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
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.
FINDINGS OF FACT
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. Boccardo
1........................................ 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 1Lorraine 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
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:
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 $2,087,000
In 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.
The first issue we consider is whether, during 1988, Sainte Claire constructively received the
Although the doctrine is sparingly applied, a taxpayer will be found to be in constructive receipt of income where the taxpayer had an unrestricted right to receive the income, the taxpayer was able to collect it, and the failure to receive it resulted from the exercise of the taxpayer's own choice. Murphy v. United States, 992 F.2d 929, 931 (9th Cir. 1993); Bennett v. United States [61-2 USTC ¶ 9635], 293 F.2d 323, 326 (9th Cir. 1961); Childs v. Commissioner [Dec. 50,239], 103 T.C. 634, 654 (1994), affd. without published opinion [96-2 USTC ¶ 50,504] 89 F.3d 856 (11th Cir. 1996); Gullett v. Commissioner [Dec. 8857], 31 B.T.A. 1067, 1069 (1935). But see Pittsburgh-Des Moines Steel Co. v. United States [73-2 USTC ¶ 9642], 360 F.Supp. 597, 600 (W.D. Pa. 1973). The doctrine prevents a taxpayer from turning its back on income otherwise available. Hamilton Natl. Bank v. Commissioner [Dec. 8240], 29 B.T.A. 63, 67 (1933). The question whether a taxpayer has constructively received income is one of fact. Avery v. Commissioner [4 USTC ¶ 1277], 292 U.S. 210, 215 (1934); Bennett v. United States, supra at 326; Martin v. Commissioner [Dec. 47,414], 96 T.C. 814, 822 (1991).
In the instant case, the evidence shows that, at the time Sainte Claire's board voted on November 1, 1988, to renew the 1968 note, it had matured, and Sainte Claire had an unqualified right to receive the principal amount. The parties stipulated that the 1968 note "became due on November 1, 1988, on which date Sainte Claire's board of directors met and extended payment of the principal thereon". Moreover, the resolution reflecting the board's action stated that the 1968 note "has matured".
While Mr. Boccardo discussed extending his note with members of Sainte Claire's board and others prior to the due date of the note, we are not persuaded by the record in the instant case that an agreement or understanding that the note would be extended existed prior to the vote of the board on November 1, 1988. Accordingly, the cases holding that a taxpayer may effectively defer for tax purposes receipt of income payable pursuant to an agreement by entering into a superseding agreement prior to the time the income is due pursuant to the terms of the original agreement, see, e.g., Martin v. Commissioner, supra at 823-824; Oates v. Commissioner [Dec. 19,049], 18 T.C. 570, 584-585 (1952), affd. [53-2 USTC ¶ 9596] 207 F.2d 711 (7th Cir. 1953); Veit v. Commissioner [Dec. 15,718], 8 T.C. 809, 817-819 (1947); Kimbell v. Commissioner [Dec. 11,077], 41 B.T.A. 940, 948-949 (1940), are not controlling in the instant case because the agreement to defer payment was not made until Sainte Claire's right to the income became vested.
The second factor to be considered is whether Sainte Claire was able to collect the principal amount of the 1968 note from Mr. Boccardo at the time it became due. Petitioners, in arguing that Sainte Claire did not constructively receive the 1968 note principal, stress that no funds of Mr. Boccardo's were transferred to, set aside for,
An obligor's lack of ready cash does not prevent constructive receipt of an amount due a taxpayer where the obligor has the ability to borrow the funds necessary for payment. A.D. Saenger, Inc. v. Commissioner [36-2 USTC ¶ 9355], 84 F.2d 23, 25 (5th Cir. 1936), affg. [Dec. 9086] 33 B.T.A. 135 (1935); Hyplains Dressed Beef, Inc. v. Commissioner [Dec. 30,738], 56 T.C. 119, 127 (1971); Ohio Battery & Ignition Co. v. Commissioner [Dec. 14,616], 5 T.C. 283, 287-288 (1945). Despite his other commitments, Mr. Boccardo could and would have paid the note had Sainte Claire requested him to do so.
Although Sainte Claire had the right to receive payment on the 1968 note and was able to collect the note principal from Mr. Boccardo, it did not actually receive payment because its board decided to renew the note to April 1, 1990. Sainte Claire's voluntary choice not to receive payment is ineffective to prevent its constructive receipt of the principal amount of the note. Llewellyn v. Commissioner [61-2 USTC ¶ 9735], 295 F.2d 649, 651 (7th Cir. 1961), affg. [Dec. 24,364(M)] T.C. Memo. 1960-197; Williams v. United States [55-1 USTC ¶ 9220], 219 F.2d 523, 527 (5th Cir. 1955); United States v. Pfister [53-2 USTC ¶ 9477], 205 F.2d 538, 541 (8th Cir. 1953); Willits v. Commissioner [Dec. 29,059], 50 T.C. 602, 613-619 (1968); Woodbury v. Commissioner [Dec. 28,696], 49 T.C. 180, 196 (1967); Frank v. Commissioner [Dec. 20,467], 22 T.C. 945 (1954), affd. per curiam [55-2 USTC ¶ 9722] 226 F.2d 600 (6th Cir. 1955); Deupree v. Commissioner [Dec. 12,888], 1 T.C. 113, 120 (1942); Lewis v. Commissioner [Dec. 8500], 30 B.T.A. 318, 324 (1934). The rule is summarized in the following excerpt from Oliver v. United States [61-2 USTC ¶ 9619], 193 F.Supp. 930, 933 (E.D. Ark. 1961), which we quoted with approval in Martin v. Commissioner [Dec. 47,414], 96 T.C. at 823-824:
Petitioners contend that tax considerations played no part in the decision to renew Mr. Boccardo's note and that there were valid business reasons for the renewal. However, the presence or absence of a tax avoidance motive does not control the applicability of the constructive receipt doctrine here. As was stated in Loose v. United States [4 USTC ¶ 1362], 74 F.2d 147, 150 (8th Cir. 1934):
Accordingly, we find that Sainte Claire constructively received the principal amount of the 1968 note during 1988, which Sainte Claire then re-advanced to Mr. Boccardo. Accordingly, Sainte Claire is required to recognize in its 1988 taxable year the gain realized on the sale of the Arboga and Gridley ranches. Because we decide the question of constructive receipt in respondent's favor, it is unnecessary for us to consider whether a disposition of the 1968 note occurred within the meaning of section 453B.
To reflect the foregoing and the parties' stipulation of settled issues,
Decisions will be entered under Rule 155.
A. They get nine percent instead of six or seven or five or four from a borrower [Mr. Boccardo] that they could call up any day and say, hey, would you do me a favor, would you pay that note tomorrow, we've got to do this, and I'd say sure.
A. You're dealing with friends.