95 T.C. 257 (1990), 4580-87, Calumet Industries, Inc. v. C.I.R.

Docket Nº:4580-87.
Citation:95 T.C. 257
Opinion Judge:GERBER, JUDGE:
Party Name:CALUMET INDUSTRIES, INC. AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Larry D. Blust, Paula Cozzi Goedert, and Kenneth L. Harris, for the petitioners. William G. Merkle and Judith M. Picken, for the respondent.
Case Date:September 13, 1990
Court:United States Tax Court
 
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Page 257

95 T.C. 257 (1990)

CALUMET INDUSTRIES, INC. AND SUBSIDIARIES, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 4580-87.

United States Tax Court

September 13, 1990

P carried back 1981 and 1980 NOL deductions to 1979. The assessment period for 1981 expired on June 30, 1985. The assessment period for 1979 was extended by agreement to June 30, 1987. On Nov. 26, 1986, R mailed P a statutory notice of deficiency in which he determined a deficiency in P's 1979 taxable year. A portion of the 1979 deficiency determination is attributable to R's adjustment of the 1981 NOL deduction. R disallowed the accrual and deduction in 1981 (and 1980) of certain rent-related expenses. Separate1y, R disallowed a 1980 bad debt deduction.

Relying on sec. 6501(h), P argues that because the 1979 deficiency is attributable, in part, to an NOL carryback from 1981, the assessment period for that part of the 1979 deficiency expired when the assessment period for 1981 expired -- June 30, 1985. Thus, according to P, the notice, as it relates to that portion of the 1979 deficiency attributable to the NOL carryback, is untimely. R argues that the assessment period for the 1979 deficiency has not expired because it was sufficiently extended by agreement. R recomputed P's 1981 NOL only for the purpose of determining P's income tax liability for 1979.

HELD: 1979 is an open year and respondent is not time barred from assessing a deficiency in that year even though it resulted from the disallowance of an NOL carryback from 1981, an otherwise closed year. Sec. 6501(h) is not applicable here. Pursuant to sec. 6501(c)(4), the parties agreed to extend the assessment period for 1979, and sec. 6501(h) does not nullify or preempt the parties' agreement or shorten the period agreed upon. Held further: The deficiency, as it relates to the rent deductions, is redetermined. Held further: The deficiency, as it relates to the bad debt deduction, is redetermined.

Larry D. Blust, Paula Cozzi Goedert, and Kenneth L. Harris, for the petitioners.

William G. Merkle and Judith M. Picken, for the respondent.

GERBER, JUDGE:

Respondent, in a statutory notice of deficiency dated November 26, 1986, determined income tax deficiencies for petitioners' 1976 and 1979 taxable years in

Page 258

the respective amounts of $24,461.00 and $141,451.20. The deficiencies concern the carryback of 1980 and 1981 net operating losses (NOL's) that resulted from deductions that have now been disallowed by respondent. After concessions, the issues remaining for our consideration are as follows: (1) Whether respondent is barred from assessing a deficiency attributable to an NOL carryback adjustment where the assessment period for the year to which the loss is carried back, and for which the deficiency was determined, is open by agreement, but the assessment period for the year in which the loss arose expired; (2) whether Calumet Industries Works, Inc. (Calumet Works), a subsidiary of petitioner Calumet Industries, Inc. (Calumet or petitioner), properly accrued in 1980 and 1981 expenses for real and personal property taxes in the total amount of $182,127; and (3) whether petitioner is entitled, under section 166, [1] to a $284,569 business bad debt deduction for 1980 which is attributable to certain payments made to or on behalf of its subsidiary, Stabiflex, Inc.

FINDINGS OF FACT

The parties' stipulation of facts is incorporated by this reference.

BACKGROUND

Calumet is a corporation organized and existing under the laws of the State of Indiana which, at the time the petition in this case was filed, had its principal place of business in Gary, Indiana. Prior to December 31, 1980, petitioner was owned 20.079 percent by Philip Graziani and 79.921 percent by Graegin Industries, Inc. (Graegin Industries). Graegin Industries was owned, directly or indirectly, by Cecil Graegin and his son, Paul Graegin, who were also officers and directors of petitioner. Cecil Graegin was also Philip Graziani's uncle.

For the years 1976, 1977, 1978, and 1979 petitioner filed separate, nonconsolidated U.S. Corporation Income Tax Returns, Forms 1120. In those years, petitioner was engaged

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in the business of fabricating steel products and performing steel mill maintenance.

On December 26, 1979, two corporations, Calumet Works and Calumet Industries Construction & Maintenance Corporation (Calumet Construction), were incorporated as wholly owned subsidiaries of petitioner to assume its major business activities. Calumet Works assumed petitioner's steel fabrication business and Calumet Construction assumed petitioner's steel mill maintenance business. Thereafter, and for all relevant periods herein, Calumet was engaged predominantly in the activity of providing administrative and management services.

For the taxable year 1980, petitioner and its subsidiaries, Calumet Works and Calumet Construction, filed a consolidated U.S. Corporation Income Tax Return, Form 1120, on a calendar year basis. Thereafter, petitioner and its subsidiaries became affiliated, for tax purposes, with the affiliated group of petitioner's parent, Graegin Industries, and its other subsidiaries, filing on a fiscal year ending June 30. For the short period from January 1, 1981, to June 30, 1981, petitioner, Calumet Works, and Calumet Construction were included in the consolidated U.S. Corporation Income Tax Return, Form 1120, of petitioner's parent, Graegin Industries, and its other subsidiaries for their fiscal year ended June 30, 1981.

PERIOD FOR ASSESSMENT

On November 30, 1981, Graegin Industries and its subsidiaries filed a U.S. Corporation Income Tax Return, Form 1120, for the fiscal year ended June 30, 1981. This return reported a consolidated NOL in the amount of $436,793, allocable to the members of the Graegin affiliated group as follows:

Taxable income (loss)
Graegin Industries $(111,894.15)
Correct Piping Co., Inc 317,011.24
Graegin Corp 459,228.14
CAP Construction, Inc (48,487.90)
Calumet (236,972.96)
Calumet Construction 362,407.05
Calumet Works ([1],178,084.74)
Consolidated NOL (436,793.32)
Page 260 On November 24, 1981, petitioner filed a Corporation Application for Tentative Refund, Form 1139, for 1979 with respondent. Petitioner sought to carry back $313,179.73 of the NOL for fiscal year ended June 30, 1981 (attributable to the corporations that were members of petitioner's former affiliated group, Calumet, Calumet Construction, and Calumet Works). On November 24, 1981, petitioner also filed a refund application for 1976. By carrying back the 1981 NOL deduction to 1979, petitioner ‘ freed up‘ investment tax credit claimed in 1979. As a result, petitioner claimed an investment tax credit carryback from 1979 to 1976 in the amount of $24,461.21. On June 30, 1985, the period for assessment, as extended by agreement, expired with respect to assessment of any income tax deficiencies against Graegin Industries and its subsidiaries for their fiscal year ended June 30, 1981. The period for assessment of petitioner's 1979 income tax was extended by agreement to June 30, 1987. On November 26, 1986, respondent mailed petitioner a statutory notice of deficiency setting forth respondent's determination that petitioner had income tax deficiencies for 1976 and 1979 in the respective amounts of $24,461 and $141,451.20. As discussed in greater detail below, respondent disallowed $121,418 of a deduction claimed on the June 30, 1981, consolidated return of Graegin Industries and its subsidiaries which was attributable to accrued property taxes claimed by Calumet Works for the 6-month period from January 1, 1981, through June 30, 1981. Respondent also determined that, as a result of his adjustments increasing petitioner's taxable income for 1979, the investment tax credit carryback from 1979 to 1976 in the amount of $24,461 should be disallowed for 1976 and be reapplied to petitioner's tax liability for 1979. Thus, the notice of deficiency was mailed after the expiration of the assessment period for 1981, the year the NOL arose, but prior to the expiration of the assessment period for 1979, the year to which the loss was carried back. ACCRUED RENT DEDUCTION ATTRIBUTABLE TO PROPERTY TAXES On September 11, 1980, Calumet Works entered into a 5-year industrial facilities lease with United States Steel Page 261 Corporation (U.S. Steel). The lease provided that Calumet Works would lease U.S. Steel's American Bridge plant located in Gary, Indiana. The plant contained 1,820,955 square feet of utilizable space and equipment which Calumet Works was to rent under the lease. The plant included a machine shop, main shop, assembly building, weld shop, receiving and shipping yards, and various other smaller buildings. Most of the equipment was housed in the machine shop of the facility. The terms of the lease provided that Calumet Works would initially lease 74,960 [2] square feet of space (consisting of the machine shop) commencing on October 1, 1980, to increase to 1,820,955 square feet by January 1, 1982, or sooner. Under the lease, Calumet Works was required to pay a ‘ minimum annual rental,‘ ‘ supplemental rent‘ (based on Calumet Works' profits), and all taxes associated with the real and personal property being leased. According to rider 2.01, the minimum annual rental was based on the following areas, rental rates per square foot of space, and the commencement dates at which given areas were to be leased:
Area rented Annual rent/ Initial date Period
(in sq. ft.) sq. ft. of rent at 50% rent
a. Machine shop 3 73,680 $1.50 10/1/80 3 months
b. Portion of 314,000 1.50 4/1/81 6 months
main shop
c. Balance of Premises
Office 22,500 4.00 1/1/82 __
Other Bldgs. 955,182 1.50 1/1/82 __
Receiving Yd. 405,035 .75 1/1/82 __
Shipping Yd. 49,278 .75 1/1/82 __
Page 262 In the event Calumet...

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