Concord Instruments Corporation v. Commissioner
| Decision Date | 31 May 1994 |
| Docket Number | Docket No. 20520-91.,Docket No. 2294-91.,Docket No. 15863-90. |
| Citation | 67 T.C.M. 3036 |
| Parties | Concord Instruments Corporation, f.k.a. Concord Control, Inc., et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Michael I. Saltzman and Barbara T. Kaplan, 805 Third Ave., New York, N.Y., for the petitioner. Nancy B. Herbert and Jeffrey L. Bassin, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies and additions to tax in petitioner's Federal income tax as follows:
Docket No. Year Ending Deficiency
15863-90 ......................... Nov. 30, 1968 $ 39,130
15863-90 ......................... Nov. 30, 1971 705,986
15863-90 ......................... Dec. 31, 1972 702,993
15863-90 ......................... Dec. 31, 1975 172,732
15863-90 ......................... Dec. 31, 1982 483,928
15863-90 ......................... Dec. 31, 1983 16,383
Addition to Tax
Docket No. Year Ending Deficiency Sec. 6661
2294-91 .......................... Dec. 31, 1984 $135,602 $33,900.50
2294-91 .......................... Dec. 31, 1985 71,455 17,863.75
Docket No. Year Ending Deficiency
20520-91 ......................... Dec. 31, 1986 $ 18,936
20520-91 ......................... Dec. 31, 1987 165,618
These three cases were consolidated for trial, briefing, and decision. After concessions, the following issues remain to be decided:
1. Whether petitioner's additions to its bad debt reserve for 1982, 1984, and 1985 were reasonable. We hold that they were not.
2. Whether petitioner may deduct accrued interest of $78,476 in 1982, the year it must include in income certain payments which led to the accrued interest, or $90,281 in 1983, the year petitioner filed amended tax returns. We hold that it may deduct $78,476 in 1982.
3. Whether petitioner may deduct payments for season tickets for professional sports teams as advertising or promotion expenses. We hold that it may not.
4. Whether petitioner may deduct fees for certain legal services rendered to its president and sole shareholder. We hold it may not.
5. Whether petitioner may accrue in 1982 a $510,455 deduction for a payment relating to its pension plan. In 1982, petitioner's lawsuit with the Pension Benefit Guarantee Corp. (PBGC), which raised issues relating to the jurisdiction of the court, the statute of limitations, and the amount of petitioner's liability was still pending. We hold that petitioner may not accrue the deduction in 1982, but may deduct $243,677 in pension expenses and $118,607 in interest for 1984.
6. Whether petitioner's cost of installing a new and larger water pump and housing in its fire sprinkler system is a repair expense or capital expenditure. We hold that it is a capital expenditure.
7. Whether petitioner has shown that it had no reasonable prospect of recovery from its insurer (in excess of a partial payment) before it made its final claim for fire damage. We hold that petitioner has not.
8. Whether, under section 461(f), petitioner may deduct $201,810 as a litigation loss in 1985 and $52,000 for related interest expense in 1987. We hold that it may not.
9. Whether a legal malpractice settlement payment made to petitioner because its counsel failed to timely file a notice of appeal is includable in income. We hold that it is not, except for the part of the payment which was based on amounts previously deducted as interest.
10. Whether, as respondent contends, section 1.1012-1(c), Income Tax Regs., provides the exclusive means for petitioner to identify stock to be sold to avoid using the first-in, first-out (FIFO) accounting method to calculate gain on the sale. We hold that it provides a safe harbor and not the exclusive means to identify stock.
11. Whether petitioner is liable for additions to tax for substantial understatement of tax under section 6661 for 1984 and 1985. We hold that it is not.
Another issue relating to petitioner's inventory writedowns for 1975 will be decided separately. References to petitioner are to Concord Instruments Corp., and its predecessors, Concord Control, Inc., and K-D Lamp Co. Section references are to the Internal Revenue Code in effect during the years in issue. Rule references are to the Tax Court Rule of Practice and Procedure.
This opinion is organized as follows:
Petitioner manufactures truck safety equipment such as switch lights, mirrors, reflectors, and cab, side, and tail lights. Its factory and office is in Cincinnati, Ohio. Andrew Stone (Stone) has owned all of the stock of petitioner and its predecessors, Concord Control, Inc., and the K-D Lamp Co. since 1964. Stone had also been president and 75-percent shareholder of a corporation called Chromcraft Co. (Chromcraft) which was unrelated to petitioner. Chromcraft manufactured furniture. Stone was involved in all phases of petitioner's business, including engineering, management, production, sales, and finance. Petitioner's comptroller, credit manager, and production control manager reported to Stone during the years in issue.
Petitioner used the accrual method to compute income for book and tax purposes for all of the years in issue.
Clark, Schaefer, Hackett & Co. (Clark, Schaefer) is an accounting firm with offices in Cincinnati and four other places. Joseph Rumpler (Rumpler) and other Clark, Schaefer personnel went to petitioner's offices and factory many times to do the annual audits.
Clark, Schaefer prepared petitioner's corporate income tax returns from 1969 to 1989. Clark, Schaefer used audit information to prepare petitioner's tax returns. Clark, Schaefer obtained amounts from the general ledger, reviewed most of petitioner's significant transactions and activities, and discussed many items with company personnel. Clark, Schaefer tax specialists reviewed tax-related items.
Petitioner used the reserve method to calculate its tax deduction for bad debts in all relevant years. It used a two-part calculation consisting of a historical method and a specific accounts method. First, petitioner took into account its bad debt history using a formula similar to that in Black Motor Co. v. Commissioner [Dec. 10,996], 41 B.T.A. 300 (1940), affd. [42-1 USTC ¶ 9265] 125 F.2d 977 (6th Cir. 1942), to compute a bad debt reserve. Second, petitioner added the amounts of any significant questionable accounts to the reserve. Petitioner added both amounts to its reserve for bad debts and deducted them.
At the end of each year, petitioner reviewed its accounts receivable records with Clark, Schaefer and identified past due accounts. Petitioner's credit manager and Clark, Schaefer discussed accounts that petitioner's credit manager believed were questionable. They reviewed the credit manager's files, and considered the age of the account, the date of the last payment, the current status of the customer, and collection efforts by petitioner. When petitioner believed an adjustment was appropriate, it sought the concurrence of the credit manager and Clark, Schaefer. Petitioner did not add any account to the bad debt reserve unless it had...
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