Bennett Paper Corp. v. Comm'r of Internal Revenue
| Decision Date | 29 March 1982 |
| Docket Number | Docket No. 9854-78. |
| Citation | 78 T.C. 458 |
| Parties | BENNETT PAPER CORPORATION and SUBSIDIARIES, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1974, petitioners constituted an affiliated group of corporations which filed a consolidated return for that year. P, the parent corporation, directly owned 93 percent of the stock in MHL, which directly owned 95 percent of the stock in KI. In 1973, KI purchased and began operating a marina business, which it sold in 1974. On Aug. 27, 1974, Concepts, one of P's subsidiaries, created a wholly owned subsidiary, CIYC, whose business purpose was to establish a marina and yacht club. In 1974, CIYC did collect some application fees from persons seeking membership in its proposed yacht club. CIYC, however, did not include these fees in gross receipts because the moneys had to be returned if the yacht club was never established. CIYC neither operated a marina facility or yacht club, nor had any yacht club members until 1975. Nevertheless, on petitioners' consolidated return for 1974, preopening expenses incurred by CIYC during that year were deducted. Held, CIYC was not carrying on a trade or business in 1974 and, therefore, the preopening expenses were not deductible under sec. 162(a), I.R.C. 1954. Held, further, no deduction may be claimed with respect to P's profit sharing plan in excess of the amount allowed by respondent. Donald H. Whaley, for the petitioners.
William J. Falk, for the respondent.
Respondent determined a deficiency of $93,895 in petitioners' 1974 Federal income tax. After concessions, the issues for decision are:
(1) Whether certain preopening expenditures claimed on petitioners' consolidated return were incurred in the course of a trade or business under section 162(a).1
(2) Whether petitioners are entitled to a deduction in excess of the amount allowed by respondent for a liability incurred under a profit sharing plan.
Some of the facts have been stipulated and are found accordingly.
Petitioners maintained their principal places of business in Maryland Heights, Mo., at the time the petition in this case was filed. For petitioners' 1974 taxable year, they filed a consolidated return. Among the corporations which were listed on the return as members of the affiliated group were Bennett Paper Corp., Commodores International Yacht Club, Inc., Concepts, Inc., and Maryland Heights Leasing, Inc.
Bennett Paper Corp. (hereinafter petitioner) was incorporated in 1956, and is authorized to do business under the laws of the State of Missouri. Petitioner manufactures corrugated boxes and various paper packaging products. Petitioner's president is Samuel F. Bennett (hereinafter Mr. Bennett), who also is the president of some of petitioner's subsidiaries.
Two of petitioner's subsidiaries are Maryland Heights Leasing, Inc. (hereinafter MHL), and Concepts, Inc. (hereinafter Concepts). Both MHL and Concepts are Missouri corporations which were formed in 1960 and 1973, respectively. Petitioner owns directly all of Concepts' stock. Petitioner owns directly 93 percent of MHL's stock; the remaining 7 percent of MHL's stock is owned by Mr. Bennett's mother. On July 16, 1973, MHL formed King Island, Inc. (hereinafter KI), a Florida corporation, to operate a marina business. MHL owned 95 percent of KI's stock; the remaining 5 percent of KI's stock was owned by Mr. Bennett's accountant, Bernard Stock.
In August of 1973, KI purchased a marina facility from Williams Marine Lodge, Inc. The purchase price consisted of $75,000 cash and a $300,000 purchase money mortgage on the property. No person other than KI signed the mortgage note or was liable to make any payments on it. In operating the marina business it had purchased, KI used the trade name of “Pirate's Cove Marina” (hereinafter Pirate's Cove) and offered the following services: sale, repair, and storage of boats, and the sale of gas and marine supplies. From the start, Pirate's Cove was an unprofitable venture for KI, largely because the marina was located on a creek which was filled with silt. The silt prevented the marina from getting its customers' boats in and out of the water, except at high tide.
Early in 1974, KI planned to start a yacht club at Pirate's Cove in addition to operating its marina business. The plan called for the yacht club to buy sailboats and power boats of various sizes and to make these boats available to club members; anyone interested in enjoying the benefits of the yacht club could apply for club membership and, if accepted, pay a membership fee of $500. It was also proposed that a member of the yacht club would pay a $40 monthly membership fee and a rental fee each time that he used one of the club's boats.
KI never opened up a yacht club at Pirate's Cove, and by August 1974, KI decided to sell the marina. In August 1974, petitioner considered the possibility of KI's establishing a marina and yacht club venture at another location, but petitioner did not want the venture to be saddled with KI's $300,000 mortgage liability.2 Consequently, on August 27, 1974, Concepts created a wholly owned subsidiary, the Commodores International Yacht Club, Inc. (hereinafter CIYC), a Florida corporation, to establish a marina and yacht club.
In September and October 1974, CIYC entered into leases of certain raw unimproved land with water rights. CIYC originally planned to operate a marina and yacht club on the leased premises, and it set up a temporary office thereon to sell memberships in the proposed yacht club. CIYC soon realized, however, that it would be less costly to purchase an existing marina facility rather than to build one on the unimproved leased property. As a result, CIYC decided to attempt to purchase an existing marina facility, and it never established a marina or yacht club on the leased premises.
By the end of 1974, CIYC had not yet purchased a marina; however, it had collected approximately $5,000 in application fees from persons interested in becoming members of its proposed yacht club. On CIYC's books, it recorded these application fees as liabilities because it was obligated to refund the moneys if the yacht club never began operation. As of December 31, 1974, CIYC recorded no gross receipts of any kind; it had neither yacht club members nor the facilities, boats, and other equipment needed to operate a yacht club; it neither owned nor operated a marina facility; it did not own any depreciable property; and it did not have reciprocal membership privileges with other marinas or yacht clubs.
In March 1975, CIYC purchased an existing marina facility known as the Caladesi Cay Marina (hereinafter Caladesi Cay), which was adjacent to the property that CIYC had leased in September and October of 1974. CIYC immediately began operating the marina at Caladesi Cay. On June 1, 1975, CIYC held the grand opening of its yacht club at Caladesi Cay, and first made boats available for rental on June 16, 1975.
On petitioners' consolidated return for 1974, a deduction of $57,870 was claimed for business expenses incurred by CIYC during such year. In the notice of deficiency, respondent determined that the claimed $57,870 business deduction represented nondeductible preopening expenses, which were required to be capitalized.
Throughout 1974, petitioner employed an accrual basis of accounting and had a profit sharing plan (hereinafter the plan) in effect for its salaried employees. The amount of profit sharing that an employee would receive was dependent upon his salary and petitioner's quarterly and annual profits. Petitioner's plan provided, in pertinent part, the following:
I. REQUIREMENTS:
(a) [Those eligible] Must be an employee of the Company for the entire quarter.
(b) [Those eligible] Must be an employee of the Company at time of payment of bonus.
(c) The combined income of Bennett Paper and its applicable subsidiaries must be in excess of three (3) percent on gross sales for the quarter. Quarters due on a calendar basis, ending March 31, June 30, September 30 and December 31.
II. METHOD OF PAYMENT:
(a) The quarter's profit sharing will be determined from the operating statement as prepared from the records of the Accounting Department. All profits are determined on a before tax basis.
(b) Fifty (50) percent of the calculated profit sharing will be paid in the month following the end of the quarter.
(c) The second half of the calculated profit sharing will be paid if the company maintains a minimum return of four (4) percent on gross sales for the entire calendar year. The percent of return will exclude all previous payments and accruals of calculated profit sharing.
(d) If the company achieves a rate of return on gross sales in excess of four (4) percent, then the second half of the calculated profit sharing will be paid as follows:
1. Twenty-five (25) percent of the total profit sharing to be paid in April, along with the following year's first quarter profit sharing.
2. The remaining twenty-five (25) percent to be paid in July, along with the following year's second quarter profit sharing.
III. METHOD OF CALCULATING PROFIT SHARING FOR THE QUARTER:
(a) Determine gross sales for the quarter.
(b) Divide operating profit by gross sales.
(c) On profits in excess of the three (3) percent, you earn one (1) percent for each one fourth ( 1/4) percent of profit.
+--------------------------------------------------------+
¦[Example] ¦ ¦
+-----------------------------------------------+--------¦
¦Sales for quarter ¦$850,000¦
+-----------------------------------------------+--------¦
¦Profit for quarter ¦59,500 ¦
+-----------------------------------------------+--------¦
¦Percent of return on sales ¦7% ¦...To continue reading
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