Brighton Recreations, Inc. v. Commissioner
| Decision Date | 31 January 1961 |
| Docket Number | Docket No. 72172. |
| Parties | Brighton Recreations, Incorporated, a Utah corporation v. Commissioner. |
| Court | U.S. Tax Court |
Arthur H. Nielsen, Esq., Newhouse Bldg., Salt Lake City, Utah, for the petitioner. Norman H. McNeil, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's income tax for the fiscal year ending September 30, 1954 in the amount of $3,060.24. The issues are: (1) whether payments on debentures to petitioner's shareholders represented deductible interest; (2) whether, in disallowing a portion of petitioner's depreciation deduction for a chair ski-lift respondent properly recomputed the asset's cost basis and useful life; (3) whether petitioner is entitled to a net operating loss deduction based on carry-overs, if any, from fiscal 1952 and fiscal 1953.
The stipulated facts are found.
Petitioner is a Utah corporation with its principal office at Salt Lake City. It filed its return for fiscal 1954 on an accrual method of accounting with the director of internal revenue for the district of Utah.
Issue No. 1 — Interest Deduction
For approximately 3 years prior to 1947, Leonard A. Brennan, sometimes hereinafter called Brennan, studied and planned the establishment of a chair ski-lift for profit on Mount Millicent at Brighton, near Salt Lake City, Utah. Under date of June 1, 1947, Brennan, on behalf of petitioner, accepted a permit1 or lease from the United States Department of Agriculture on a portion of the Wasatch National Forest at Brighton for the purpose of constructing a ski-lift. Brennan had this site surveyed and drawings prepared. He obtained commitments from various construction companies.
Sometime during the early part of 1947, Brennan contacted several business and professional men regarding investment in a venture to construct and operate a ski-lift at Brighton. These men, including Brennan, will sometimes hereinafter be called the group. At that time there was no comparable ski-lift in operation at or near Salt Lake City. The group determined that the corporate form of doing business would be appropriate because of the limited liability aspect. It recognized that the operation of a ski-lift involved a sizable risk and that approximately $120,000 would be required for construction. However, the group was not willing to advance $120,000 to construct the ski-lift. It agreed to place $20,000 into the capital structure of a corporation and advised Brennan to seek any type of outside financing for the balance of the money necessary for construction.
On or about May 17, 1947, the incorporators of petitioner executed its Articles of Incorporation, subscribed to and paid for 10 per cent of its $20,000 authorized capital stock (4,000 shares at $5 par value) and forwarded the Articles to Utah's secretary of state. There was stamped on the Articles the following: "Received May 26, 1947 * * * Secretary of State." The incorporators, shares subscribed and amounts were as follows:
Shares Amount
Leland H. Stevens...... 80 $ 400
Dr. Guy Wight.......... 80 400
Ralph Reid............. 80 400
Robert Schubach........ 80 400
Leonard A. Brennan..... 80 400
___ ______
400 $2,000
Petitioner's Articles of Incorporation stated in part:
The affairs and business of the corporation shall be controlled and managed by the Board of Directors which have power without action of confirmation by the stockholders to acquire or dispose of property, real and personal by agreement, franchise, lease, sale, purchase or otherwise, and to borrow money and to assign, transfer, pledge, mortgage or otherwise encumber all or any part of the property and assets of the corporation as securities for the repayment thereof and on such terms and conditions and for such purposes as the board of directors may from time to time determine; and to create a bonded indebtedness, to issue promissory notes, debentures, or other evidences of indebtedness secured or unsecured, on all or any part of the property of the corporation. * * *
On May 26, 1947, petitioner qualified as a Utah corporation. One of the main purposes of petitioner was to engage in the business of providing recreational facilities in the resort area known as Brighton.
On May 28 and June 10, 1947, petitioner's board of directors held its first two meetings. During these meetings the directors discussed, among other things, the matter of financing the construction of the proposed ski-lift. The minutes of the May 28 meeting stated, in part:
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