Grynberg v. Comm'r of Internal Revenue
| Decision Date | 27 August 1984 |
| Docket Number | 24307–82.,25073–81,Docket Nos. 3688–80 |
| Citation | 83 T.C. No. 17,83 T.C. 255 |
| Parties | JACK J. GRYNBERG and CELESTE GRYNBERG, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
On their joint Federal income tax returns for 1974 and 1975, the taxpayers made elections under section 170(b)(1)(D)(iii) for purposes of determining their charitable contribution deductions. After adjustments were made by the Commissioner concerning unrelated items for those years, the taxpayers attempted to revoke their elections. Held, the doctrine of election precludes the taxpayers from revoking the elections made on their returns as filed.
During the years 1974 through 1979, cash basis taxpayers made prepayments, in each December, of delay rental on oil and gas leases due in February and March of the following year. Held, the prepayments were not ordinary and necessary expenses of the years in which they were made. Williamson v. Commissioner, 37 T.C. 941 (1962), followed. Carl A. Polsky, Daniel E. Farmer and Jonathan D. Sokoloff, for the petitioners.
William F. Garrow, for the respondent.
In these consolidated cases respondent determined deficiencies in petitioners' Federal income taxes as follows:
+---------------------------------------+
¦Year ¦Deficiency ¦Year ¦Deficiency ¦
+------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------+------------+------+------------¦
¦1974 ¦$82,814 ¦1977 ¦$214,745 ¦
+------+------------+------+------------¦
¦1975 ¦139,461 ¦1978 ¦92,550 ¦
+------+------------+------+------------¦
¦1976 ¦262,981 ¦1979 ¦8,215 ¦
+---------------------------------------+
The parties have reached a partial settlement, and the only issues for decision are (1) whether petitioners can revoke their elections under section 170(b)(1)(D)(iii)1 for 1974 and 1975 with respect to their charitable contributions of capital gain property, and (2) whether deductions claimed by petitioners for advance payments of delay rental on oil and gas leases were proper.2 These issues were submitted fully stipulated. The stipulation of facts and exhibits are incorporated herein by reference.
Petitioners are husband and wife who resided at Englewood, Colorado, at the time the petitions were filed. Petitioners timely filed their joint Federal income tax returns for 1974 through 1979. For convenience, we will set forth the facts relating to each issue separately.
In 1974, petitioners donated 20,000 shares of common stock of Oceanic Exploration Company, Inc. to the Allied Jewish Federation of Denver, a charitable organization qualified under section 170(b)(1)(A)(vi). The undisputed value of the stock was $667,500. In 1975, petitioners donated an additional 35,000 shares of common stock of the same company to the same charity. The undisputed value of those shares was $332,500. Since the donations consisted of capital gain property, petitioners had to determine which of two permissible methods under section 170 they would use in calculating, for Federal income tax purposes, the charitable contribution deductions with respect to those donations.
Under section 170 a taxpayer has two methods of calculating the amount of a charitable contribution deduction with respect to donations of capital gain property. The charitable contribution deduction can be calculated on the basis of the fair market value of the capital gain property which was donated, subject to a limit of 30 percent of the taxpayer's adjusted gross income with any remainder carried over to subsequent years. See section 170(b)(1)(D)(i), 170(b)(1)(F) and 170(d)(1). Alternatively, the charitable contribution deduction can be calculated on the basis of the fair market value of the capital gain property which was donated, reduced by 50 percent of the amount which would have been long-term capital gain if the property had been sold at its fair market value, subject to a limit of 50 percent of the taxpayer's adjusted gross income with any remainder carried over to subsequent years. See section 170(b)(1)(D)(iii) and 170(e)(1)(B).
In computing the amount of the charitable contribution deductions claimed on their 1974 and 1975 Federal income tax returns, petitioners used the second method (i.e., the fair market value of the Oceanic Exploration Company stock donated to the charity each year by petitioners was reduced by 50 percent of the excess of the fair market value of that stock over petitioners' basis in the stock). Those amounts were claimed as charitable contribution deductions on petitioners' tax returns, subject to the limit of 50 percent of their adjusted gross income in each year.
In a notice of deficiency dated December 17, 1979, respondent made adjustments to petitioners' returns for 1974 and 1975, as follows:
+---------------------------------------------------------+
¦ ¦ ¦1974 ¦1975 ¦
+---+----------------------------------+---------+--------¦
¦ ¦ ¦ ¦ ¦
+---+----------------------------------+---------+--------¦
¦(a)¦Partnership income ¦$94,152 ¦0 ¦
+---+----------------------------------+---------+--------¦
¦(b)¦Legal and professional fees ¦2,474 ¦$1,520 ¦
+---+----------------------------------+---------+--------¦
¦(c)¦Travel and entertainment expense ¦8,517 ¦1,456 ¦
+---+----------------------------------+---------+--------¦
¦(d)¦Lease rental ¦0 ¦22,426 ¦
+---+----------------------------------+---------+--------¦
¦(e)¦Delay rentals ¦194,694 ¦[66,192]¦
+---+----------------------------------+---------+--------¦
¦(f)¦Consulting fees ¦0 ¦2,617 ¦
+---+----------------------------------+---------+--------¦
¦(g)¦Depletion ¦0 ¦261,272 ¦
+---+----------------------------------+---------+--------¦
¦(h)¦Ordinary gain on sale of assets ¦ ¦[6,403] ¦
+---+----------------------------------+---------+--------¦
¦(i)¦Net gain on sale of capital assets¦0 ¦1,709 ¦
+---+----------------------------------+---------+--------¦
¦(j)¦Contributions ¦[149,918]¦14,952 ¦
+---------------------------------------------------------+
Item “j” above (viz, the adjustments to “contributions”) reflects mechanical adjustments which were caused by other unrelated adjustments which increased petitioners' adjusted gross income and therefore increased the charitable contribution deduction limits for each year. The amount allowable as a charitable contribution deduction for 1974 increased because petitioners' adjusted gross income for 1974 increased. The amount allowable as a charitable deduction for 1975 decreased due to the increased deduction allowed for 1974, resulting in a smaller charitable contribution deduction carryover to 1975. In making the recalculations of petitioners' charitable contribution deductions for 1974 and 1975, respondent utilized the same method of determining petitioners' charitable contribution deductions with respect to the contributions of the appreciated stock that petitioners utilized on their tax returns.
In 1981, petitioners requested that the elections they made on their 1974 and 1975 tax returns in calculating their charitable contribution deductions under section 170(b)(1)(D)(iii) be revoked and requested that the deductions be recalculated under section 170(b)(1)(D)(i).
During the years 1974 through 1979, petitioners owned several hundred oil and gas leases acquired from the United States government, from various state governments and from private lessors. The properties subject to the leases were located in several states, including Colorado, Michigan, New Mexico, Utah and Wyoming.
Under the lease provisions, petitioners were entitled to search for, extract and sell oil and gas from the properties. Petitioners, however, were also obligated to pay to the lessors a specified annual fee with respect to each lease unless certain conditions enumerated in the various leases were satisfied, such as the commencement of drilling operations or the discovery of specified quantities of oil or gas. This annual fee was referred to as “delay rental.” The purpose of delay rental was to compensate the lessor for the delay in the development of drilling or production operations on the properties subject to the leases. Payments of delay rental prevented termination of the leases where drilling or production operations had not commenced. Failure to pay delay rental due on a particular lease would result in automatic termination of the lease.
Depending on the provisions of each lease, delay rental payments were due on the first day of the anniversary month, on the second day of the anniversary month, or on some other day during the anniversary month. From 1971 to the present time, petitioners have paid delay rental due each year during the months of April through December on or about the first day of the month preceding the anniversary month. For example, if a delay rental payment were due sometime in the month of July, petitioners would make payment thereof on or about the first of June. However, from 1971 to the present time, in addition to the delay rental due in the following January, petitioners have prepaid in December of each year delay rental which did not become due until the following February and March.3
Petitioners were calendar year taxpayers and utilized the cash receipts and disbursements method of accounting (hereinafter referred to as the “cash method”) for Federal income tax purposes. They deducted the delay rental paid in December with respect to lease anniversary dates occurring in February and March of the following year.
During the years 1974 through 1979, petitioners made the following prepayments...
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