Charlie Sturgill Motor Co. v. Commissioner, Docket No. 5304-71 and 5305-71.

CourtUnited States Tax Court
Writing for the CourtSCOTT
Citation32 TCM (CCH) 1336,1973 TC Memo 281
Docket NumberDocket No. 5304-71 and 5305-71.
Decision Date26 December 1973
PartiesCharlie Sturgill Motor Co. v. Commissioner. Charlie and Christine Sturgill v. Commissioner.

32 TCM (CCH) 1336
1973 TC Memo 281

T.C. Memo. 1973-281.

Charlie Sturgill Motor Co.

Charlie and Christine Sturgill

Docket Nos. 5304-71 and 5305-71.

United States Tax Court.

Filed December 26, 1973.

32 TCM (CCH) 1337
32 TCM (CCH) 1338
William R. Bagby, 1107 First Nat'l. Bldg., Lexington, Ky., for the petitioners. Christopher D. Rhodes, for the respondent

Memorandum Findings of Fact and Opinion

SCOTT, Judge:

Respondent determined deficiencies in income taxes and additions to tax under section 6653(a), I.R.C. 1954, of petitioners for the years and in the amounts as follows:

                 Fiscal year Addition to tax under
                 ended August Sec. 6653(a)
                 Petitioner 31 Deficiency I. R. C. 1954
                 Charlie Sturgill Motor Co. ............... 1963 $ 2,638.02 $ 181.16
                 1964 6,576.48 376.82
                 1965 9,699.00 531.21
                 1966 13,118.57 655.93
                 1967 6,707.77 335.39
                 Calendar Year
                 Charlie and Christine Sturgill ........... 1963 3,744.48
                 1964 8,167.83 408.39
                 1965 26,118.01 1,305.90
                 1966 16,242.58 812.13

Some of the issues raised by the pleadings have been conceded by each of the parties, leaving for our decision the following:

1. (a) Whether expenditures of $8,811.43 and $11,043.83 by Charlie Sturgill Motor Co. on its garage during its fiscal years 1964 and 1965, respectively, are deductible in whole or in part under section 162, I.R.C. 1954,1 as repairs or are capital expenditures and (b) whether $3,452.52 spent for blacktop by Charlie Sturgill Motor Co. in 1967 is deductible as repairs under section 162 or is a capital expenditure.

2. (a) Whether the amounts deducted as charitable contributions by Charlie Sturgill Motor Co. (hereinafter referred to as Motor Co.) in each of the years here in issue were in fact payments made on behalf of Charlie Sturgill (hereinafter referred to as Sturgill) and therefore nondeductible distributions to a stockholder-officer, and (b) whether $100 paid by Motor Co. to the University Century Club is a payment on behalf of Sturgill of an amount which is not deductible by either Motor Co. or Sturgill and therefore is income to Sturgill.

3. (a) Whether payments in each of the years here in issue by Motor Co. to restaurants

32 TCM (CCH) 1339
and social clubs for fees incurred by Sturgill, a payment of $50 per month by Motor Co. to Sturgill, and payments of membership fees and dues by Motor Co. to several social clubs on behalf of Sturgill were deductible business expenses by Motor Co., and (b) if these payments were not properly deductible by Motor Co., did they constitute income to Sturgill as payments made by Motor Co. for his personal expenses.

4. Whether payments by Motor Co. in its fiscal year 1966 of medical bills incurred by Charlie and Christine Sturgill were deductible pursuant to a qualified corporate accident and health plan under section 105, and if not, did these payments constitute income to the Sturgills when they were made in their calendar years 1965 and 1966.

5. (a) Whether Motor Co. properly deducted in its fiscal year 1966 as a worthless debt the unpaid balance of amounts it had advanced to its wholly owned subsidiary, Fairfax Rent-A-Car, over a period of approximately 5 years, and (b) the proper amount of the loss incurred by Motor Co. in its fiscal year 1966 due to the worthlessness of its stock in Fairfax Rent-A-Car when that company was liquidated.

6. Whether Motor Co. is entitled to depreciate a leasehold improvement of blacktopping over a 10-year period if it is not entitled to depreciate all the leasehold improvements made over the 5-year period of a lease of property by Motor Co. from Sturgill's son Don.

7. Whether Motor Co. is entitled to a demolition loss of $2,090.40 in its fiscal year 1966 because of the destruction of a fence.

8. Whether Motor Co. is entitled to deduct depreciation on furniture and equipment for its fiscal year 1967 of $1,078 in addition to the depreciation deducted on its tax return for that year.

9. (a) Whether a payment of $7,600 by The Colony, Inc. (hereinafter referred to as Colony) to Sturgill who owned 50 percent of Colony's stock was taxable to Sturgill as a dividend, and (b) whether payments to Sturgill by Colony of $228 in 1964 and $731.50 in 1965 are taxable to Sturgill as dividends.

10. Whether the amount of $32,800 paid to Sturgill by the State of Kentucky in 1964 in connection with the condemnation of certain farmland owned by Colony was for damages to improvements he had placed on Colony's land or was a payment to avoid litigation includable in his taxable income.

11. Whether Sturgill received a dividend from Colony in 1967 because of Colony's, in effect, paying part of the purchase price of land deeded to Sturgill, and, if so, the amount of this dividend.

12. Whether Sturgill underreported his farm income for the years 1964, 1965, and 1966.

13. Whether Sturgill sustained a loss in 1963 on the sale of rental property on North Limestone Street in Lexington, Kentucky, and, if so, the amount of the loss sustained.

14. Whether Sturgill is entitled to deduct legal fees paid to attorneys representing him in proceedings in which the Commonwealth of Kentucky expropriated a portion of his land.

15. Whether a portion of the underpayment of taxes by Motor Co. was due to negligence or intentional disregard of rules and regulations.

16. Whether a portion of the underpayment of taxes by Sturgill was due to negligence or intentional disregard of rules and regulations.

General Findings of Fact2

Some of the facts have been stipulated and they are so found.

Charlie and Christine Sturgill are husband and wife, who at the time of the filing of their petition in this case resided in Lexington, Kentucky.

Charlie Sturgill Motor Co. is a Kentucky corporation with its principal place of business at the time of the filing of its petition in this case at 129 East High Street, Lexington, Kentucky.

Charlie and Christine Sturgill filed their Federal income tax returns for the calendar years 1963, 1964, 1965, and 1966 with the district director of internal revenue at Louisville, Kentucky.

Sturgill began business as a Pontiac automobile dealer in Lexington, Kentucky in

32 TCM (CCH) 1340
1934. In 1946 he incorporated his business in Kentucky as the Charlie Sturgill Motor Co. (Motor Co.). Sturgill has been president and his wife has been the secretary of Motor Co. since the date of its incorporation. Together Charlie and Christine Sturgill own 680 of the 700 outstanding shares of Motor Co.

Sturgill is a 50 percent stockholder in The Colony, Inc. (Colony), a farming and real estate corporation incorporated in 1946 in Kentucky. Colony's principal address is also at 129 East High Street in Lexington, Kentucky. The other 50 percent of Colony was owned by Bruce Isaacs until his death in 1966 and has thereafter been owned by the estate of Bruce Isaacs.

The Fairfax Rent-A-Car Corporation (hereinafter, Fairfax) was organized in April 1958 as a wholly owned subsidiary of Motor Co. Fairfax engaged in the car and truck rental business until it was liquidated on August 31, 1966.

1(a) Deductibility of Expenditures on Garage

Findings of Fact

Motor Co. constructed a garage during 1946 and 1947, at a time when materials and labor were scarce. By 1963, the garage was in a very poor condition and during its fiscal year 1963, Motor Co. expended $71,244.13 to restore and improve the garage. This entire amount was capitalized by Motor Co. on the basis of a useful life of 33 years.

During 1964 both the interior and exterior of the showroom area of the garage was damaged by water. Water leaked through the concrete block walls which became badly cracked and through the ceiling into the office area. Water also leaked through the roof of the canopy and the windows at the front of the showroom. The interior plastering of the showroom was damaged by the water. Plaster was loose on both the walls and ceiling. The accoustical tile was falling off the ceiling in the offices in some places and the window sills and roof of the showroom rotted from the leakage.

Some unsafe conditions existed in the garage building. The stairway in the showroom was unsafe and the floors of the showroom were supported by temporary posts. The terrazzo floor in the showroom was cracked and damaged by blows from the cars, as was a downspout. The concrete walks and ramps leading into the showroom were cracked in places.

Motor Co. employed an architect, A.H. Harmon, to examine the showroom area and recommend the work necessary to correct the unsafe conditions and water damage. The architect recommended that a copper roof replace the tar one, that new gutters and downspouts be installed, that steel window sills be installed in the showroom, and that the exterior of the concrete block walls of the showroom be veneered with brick and waterproof mortar. He also recommended that work be done on the sidewalks and ramp leading into the showroom and that a block wall between the showroom and the remainder of the garage be torn out and a partition rebuilt with copper flashing along the separating wall. The work was to change the style of the building from contemporary to colonial.

Motor Co. employed a contracting firm to do the work on the exterior of the building in accordance with the recommendation of the architect and this work was completed in Motor Co.'s fiscal year ended August 31, 1964. Motor Co. paid the contracting firm $16,138.73 for the work on the exterior of the building. Motor Co. capitalized $10,528.73 of this amount and deducted $5,610.00 of the amount as repairs and also deducted $270 paid to the architect as...

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