Riss v. Comm'r of Internal Revenue

• Decision Date: 24 May 1971
• Docket Number: 3879-62,3795-62,3178-66.,Docket Nos. 3794-62
• Citation: 56 T.C. 388
• Parties: RICHARD R. RISS, SR., ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

56 T.C. 388

RICHARD R. RISS, SR., ET AL.,1 PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 3794-62

3795-62

3879-62

3178-66.

United States Tax Court

Filed May 24, 1971.

Guy A. Magruder, Jr., and Richard M. Erickson, for the petitioners.

Donald W. Wolf, for the respondent.

1. Petitioner Transport Manufacturing & Equipment Co. of Delaware (T.M.C.) and its sister corporation, Riss & Co., Inc. (Riss), were controlled by the same family interests. Riss was, during all of the years under consideration, a common carrier, authorized to use certain trucking routes granted to it by the Interstate Commerce Commission (Commission). In accordance with an industry-wide practice T.M.E. was brought into being in 1938 to serve as a conduit through which Riss could procure equipment (both rolling and stationary) which it otherwise would have had difficulty in obtaining because of certain Commission regulations. The equipment purchased by T.M.E. was leased to Riss at an annual stipend which was calculated to exceed T.M.E.‘s depreciation deductions on such equipment by a prearranged nominal amount. (No question exists as to the bona fides of this relationship.) Because T.M.E. employed the ‘double declining balance’ method in depreciating its assets, the annual rental charge to Riss was high during the early years of an asset's service and low during the later years. In 1957, T.M.E. and Riss determined that certain of the trailers being leased to Riss were handicapping that company in its efforts to secure new business. As a result, the two companies decided that it would be in their mutual interest to sell these trailers and purchase new ones. However, both recognized that were such a sale to occur, Riss would lose out on the later-year, low rentals associated with the trailers which were to be sold. Accordingly, to compensate Riss for what might, otherwise, have been a devastating blow to Riss' economy, T.M.E. agreed that it would pay Riss any gain which it (T.M.E.) realized on the disposition of the trailers. As a result, no income was recognized by T.ME. when the sale finally occurred. Held, to the extent of the later-year, low rentals which Riss stood to lose as a result of the trailer sale described above, T.M.E. was not required to recognize gain. Held, further, the value to Riss of these low rental payments is determined to have been $1,997,929.50.

2. During the years 1953 through 1960, Riss experienced a series of severe economic blows. As a result, its revenues dropped precipitously, some of its trucking routes were allowed to go unused and, by the end of 1960, it owned petitioner T.M.E. $1,383,029.71. Nevertheless, it remained a going concern and continued to receive credit from T.M.E. Held: The 1,383,029.71 owed to T.M.E. had not become wholly worthless at the end of 1960. Accordingly, it was improper for T.M.E. to treat that amount as a bad debt on its income tax return for that year.

3A. Prior to June 1, 1957, T.M.E. owned residential property located in the community of Shawnee Mission, Kans. Until May 31, 1956, the property had been used as a residence by Robert Riss, one of T.M.E.‘s shareholders. On that date, however, the property was abandoned and was left unoccupied until June 1, 1957, when it was sold to an outside party. Prior to August 23, 1960, T.M.E. owned residential property located in Kansas City, Mo. From the time of its acquisition in 1949 until October 1, 1958, the property had been used as a personal residence by the former wife and daughter of T.M.E.‘s principal shareholder, Richard Riss, Sr. (Richard). On that date, however, the property was abandoned and was left unoccupied until Aug. 23, 1960, the date of its disposition to Richard. Held: At no time was either property held for the production of income or used in T.M.E.‘s trade or business. Accordingly, all expenditures associated with the maintenance of such properties, subsequent to their respective dates of abandonment and prior sale, are denied.

3B. During 1958 and 1959, T.M.E. claimed long-term capital losses attributable to the sale of certain automobiles which had been devoted to the personal use of T.M.E.‘s shareholders and their wives. Held: Because section 165 does not limit corporate taxpayers to the type of losses they may claim, the losses incurred by T.M.E. as a result of the automobile sales described above were properly deductible to the extent permitted by section 165(f). Legislative history discussed.

4. Held: T.M.E. was not entitled to a net operating loss carryback from the year 1960.

5. Pursuant to a letter of guarantee which he had executed to the Commercial National Bank of Kansas City, Kans. (Commercial), Richard was required to satisfy certain obligations (totaling $125,000) which were owed to National by the Riss Corp. Payment of the $125,000 was made during 1963. In his income tax return for the year 1963, Richard treated this amount as a bad debt. Held: The $125,000 obligation which arose in favor of Richard, as a result of his having satisfied Riss Corp.‘s debt to Commercial, was not wholly worthless during 1963. Accordingly, the bad debt deduction taken by Richard on his income tax return for that year was improper.

6. During the years 1957 through 1963, Richard was the owner of an 82-acre tract of land located in Kansas City, Mo. (Pittman Road property). Richard had purchased the property in 1937 at a cost of $35,500. At the time of the within proceeding, it was worth almost $900,000. Various species of animals were raised on the property during the years under consideration.

Only one major building stood on the property. Built originally as a barn, during 1956, the building was converted to a residence facility at a cost to Richard of $66,678.04. A rock wall, which, in part, abutted the building, was also constructed in that year. Held, certain expenditures associated with the maintenance of the Pittman Road property for the production of income were properly deductible during the years under consideration. Held, further, those expenditures which were incurred as a result of petitioner's breeding activities were not deductible, Held, further, expenditures associated with the maintenance of the residence facility were, similarly, not deductible.

7. On September 9, 1958, T.M.E. sold Richard its 50-percent interest in the stock of six related corporations. The price paid by Richard ($150,000) was equal to T.M.E.‘s basis in the stock. Held, the fair market value of the stock on the date of sale was $246,000. Held, further, as a result of the above sale, Richard received a constructive dividend from T.M.E. in the amount of $96,000.

8. Held, Richard was not entitled to a net operating loss carryback from the year 1963. IRWIN, Judge:

Respondent determined deficiencies in petitioners' income tax for the following years:

+----+
                ¦¦¦¦¦¦
                +----+
                

                                                    Docket
                Name                                                No.       Year Deficiency
                                                                            ( 1957 $138,428.05
                Richard R. Riss, Sr                                 3794-62 ( 1958 182,981.25
                                                                            ( 1960 120,614.85
                Richard R. Riss, Sr., and Helen Gossard Riss        3795-62   1959 53,346.96
                                                                            ( 1962 93,326.54
                Richard R. Riss, Sr                                 3178-66 ( 1963 83,077.01
                                                                            ( 1957 863,236.09
                                                                            ( 1958 126,853.01
                Transport Manufacturing & Equipment Co. of Delaware 3879-62 ( 1959 161,793.31
                                                                            ( 1960 104,501.22
                

Certain concessions having been made by the parties, the issues remaining for decision are:

Issue 1: Whether petitioner Transport Manufacturing & Equipment Co. of Delaware (hereinafter T.M.E.) acted properly in not recognizing, as gain, any part of the $3,904,000 which is received from the sale of certain used trailers during the year 1957.

Issue 2: Whether a $1,383,029.71 debt owed to T.M.E. by Riss & Co., Inc., was properly treated as a bad debt on T.M.E.‘s income tax for the year 1960.

Issue 3:

A. Whether expenditures associated with the maintenance of certain parcels of residential property were properly deductible by T.M.E.

B. Whether losses attributable to the disposition of certain automobiles, formerly devoted to the personal use of T.M.E.‘s shareholders, were properly deductible by T.M.E. under section 165.

Issue 4: Whether T.M.E. was entitled to a net operating loss carryback from the year 1960.

Issue 5: Whether, as a result of certain guarantee payments (totaling $125,000) which were made by petitioner Richard Riss, Sr. (hereinafter Richard), during the year 1963, Richard was entitled to a bad debt deduction of $125,000 in that year.

Issue 6: Whether various expenditures incurred by Richard in connection with a tract of land which he owned in Kansas City, Mo., were properly deductible as costs associated with the maintenance of property held for the production of income.

Issue 7: Whether the sale to Richard of shares of stock held by T.M.E. in six related corporations constituted a constructive dividend to Richard.

Issue 8: Whether Richard was entitled to a net operating loss carryback from the year 1963.

FINDINGS OF FACT— GENERAL

Some of the facts have been stipulated by the parties. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

During the years under consideration, petitioner Transport Manufacturing & Equipment Co. of Delaware (T.M.E.) was a corporation, existing under the laws of the State of Delaware. Its principal office at the time its petition herein was filed was located in Kansas City, Mo. For each of the years 1957 through 1962, inclusive, T.M.E. filed U.S....