Clayton v. Commissioner
| Decision Date | 13 August 1981 |
| Docket Number | 9508-76.,Docket No. 9507-76 |
| Citation | 42 TCM (CCH) 670,1981 TC Memo 433 |
| Parties | Charles W. Clayton, Jr., and Joan B. Clayton v. Commissioner. W. Malcolm Clayton and Mary H. Clayton v. Commissioner. |
| Court | U.S. Tax Court |
Harrison Terry Slaughter and Joseph Byron Whitebread for the petitioners. Lewis J. Hubbard, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases respondent determined deficiencies and additions to the Federal income taxes of petitioners as follows:
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Charles W. Clayton and Per Statutory Increases Per
Joan B. Clayton Notice of Amended Answer
Docket No. 9507-76 Deficiency to the Petition Total
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1973 deficiency ....................... $175,339.33 $63,404.03 $238,743.36
Section 6651(a)1 addition ........ 8,766.97 3,170.20 11,937.17
Section 6653(a) addition .............. 11,511.24 3,170.21 14,681.45
1974 deficiency ....................... 141,258.13 17,862.83 159,120.96
Section 6653(a) addition .............. 7,110.52 893.14 8,003.66
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W. Malcolm Clayton and Per Statutory Increases Per
Mary H. Clayton Notice of Amended Answer
Docket No. 9508-76 Deficiency to the Petition Total
______________________________________________________________________________________
1973 deficiency ....................... $175,577.13 $62,668.71 $238,245.84
Section 6651(a) addition .............. 8,778.86 3,133.43 11,912.29
Section 6653(a) addition .............. 11,288.49 3,133.44 14,421.93
1974 deficiency ....................... 139,029.32 17,861.89 156,891.21
Section 6653(a) addition .............. 6,902.52 953.10 7,855.62
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Due to several concessions by both parties, the issues remaining for our determination are:
(1) Whether the useful lives assigned to office buildings and motels owned by petitioners were proper under section 167 for purposes of computing depreciation deductions.
(2) Whether petitioners are entitled to an abandonment loss for the taxable year 1973 under section 165 for the unsalvaged portion of a motel in construction which was converted to an office building.
(3) Whether petitioners received excess compensation from their wholly-owned corporation in 1973.
(4) Whether petitioners' partnership, the Eastside Land Trust, is entitled to a charitable deduction under section 170 for the taxable year 1973 resulting from a transfer of land by the partnership to Orange County, Florida, for use as a public park and whether the partnership realized ordinary income on the transfer.
(5) Whether the Eastside Land Trust is entitled to a charitable contribution under section 170 for the taxable year 1974 for a purported gift of certain property to the Winter Park Church of Religious Science and whether the partnership realized ordinary income on a simultaneous sale to the church.
(6) Whether certain claimed expenses relating to the Cross Creek property were properly deductible by petitioners in 1974 as abandoned land planning costs and engineering fees.
(7) Whether the values of second mortgage notes received by petitioners pursuant to a liquidation of Howell Hills Inc. under section 333 were less than their face amounts.
(8) Whether petitioners had reasonable cause for late filing of their 1973 income tax returns.
(9) Whether petitioners were negligent in filing their 1973 and 1974 returns.
Some of the facts have been stipulated. These facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioners, Charles W. Clayton, Jr., and Joan B. Clayton who resided in Winter Park, Florida, at the time of the filing of their petition in this case, filed their joint Federal income tax returns for the taxable years 1973 and 1974 with the Internal Revenue Service Center, Chamblee, Georgia.
Petitioners W. Malcolm Clayton and Mary H. Clayton who resided in Orlando, Florida, at the time of the filing of their petition with this Court, filed their joint Federal income tax returns for the taxable years 1973 and 1974 with the Internal Revenue Service Center, Chamblee, Georgia.
In 1947 petitioners organized a real estate partnership known as Claytons Realty. In subsequent years the business became very successful and in 1953 the Claytons began organizing corporations to engage in various real estate projects and related ventures.
During the years in question, petitioners owned eight office buildings and two motel complexes, each consisting of three separate buildings. Petitioners took depreciation deductions on these buildings utilizing the component method of depreciation.
On their tax returns for 1973 and 1974 petitioners showed useful lives of 20 years for most of their buildings. Subsequently, petitioners amended their returns to reflect useful lives of 10 years for their buildings. After an initial adverse determination by the Commissioner with respect to the useful lives of petitioners' buildings, petitioners reallocated the costs of various buildings into revised components believing that their accountant, James Johnson, had not properly allocated costs to the various components, and had failed to list several components to which costs should have been allocated. Accordingly, the petitioners' building contractor, Edward N. Fielding, who supervised construction of each building, examined all the cost ledger cards for each of the buildings and, predominantly from memory, allocated each contractor's cost to what he believed was the proper component. A summary of costs by component was then prepared, thus revising the allocation of costs reflected on petitioners' tax returns for 1973 and 1974. The most salient features of Mr. Fielding's revision were a reduction in costs allocated to building shells and increases in allocations to building components and leasehold improvements. Building shells for office buildings were assigned useful lives of 22 years while motel building shells were assigned longer lives. The following charts reflect the original and revised cost allocations along with the useful lives and depreciation taken by petitioners (originally and as ultimately revised) and the corresponding data urged upon us by respondent:
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