Mitchell v. Comm'r of Internal Revenue, Docket No. 1871-63.
| Citation | 42 T.C. 953 |
| Decision Date | 26 August 1964 |
| Docket Number | Docket No. 1871-63. |
| Parties | CLINTON H. MITCHELL AND NAOMI H. MITCHELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Clinton H. Mitchell, pro se.
Herbert T. Ikazaki, for respondent.
1. In 1959 the petitioners, in a transaction governed by section 1031 of the Internal Revenue Code of 1954, exchanged certain property for property of like kind, the other parties to the exchange assuming an existing mortgage on the petitioners' property and executing in favor of the petitioners a note secured by a deed of trust. Held, that the payments received by the petitioners in the year of the transaction, consisting of the net value of the property received in the exchange and cash payments made on the note, exceeded 30 percent of the ‘selling price,‘ consisting of the net value of the property received in the exchange, the amount of the encumbrance assumed by the other parties to the exchange, and the fair market value of the note of such other parties, and that therefore the petitioners are not entitled to report the recognized gain upon the installment method provided in section 453 of the Code.
2. Held, further, that no part of the consideration passing from the petitioners in such exchange was attributable to the acquisition of a sublease from the other parties, and that accordingly the full amount of the adjusted basis of the property received in the exchange is to be allocated between the motel and the furniture and fixtures in proportion to their values, for purposes of computing the depreciation allowance under section 167 of the Code.
3. Held, further, that the petitioners adopted the straight-line method for computing the allowance for depreciation on the motel and the furniture and fixtures for the taxable years 1959 and 1960 and that they are not entitled to change such method to the declining-balance method without the consent of the respondent.
4. Held, further, that the petitioners are not entitled to an additional first-year depreciation allowance on the furniture and fixtures of the motel for the taxable year 1959, under section 179 of the Code, in the absence of a showing that they filed an election with respect thereto as required by that section.
5. Held, further, that the petitioners, operating upon the cash receipts and disbursements method of accounting, are not entitled to deduct interest accrued, but unpaid, on their obligations.
6. Held, further, that costs of transportation and meals incurred by the petitioner on trips made on the average of about once a week from his residence in Redlands, Calif., to Anaheim, Calif., to supervise the management of a motel which he owned and operated there, are not deductible as traveling expenses under section 162(a)(2) of the 1954 Code.
7. Held, further, that the petitioners are not entitled to any deductions as traveling expenses under section 162(a)(2) on account of the use of their automobile in driving from Bar Harbor, Maine, to Anaheim, Calif., in 1960, the amounts claimed being personal expenses incurred on a vacation trip; and that the petitioners have not shown that any portion of the amount claimed represented casualty losses under section 165(c) of the Code.
8. Held, further, that the petitioners are not entitled to deduct as charitable contributions depreciation on their private automobile used in rendering services gratuitously to charitable and religious organizations or costs of meals consumed while rendering such services. Clinton H. Mitchell, pro se.
Herbert T. Ikazaki, for respondent.
The respondent determined deficiencies in income tax for the taxable tears 1959 and 1960 in the respective amounts of $14,708.03 and $1,357.32
The parties having made certain concessions, the issues remaining are:
(1) Whether the petitioners may report the gain on an exchange of property, recognized under section 1031 (b), on the installment method pursuant to the provisions of section 453, or, whether such gain is taxable in the year of exchange;
(2) Whether, as part of such exchange the petitioners received, besides a motel and its furnishings, an interest in a 99-year lease to the land upon which the motel is located, requiring the allocation thereto of some portion of the consideration given by the petitioners in the exchange, or whether such consideration is all attributable to the motel and furnishings, for purposes of determining the basis for depreciation;
(3) Whether in computing depreciation on the motel and furnishings for the taxable years 1959 and 1960 the petitioners are required to use the straight-line method as shown in the original return for the year 1959, or whether they may use the declining-balance method claimed in an amended return for the year 1959 filed after the statutory due date for the filing of the return, they having stated in the original return that they reserved the right to alter the method of depreciation;
(4) Whether the petitioners are entitled for the year 1959 to an additional first year allowance for depreciation on furniture and fixtures under section 179;
(5) Whether petitioners, who kept their books and records on the cash receipts and disbursements method of accounting for the taxable years in question, can claim deductions, under section 163, for interest accrued but unpaid;
(6) Whether petitioners are entitled to deductions claimed for each of the taxable years in question for traveling expenses; and
(7) Whether petitioners are entitled to deductions, claimed for the year 1959 as charitable contributions, representing depreciation on their private automobile and the cost of meals incurred while engaged in rendering services to charitable and religious organizations.
Some of the facts have been stipulated and are incorporated herein by reference.
The petitioners are husband and wife. The husband will hereinafter be referred to as the petitioner. During the taxable year 1959 petitioners maintained their personal residence in a home in Redlands, Calif. For such taxable year they filed with the district director of internal revenue, Los Angeles, Calif., four joint income tax returns. The four returns were filed on or about January 17, 1960, January 29, 1960, December 27, 1960, and August 14, 1961. Each of the returns, filed after January 17, 1960, purported to amend the immediately preceding return. The last return was filed after the petitioners had been called in for conferences with representatives of the Internal Revenue Service.
For the taxable year 1960, petitioners filed two joint income tax returns with the district director of internal revenue in Los Angeles. The first return was filed on April 14, 1961. The second return, purporting to amend the first return, was filed on August 17, 1961. The petitioners kept their books and records and filed all their returns on the cash receipts and disbursements method of accounting.
On January 16, 1959, the petitioners entered into an ‘Exchange Agreement’ with Ralph R. and Mona E. Petreny, husband and wife, whereby the Petrenys agreed to exchange a motel, known as the Musketeer Motel, located at Anaheim, Calif., for two pieces of improved real property belonging to the petitioners, consisting of premises 8800-8806 Sunset Boulevard and 1021-1025 Palm Avenue, Los Angeles, Calif. In the exchange agreement it was stated that for purposes of the exchange the petitioners' property was valued at $148,000, subject to an encumbrance of approximately $18,624 (less January payment), and that for purposes of the exchange the Petrenys' property was valued at $247,000, subject to a deed of trust in favor of a bank in the approximate amount of $80,872.60 (after February payment). It was further provided that included in the purchase price, and to remain on the property, were all furnishings, bedding, linens, signs, and all equipment for the operation of the motel. In the escrow instructions the petitioners and the Petrenys valued all this equipment at $47,000. It was agreed that the Petrenys would execute in favor of the petitioners a trust deed in the amount of approximately $69,576, and that the petitioners would execute in favor of the Petrenys a note and chattel mortgage in the approximate amount of $105,000, with interest at 6 percent per annum. It was provided that the combined payments which the petitioners should make on the deed of trust in favor of the bank which they had assumed and the note and chattel mortgage which they would execute in favor of the Petrenys should not be more than $1,600 monthly.2 It was further provided that the Petrenys would sublease to the petitioners the land upon which the motel was located. / 3/ per annum.
Also, in accordance with the above agreement, the petitioners and the Petrenys entered into a sublease on January 27, 1959, of the portion of the premises covered by the Petrenys' 99-year lease upon which the motel was located. The sublease was for the remaining term of the original lease, approximately 98 years. In the sublease the petitioners agreed to pay to the Petrenys the sum of $500 per month basic rental, plus 7 percent of the gross receipts derived from the premises in excess of $80,000 per annum for a period of 30 months, and plus 7 percent of the gross receipts derived from the premises in excess of $70,000 per annum thereafter. It was further provided that if the petitioners should, among other things, sublease the premises or transfer their sublease, they should remain liable for a basic rental of $500 per month, plus 7 percent of the gross receipts derived from the leased premises in excess of $60,000 per year. It was provided that, except insofar as its terms were changed and modified by the sublease, the petitioners accepted the sublease subject to all the terms and conditions of the original lease.
The real property conveyed by the petitioners in the exchange had an adjusted basis of $32,526.13. It had a...
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