Finney v. Commissioner
| Decision Date | 28 January 1980 |
| Docket Number | Docket No. 1002-76,1003-76. |
| Citation | 39 TCM (CCH) 938,1980 TC Memo 23 |
| Parties | Frederick W. Finney, Mary E. Finney v. Commissioner. F.W. Finney Construction Corporation v. Commissioner. |
| Court | U.S. Tax Court |
John G. Rocovich, Jr. and Cordell M. Parvin, 416 S. Jefferson St., Roanoke, Va., for the petitioners. Michael R. Moore and John C. McDougal, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent has determined the following deficiencies in petitioners' Federal income tax:
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Additions to
Taxable tax under
Dkt. No. Petitioner Year Deficiency sec. 6653(a)1
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1002-76 Frederick W. Finney, 1972 $22,794.00
Mary E. Finney 1973 14,715.00
1003-76 F. W. Finney Construction 1972 16,161.26 $808.06
Corporation 1973 2,366.03 118.30
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Concessions having been made, the issues presented for our decision are as follows:
(1) Whether expenses and depreciation claimed in connection with certain activities conducted on a houseboat owned by F.W. Finney Construction Corporation are deductible as ordinary and necessary business expenses and depreciation expense, under the respective provisions of sections 162 and 167, or, in the alternative, whether such expenses and depreciation are deductible as entertainment expenses and depreciation expense after the application of section 274;
(2) Whether expenses incurred for travel and entertainment at various locations, as well as certain miscellaneous expenses and depreciation claimed by F.W. Finney Construction Corporation, are deductible pursuant to sections 162 and 167, and after the application of section 274;
(3) Whether the total expenses and depreciation claimed with respect to automobiles furnished by F.W. Finney Construction Corporation to its president and sole shareholder, Frederick W. Finney, are deductible under the respective provisions of sections 162 and 167;
(4) Whether any portion of the expenses incurred or depreciation claimed by F.W. Finney Construction Corporation, and disallowed by respondent, constitutes a constructive dividend to Frederick W. Finney; and
(5) Whether F.W. Finney Construction Corporation is subject to the negligence penalty provided under section 6653(a).
Some of the facts have been stipulated and are so found.
The principal office of F.W. Finney Construction Corporation (petitioner in docket No. 1003-76) was at Vinton, Virginia, at the time its petition herein was filed. Petitioner filed its Federal income tax returns for the calendar years in issue with the Internal Revenue Service Center, Memphis, Tennessee.
Frederick W. Finney and Mary E. Finney (petitioners in docket No. 1002-76) are husband and wife and resided in Vinton, Virginia, at the time their petition was filed herein. Petitioners filed their joint Federal income tax returns for the years in issue with the Internal Revenue Service Center, Memphis, Tennessee. Mary E. Finney is a party herein only because of the joint returns and, consequently, Frederick W. Finney will hereinafter be referred to as petitioner.
Petitioner has been actively involved in real estate development since 1961. He formed several partnerships with larger developers and eventually organized F.W. Finney Construction Corporation (Finney Construction or Company, where the identity is clear) in 1970. During the taxable years at issue, petitioner was the president and sole stockholder of Finney Construction. The secretary-treasurer and vice president of Finney Construction were, at all times relevant to this case, petitioner's spouse and brother-in-law, respectively.
In addition to an office in petitioner's personal residence during the years in issue, Finney Construction had an office located in Vinton, Virginia. On June 23, 1972, a building permit was issued to Finney Construction for an addition to its office space, said addition being completed sometime prior to June 30, 1973.
During this period of renovation, the office furniture and equipment, company files, and telephone service, were all continuously maintained at Vinton. The corporate payroll still issued from the Vinton office and the sole secretarial employee continued to serve at that office. While the Vinton office was under partial construction because of the office addition, numerous business associates met petitioner at that office to discuss business notwithstanding the condition of the premises.
Throughout 1972 and 1973, Finney Construction also owned a trailer which was 20-feet long and 9-feet wide. This trailer was located in the Montgomery Village real estate development and was occasionally moved to different sections within that development. It contained, inter alia, a telephone, drafting tables, desk, file cabinets, and maps of the subdivision. The trailer was used as a field office for the benefit of petitioner and his subcontractors.
Throughout the taxable years at issue, Finney Construction was primarily engaged in the business of residential real estate development. It developed two subdivisions known as Frederick Acres and Montgomery Village. One of the most desirable features of these two subdivisions was their location.
Frederick Acres is located approximately 11 miles from Roanoke, Virginia, and 7 miles from Smith Mountain Lake (one of the largest lakes within 300 miles of Roanoke). Montgomery Village is situated approximately 6 miles from Roanoke, Virginia, and 5½ miles from Smith Mountain Lake. In addition to these real estate developments, Finney Construction also built the Aqua Net Swimming and Racket Club in Montgomery Village.2 It also constructed the Bay Roc Dry Storage at the Bay Roc Marina near Smith Mountain Lake, which was completed in December 1973.
Docked at the Bay Roc Marina on Smith Mountain Lake was the Company's 55-foot Kingscraft Houseboat which it had purchased on October 17, 1973, at a cost of $54,619. During 1973 and shortly before the purchase of the Kingscraft Houseboat, Finney Construction sold its Stardust Cruiser Houseboat which the company had acquired on June 28, 1971, at a cost of $27,840.12.
The latter boat, which the company owned for taxable year 1972 and most of taxable year 1973, was also docked at Bay Roc Marina. It was 50-feet long and 12-feet wide with a solid steel hull. Near its bow was a covered patio area. The interior of the boat housed the helm. Situated across from the helm was a sofa, chair, and storage area. Behind the helm was the boat's galley which contained a sink, gas range, and full-size refrigerator. On the starboard side of the galley was a breakfast nook with a table and beyond that were two bunk beds and a lavatory. The boat's stateroom was located near the stern and had an exit door to the outside deck.
The corporate houseboat was kept well stocked with both alcoholic and nonalcoholic beverages and a variety of foodstuffs. It also had a music system which required the use of audio tape recordings.
Petitioner, as the Company's sole stockholder and chief executive officer, sometimes used the corporate houseboat as a promotional tool to help persuade prospective buyers of homes in Frederick Acres and Montgomery Village to close the sale.
His practice was to travel through the subdivisions to meet realtors and potential buyers then, after explaining the construction and value of the given property, petitioner would sometimes escort the interested parties to the Company's houseboat where a variety of refreshments would be served with an eye toward closing the sale. During 1972 and 1973 Finney Construction sold approximately 100 homes.
In addition, petitioner would conduct sales meetings with numerous realtors in the area and conclude such meetings on the corporate houseboat. While on the boat, petitioner served refreshments to the realtors. Finney Construction maintained no record of the number of meetings or the expenses incurred therewith.
During 1973, Finney Construction used the houseboat to promote its subsidiary corporation, the Aqua Net Swimming and Racket Club. The parents and children of the club's swim team were invited on the corporate houseboat in order to promote the club and sell more homes in Montgomery Village by gaining the goodwill of that community. As with the realtors and prospective home buyers, no record was kept of the swim club's meetings or social gatherings on the boat.
In addition to those described above, petitioner also met with attorneys, bankers, subcontractors, suppliers, and other business associates on the corporate houseboat primarily to promote the sale of homes by Finney Construction. These meetings occurred near the helm or in the galley, since the boat was without a study and had no office furnishings. Petitioner's spouse, a corporate officer of Finney Construction, would frequent the houseboat for the primary purpose of operating the nearby corporate swim club. Moreover, petitioner's two children would visit the houseboat an weekends.
In 1972 and 1973, petitioner, his family, and his brother-in-law's family, would use the corporate houseboat approximately six times during the summer, on weekends. Once or twice each summer the two families would remain on the houseboat overnight. Petitioner also had a few parties on the corporate houseboat but no record was kept by Finney Construction as to who actually attended these functions At least two families, who were homeowners in the real estate ...
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