Allen v. Commissioner
| Decision Date | 27 February 1975 |
| Docket Number | Docket No. 8114-71,8210-71. |
| Citation | 34 TCM (CCH) 242,1975 TC Memo 39 |
| Parties | Raymond L. Allen and Shirley L. Allen v. Commissioner. Sportcraft Homes, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Michel G. Emmanuel and Michael D. Annis, 20th Floor, Exchange Nat'l Bldg., 610 Florida Ave., Tampa, Fla., for the petitioners. W.P. White, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies and penalties against Raymond and Shirley Allen for the following years:
Calendar Section 6653 (a)1
Year Deficiency Penalty
1967 ...... $ 24,209.27 $ 1,210.46
1968 ...... 2,014,056.46 100,702.82
1969 ...... 115,325.21 5,766.26
_____________ ___________
Total ... $2,153,590.94 $107,679.54
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Respondent determined the following deficiencies and penalties against Sportcraft Homes, Inc., in the following years:
Fiscal Year Section 6653(b)
Ended Deficiency Penalty
June 30, 1967 ....... $163,701.75 $ 81,850.88
June 30, 1968 ....... 534,217.37 267,108.68
August 27, 1968 ..... 100,175.70 50,087.85
___________ ___________
Total ............ $798,094.82 $399,047.41
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Respondent has confessed error regarding his imposition of the negligence penalties determined against the Allens and the fraud penalties determined against Sportcraft Homes, Inc. During the course of the trial the parties settled numerous issues, leaving the following issues to be resolved herein:
1. Whether the 1964 transaction in which the Allens purported to sell their stock in certain corporations to Bishop Reicher constituted a sale for purposes of section 1222(3).
2. Whether the 1968 transaction in which the Allens sold their contract right against Bishop Reicher to National Homes Corporation constituted the sale of a capital asset.
3. Whether the value of National Homes stock placed in escrow pursuant to the terms of the Agreement among the Allens, National Homes and others constitutes income to the Allens in the year the escrow was established.
4. What deductible expenses were incurred by the Allens in 1968 and 1969 in connection with the operation of the Runaway Bay Club?
5. Whether rent accrued by Sportcraft Homes, Inc., for the fiscal years ended June 30, 1967, June 30, 1968, and August 27, 1968 is deductible.
Some of the facts have been stipulated by the parties and are found accordingly.
The petitioners Raymond and Shirley Allen ("the Allens"), husband and wife, resided in Florida at the time they filed their petition. They filed their joint Federal income tax returns for the calendar years in issue with the district director in Jacksonville, Florida. They utilized the cash basis method of accounting.
Petitioner Sportcraft Homes, Inc. ("Sportcraft Homes"), a Florida corporation, maintained its principal place of business in Clearwater, Florida at the time it filed its petition. It filed its corporate income tax returns for the taxable years ended June 30, 1967, June 30, 1968 and August 27, 1968 with the district director in Jacksonville, Florida. Sportcraft Homes used the accrual method of accounting.
Beginning in the early 1950's and continuing through the years in issue, the Allens were active in the travel trailer and mobile home manufacturing business. As a result of his extensive experience with the industry, Raymond Allen ("Ray Allen") became optimistic about the future. In order to participate in the anticipated future growth of the industry, he actively expanded his mobile home manufacturing operations through various entities under his control.
By 1964, Ray Allen had established plants strategically located in Florida, California and Arizona. Two Florida plants were operated by Sportcraft Trailer Manufacturing, Inc. ("Sportcraft Trailer"), a Florida corporation. A California plant was operated by Sportcraft Trailer's wholly-owned subsidiary, Sportcraft Trailers of California, Inc. ("Sportcraft California"), and an Arizona plant by Sportcraft Trailer's other wholly-owned subsidiary, Sportcraft of Arizona, Inc. ("Sportcraft Arizona"). Also, at this time Shirl-Ray Corporation ("Shirl-Ray"), a Florida corporation, operated a mobile home manufacturing plant (Parkwood Homes) in Clearwater, Florida. The Allens owned all the stock of both Sportcraft Trailer and Shirl-Ray.
Sportcraft Trailer reported the following amounts of taxable income in the following years:
Taxable Year Ended Taxable Income
September 30, 1961 ......... $ 62,838.32
September 30, 1962 ......... 118,204.90
September 30, 1963 ......... 122,149.88
April 17, 1964 ............. 128,285.25
Shirl-Ray was not only active in the mobile home manufacturing business through its ownership and operation of the Parkwood Homes plant, but also owned certain real estate. Shirl-Ray reported the following amounts of taxable income in the following years:
Taxable Year Ended Taxable Income
October 31, 1962 .......... $ 7,742.47
October 31, 1963 .......... 39,082.33
April 17, 1964 ............ 82,330.65
Allen Sales Corporation ("Allen Sales") was incorporated in Florida in 1957. From its inception all its stock was owned by the Allens. This corporation functioned as a sales arm or distributor for Sportcraft Trailer until it was dissolved in September 1963. After this dissolution, the profits that had formerly been received by Allen Sales were received by Sportcraft Trailer. Allen Sales reported the following amounts of taxable income in the following years:
Taxable Year Ended Taxable Income
September 30, 1961 .......... $ 5,618.46
September 30, 1962 .......... 32,002.11
September 30, 1963 .......... 23,601.97
Sportcraft California was engaged in the trailer manufacturing business; its plant was located in Hemet, California. Sportcraft California reported the following amounts of taxable income in the following years:
Taxable Year Ended Taxable Income
January 31, 1963 .......... ($49,928.47)
January 31, 1964 .......... 67,313.29
April 17, 1964 ............ 17,953.22
Sportcraft Arizona was primarily engaged in the manufacture of mobile homes; its plant was located at Tempe, Arizona. Sportcraft Arizona reported the following amounts of taxable income in the following years:
Taxable Year Ended Taxable Income
September 30, 1962 ....... $54,868.33
September 30, 1963 ....... 70,870.36
April 17, 19643 ..... (8,273.32)
As the size of mobile homes grew, it became impractical to ship them very far. There developed a rule of thumb that because of shipping cost a manufacturing plant should be within about 250 miles of its prime market areas. The fastest growing market areas in the early 1960's were Florida, Arizona and California. Consequently, there was a decided trend among the existing manufacturers to establish plants in these areas. In addition, companies which had not previously been engaged in the mobile home business were seeking to enter the industry in those areas.
Mobile home manufacturing requires skills which are unlike those of conventional home builders, but more analogous to the assembly-line production methods used in the automobile industry. At least in Florida, the pool of workers skilled in assembly-line production techniques was not great in 1964. This presented a problem for any potential competitors trying to locate in the area.
Sportcraft Trailer and its subsidiaries had established plants in all three of the key states. They were in a good position to benefit from the anticipated boom in the mobile home industry. Furthermore, Sportcraft Trailer enjoyed an excellent reputation in the mobile home industry: its products were widely respected and highly desirable; dealers wanted to be franchised by it; and over a period of more than a decade it had established a trained labor pool and had been able to attract some employees of exceptional ability.
The intangible assets of a mobile home manufacturer are frequently more important in determining its value than are its fixed assets. The intangible assets owned by Sportcraft Trailer in 1964 included: (1) excellent management personnel; (2) a trained labor pool; (3) a good dealer organization; (4) a superior reputation; (5) geographically well located plants; (6) designs and drawings for trailers; (7) a close and personal relationship with suppliers; (8) going concern value as a company with an established market; and (9) well-recognized trade names.
In 1963 Ray Allen met Bernard J. Lechner ("Lechner"), an attorney and certified public accountant from a Chicago, Illinois accounting firm. Ray Allen was favorably impressed with him and persuaded him to accept employment with Sportcraft Trailer. Lechner assumed responsibility for the financial management of Sportcraft Trailer, its subsidiaries and Shirl-Ray. He also furnished personal tax, legal and financial advice to the Allens.
Although the Sportcraft group of mobile home manufacturing corporations was quite profitable and possessed a potential for growth, in 1963 it was experiencing financial difficulties because of a shortage of working capital. In an effort to alleviate this problem, officers of the corporation tried to borrow additional money from various bankers. After these efforts proved unsuccessful, one of the bankers placed an advertisement in the Wall Street Journal sometime during 1964 seeking help for Sportcraft Trailer and the related corporations.
The advertisement in the Wall Street Journal produced an inquiry from Robert M. Bernstein ("Bernstein"). Lechner responded to Bernstein's inquiry and found that Bernstein had made a blind reply, but that he might be able to arrange a...
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