Montgomery Co. v. Comm'r of Internal Revenue
| Citation | 54 T.C. 986 |
| Decision Date | 14 May 1970 |
| Docket Number | Docket No. 4328-67. |
| Parties | THE MONTGOMERY CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
D. Paul Alagia, Jr., and J. Bernard Brown, for the petitioner.
W. Gerald Thornton, for the respondent.
1. Held, a certain lease cancellation payment of $10,000 in 1962 was made solely for the purpose of acquiring a new, more lucrative lease from a new tenant, the TraveLodge Corp.; consequently, the payment should be amortized over the life of the new TraveLodge lease.
2. Held, petitioner's earnings and profits for the taxable years 1962 through 1964 were not permitted to accumulate beyond the reasonable needs of petitioner's motel venture business including the reasonably anticipated needs of such business. Held, further, in view of the credit provided for in sec. 535(c)(1) of the 1954 Code, it is unnecessary to consider whether petitioner was formed or availed of for the proscribed purpose and, therefore, petitioner is not liable for the accumulated-earnings tax imposed by sec. 531. See secs. 531 through 537 of the 1954 Code.
Respondent determined deficiencies in income tax for the taxable years ended December 31, 1962, 1963, and 1964, of $1,694.62, $4,965.47, and $4,467.65, respectively.
Two issues are presented:
(1) Is a certain ‘lease cancellation expense’ of $10,000 incurred and paid by petitioner in 1962 deductible over a 2-year period as claimed by petitioner, or over a 25-year period as determined by the respondent?
(2) Was petitioner, during the taxable years, availed of for the purpose of avoiding income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed, so as to be subject to the accumulated-earnings tax imposed by section 531 of the Internal Revenue Code of 1954?1
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized and existing under the laws of the Commonwealth of Kentucky and, at the time of the filing of the petition, had its principal office and place of business at Second and Liberty Streets, Louisville, Jefferson County, Ky.
Petitioner filed its Federal income tax returns (Form 1120) for the taxable years ended December 31, 1962, 1963, and 1964, with the office of the district director of internal revenue, Louisville, Ky.
Petitioner was organized on January 26, 1948, under the name Montgomery Auto Co., to engage in the business of retail sale of automobiles and trucks under a franchise from the Chevrolet Motor Division of General Motors Corp. On May 30, 1952, the corporate name was officially changed to Montgomery Chevrolet, Inc. On July 15, 1953, petitioner changed its name to The Montgomery Co. and thereafter transferred its operating assets, exclusive of the real estate, plant and buildings, and insurance business, to a new corporation known as Montgomery Chevrolet, Inc., hereinafter sometimes referred to as Chevrolet. The insurance business was sold to Hufnagel & Stivers Insurance, Inc., on May 1, 1964.
During the years in issue, the total outstanding stock of petitioner was owned as follows:
+------------------------------------------------+
¦ ¦Number of shares ¦
+------------------------+-----------------------¦
¦Name ¦ ¦
+------------------------+-----------------------¦
¦ ¦1962 ¦1963 ¦1964 ¦
+------------------------+-------+-------+-------¦
¦Louise C. Montgomery ¦508 1/2¦565 1/2¦532 1/2¦
+------------------------+-------+-------+-------¦
¦Schuhmann A. Montgomery ¦87 1/2 ¦93 ¦98 1/2 ¦
+------------------------+-------+-------+-------¦
¦Richard L. Montgomery ¦87 1/2 ¦93 ¦98 1/2 ¦
+------------------------+-------+-------+-------¦
¦Robert A. Montgomery ¦59 1/2 ¦65 ¦70 1/2 ¦
+------------------------+-------+-------+-------¦
¦Herbert A. Montgomery ¦38 1/2 ¦38 1/2 ¦38 1/2 ¦
+------------------------+-------+-------+-------¦
¦Rita L. Montgomery ¦38 1/2 ¦44 ¦49 1/2 ¦
+------------------------+-------+-------+-------¦
¦Mary L. Montgomery ¦16 1/2 ¦22 ¦27 1/2 ¦
+------------------------+-------+-------+-------¦
¦Suzanne M. Obergefell ¦16 1/2 ¦22 ¦27 1/2 ¦
+------------------------+-------+-------+-------¦
¦Total shares outstanding¦943 ¦943 ¦943 ¦
+------------------------------------------------+
Louise C. Montgomery is the mother of the other seven stockholders of petitioner and is also the mother of Raymond E. Montgomery, Jr., a stockholder of Chevrolet but not a stockholder of petitioner. Herbert A. is also known as Adolph, and Raymond E. is also known as R. E. At the time of the trial herein Louise was 67 years of age and in reasonably good health.
During the years in issue, the directors of petitioner were as follows:
+--------------------------------------+
¦Name ¦1962¦1963¦1964¦
+-----------------------+----+----+----¦
¦ ¦ ¦ ¦ ¦
+-----------------------+----+----+----¦
¦Louise C. Montgomery ¦x ¦x ¦x ¦
+-----------------------+----+----+----¦
¦Schuhmann A. Montgomery¦x ¦x ¦x ¦
+-----------------------+----+----+----¦
¦Richard L. Montgomery ¦x ¦x ¦x ¦
+-----------------------+----+----+----¦
¦Robert A. Montgomery ¦ ¦ ¦x ¦
+-----------------------+----+----+----¦
¦Herbert A. Montgomery ¦ ¦ ¦x ¦
+--------------------------------------+
During the years in issue, the officers of petitioner and the compensation paid to them by petitioner were as follows:
+-------------------------------------------------------------------+
¦ ¦Salary paid ¦
+-------------------------------------------------------------------¦
¦Name and position ¦ ¦ ¦
+-----------------------------------------------------+------+------¦
¦ ¦1962 ¦1963 ¦1964 ¦
+----------------------------------------------+------+------+------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------------+------+------+------¦
¦Louise C. Montgomery, president ¦$3,000¦$3,000¦$3,000¦
+----------------------------------------------+------+------+------¦
¦Schuhmann A. Montgomery, vice president ¦4,050 ¦0 ¦0 ¦
+----------------------------------------------+------+------+------¦
¦Richard L. Montgomery: ¦ ¦ ¦ ¦
+----------------------------------------------+------+------+------¦
¦Secretary-treasurer (up to 4/6/64) ¦0 ¦0 ¦ ¦
+----------------------------------------------+------+------+------¦
¦Secretary (since 4/6/64) ¦ ¦ ¦ ¦
+----------------------------------------------+------+------+------¦
¦Robert A. Montgomery, treasurer (since 4/6/64)¦ ¦ ¦ ¦
+-------------------------------------------------------------------+
Chevrolet, which was organized in 1953 to operate the Chevrolet Automobile Dealership business, has continued to operate such business to and including the taxable years in issue. During the years in issue, the outstanding stock of Chevrolet was owned as follows:
+-------------------------------------------+
¦ ¦Number of shares ¦
+-------------------------------------------¦
¦Name ¦ ¦ ¦
+-------------------------------+-----+-----¦
¦ ¦1962 ¦1963 ¦1964 ¦
+-------------------------+-----+-----+-----¦
¦ ¦ ¦ ¦ ¦
+-------------------------+-----+-----+-----¦
¦Louise C. Montgomery ¦840 ¦790 ¦740 ¦
+-------------------------+-----+-----+-----¦
¦Raymond E. Montgomery, Jr¦1,150¦1,174¦1,200¦
+-------------------------+-----+-----+-----¦
¦Schuhmann A. Montgomery ¦225 ¦225 ¦215 ¦
+-------------------------+-----+-----+-----¦
¦Herbert A. Montgomery ¦198 ¦223 ¦258 ¦
+-------------------------+-----+-----+-----¦
¦Total shares outstanding ¦2,413¦2,412¦2,413¦
+-------------------------------------------+
During the years in issue, the directors of Chevrolet were as follows:
+----------------------------------------+
¦Name ¦1962¦1963¦1964¦
+-------------------------+----+----+----¦
¦ ¦ ¦ ¦ ¦
+-------------------------+----+----+----¦
¦Raymond E. Montgomery, Jr¦x ¦x ¦x ¦
+-------------------------+----+----+----¦
¦Herbert A. Montgomery ¦x ¦x ¦x ¦
+-------------------------+----+----+----¦
¦Louise C. Montgomery ¦x ¦x ¦x ¦
+-------------------------+----+----+----¦
¦Schuhmann A. Montgomery ¦x ¦x ¦x ¦
+----------------------------------------+
The officers of Chevrolet and the compensation paid to them by Chevrolet during the years in issue were as follows:
+----------------------------------------------------------------------------+
¦Name and position ¦1962 ¦1963 ¦1964 ¦
+-------------------------------------------+----------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+-------------------------------------------+----------+----------+----------¦
¦President: ¦ ¦ ¦ ¦
+-------------------------------------------+----------+----------+----------¦
¦Raymond E. Montgomery, Jr ¦$18,700.92¦$18,719.04¦$18,716.82¦
+-------------------------------------------+----------+----------+----------¦
¦Vice president: ¦ ¦ ¦ ¦
+-------------------------------------------+----------+---------------------¦
¦Herbert A. Montgomery (1/1/62 to 5/31/62) ¦4,252.20 ¦ ¦...To continue reading
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