French v. Commissioner, Docket No. 15509-88.
| Decision Date | 25 June 1990 |
| Docket Number | Docket No. 15509-88. |
| Citation | 59 TCM (CCH) 966,1990 TC Memo 314 |
| Parties | John M. French and Joana E. French v. Commissioner. |
| Court | U.S. Tax Court |
Ernest C. Pinza, 890 Washington St., Santa Clara, Calif., for the petitioners. Robert J. Misey, Jr., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1984 in the amount of $19,360.30 and additions to tax for that year under section 6653(a)(1) and section 6661 in the respective amounts of $884.76 and $3,523.25.1 Respondent also determined that petitioners were liable for an addition to tax under section 6653(a)(2) in an amount to be determined.
Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision: 1) whether petitioners may deduct, as ordinary and necessary employee business expenses under section 162, a portion of the costs (including depreciation) of operating an airplane owned by petitioner, John M. French, which he used during the course of his employment with Valley Data Sciences, Inc.; 2) whether the costs of general maintenance of the airplane and training flights are ordinary and necessary expenses which may be deducted under section 162 as employee business expenses; 3) whether petitioners may deduct, as ordinary and necessary expenses incurred in the production of income under section 212, the operating costs (including depreciation) of flying the airplane to petitioners rental property; 4) whether petitioners are liable for additions to tax under section 6653(a)(1) and section 6653(a)(2); 5) whether petitioners are liable for an addition to tax under section 6661.
Some of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife, were residents of San Jose, California at the time of the filing of the petition herein. Petitioners filed a joint Federal income tax return for the calendar year 1984 on February 25, 1985. They filed an amended return for the calendar year 1984 on April 13, 1985.
Petitioner John M. French (Mr. French or petitioner), is a licensed airplane pilot. Petitioner has been licensed to fly personally owned airplanes since 1965. Petitioner owned a single-engine airplane prior to 1983, but after several in-flight problems, became concerned for his and his family's safety in that airplane and therefore, in 1983, purchased a twin-engine Beechcraft Baron 58 (the Beechcraft or the airplane). In order to qualify to fly this type of airplane, petitioner was required to take additional in-flight training during 1984 in the areas of instrument landings and navigation techniques. During 1984, petitioner encountered numerous mechanical difficulties with his airplane and made several trips to Beechcraft West Hayward and L.A.C. Avionics for repairs. If any repairs were performed, petitioner would always test-fly his airplane to ensure that the repairs had been performed properly. Petitioner kept a chronological flight log in which he listed the date, destination, flight time, and purported purpose of each flight taken during 1984. According to petitioner's log he flew a total of 90.7 hours in 1984.
Petitioner is an electronics engineer. In 1982, he helped form a corporation named Valley Data Sciences, Inc. (VDS). In 1984, petitioner was employed by VDS as vice president of engineering and was a salaried officer in charge of production. His salary was approximately $85,000 per annum. He was also entitled to receive bonuses if VDS became profitable; however, during 1984, VDS was still struggling and bonuses were not appropriate. During 1984, petitioner owned approximately 15 percent of the stock of VDS.
VDS manufactured computer hardware and software. Among the items of hardware manufactured and sold by VDS was a 40-pound "box" which had been designed by Mr. French. The box contained several "PC cards," a power source, and a small computer so that it could interface with personal computers. Semiconductor manufacturers were interested in the box because it could be used to program and test the semiconductor silicon chips which instruct a personal computer how to perform certain initialization and start-up tasks.
VDS had both internal sales officers and external sales organizations which represented it throughout the United States. In its sales advertising, VDS claimed that the box could be quickly adapted to the unique requirements of a particular computer manufacturer's semiconductors. On several occasions during 1984, petitioner was contacted by VDS sales representatives and was requested to accompany them on "short-fuse" sales calls in the Bay Area and around the United States so that he could quickly adapt and demonstrate the box to potential customers the following day.
Although commercial flights to customers' locations were generally available, petitioner did not investigate the possibility of flying commercially. Petitioner generally flew his personally owned airplane on sales-related trips. Petitioner considered the "box" to be too big to carry on board a commercial airplane and too fragile to check as baggage. According to petitioner's flight log, on March 18, 1984, he adapted the box and flew it from San Jose to Van Nuys, California, so that he could accompany two representatives from ELCOR Electronic Sales (ELGOR) on several sales calls. On his way to Van Nuys, petitioner flew his mother-in-law to Long Beach and this added 20 to 25 minutes to the duration of the flight which totaled 4.4 hours. Petitioner returned to San Jose several days later but left the "box" in Van Nuys.
On April 11, 1984, petitioner flew his airplane to Van Nuys to pick up the "box" and transport it to a VDS regional sales office located in Santa Ana where he accompanied the regional sales director on two sales calls. On the following day, he flew the regional sales manager to Palomar Airport where they made a third sales presentation. After the presentation, he flew the regional sales manager back to Santa Ana and the box back to Van Nuys. He then returned to San Jose.
Petitioner's flight log indicates that he made several more trips in connection with business of VDS in 1984. On April 25, 1984, he flew to Columbia, a small town in the Sierras, to pick up a shipment of transformers from a supplier. On June 7, 1984, he flew several sales representatives to Harris Ranch to attend a luncheon. According to petitioner's flight log, he made another 4-hour flight in connection with VDS sales on June 17, 1984. On October 30, 1984, petitioner flew himself, his equipment, the VDS director of software, and two engineers to an electronics trade show and convention where VDS had rented a booth. He returned to San Jose the same day.
In early July 1984, petitioner flew his family to Sun Valley for a one-week summer vacation. During the course of his vacation, Mr. Bob Soto, the new president of VDS, requested that petitioner return to San Jose for a 2-1/2-hour meeting. Petitioner flew back to San Jose on July 3, 1984, attended the meeting, and then returned again to Sun Valley on July 4, 1984. Total round-trip flying time from Sun Valley to San Jose and back again was 6.3 hours. Petitioner requested and received reimbursement for the cost of fuel expended during the 6.3-hour trip.
Other than in this instance, petitioner never requested that VDS reimburse him for the fuel and operational expenses of flying his airplane on behalf of VDS in 1984. Petitioner was reimbursed by VDS for other travel expenses and was reimbursed for the costs of leasing a vehicle which he used in connection with his VDS employment. If petitioner had requested that VDS reimburse him for the costs of flying his plane on behalf of VDS, he would probably have received such reimbursement. In addition, VDS would probably have reimbursed petitioner for the costs of chartering a plane at an hourly rate had petitioner chosen to do so. However, petitioner had an informal understanding with the president of VDS that he would not request reimbursement for the costs of operating his airplane on behalf of VDS until the company became profitable. Therefore, petitioner did not request reimbursement at, for example, an hourly rate for the use of his airplane.
Mr. French also flew his airplane to Mammoth Lakes Resort (Mammoth Lakes) nine times during 1984. Petitioners owned a condominium (the condo) at Mammoth Lakes which they leased on a long-term basis during the winter months and rented on a short-term basis during the summer months. Mammoth Lakes is both a winter skiing resort and a summer resort with swimming and hiking available. When petitioners purchased their condo in 1974 for $30,000, they employed a manager to lease and maintain the condo. Petitioners became displeased with the quality of the maintenance performed by the manager. Thereafter, petitioners did not have an employed manager to maintain the condo, but were friendly with the manager of the condo who would on occasion render some assistance to them. Management companies were available at Mammoth Lakes to render services for a percentage of rental income. Petitioners advertised the rental of the condo in the Los Angeles Times. From November 1983 through May 1984, they leased the condo at a rate of $750 a month. During the summer months of 1984, petitioners rented the condo for approximately $250 to $300 per week. In addition to rental income, petitioners hoped that they could eventually sell the condo at a profit and, in 1986, they did sell it for $80,000.
On the morning of January 2, 1984, petitioner flew his airplane to Mammoth Lakes to take the son of a neighbor to drive a car petitioners left there back to San Jose. While he was there, petitioner installed screens around pipes which ran up from the ground so that animals could not crawl up into the walls of the condo. The tenant...
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