                        T.C. Memo. 1997-171



                      UNITED STATES TAX COURT



SAINTE CLAIRE CORPORATION, JAMES F. BOCCARDO, TAX MATTERS PERSON,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

    SAINTE CLAIRE CORPORATION, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos.   5921-95, 5922-95.1     Filed April 7, 1997.



     Clarence J. Ferrari, Jr. and Lisa I. Caputo, for

petitioners.

     Lavonne D. Lawson, for respondent.




1
     These cases were consolidated for purposes of trial,
briefing, and opinion and will hereinafter be referred to as the
instant case.
                               - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:   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 income tax in the amounts of $23,106 and

$717,998, respectively.2   Unless otherwise indicated, all section

references are to the Internal Revenue Code as in effect for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     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.3




2
     Although Sainte Claire elected to be an S corporation for
its 1987 and 1988 taxable years, respondent determined that it
was liable for tax on its excess net passive income pursuant to
sec. 1375 for 1987 and on its net capital gain pursuant to sec.
1374 for 1988.
3
     Petitioners object on grounds of relevance to entries in an
exhibit prepared by respondent's agent that relate to payments of
interest by James F. Boccardo to Sainte Claire during 1985 and
1986. While we sustain petitioners' objection, consideration of
those entries would not have altered our decision herein.
                                 - 3 -

                          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:
                                - 4 -

     James F. and Lorraine V. Boccardo1             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
     1
         Lorraine 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
                               - 5 -

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 assumed the existing mortgages on the ranches and gave

Sainte Claire a promissory note (1968 note) dated November 1,

1968, in the amount of $2,087,500 that bore interest at the rate

of 6-½ percent per annum, payable semiannually, and that provided

for a balloon payment of the principal on or before November 1,

1988.   Although the 1968 note stated that it was secured by deed

of trust, it was actually unsecured.    Mr. Boccardo sold the

Gridley ranch during 1975.   He sold the Arboga ranch during

October 1988 for $5,150,000.

     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.
                                 - 6 -

     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:

          WHEREAS, The Promissory Note dated November 1,
     1968 in the sum of $2,087,500 executed by James F.
     Boccardo, has matured, the following Resolution was
     unanimously adopted:

          BE IT RESOLVED, that this Corporation shall renew
          the Promissory Note in the sum of $2,087,500 to
          April 1, 1990, at an interest rate of Nine (9)
          Percent, said note to be executed by James F.
          Boccardo.
                              - 7 -

     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 $2,087,0004 and interest in the amount of $72,562.20.

Also during that year, Sainte Claire distributed the principal

payment of $2,087,000 to its shareholders.   Sainte Claire

reported gain on the sale of the Arboga and Gridley ranches in



4
     The parties do not attempt to explain the $500 discrepancy
between the principal amount of the 1991 note, which was
$2,087,500, and the amount of principal paid by Mr. Boccardo,
which was $2,087,000. The parties, however, stipulated that Mr.
Boccardo paid the principal amount owed Sainte Claire during
1993.
                              - 8 -

the amount of $2,087,500 on its 1993 S corporation income tax

return.

                             OPINION

     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.5

5
     Because Sainte Claire made its election to be an S
corporation on Dec. 29, 1986, it is, in general, subject to
taxation on its net capital gain pursuant to the provisions of
sec. 1374 as it existed prior to the amendments made by sec. 632
of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2275-
2277. Tax Reform Act of 1986, Pub. L. 99-514, sec. 633(b), 100
Stat. 2277 (providing for effective date of change). Sec.
1374(a), prior to amendment, provided that, if for a taxable year
of an S corporation, its net capital gain exceeded $25,000 and 50
percent of its taxable income, and the S corporation's taxable
income for the year exceeded $25,000, a tax was imposed on the
income of the corporation. Pursuant to sec. 1374(c)(1), prior to
amendment, the tax was not imposed for an S corporation's taxable
year where its election to be treated as an S corporation had
been in effect for the 3 immediately preceding taxable years.
                                                   (continued...)
                              - 9 -

     The first issue we consider is whether, during 1988, Sainte

Claire constructively received the principal of the 1968 note.6

Section 451(a) provides that any item of gross income received by

a taxpayer is to be included in the gross income for the taxable

year in which received, unless the item is to be properly

accounted for during a different period pursuant to the

taxpayer's method of accounting.   Section 1.451-1(a), Income Tax

Regs., provides that taxpayers using the cash receipts and

disbursements method of accounting, which Sainte Claire did

during relevant times, shall include in gross income amounts when

actually or constructively received.   Section 1.451-2(a), Income

Tax Regs., describes the doctrine of constructive receipt as

follows:

     Income although not actually reduced to a taxpayer's
     possession is constructively received by him in the
     taxable year during which it is credited to his
     account, set apart for him, or otherwise made available
     so that he may draw upon it at any time, or so that he

5
   (...continued)
Sec. 1.1374-1A(c)(1)(i)(A), Income Tax Regs. See generally
Warrensburg Bd. & Paper Corp. v. Commissioner, 77 T.C. 1107
(1981). The exception provided by former sec. 1374(c)(1) does
not apply to Sainte Claire.
6
     In briefing this issue, both parties discuss Vaughn v.
Commissioner, 81 T.C. 893 (1983), modified 87 T.C. 164 (1986);
however, neither party notes that this Court subsequently
reconsidered its holding that the taxpayer had constructively
received the proceeds of an installment sale. Vaughn v.
Commissioner, 87 T.C. 164, 167 (1986), modifying 81 T.C. 893
(1983). In reconsidering that holding, this Court also stated
that the discussion of constructive receipt in the earlier
opinion should be disregarded. Id. at 168 n.2. Accordingly, we
do not consider the opinion cited to us by the parties.
                               - 10 -

     may have drawn upon it during the taxable year if
     notice of intention to withdraw had been given.
     However, income is not constructively received if the
     taxpayer's control of its receipt is subject to
     substantial limitations or restrictions. * * *

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, 293 F.2d 323, 326 (9th Cir. 1961); Childs v.

Commissioner, 103 T.C. 634, 654 (1994), affd. without published

opinion 89 F.3d 856 (11th Cir. 1996); Gullett v. Commissioner, 31

B.T.A. 1067, 1069 (1935).   But see Pittsburgh-Des Moines Steel

Co. v. United States, 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, 29

B.T.A. 63, 67 (1933).   The question whether a taxpayer has

constructively received income is one of fact.    Avery v.

Commissioner, 292 U.S. 210, 215 (1934); Bennett v. United States,

supra at 326; Martin v. Commissioner, 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
                              - 11 -

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, 18 T.C. 570, 584-585 (1952), affd. 207

F.2d 711 (7th Cir. 1953); Veit v. Commissioner, 8 T.C. 809, 817-

819 (1947); Kimbell v. Commissioner, 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, or otherwise made available to
                               - 12 -

Sainte Claire during 1988.   We note that the existence of an

entry crediting the note principal to Sainte Claire on Mr.

Boccardo's books is not required for a finding of constructive

receipt.7   Cooney v. Commissioner, 18 T.C. 883, 885-887 (1952);

Hooper v. Commissioner, T.C. Memo. 1995-108.   Moreover, at the

time that the note was due, Mr. Boccardo, a successful attorney

and real estate investor, was worth over $50 million and had a

substantial income.   Although, because of commitments connected

with his real estate investments, he did not have sufficient cash

on hand to pay the note, he admitted that he could have borrowed

the funds to do so.

     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, 84 F.2d 23, 25 (5th

Cir. 1936), affg. 33 B.T.A. 135 (1935); Hyplains Dressed Beef,

Inc. v. Commissioner, 56 T.C. 119, 127 (1971); Ohio Battery &

Ignition Co. v. Commissioner, 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.8    Rhombar

7
     Mr. Boccardo apparently used the cash method of accounting.

8
     Although his commitments may have made it inconvenient to do
so, Mr. Boccardo was willing to pay Sainte Claire. For instance,
at one point in his testimony, while discussing the advantages to
Sainte Claire of having him as its debtor, Mr. Boccardo stated:
                                                   (continued...)
                              - 13 -

Co. v. Commissioner, 47 T.C. 75, 85-86 (1966) affd. on another

ground 306 F.2d 516 (2d Cir. 1967), which is relied on by

petitioners, is distinguishable because the debtor in that case

was in a "stringent cash position" and apparently was unable to

pay its obligations, precluding application of the doctrine.

      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, 295 F.2d 649, 651 (7th Cir. 1961),

affg. T.C. Memo. 1960-197; Williams v. United States, 219 F.2d

523, 527 (5th Cir. 1955); United States v. Pfister, 205 F.2d 538,

541 (8th Cir. 1953); Willits v. Commissioner, 50 T.C. 602, 613-

619 (1968); Woodbury v. Commissioner, 49 T.C. 180, 196 (1967);

Frank v. Commissioner, 22 T.C. 945 (1954), affd. per curiam 226

F.2d 600 (6th Cir. 1955); Deupree v. Commissioner, 1 T.C. 113,

8
    (...continued)
      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.

      Q.   Now--

      A.   You're dealing with friends.
                               - 14 -

120 (1942); Lewis v. Commissioner, 30 B.T.A. 318, 324 (1934).

The rule is summarized in the following excerpt from Oliver v.

United States, 193 F. Supp. 930, 933 (E.D. Ark. 1961), which we

quoted with approval in Martin v. Commissioner, 96 T.C. at 823-

824:

       [Where a taxpayer] acquires an unconditioned vested
       right to receive the proceeds of the sale, and the
       buyer is ready, willing, and able to make payment, the
       taxpayer cannot avoid treating the proceeds as income
       for that year by voluntarily declining to accept
       payment during that year, or by requesting the
       purchaser not to pay him until a later year, or even by
       voluntarily putting himself under some legal disability
       or restriction with respect to payment. In such
       circumstances, he will be deemed in constructive
       receipt of the income notwithstanding his refusal to
       accept payment or his self-imposed restraints on
       payment. [Emphasis supplied.]

       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, 74 F.2d 147, 150 (8th Cir.

1934):

       If the sole basis and reason for constructive receipt
       of income were the avoidance of fraud in tax evasion,
       * * * [the taxpayer's] argument would carry much force
       because there was obviously no thought of tax evasion
       here. However, the strongest reason for holding
       constructive receipt of income to be within the statute
       is that for taxation purposes income is received or
       realized when it is made subject to the will and
       control of the taxpayer and can be, except for his own
       action or inaction, reduced to actual possession. So
       viewed, it makes no difference why the taxpayer did not
                             - 15 -

     reduce to actual possession. The matter is in no wise
     dependent upon what he does or upon what he fails to
     do. It depends solely upon the existence of a
     situation where the income is fully available to him.
     * * *

     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.
