Akers v. Commissioner

• Decision Date: 24 April 1984
• Docket Number: 5876-80.,5875-80,5873-80,Docket No. 6717-77,6734-78,6729-77,5874-80,6758-78,6759-78
• Parties: J. Clark Akers, III and Eleanor M. Akers, et al. v. Commissioner.
• Court: U.S. Tax Court

47 TCM (CCH) 1621

1984 TC Memo 208

T.C. Memo. 1984-208.

J. Clark Akers, III and Eleanor M. Akers, et al.¹ v. Commissioner.

Docket Nos. 6717-77, 6729-77, 6734-78, 6758-78, 6759-78, 5873-80, 5874-80, 5875-80, 5876-80.

United States Tax Court.

Filed April 24, 1984.

Mark H. Westlake and Ervin M. Entrekin, First American Center, Nashville, Tenn., for the petitioners. John L. Hopkins and Robert B. Nadler, for the respondent.

Memorandum Findings of Fact and Opinion

IRWIN, Judge:

In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:

                __________________________________________________________________________________________________________
                                                                                                    Addition
                      Docket                                                        Income Tax       to Tax
                       Nos.    Petitioners                                   Year   Deficiency    Sec. 6653(a)2
                __________________________________________________________________________________________________________
                      6717-77    J. Clark Akers, III and Eleanor M. Akers    1967   $   874.24
                                                                             1968     3,453.27
                                                                             1969     6,174.33
                                                                             1970     5,597.34
                      6729-77    William B. Akers and Jo Ann Akers.......    1967       772.53
                                                                             1968     3,125.46
                                                                             1969     5,632.80
                                                                             1970     5,131.60
                      6734-78    J. Clark Akers, III and Eleanor M. Akers    1974    15,704.93
                                                                             1975    47,603.88
                      6758-78    Asphalt Products Company, Inc...........    1974   154,332.16      $7,716.61
                                                                             1975     7,151.98         357.60
                      6759-78    William B. Akers and Jo Ann Akers.......    1974    14,927.70
                                                                             1975    53,713.62
                      5873-80    Asphalt Products Company, Inc...........    1976    17,031.14
                      5874-80    Estate of James C. Akers, Estelle L
                                   Akers Executrix and Estelle L. Akers..    1976    12,929.62
                      5875-80    J. Clark Akers, III and Eleanor M. Akers    1976    56,089.00
                      5876-80    William B. Akers and Jo Ann Akers.......    1976    56,186.00
                __________________________________________________________________________________________________________
                

After concessions by petitioners and respondent,³ the issues remaining for our decision are: (1) whether respondent correctly determined the fair market value of two wastewater treatment plants and related equipment donated to Vanderbilt University in 1975 by J. Clark Akers, III and William B. Akers; (2) whether Asphalt Products Company, Inc. properly reported income using the cash basis method, or whether it must use the accrual method of accounting; (3) whether medical insurance and reimbursement payments by Asphalt Products Company, Inc. to or for the benefit of James C. Akers, Jr., J. Clark Akers, III, and William B. Akers, were made pursuant to a plan qualifying under section 105; (4) whether the portion of these payments made for the benefit of James C. Akers, Jr. and Estelle L. Akers should be treated as constructive dividends to shareholders J. Clark Akers, III and William B. Akers; (5) whether Asphalt Products Company, Inc. may deduct such payments as ordinary and necessary business expenses under section 162; (6) whether James C. Akers, Jr. and Estelle L. Akers realized taxable income due to the below fair market rental or bargain purchase of a residence from Asphalt Products Company, Inc.; (7) whether J. Clark Akers, III and William B. Akers received constructive dividends from Asphalt Products Company, Inc. by virtue of such bargain rental and sale; and (8) whether Asphalt Products Company, Inc. is liable for section 6653(a) negligence additions for 1974 and 1975.

Findings of Fact — General

Some of the facts have been stipulated. The written and oral stipulations, together with the attached exhibits, are incorporated herein by this reference.

Petitioners J. Clark Akers, III (hereinafter sometimes referred to as Clark) and Eleanor M. Akers are husband and wife who, at the time of filing their petitions with this Court, were residents of Nashville, Tennessee. They filed joint Federal income tax returns for the calendar years 1967 through 1970 with the Southeast Service Center, Chamblee, Georgia, and for the calendar years 1974 through 1976 with the Memphis Service Center, Memphis, Tennessee.

Petitioners William B. Akers (hereinafter sometimes referred to as William) and Jo Ann Akers are husband and wife who, at the time they filed their petitions with this Court, were residents of Nashville, Tennessee. They filed joint Federal income tax returns for the calendar years 1967 through 1970 and an amended return for 1970 with the Southeast Service Center, Chamblee, Georgia. They filed joint Federal income tax returns for the calendar years 1974 through 1976 and an amended return for 1976 with the Memphis Service Center, Memphis, Tennessee.

Petitioner Asphalt Products Company, Inc. (hereinafter referred to as Asphalt Products) is a corporation with a principal place of business in Nashville, Tennessee at the time its petitions were filed. Its corporate Federal income tax returns for the calendar years 1974 through 1976 and an amended return for 1976 were filed with the Memphis Service Center, Memphis, Tennessee.

Estelle L. Akers (hereinafter referred to as Estelle) resided in Nashville, Tennessee at the time the petition was filed in docket No. 5874-80. For the calendar year 1976, Estelle L. Akers and the Estate of James C. Akers, Jr. filed a joint return and an amended return with the Memphis Service Center, Memphis, Tennessee. James C. Akers, Jr. (hereinafter referred to as James) died during 1976. Estelle died on January 3, 1982. Estelle and James were husband and wife, and are the parents of Clark and William.

Eleanor M. Akers and Jo Ann Akers are parties to these proceedings solely by virtue of having signed joint Federal income tax returns with J. Clark Akers, III and William B. Akers.

For organizational purposes, we have found facts separately for some issues in these consolidated cases. However, as certain facts are relevant to more than one issue, they may be used as a basis for resolution of more than one issue.

Findings of Fact — Specific

I. Fair Market Value of Wastewater Treatment Plants. In the early 1970's, Environmental Quality Engineering, Inc. (hereinafter referred to as EQE), a California corporation, built two portable wastewater treatment plants (plants). These plants were mounted on trailers. Some of the funds for the plants were borrowed from Pathfinder Resources, Inc. (Pathfinder), a subsidiary of Aladdin Industries of Nashville, Tennessee.⁴ Between October 1972 and August 1973, EQE paid third parties approximately $165,000 for fabricating and furnishing the two plants, and for related materials. Of the $165,000, approximately $54,000 was for refurbishing the equipment in July and August of 1973. These amounts do not include the initial cost of the trailers themselves, or the engineering, design, and overhead costs of EQE.

One of the wastewater treatment plants was designed specifically to demonstrate a process patented by the University of California under license to EQE. The other plant incorporates equipment which permits several chemical-physical wastewater treatment procedures to be performed independently. This capability allows the user to experiment with various forms of wastewater treatment at a particular site in order to confirm such laboratory experiments as, for example, the type and size of permanent water treatment plant necessary to treat suitably the effluents at a particular site.

When EQE failed financially, Pathfinder, as a secured creditor, offered the two plants for sale pursuant to sealed bids. Pathfinder reserved the right to accept or reject the bids received. In May 1974, bids were sought by a letter stating that Pathfinder was disposing of "an advanced waste treatment process and two fully-equipped pilot plant trailers," that "in excess of $300,000 was spent to equip the trailers," and that the patent process rights were available either in conjunction with or separately from the trailers. Subsequently, another letter was sent stating that a large number of spare parts valued at approximately $10,000, including "several electric motors, electric pumps, switch boxes, valves, and assorted pipe fittings * * *," were to be included with the two plants. The bidsolicitation letter was sent to eighteen individuals at companies active in the pollution control business, many of them manufacturers of pollution control equipment.

Only two bids were submitted to Pathfinder. One bid in the amount of $15,010 was submitted by Richard Clark, the former president and owner of EQE, who had designed and supervised the building of the two plants. The other bid in the amount of $17,500 cash was submitted by William B. Akers and J. Clark Akers, III. The Akers' bid was accepted.

On April 9, 1974, an inventory of the plants was performed in conjunction with the sale. In pertinent part, this inventory stated:

The general overall condition of the equipment appeared to be in good condition. Since the equipment is stored out of doors, fairly near the bay, it is subject to a harsh environment and will need maintenance in the not to sic distant future if it is to retain its value.

* * *

Description of A.B.C. Equipment

The equipment * * * essentially consisted of two semi trailers (8' wide x

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