595 F.2d 1060 (5th Cir. 1979), 77-1939, Winn v. C. I. R.

Docket Nº:77-1939.
Citation:595 F.2d 1060
Party Name:E. H. WINN, Jr. and Betty Lee Jones Winn, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Date:May 23, 1979
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1060

595 F.2d 1060 (5th Cir. 1979)

E. H. WINN, Jr. and Betty Lee Jones Winn, Petitioners-Appellants,



No. 77-1939.

United States Court of Appeals, Fifth Circuit

May 23, 1979

Page 1061

Charles L. Brocato, Jackson, Miss., for petitioners-appellants.

Myron C. Baum, Acting Asst. Atty. Gen., Tax Div., Gilbert E. Andrews, Acting Chief, App. Section, U. S. Dept. of Justice, Charles L. Saunders, Acting Chief Counsel, Internal Revenue Service, Washington, D. C., Leon G. Wigrizer, Acting Chief Counsel, M. Carr Ferguson, Asst. Atty. Gen., Tax Div., Michael L. Paup, Aaron P. Rosenfeld, Attys., Dept. of Justice, Washington, D. C., for respondent-appellee.

Appeal from the Decision of the Tax Court of the United States.

Before THORNBERRY, CLARK and RONEY, Circuit Judges.

CHARLES CLARK, Circuit Judge:

This case presents two unrelated questions of construction of the federal income tax law. The first requires that we interpret the term "passive investment income" in order to determine whether a taxpayer qualified for small business corporation, or "Subchapter S," tax treatment under 26 U.S.C.A. § 1372 (Internal Revenue Code § 1372). The second involves examination of a claimed deduction for a charitable contribution under 26 U.S.C.A. § 170(c) (Internal Revenue Code § 170(c)).

The facts are basically undisputed. The taxpayers, E. H. Winn, Jr., and Betty Lee Jones Winn, husband and wife, filed joint tax returns for the years in question and claimed deductions for losses from a corporation which had elected "Subchapter S" treatment, Wagren Barge Company, and for a charitable contribution made to a Presbyterian missionary. Winn was two-thirds owner of Wagren Barge Company and its related companies, Security Barge Lines, Security Towing Company, WFK

Page 1062

Towing Company, Wagren Steel Company, and Greenville Marine Services, Inc. All were separately incorporated but shared the same stockholders, boards of directors, and office space. They operated as an integrated water transportation system which ran an affreightment service for dry-bulk commodities on United States inland waterways.

Security Barge Lines operated and supervised the system. It actively solicited customers and used the available barges and other equipment of the related corporations to fill the "contracts of affreightment," or agreements under which the commodities were to be hauled. Income and expenses for each job were assigned by Security to the related corporation supplying the equipment or performing the required services. As part of this system Wagren maintained cross-charter arrangements to rent its barges to Security when needed or to rent them to unrelated barge companies under Wagren's own contracts.

Such agreements, known as charter parties, can embody various degrees of obligation on the part of the owner. For instance, in a "fully found" charter, the owner delivers the equipment fully manned, supplied and equipped, and able to perform a particular job for the charterer. In contrast, Wagren chartered barges having no equipment or crew on a "bareboat" basis. Under this arrangement, complete control and possession of the vessel is turned over to the charterer; the owner is obligated only to supply the barge in a seaworthy condition. The charterer receives merely the right to utilize a particular barge. The owner does not provide affreightment services, such as moving the barge to the desired port for loading, arranging for towing and tug services, or barge cleaning. Performance of these latter services, which relate to the transportation of cargo, earns a carrier "affreightment income." Income received by an owner for bareboat chartering, however, is called "barge charter income."

For the taxable years in question, 1968 and 1969, Wagren received barge charter income for bareboat charter parties with its sister corporation, Security, largely through inter-company accounts, but also from bareboat charters to unrelated companies. Wagren's barge charter income for the relevant years constituted more than 20 percent of its gross receipts. During these taxable years, the Winns elected to treat Wagren as a Subchapter S corporation in order to take advantage of certain investment tax credits.

An election under Subchapter S terminates if the electing corporation has "passive investment income" in excess of 20 percent of its gross receipts. 26 U.S.C.A. § 1372(e)(5) (Internal Revenue Code § 1372(e)(5)). 1 The statute specifically defines rents as one variety of "passive investment income." The tax court found that Wagren's "barge charter income" constituted "passive investment income," and therefore that the company was not entitled to Subchapter S treatment. We agree.

Winn argues that the barge charter income was earned by Wagren as part of an active business endeavor rather than a passive investment. Thus he says Wagren has earned no "passive investment income." His reasoning is based upon House v. C. I. R., 451 F.2d 982 (5th Cir. 1972), which involved

Page 1063

related Subchapter S corporations engaged in the business of lending money. House interpreted the predecessor of the present § 1372(e)(5). At the time House arose, this statute provided for termination of Subchapter S status if more than 20 percent of the corporation's gross income came from "personal holding company income," which the section defined to include interest. 2 Finding that 26 U.S.C.A. § 542 (Internal Revenue Code § 542) expressly exempted business active companies of the type before it from the statutory definition of "personal holding companies," House held that interest received by the companies which were not personal holding companies under § 542 could not be "personal holding company income." The court reasoned that "interest" in § 1372(e)(5) should not be read in isolation from its source. Thus, even though the involved corporations received more than 20 percent of their income in the form of interest, House held that because the corporations were not personal holding companies they did not lose their Subchapter S status.

Wagren can point to no statutory provision similar to the definition section found to be pertinent in House which would take its barge charter income out of the § 1372(e)(5) classification of "passive investment income." In fact, § 1372(e)(5)(C) now defines that term as "rents" and without more, Wagren's barge charter income would be "rents." 3 But there is more. Treasury Regulation § 1.1372-4(b)(5)(vi) defines "rents" as:

amounts received for the use of, or right to use, property (whether real or personal) of the corporation . . . . Payments for the warehousing of goods or for the use of personal property do not constitute rents if significant services are rendered in...

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