreement, or upon the expiration of ten (10) years from the date hereof.
4. Place of Business
The principal place of business shall be Bend, Oregon.
5. Corpus
The corpus of this Trust and Association shall be as required from time to time in furtherance of the business of the Association in ratio to each associate's share in the profits and losses as hereinafter provided.
6. Profits and Losses
* * *
8. Accrual Basis of Accounting
At all times during the continuance of this Trust and Association, the associates shall keep accurate books of account in which all matters relating to the Trust and Association, including all income, expenditures, assets, and liabilities thereof, shall be entered. Said books shall be kept on an accrual basis and shall be open to examination by any associate at any time.
* * *
11. Time Devoted
WILLIAM A. MALIS, Trustee, shall devote as much time and attention as is necessary and use the utmost of his skills and ability in the furtherance of the Trust and Association business.
12. Management and Legal Authority
Grant provided Malis with $225,000 in 1975 in relation to Sundance Ranches.
In March 1975, Clawson, using the fictitious name, Cameron Cliff Land Company, and Malis, using the name Sundance Ranches, executed a document entitled Contract of Sale. They dated the document "this 10th day of January, 1975." The document included the following provisions:
Contract of Sale
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