Cooper v. Comm'r of Internal Revenue

• Decision Date: 04 February 1974
• Docket Number: Docket Nos. 2496-72— 2499-72.
• Citation: 61 T.C. 599
• Parties: RICHARD M. COOPER AND MARY J. COOPER, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

61 T.C. 599

RICHARD M. COOPER AND MARY J. COOPER, ET AL.,1 PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 2496-72— 2499-72.

United States Tax Court

Filed February 4, 1974.

R. Paul Sorenson, for the petitioners.

Harry Morton Asch, for the respondent.

The petitioners, who were shareholders in a corporation, entered into an agreement establishing an alleged joint venture to provide additional funds to the corporation equal to its accumulated net operating loss. The alleged joint venture conducted no other activities. Held, under the circumstances, the alleged joint venture served no business purpose and shall be disregarded for tax purposes; the transaction is in reality a contribution of capital to the corporation.

SIMPSON, Judge:

The respondent determined the following deficiencies in the Federal income taxes of the petitioners for the year 1968:

+----------------------------------------------------------------+
                ¦Docket No.  ¦Petitioners                           ¦Deficiency  ¦
                +------------+--------------------------------------+------------¦
                ¦2496-72     ¦Richard M. Cooper and Mary J. Cooper  ¦$547.84     ¦
                +------------+--------------------------------------+------------¦
                ¦2497-72     ¦Harry C. Neer and Mary Neer           ¦989.82      ¦
                +------------+--------------------------------------+------------¦
                ¦2498-72     ¦W. Albert Johnson and Lulu S. Johnson ¦1,067.28    ¦
                +------------+--------------------------------------+------------¦
                ¦2499-72     ¦Robert D. Brown and Loretta Maye Brown¦1,421.42    ¦
                +----------------------------------------------------------------+
                

Certain issues have been conceded by the petitioners in docket Nos. 2497-72 and 2499-72, and the only issue remaining for decision is whether the petitioners may deduct as a loss payments made by them to an alleged joint venture established to provide additional funds to a corporation of which they were the shareholders.

FINDINGS OF FACT

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

The petitioners are Richard M. and Mary J. Cooper (husband and wife), Harry C. and Mary Neer (husband and wife), W. Albert and Lulu S. Johnson (husband and wife), and Robert D. and Loretta Maye Brown (husband and wife). All the petitioners were legal residents of Las Vegas, Nev., at the time the petitions were filed herein. They filed joint Federal income tax returns for the year 1968 with the Internal Revenue Service Center, Ogden, Utah. Messrs. Cooper, Neer, Johnson, and Brown will be referred to as the petitioners.

Each petitioner operated his own company in the food business. On September 22, 1964, the petitioners formed a corporation called the Las Vegas Cold Storage & Warehouse Co. (the corporation), of which each owned 25 percent of the stock. The corporation acquired two buildings located adjacent to each other, each having approximately 20,000 square feet of space. The corporation was formed in part with the idea that one day it would install cold storage facilities, and thereafter, provide storage space for the businesses of the petitioners. The petitioners' food businesses did use some of the space in the corporation's buildings for offices. However, the cold storage equipment was never installed, and the petitioners' food businesses had to use storage space in other buildings.

The corporation was also formed to lease storage space to others. However, one of its buildings remained vacant for several years, and the corporation incurred successive net operating losses, which totaled $38,206 by the end of 1967. The corporation was, therefore, forced to secure additional funds from the petitioners in order to meet expenses, and at one point, it reported outstanding loans by shareholders of $23,338.41.

In 1967, one of the petitioners consulted an attorney to determine whether the funds he supplied the corporation could be claimed as a deduction on his personal income tax return. Thereafter, the attorney prepared an agreement for the petitioners, which was executed by them and which provided:

JOINT VENTURE AGREEMENT

THIS AGREEMENT, made this 30th day of November, 1967, by and between ROBERT D. BROWN, RICHARD M. COOPER, W. A. JOHNSON and HARRY C. NEER,

WHEREAS, the aforementioned parties have, prior to this date, formed a corporation entitled, LAS VEGAS COLD STORAGE & WAREHOUSE CO., which corporation operates an office building and warehouse company in which the businesses of the aforementioned parties operate from; and

WHEREAS, it is the desire of the parties to pay to the corporation sufficient monies to cover the net operating loss of said corporation as rental payments, thereby indemnifying the corporation from any net operating loss.

NOW, THEREFORE, IT IS HEREBY AGREED that each of the parties set forth above shall contribute to the joint venture a sum of money equal to one-fourth (1/4th) of the net operating loss of LAS VEGAS COLD STORAGE & WAREHOUSE CO. on or before three (3) months after the loss is determined, as computed on the U.S. Corporation Income Tax Return of said corporation; and

IT IS FURTHER AGREED that said joint venture shall immediately pay to said corporation the monies paid over to said joint venture, as and for additional rental payments.

IN WITNESS WHEREOF the parties hereto have set their hands the day and year herein first written.

(S) Robert D. Brown ROBERT D. BROWN (S) Richard M. Cooper RICHARD M. COOPER (S) W. A. Johnson W. A. JOHNSON (S) Harry C. Neer HARRY C. NEER

The arrangement will be referred to as a ‘joint venture’ for sake of convenience, without intending to indicate whether, as a matter of law, a joint venture was established by such agreement.

On March 19, 1968, the petitioners, as shareholders of the corporation, met and adopted a resolution to dissolve the corporation within a 12-month period in accordance with a plan of complete liquidation. Thereafter, on April 29, 1968, each petitioner issued a check in the amount of $9,552 payable to ‘Vegas Warehouse-Joint Venture,‘ and such checks were endorsed over to the order of the corporation. The joint venture did not participate in any other business transaction. By May 30, 1968, the corporation ceased operations, sold the buildings, and distributed the corporate assets to the petitioners.

In its final U.S. Corporation Income Tax Return for the period ending May 30, 1968, the corporation reported the payments received from the joint venture as income attributable to an indemnity payment. The joint venture filed a U.S. Partnership Return of Income, on which it reported that ‘indemnity’ was its principal product or service. It also reported a loss of $38,208 and indicated that the petitioners devoted no time to the joint venture.

On their returns for the year 1968, the petitioners each claimed a deduction of $9,552 attributable to losses incurred by the joint venture, and each reported receipt of $18,393 as the proceeds attributable to the liquidation of the corporation.

In his notices of deficiency, the respondent determined that no loss was incurred by the joint venture in the conduct of a trade or business, and that the payment was in reality a contribution of capital by the petitioners to the corporation.

OPINION

The corporation apparently needed additional funds, and the petitioners, as its shareholders, decided to supply such funds. If the additional funds constituted contributions to the capital of the corporation or were loans to the corporation, the petitioners were not entitled to deduct the payments when made. However, the petitioners take the position that they formed a joint venture to supply additional capital to the corporation, that the joint venture incurred a loss, and that as members of the joint venture, they were entitled to deduct such loss. In the alternative, they argue that the funds were supplied the corporation as additional rent for the space occupied by them and that they are entitled to deduct such amounts as rental payments. We must decide whether, for purposes of the Federal income tax, there was a joint venture which incurred losses deductible by its members or whether the petitioners have established that they are entitled to deduct the payments as rental expenses.

We have considered the arguments of both parties and the relevant evidence in the record, and on the basis of such consideration, we hold that the so-called joint venture was created for no business purpose and carried on no business activity. It was merely a device to shift a deduction from a corporation to its shareholders. Accordingly, it must be disregarded for purposes of the Federal income tax.

There is no doubt that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits. Gregory v. Helvering, 293 U.S. 465 (1935); ...