Bragg v. Commissioner
| Decision Date | 18 October 1993 |
| Docket Number | Docket No. 18827-90. |
| Citation | 66 T.C.M. 1047 |
| Parties | Jackson B. Bragg and Suzanne Bragg v. Commissioner. |
| Court | U.S. Tax Court |
B. Gray Gibbs, One Fourth St. North, St. Petersburg, Fla., for the petitioners. Charles A. Baer, for the respondent.
Memorandum Findings of Fact and Opinion
For taxable year 1985, respondent determined a $75,848 deficiency in petitioners' Federal income tax, an addition to tax for fraud under section 6653(b)(1)1 in the amount $37,924, an addition to tax under section 6653(b)(2) for 50 percent of the interest due on $75,848, an addition to tax for a valuation overstatement under section 6659 in the amount of $16,176, and an addition to tax for a substantial understatement of income tax under section 6661 in the amount of $5,482.
After concessions by both parties, which will be given effect in the Rule 155 computation, the issues for decision for taxable year 1985 are:
(1) Whether petitioners are entitled to a claimed charitable contribution deduction under section 170 in the amount of $145,000 for the donation of a yacht hull to a charitable organization. We hold that they are not, but that a deduction of $45,000 is allowable.
(2) Whether petitioners are entitled to deduct rental expenses with respect to alleged rental property which they own in North Carolina. We hold that they are not.
(3) Whether petitioners are entitled to a bad debt deduction for sums paid to or on behalf of their son Charles Bragg. We hold that they are not.
(4) Whether petitioners are liable for the additions to tax under section 6653(b) for fraud. We hold that they are not.
(5) Whether petitioners are liable for the addition to tax for a valuation overstatement under section 6659. We hold that they are.
(6) Whether petitioners are liable for the addition to tax under section 6661 for a substantial understatement. We hold that they are.
(7) Whether petitioners are liable for interest on a substantial underpayment attributable to tax-motivated transactions under section 6621(c). We hold that they are.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated by this reference. Petitioners resided in Daytona Beach, Florida, at the time they filed the petition in this case. Petitioners are married and filed a joint Federal income tax return for taxable year 1985. References to petitioner in the singular refer to Jackson B. Bragg.
In 1969, petitioners began construction of an ocean-going aluminum yacht. A naval architect drew the original plans, which called for an 83-foot yacht. During construction, the size of the yacht was modified by adding 10 feet to the midsection. In 1971, petitioners ceased construction of the yacht and never recommenced construction. At the time construction ceased, the hull was approximately 70 percent finished. Specifically, aluminum plating had been installed, and fuel, water, and sewer tanks had been installed as well as hot and cold water pipes and bathroom plumbing. The vessel had no engine, hull plates, or cabin. Petitioners constructed and stored the hull in a warehouse owned at various times by petitioner or his son Charles Bragg. One end of the warehouse was cut open in order to make room for the additional 10 feet of construction leaving the hull partially exposed to the outdoors.
During the period from 1972 through 1985, petitioner attempted to sell the hull. In 1973, Mr. Robert Sherbert, a master builder and designer of boats for 32 years, inspected the plans and the hull. Mr. Sherbert was considering purchasing petitioners' hull to use in the construction of a yacht for a client. Mr. Sherbert's client inquired as to the value of the hull; Mr. Sherbert stated that petitioners would ask $145,000 to $150,000. Mr. Sherbert's client did not purchase the hull. Mr. Sherbert was one of petitioners' expert witnesses at trial.
In 1985, petitioner authorized Bill Begley, a yacht broker employed by Adventure Yacht Sales, Inc. (Adventure), to sell the hull for a commission of 10 percent. Petitioner came to Adventure to purchase another boat as well as to sell the hull. Mr. Begley presented the hull to several potential buyers. Mr. Begley was unable to recall the names of all the potential buyers; however, he had dealings with one gentleman from Director's Boat Yard, Hank Hostrup from Palatka Ship Builders, and one or two other persons with respect to the selling of the hull. From his dealings with the potential buyers, Mr. Begley was told that moving the hull would create an additional expense. In order to move the hull to a navigable area, the warehouse would have to be dismantled, power lines and trees would have to be removed, and permits would have to be obtained.
Adventure obtained two independent appraisals of the hull; petitioners paid for both appraisals. The first appraisal was performed on August 7, 1985, at a cost of $80 by marine surveyor Mr. Robert Marks, Jr., who estimated the current market value of the hull to be between $30,000 and $35,000 and its scrap value to be $8,400. The second appraisal was performed on August 8, 1985, at a cost of $75 by marine surveyor Mr. Charles Swimm who estimated the current market value of the hull to be $28,744 and its scrap value to be $7,714. Mr. Swimm did not inspect the plans for the yacht; however, he did inspect the hull.
Mr. Hank Hostrup, a marine consultant, surveyor, and estimator, was contacted by Mr. Begley with respect to purchasing the hull for a client. Mr. Hostrup inspected the hull, determining that it was 70 to 75 percent completed. Mr. Hostrup did not review the plans for the yacht. Mr. Begley recommended that Mr. Hostrup offer $50,000 for the hull. Mr. Hostrup recommended to his client that the hull not be purchased for $50,000 because Mr. Hostrup was told by Mr. Begley that nondestructive testing was performed on the welds indicating that 75 percent of the welds were defective. Mr. Hostrup made an offer of $45,000 for the hull, which offer was rejected by petitioner.
After spending what Mr. Begley claimed to be a considerable amount of time trying to obtain a buyer for the hull without procuring a sale, Mr. Begley suggested other options to petitioner including selling the hull for scrap and donating the hull. Adventure informed petitioner that if he wanted more money for the hull, he should donate it to a tax-exempt institution. Mr. Begley was notified that petitioner intended to donate the hull.
Petitioner sought the advice of his accountant, Mr. Larry Stockhausen, with respect to the donation of the hull to a charitable organization. Mr. Stockhausen is a certified public accountant (C.P.A.) and has been petitioners' tax return preparer since 1976. Mr. Stockhausen advised petitioner to obtain a qualified appraisal of the hull and to seek the advice of a tax attorney. Petitioner contacted Mr. Marshall Barkin, a tax attorney, with respect to the donation. Subsequently, Mr. Barkin sent petitioner an opinion letter merely setting forth the rules relating to charitable contributions. Petitioner engaged the services of Mr. Stanley Solomon, a real estate attorney, to assist in the donation of the hull.
Petitioner contacted several potential donees for the hull including the Florida Institute of Technology, Florida Southern College, a YMCA, and the Unity Center of Christ of Daytona Beach, Florida (sometimes referred to as the church). Petitioner chose to donate the hull and the warehouse in which it was housed to the Unity Center of Christ. During the taxable year at issue, the Unity Center of Christ, Daytona Beach, Florida, was a qualifying organization under section 170(c).
Petitioner obtained the services of Captain William Weber to survey and appraise the hull. Petitioner explained to Captain Weber that the purpose of the appraisal was to effectuate a donation of the hull to a church. Captain Weber has been in the business of shipbuilding and surveying marine vessels for nearly 50 years. Captain Weber was one of petitioners' expert witnesses at trial.
On December 14, 1985, Captain Weber certified that he conducted an appraisal of the hull to determine its condition and to establish its current market value. In his 1-1/2-page appraisal report, Captain Weber outlined in four paragraphs the work completed on the hull, and in the following three paragraphs, made observations as to what was still to be completed based upon the original plans for the yacht. In the fifth paragraph, Captain Weber concluded that the vessel was in one-third of its completed stage of construction, and in considering the quality of materials used and quality of workmanship, determined the fair market value of the vessel to be $145,000. In the final paragraph, Captain Weber stated that his appraisal was based upon the facts presented and evidence of expenditures involving materials and labor. Petitioner paid Captain Weber $580 for his appraisal.
Mr. Solomon drafted the donation agreement dated December 5, 1985, in which it was agreed that the acceptance of the hull by the church was contingent upon the concurrent donation of the warehouse and that the church hold title to such property for a period of 2 years. The agreement was signed by petitioner; Reverend John Byrns signed on behalf of the church. At some time subsequent to this initial agreement, Reverend Byrns decided that the church did not want the warehouse as it was encumbered by a first mortgage. Before the end of 1985, Reverend Byrns told petitioner that the church did not want the real property. The original December 5, 1985, agreement was later modified by crossing out all references to the warehouse to reflect that the real estate was not part of the donation transaction; the document reflects that it was initialed by both parties. There is no date indicated on the document with respect to when it was initialed to...
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