Casa De La Jolla Park, Inc. v. Commissioner

Donald Marshall was a Canadian citizen who became involved with a project of Versatyme Controls Corp. (Versatyme) as Versatyme was trying to obtain bridge financing for a piece of real estate to be used as a time-share. Marshall bought the property and borrowed $1 million from the Royal Bank of Canada to finance the purchase. As part of the collateral for the loan, Marshall gave up all rights in time-share promissory notes from third parties as the notes were executed. Marshall then obtained 100 shares of DBJM of California (DJBM) stock with his $1 million loan, with DBJM then purchasing the La Jolla property for $1 million. Marshall then gave Versatyme an option to acquire that stock for $1.2 million in notes secured by deeds of trust and a third of the net venture profits (time-share fees). Versatyme exercised that option and gave Marshall a $1.2 million promissory note and a deed of trust in the La Jolla property. The Bank of California (BankCal) was to collect and disburse the time-share funds. Later, Versatyme could not meet its obligation under the promissory notes. Marshall then established Casa De La Jolla Park, Inc. (plaintiff) to keep marketing time-share units. Marshall bought all of the stock and was the company’s sole shareholder and director. Casa De La Jolla Park, Inc., acquired all of Marshall’s interests and rights in the La Jolla property in exchange for a promissory note covering just over $1.6 million—Marshall’s total expenditures on the La Jolla property to date, which was the purchase price and additional advances to DBJM. Casa De La Jolla Park, Inc., then acquired all of Versatyme’s rights to the property. Soon thereafter, Blake Resources Ltd., one of Marshall’s other companies, went bankrupt. Casa De La Jolla Park, Inc. directed BankCal to pay the net proceeds on the time-share in the La Jolla property directly to Royal Bank to cover Blake’s debt rather than directly to Marshall. Casa De La Jolla Park, Inc. filed annual income tax returns, reflecting no withholding on gross amounts paid of just over $300,000 and $500,000 for 1982 and 1983, respectively. The Commissioner of Internal Revenue (the commissioner) (defendant) argued that Casa De La Jolla Park, Inc. was responsible for withholding income under 26 U.S.C. § 1441 (see Withholding for Nonresident Aliens and Foreign Corporations), which requires the person paying fixed, determinable, annual, or periodical income from sources in the United States to withhold that tax. Marshall argued that he did not receive the income and that Casa De La Jolla Park, Inc., was not a withholding agent.