Shea v. Comm'r of Internal Revenue (In re Estate of Shea) , Docket Nos. 2978-68— 2984-68.
| Decision Date | 05 October 1971 |
| Docket Number | Docket Nos. 2978-68— 2984-68. |
| Citation | 57 T.C. 15 |
| Parties | ESTATE OF JOHN F. SHEA, DECEASED, GRACE A. SHEA, EXECUTRIX, AND GRACE A. SHEA, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Howard A. Heffron and Charles B. Hochman, for the petitioner.
Stanley J. Goldberg and Michael K. Phalin, for the respondent.
A corporate taxpayer purchased a ship and charter for a stated consideration. Following the destruction of the ship, the taxpayer sold the charter. Held, the charter was property ‘subject to an allowance for depreciation,‘ and its sale produced capital gain under sec. 1231(a), I.R.C. 1954.
The Commissioner determined deficiencies in the Federal income tax of the petitioners as follows:
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¦ ¦ ¦ ¦ ¦ ¦
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¦ ¦ ¦ ¦ ¦Addition to ¦
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¦Docket No.¦Year ¦Deficiency¦tax under ¦
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¦ ¦ ¦ ¦ ¦sec. 6651(a)¦
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¦ ¦ ¦ ¦ ¦ ¦
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¦ ¦(¦1959¦$3,566.56 ¦ ¦
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¦2978-68 ¦(¦1960¦155.69 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1959¦435,987.12¦ ¦
+----------+-+----+----------+------------¦
¦2979-68 ¦(¦1960¦3,257.26 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1961¦1,396.24 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1959¦131,955.93¦ ¦
+----------+-+----+----------+------------¦
¦2980-68 ¦(¦1960¦2,200.60 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1962¦1,719.82 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1959¦142,568.04¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1960¦4,961.42 ¦ ¦
+----------+-+----+----------+------------¦
¦2981-68 ¦(¦1961¦495.25 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1962¦1,110.17 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1959¦196,469.44¦ ¦
+----------+-+----+----------+------------¦
¦2982-68 ¦(¦1960¦2,381.38 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1961¦1,314.82 ¦ ¦
+----------+-+----+----------+------------¦
¦2983-68 ¦ ¦1962¦382.17 ¦ ¦
+----------+-+----+----------+------------¦
¦ ¦(¦1959¦141,091.24¦ ¦
+----------+-+----+----------+------------¦
¦2984-68 ¦(¦1960¦3,352.07 ¦$167.61 ¦
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With the mutual consent of the parties, the above-entitled cases have been consolidated for purposes of this opinion. All the issues presented in docket No. 2983-68 have been resolved by the concessions of the parties. As for the other docket numbers, concessions have been made by the parties; and, as a consequence, the sole issue presented for decision is whether the gain, which arose from the disposition of the Metropolitan Petroleum Co. tanker voyage charter party by the Heron Steamship Co. on June 8, 1959, gave rise to ordinary income under section 61 or capital gain under section 1231(a). 2
Some of the facts have been stipulated. The stipulation of facts and exhibits thereto are herein incorporated by reference.
John F. Shea and Grace A. Shea were husband and wife who filed their joint Federal income tax return for the calendar year 1959 with the district director of internal revenue in Brooklyn, New York. John F. Shea died on March 25, 1961. Grace A. Shea, petitioner herein, both in her individual capacity and as the executrix of her late husband's estate, legally resided in Garden City, N.Y., at the time the petition herein was filed.
Petitioners Charles C. Valentine and John M. Valentine, husband and wife, were legal residents of Manhasset, N.Y., at the time the petition herein was filed. They filed their joint Federal income tax return for the calendar year 1959 with the district director of internal revenue in the Manhattan District, New York, N.Y.
Petitioners Thomas J. Stevenson, Jr., and Virginia C. Stevenson, husband and wife, were legal residents of Plandome, N.Y., at the time the petition herein was filed. They filed their joint Federal income tax return for the calendar year 1959 with the district director of internal revenue in Brooklyn, New York.
Petitioners Ivan G. Ellis and Dorothy S. Ellis, husband and wife, were legal residents of Garden City, N.Y., at the time the petition herein was filed. They filed their joint Federal income tax return for the calendar year 1959 with the district director of internal revenue in the Manhattan District, New York N.Y.
Thomas J. Stevenson died on January 28, 1968, and Helen V. Stevenson died on August 12, 1961. Thomas J. Stevenson, Jr., and the First National City Bank are petitioners who qualified as the executors of the Estate of Thomas J. Stevenson on February 13, 1968. Thomas J. Stevenson, Jr., and Kenneth H. Stevenson are petitioners who qualified as the executors of the Estate of Helen V. Stevenson on August 30, 1961. At the time the petition herein was filed, Thomas J. Stevenson, Jr., was a legal resident of Plandome, N.Y.; Kenneth H. Stevenson was a legal resident of Short Hills, N.J.; and the principal office of the First National City Bank was located in New York City, N.Y.
Petitioners Kenneth H. Stevenson and Beverly E. Stevenson, husband and wife, were legal residents of Short Hills, N.J., at the time the petition herein was filed. They filed their joint Federal income tax return for the calendar year 1959 with the district director of internal revenue in the Manhattan District, New York, N.Y.
During all relevant times, Ivan G. Ellis, John F. Shea, Helen V. Stevenson, Kenneth H. Stevenson, Thomas J. Stevenson, Thomas J. Stevenson, Jr., and Charles C. Valentin (hereinafter referred to as petitioners) were shareholders in Heron Steamship Co. (hereinafter referred to as Heron).
Heron was incorporated under the laws of the State of Delaware on February 13, 1957. Its Federal income tax returns were filed on the basis of a fiscal year ending on May 31. On June 3, 1959, Heron filed a timely election, containing the consents of all of its shareholders, to be taxed under sections 1372-1378 as a small business corporation, pursuant to subchapter S of the Internal Revenue Code of 1954. The election was effective for Heron's taxable year ending May 31, 1960, the fiscal year in issue.
On June 10, 1957, Heron purchased a vessel S.S. Valchem (which had previously been named the Calusa and the Valpont) from Valentine Tankers Corp. (hereinafter referred to as Tankers), a wholly owned subsidiary of Metropolitan Petroleum Co. (hereinafter referred to as Metropolitan), which was in turn a wholly owned subsidiary of the Pittston Co. (hereinafter referred to as Pittston), a publicly held corporation whose stock was and is traded on the New York Stock Exchange. The consideration paid by Heron to Tankers for the ship (subject to the charter party discussed below) was $1,600,000.
At the time of the purchase, the Valchem was subject to a charter party dated May 1, 1953, between Tankers, as owner of the Valchem, and Metropolitan, as charterer. The charter party (hereinafter sometimes referred to as the Metropolitan charter) provided that Tankers would transport by sea for the charterer a cargo of ‘clean petroleum products' for a period of 5 years from and after the date of first loading.
The Metropolitan charter was a consecutive voyage charter, i.e., a charter, effective for as many voyages as could be completed within the term of the contract. It was contemplated by the parties that, under normal conditions, the Valchem would make at least 24 voyages per year. The Metropolitan charter also provided that the owner had the right to substitute as the hauling vessel another vessel of approximately the same size, type, speed, and position as the Valchem.
The rate payable by Metropolitan under the Metropolitan charter was specified to be the rate set out by the U.S. Maritime Commission in 1948 (hereinafter referred to as the USMC flat rate). That rate was $2.85 per ton per voyage. The USMC flat rate is recognized by the maritime industry as giving an owner of a vessel a fair return on his investment. Current charter rates are quoted in terms of percentages above or below the flat rate, thus reflecting any fluctuations in market conditions.
Charters similar to the Metropolitan charter are and were, during the taxable year in issue, traded on organized and established markets, such as the Baltic Exchange in London and the Maritime Exchange in New York. The rates at which ship charters are fixed fluctuate widely, depending upon the supply of available vessels and the demand for vessels by charterers. The demand for tankers varies greatly and is drastically affected by such extraneous events as the closing of the Suez Canal and problems in negotiating oil agreements with Arab countries. During the period 1957 through 1959, the rate at which ships of the Valchem class were chartered for similar cargo fluctuated between a high of $9.348 per ton per voyage and a low of $1.826 per ton per voyage.
The market value of an existing long-term charter with a fixed rate, such as the Metropolitan charter, will also vary, depending upon the fluctuation in charter rates. When the rate for new charters is substantially above that set in an existing charter, the existing charter will have little or no market value. On the other hand, when the rate in an existing charter exceeds the then current rate for new charters, the existing charter can be extremely valuable in terms...
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