Churchill Farms, Inc. v. Commissioner, Docket No. 6307-66.
| Decision Date | 23 September 1969 |
| Docket Number | Docket No. 6307-66. |
| Citation | 1969 TC Memo 192,28 TCM (CCH) 990 |
| Parties | Churchill Farms, Inc., Petitioner v. Commissioner. |
| Court | U.S. Tax Court |
deQuincy v. Sutton, Greater Mississippi Life Bldg., Meridian, Miss., for the petitioner. William O. Lynch and Harold Friedman, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's income and personal holding company taxes and additions to tax under section 6653(a)2 as follows:
-----------------------------------------------------------------------------
Personal
Holding Addition to Tax
Year Income Tax Company Tax Sec. 6653(a) Total
-----------------------------------------------------------------------------
1959 ....... $ None $ 8,236.15 $ None $ 8,236.15
1960 ....... 17,953.56 32,455.79 2,520.47 52,929.82
1961 ....... 13,082.56 30,175.34 2,162.90 45,420.80
1962 ....... 7,757.67 21,471.18 1,461.44 30,690.29
1963 ....... 15,275.77 36,642.37 2,595.91 54,514.05
1964 ....... 6,395.23 22,147.64 1,427.14 29,970.01
__________ ___________ __________ ___________
Total .... $60,464.79 $151,128.47 $10,167.86 $221,761.12
-----------------------------------------------------------------------------
Certain issues have been settled by the parties. The issues remaining for decision are:
(1) What amounts, if any, petitioner is entitled to deduct under section 162(a) as expenses for repairs and maintenance for the years 1960 through 1964; whether the amounts which are not deductible may be capitalized under section 263(a).
(2) What amounts, if any, petitioner is entitled to deduct under section 167(a) for depreciation for the years 1960 through 1964.
(3) Whether respondent erred in disallowing part of the deductions claimed by petitioner under section 162(a) as expenses for insurance and sundry items for 1960, 1961, and 1962.
(4) Whether, for 1960, petitioner is entitled under section 162(a) to a deduction for truck repairs.
(5) What amounts, if any, petitioner is entitled to deduct under section 162(a)(1) for salaries and wages, including social security and withholding taxes, for the years 1960 through 1964.
(6) What amounts, if any, petitioner is entitled to deduct under section 162(a) for legal services for 1961, 1962, 1963, and 1964.
(7) Whether, for 1961, petitioner is entitled to a deduction under section 162(a) for amounts paid as "Release of Damages."
(8) Whether petitioner is entitled to deductions under section 162(a)(1) for a supervisor's fee in the amount of $10,000 for each of the years 1962 and 1963.
(9) Whether, for 1963, petitioner is entitled to a deduction under section 162(a) for "Miscellaneous" expenses.
(10) Whether, in computing the deduction for percentage depletion, petitioner is entitled under section 613 to include in its "gross income from the property" the amounts of its legal fees paid by its lessees in 1961 and a deposit of $8,635.38 made in 1963.
(11) Whether petitioner is subject to the personal holding company tax imposed by section 541 for the years 1959 through 1964. The resolution of this issue depends on whether oil lease bonuses received by petitioner during each of these years, and amounts corresponding with deductions for depletion taken in prior years and reported as gross income in each of these years, constitute personal holding company income within the meaning of pre-1964 section 543 (a) (8) for 1959 through 1963, and section 543(a)(3), for 1964.
(12) Whether all or any part of the underpayments of income tax due by petitioner for the years 1960 through 1964 are due to negligence or intentional disregard of the rules and regulations within the meaning of section 6653(a).
Churchill Farms, Inc. (hereinafter referred to as petitioner), had its principal office in New Orleans, Louisiana, at the time of the filing of its petition. Petitioner filed its Federal corporate income tax returns for the calendar years 1959 through 1964, inclusive, with the district director of internal revenue, New Orleans, Louisiana.
During the years in controversy petitioner owned a tract of land consisting of approximately 4,200 acres, located in Jefferson Parish, Louisiana, 10 miles west of, and across the Mississippi River from, downtown New Orleans. Access to the property from New Orleans is by two bridges across the Mississippi — one bridge connected with downtown New Orleans, the other six miles upstream. The tract borders on Lake Cataouatche, an access route to the intercoastal waterways, and is subject to tidal flow from the lake. Like the other low-lying lands around New Orleans, it would be three feet below mean sea level if drained.
The tract includes an area of approximately 835 acres — known as the "ponds" because of the presence of numerous small bodies of water — around which a protective levee was constructed about 1927 and for which a drainage system was developed. The ponds area is anywhere from three to four feet below the level of the land outside the levee — known as the "trembling prairie" — and was farmed in earlier years. Located within the ponds area are a headquarters building, a caretaker's dwelling, a boathouse, some wharves, and a storage building.
The trembling prairie is, for the most part, covered with three feet of water, upon which about one foot of humus floats. It is shaped like a bowl and has the appearance of surface land, but it will not bear the weight of a man for any substantial length of time.
A few years prior to 1964 the Lafourche Levee District was established for the purpose of installing a levee and drainage system which was to encompass parts of Jefferson, St. Charles, and Lafourche Parishes, protecting these areas from the waters of Lake Cataouatche. The Lafourche Levee District obtained rights of way and commenced digging in 1964. Jefferson Parish also commenced constructing drainage canals and pumping stations which, with the levee, were to provide a complete protection and drainage system. Most of petitioner's land was within the area to be protected. A part of the Lafourche system is a carryoff canal which, in part, roughly parallels petitioner's boundary line.
During the years here in issue petitioner's income was derived from oil and gas leases covering portions of its land.
Issue 1. Repairs and Maintenance 1960
At the beginning of 1960 the existing improvements on petitioner's land were old and deteriorated. They had been constructed or installed prior to 1925, and few steps had been taken to keep them in repair. In 1960 petitioner, under new ownership, commenced a major construction program, related to existing, as well as new, improvements, including the construction of a new headquarters building.
The headquarters building was a 30-foot by 40-foot frame building with a plywood exterior and wood panel interior. It contained three bedrooms, two of which were furnished, a large combination living and dining room with a large table, a kitchen with a built-in oven and range, as well as a refrigerator and a deep freezer, and two and one-half baths. Carpeting and drapes were not furnished until 1965.
The large combination room was frequently used by petitioner for meetings with prospective purchasers, conferences with businessmen, engineers, and representatives from parish agencies to discuss the parish drainage program (which was to affect petitioner's land), discussions with prospective oil lessees, and annual shareholder meetings. In addition, petitioner kept various records there, including maps and surveys. The headquarters also was used as a departure point for helicopter and boat trips (within the ponds area) to inspect the operations of the oil lessees on petitioner's property.
In its return for 1960 petitioner claimed deductions for repairs and maintenance totaling $40,007.42; respondent disallowed the full amount of these deductions. Petitioner concedes that of the amount deducted, the sum of $18,413.28 represents capital expenditures rather than expenses deductible for 1960. A description of the items remaining in issue and the amounts deducted for each follows:
(1) Construction work, $9,638.38. The contractor made numerous improvements to the caretaker's building, consisting of installation of plumbing and heating facilities; replacement of one-third of the windows, some exterior and interior doors, and several ceilings; and a large amount of work on the roof. This work materially added to the life of the building. The contractor also installed a new floor in the storage building, completely rebuilt the wharves, walkways, and boathouse roof, and replaced one-half of the interior supports and one-third of the roof of the pumphouse.
(2) Part-time labor, $90, and photostats of pump design, $9.89. These expenditures were incurred in connection with the above construction.
(3) Sand and shells, $2,629.08. These materials were used to rebuild the existing access road which had deteriorated to the extent that some portions of it were impassable. Substantially all deliveries of the materials were made within a three-month period, approximately 80 percent having been delivered on two days.
(4) Surveys, $8,092.80. This expenditure was incurred for the preparation of survey maps showing the location of petitioner's tract in relation to adjacent tracts, roads, canals, and other physical features, and the placement of 48 section markers on both the exterior and the interior section lines of petitioner's land; land marks previously used, installed before 1925, had largely disappeared or were unreliable. Petitioner utilized the survey maps and section markers in...
To continue reading
Request your trial