Clark v. Commissioner
| Citation | 30 TCM (CCH) 259,1971 TC Memo 61 |
| Decision Date | 30 March 1971 |
| Docket Number | Docket No. 2192-69. |
| Parties | Robert E. Clark and Mary B. Clark v. Commissioner. |
| Court | United States Tax Court |
Andrew J. Goodwin, Charleston Nat. Plaza, Charleston, W. Va., for the petitioners. Rudolf L. Jansen, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' income taxes and additions to tax under section 6653(a) of the Internal Revenue Code of 19541 for negligence or intentional disregard of rules and regulations, for the calendar years 1965, 1966 and 1967, as follows:
Addition to Tax
Year Deficiency Sec. 6653(a)
1965 ..... $ 784.48 $39.22
1966 ..... 1,399.00 69.95
1967 ..... 1,358.42 67.92
By an Amendment to Answer filed at the trial, respondent also asserted an addition to tax under section 6651(a) of the 1954 Code for failure to file a return for 1967. On brief, however, respondent has conceded this issue. Certain of the adjustments set forth in the notice of deficiency were not contested and, accordingly, are not in issue. Also, concessions have been made by the parties with respect to other adjustments. Specifically, with respect to the petitioner Robert E. Clark, respondent conceded, on opening statement and brief, that "a deduction of $755.09 is allowable for the year 1967 as a section 162 travel expense." On reply brief, petitioners stated that they "do not contend any travel expense beyond that amount." Thus, the travel expenses of the petitioner Robert E. Clark, for the year 1967 are no longer an issue. In addition, petitioners did not assign error to respondent's determination of negligence or intentional disregard of rules and regulations under section 6653(a) and introduced no evidence with respect thereto at the trial.
The issues remaining to be decided are as follows:
(1) Whether petitioners are entitled to deductions in the amounts of $2,155.58, $1,579.25, and $149.14 for payments made in 1965, 1966 and 1967, respectively, on business obligations incurred prior to 1965;
(2) Whether petitioners are entitled to deductions in the amounts of $790.55, $782.68 and $1,848.26 for payments made to the Twentieth Street Bank of Huntington, West Virginia, in 1965, 1966 and 1967, respectively;
(3) Whether petitioners are entitled to a deduction for automobile expenses incurred in connection with the servicing of rental properties in excess of $300 for each of the years 1965, 1966 and 1967 allowed by respondent;
(4) Whether and to what extent, if any, the petitioner, Robert E. Clark, realized taxable gain in the year 1966 when he transferred his 30 percent stock interest in Clark Filter and Equipment Company to Dunbar Metal and Supply Company in exchange for $2,000.00 worth of the stock of Dunbar Metal and Supply Company;
(5) Whether petitioners are liable for additions to tax for each of the years 1965, 1966 and 1967, under the provisions of section 6653(a) of the Internal Revenue Code of 1954.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by reference.
Petitioners Robert E. Clark and Mary B. Clark (hereinafter referred to as petitioners or Robert or Mary) are husband and wife and maintain their legal residence in Charleston, West Virginia. Petitioners filed a joint Federal income tax return for the years 1965 and 1966, and filed a tentative joint Federal income tax return for the year 1967 with the district director of internal revenue at Parkersburg, West Virginia.
The Clark Filter Company (hereinafter referred to as Clark Filter) was formed as a sole proprietorship by Robert some time during the year 1954. Its principal business was the distribution of industrial filtration equipment. Clark Filter's source of products was through several franchises, the most significant of which were from Commercial Filter Corporation and Filterite Corporation.
Robert operated Clark Filter primarily as a manufacturer's agent, whereby the company would solicit and accept orders for the manufacturer to ship and bill directly to the buyer. While the above method of doing business was Clark Filter's principal way of doing business it also maintained an inventory from which Robert would occasionally sell directly to the buyer.
On or about May 1, 1964, pursuant to discussions between Robert and the owners of Dunbar Metal and Supply Company, Inc. (hereinafter referred to as Dunbar Metal), a new corporation was formed called Clark Filter and Equipment Company, Inc. (hereinafter referred to as Clark, Inc.). Robert transferred the franchises he held in exchange for 30 percent of the stock of the new corporation and Dunbar Metal received the remainder of the stock. Robert remained personally liable for all the outstanding indebtedness of Clark Filter. These liabilities, according to a list thereof prepared by Robert on April 24, 1964 (exclusive of any indebtedness to the Fred McCorkle Machine Shop, hereinafter discussed), amounted to $7,901.14 and represented amounts owed by Clark Filter for the purchase of filters, gaskets, strainers and other items, as well as general operating expenses.
In November, 1966, pursuant to an oral agreement between Robert and Dunbar Metal that Dunbar Metal acquire 100 percent control of Clark, Inc., Robert exchanged his 30 percent interest in Clark, Inc., for $2,000 worth of stock of Dunbar Metal, valued at $3.25 per share. Robert received additional Dunbar Metal stock worth $398.13 in 1967.
In 1965, 1966 and 1967, as the result of legal actions instituted by certain of the creditors of Clark Filter and the garnishment of wages or salary owed him by Dunbar Metal, Robert paid $2,155.58, $1,579.25 and $149.14, respectively, in satisfaction of business expenses of Clark Filter, the liability for which had been retained by him.
One of the business creditors of Clark Filter was the Fred McCorkle Machine Shop (hereinafter referred to as McCorkle). As of November 6, 1963, Clark Filter was indebted to McCorkle in the amount of $4,000.00. McCorkle was owned by the McGinnis family, who also controlled the Twentieth Street Bank of Huntington, W. Va. In 1963, Robert applied to the Twentieth Street Bank for a $6,000 loan for general use in his business. The bank agreed to lend him the money if he would sign a note which would include the amount owed by him to McCorkle. Robert signed a note to the bank in the amount of $10,000 and also gave the bank a second mortgage on his home as security. The bank paid him $1,000 in cash and credited $5,000 to an account in the name of Clark Filter. The record herein does not disclose what disposition was made of the remaining $4,000 included in the $10,000 note. Subsequent to the execution of the $10,000 note, all payments thereon were made to the bank. No payments on the McCorkle indebtedness were ever made by Robert directly to McCorkle and McCorkle has not made any demand upon Robert for payment of his indebtedness to it, since the note was signed. During the years 1965, 1966 and 1967, Robert made payments on the note to the Twentieth Street Bank in the amounts of $790.55, $782.68 and $1,848.26, respectively.
On their returns for 1965 and 1966, petitioners claimed deductions including amounts described as "Paid on debts of Clark Filter Co." or "Am't pd Clark Filter Co. debts." On their "Tentative Return" for 1967, they claimed as itemized deductions the total amount of $3,700, without explanation or designation of categories. The respondent disallowed portions of the claimed itemized deductions, including amounts paid during the taxable years on business expenses incurred by Clark Filter in prior years.
During the taxable years, Mary was a partner with her brother, James A. Bibby, Jr., and her mother, Mary C. Bibby, in a real estate investment business. She was responsible for the maintenance, renting and collection of rents of 18 rental properties containing 41 rental units. In connection with these duties Mary used her personal automobile to transport a maintenance man to and from the various properties which were situated from 2 to 10 miles from petitioners' residence. On each of their returns for 1965 and 1966 petitioners claimed a deduction of $600 for "Car Expense on rental property." The "Tentative Return" for 1967 contains no specific reference to such an expense. Respondent, on brief, concedes that petitioners are entitled to a deduction in the amount of $300 for each of the taxable years for automobile expenses incurred in the servicing of rental properties.
OpinionThe first issue involves the deductibility of certain payments made during the taxable years 1965, 1966 and 1967 on business obligations incurred prior to 1965.
Under section 162(a)2 of the Code, a taxpayer on the cash basis of accounting is entitled to deduct all ordinary and necessary expenses paid during the taxable year in carrying on a trade or business; a taxpayer on the accrual basis of accounting is entitled to deduct such expenses in the year they were incurred. Flood v. United States 43-1 USTC ¶ 9259, 133 F. 2d 173, 178 (C. A. 1, 1943).
There is no dispute either as to the amount of the payments or that the expenses in question were ordinary and necessary expenses incurred in the operation of petitioner's trade or business prior to 1965. Respondent also concedes that "ordinary and necessary expenses incurred in a trade or business in prior years and paid in a current taxable year, by an individual taxpayer using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Internal Revenue Code of 1954, even though the trade or business has been discontinued," citing Rev. Rul. 67-12, 1967-1 C. B. 29. See also Flood v. United States, supra; Morgan S. Kaufman Dec. 17,054, 12 T. C. 1114, 1118 (1949); Waters F....
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