Fox v. Comm'r of Internal Revenue, Docket Nos. 1867-66
| Citation | 50 T.C. 813 |
| Decision Date | 09 September 1968 |
| Docket Number | 1868-66.,Docket Nos. 1867-66 |
| Parties | ORRIN W. FOX AND EBBA FOX, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTRICHARD L. FOX AND KATHRYN S. FOX, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
J. Patrick Whaley and Stuart T. Peeler, for the petitioners.
Marion Malone, for the respondent.
Petitioners, through a partnership, sold certain property under a contract in which they retained the right to remove or salvage the improvements. They subsequently discovered that, with minor exceptions, they could not utilize the improvements and they thereupon sold them as salvage. Held, petitioners failed to prove that their intent to utilize the improvements was fixed and a sufficiently significant force to support an abandonment loss to the partnership. Held, further, petitioners failed to prove that certain business bad debts became worthless during the taxable year.
Respondent determined deficiencies in petitioners' income taxes for their taxable years ending December 31, 1962, as follows:
+--------------------------------------------------------------+
¦Petitioner ¦Docket No.— ¦Deficiency ¦
+---------------------------------+---------------+------------¦
¦Orrin W. Fox and Ebba Fox ¦1867-66 ¦$36,560.14 ¦
+---------------------------------+---------------+------------¦
¦Richard L. Fox and Kathryn S. Fox¦1868-66 ¦36,816.87 ¦
+--------------------------------------------------------------+
All matters in issue involve the affairs of the Fox investment Co., a partnership, in which petitioners Orrin W. Fox and Richard L. Fox were sole and equal partners. Consequently, both dockets were consolidated for trial and decision. Petitioners' concessions leave two issues for our consideration:
(1) Whether petitioners are entitled to an abandonment loss deduction for the unrecovered basis of improvements on certain property they sold, and, if not, what the proper treatment of the unrecovered basis should be.
(2) Whether petitioners are entitled to business bad debt deductions in the amount of $98,355.90.
Some of the facts are stipulated and are found accordingly.
Petitioners Orrin W. Fox and Ebba Fox are husband and wife, as are petitioners Richard L. Fox and Kathryn S. Fox. Petitioners all resided in Pasedena, Calif., at the time of the filing of the petitions herein. Each couple filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue, Los Angeles, Calif. Richard Fox is the son of Orrin Fox. All subsequent references to petitioners shall be deemed to mean Orrin and Richard.
Petitioners, through the vehicle of corporations, sold, leased, and serviced trucks and construction equipment. They had considerable familiarity with the construction industry. Petitioners also were equal partners in Fox Investment Co. which during 1962 maintained its books and records on a cash basis with the exception of certain receivables.
Issue 1. The Abandonment Loss
In 1961, the partnership owned improved land on the 2300 block of East Colorado Boulevard in Pasedena. Petitioners' corporations conducted business on this property.
In the summer of 1961, the partnership entered into negotiations with Safeway Stores, Inc. (hereinafter referred to as Safeway), for the sale of the East Colorado Boulevard property. The partnership did not instigate these negotiations.
Safeway was only interested in the property as a site for a new grocery store; it did not want the existing improvements. It would have paid the same for the land with or without the improvements. Throughout the negotiations, Safeway did not investigate and did not consider the cost of clearing the site. It expected that most of the improvements would be removed.
After discovering, during the negotiations, that Safeway had no use for the buildings, petitioners decided that, if Safeway purchased the property, they would attempt to move and to continue to use the buildings to the extent economically feasible. They did not, at that time, investigate the feasibility of moving the improvements. Nor did they inquire into the availability of another business site.
On November 3, 1961, the partnership executed an agreement giving Safeway an option until May 1, 1962, to buy the property for $900,000, with credit for the $10,000 option price. Under the terms of the agreement, if the option was exercised, the partnership could continue to occupy the premises for 6 months after the sales escrow was closed, at a rental rate of $1,250 per month.
At the partnership's request, the following sentence was inserted in the rider to the agreement, which was prepared by Safeway and generally followed its form of contract:
Prior to the date Seller delivers exclusive possession of the property to Buyer, Seller may remove any or all improvements or salvage from the property. * * *
The clause in Safeway's form contract relating to damage to improvements was struck, but the following form clause was left intact:
Seller hereby grants unto the Buyer the exclusive right and option to purchase * * * that certain property, together with all the improvements and appurtenances thereon.
The emphasized portion above was permitted to remain on the theory that the matter was adequately taken care of by the rider.
The partnership was motivated to make the sale by the attractiveness of the price offered and the opportunity for petitioners to modernize their facilities through a change of location.
On May 1, 1962, Safeway exercised its option and on June 19, 1962, the sales escrow was closed. In May, petitioners began looking for a new business location. They experienced some difficulty because of the fact that no one property owner had the necessary 4 or 5 acres at any of the locations they considered. Eventually, they secured an acceptable property on the 3400 block of East Colorado Boulevard. The escrows were closed with respect to this property on November 2, 1962.
In early October 1962, petitioners engaged architects to make a study for a new plant layout at the new location, including the feasibility of utilizing the old improvements. They had not done this before because they had not known where the business would relocate. By October 25, 1962, the architects had determined that, with the exception of a portion of the materials (roofs and wood partitions), most of the improvements could not be economically moved and used at all. Accordingly, invitations were sent to submit bids to move the usable portion of the improvements and for salvage of the remainder. On November 13, 1962, the bids received were opened. A $27,186 bid from Basore Moving Co. that included $1,500 for salvage was accepted. On November 14, 1962, having learned the full cost of relocating, petitioners sought to persuade Safeway to give up its agreement and to accept other property. Safeway refused but did consent to an extension of the partnership occupancy and the time for removal of improvements until March 19, 1963. Petitioners tried at least twice more to persuade Safeway to give up its agreement, but Safeway remained adamant.
The move to the new location started in December 1962 and petitioners' businesses were completely out of the Safeway site by March 1963. The removal of the improvements by way of salvage and demolition was not completed until after Safeway began its construction in 1963.
After crediting the $1,500 salvage, the partnership had an unrecovered basis of $144,128.39 which it deducted as an abandonment loss on its 1962 return. 1
Issue 2. The Bad Debt Deductions
T. J. Haddock Debts
In early 1960, the partnership owned all of the stock of the Fox Truck Leasing Corp. (hereinafter sometimes referred to as the Fox Corp.), whose main business was leasing construction equipment and heavy-duty construction trucks. On March 3, 1960, Fox Corp. entered into a rental agreement with B & T Trucking, Inc. (hereinafter referred to as B & T). The agreement provided for a 3-year lease of certain specified equipment at a monthly rental of $5,000. The obligations of B & T under the agreement were guaranteed by T. J. Haddock. T. J. Haddock had an unspecified interest in J. E. Haddock, Ltd., with which petitioners had done valuable business for many years.
In the latter part of 1960, B & T became delinquent in its rental payments. After unsuccessful attempts at collection and prior to February 1961, petitioners sued T. J. Haddock personally on his guarantee and also sought to reach his interests in certain real property at ‘Montebello,‘ in J. E. Haddock, Ltd., and in one ‘Haddock Transportation Company.’
Petitioners estimated that they could get $30,000 on the Haddock guarantee out of the ‘Montebello’ property. They did, in fact, get about $35,000 in 1963 or later.
On February 8, 1961, some time after petitioners had filed suit against T. J. Haddock personally, J. E. Haddock, Ltd., filed a voluntary petition for an arrangement under chapter XI of the Federal Bankruptcy Act. Orrin Fox attended creditors meetings and participated in the successful procurement of a bid of $700,000 for certain real estate owned by J. E. Haddock, Ltd.
As of December 18, 1962, the account receivable from B & T was carried on Fox Corp.‘s books at its face value, $118,641.34.
Based on the foregoing and on conversations with the referee and receiver in the chapter XI proceeding, Orrin Fox thought on that date that the partnership claim against B & T would eventually be paid in full.
On December 18, 1962, Fox Corp. had an account receivable from T. J. Haddock on its books in the amount of $518.56, representing a part of his obligation on the guarantee.
On December 18, 1962, petitioners caused the Fox Corp. to be totally liquidated and its assets, including the debts here in question, to be distributed to the partnership. For purposes of...
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