Jacqueline, Inc. v. C.I.R., 092777 FEDTAX, 2982-65

Docket Nº:2982-65, 4708-65, 5701-65, 1560-66, 3731-66, 4596-66, 512-67, 2201-70, 2304-70, 2305-70, 2306-70, 5231-70.
Opinion Judge:DAWSON, Judge:
Party Name:JACQUELINE, INC., ET AL.,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Louis D. Curet, for the petitioners. Bruce A. McArdle and E. M. Quijano, for the respondent.
Case Date:September 27, 1977
Court:United States Tax Court

36 T.C.M. (CCH) 1363

JACQUELINE, INC., ET AL.,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 2982-65, 4708-65, 5701-65, 1560-66, 3731-66, 4596-66, 512-67, 2201-70, 2304-70, 2305-70, 2306-70, 5231-70.

United States Tax Court

September 27, 1977

Louis D. Curet, for the petitioners.

Bruce A. McArdle and E. M. Quijano, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

These consolidated cases were assigned to and heard by former Special Trial Judge Joseph N. Ingolia pursuant to Rules 180 through 182, Tax Court Rules of Practice and Procedure. His report was filed on April 14, 1977, and subsequently the parties filed certain exceptions to it. The exceptions have been considered and, for the most part, are rejected. Some modifications have been made in the report of the former Special Trial Judge. In almost every material respect his findings of fact are adopted. The Court also agrees with and adopts his views and conclusions on the legal issues except for the depreciation deduction claimed by Southland which is discussed in the Opinion as Issue 3-Constructive Ownership.

Respondent determined deficiencies in the Federal income taxes and additions to tax with respect to the petitioners, as follows:

JACQUELINE, INC.
Additions to the Tax
Int. Rev. Code of 19542
Docket Taxable Year
Number Ended Deficiency Sec. 6651(a) Sec. 6653(a)
2982-65 10-31-59 $12,985.36 $ 715.27 $715.27
10-31-60 10,218.70 567.55 567.55
10-31-61 8,573.82 ...... 428.69
1560-66 10-31-62 8,577.73 ...... 428.89
512-67 10-31-63 6,226.59 311.33 400.65
2306-70 4-30-64 9,643.68 2,410.92 482.18
THE LeBARON CORPORATION
Additions to the Tax
Int. Rev. Code of 1954
Docket Taxable Year
Number Ended Deficiency Sec. 6651(a) Sec. 6653(a)
4708-65 10-31-60 $37,253.06 $9,313.26 ......
4596-66 10-31-61 17,526.78 4,381.70 $ 876.34
10-31-62 37,994.98 9,498.75 1,899.75
2305-70 10-31-63 27,075.80 6,768.95 1,353.79
4-30-64 15,084.14 3,771.04 754.21
MOTOR HOTELS OF LOUISIANA, INC.
Additions to the Tax
Int. Rev. Code of 1954
Docket Taxable Year
Number Ended Deficiency Sec. 6651(a) Sec. 6653(a)
5701-65 4-30-59 $ 8,530.52 ...... $ 426.53
4-30-60 22,619.28 ...... 1,130.96
4-30-61 6,406.65 ...... 320.33
4-30-62 3,234.57 $ 161.73 161.73
3731-66 4-30-63 21,397.91 ...... 1,069.90
2304-70 4-30-64 32,244.32 8,061.08 1,612.22
4-30-65 2,085.61 521.40 104.28
4-30-66 22,882.07 5,720.52 1,144.10
SOUTHLAND INNS, INC.
Additions to the Tax
Deficiency Int. Rev. Code 1954, Sec. 6651(a)
Docket Taxable Per Stat. Increased Per Stat. Increased
Number Yr. Ended Notice Deficiency Total Notice Deficiency Total
2201-70 4-30-65 $ 84,429.31 $49,918.49 $134,347.80 $21,107.33 $12,479.62 $33,586.95
4-30-66 45,074.60 43,487.72 88,562.32 11,268.65 10,871.93 22,140.58
5231-70 4-30-67 99,647.74 42,461.88 142,109.62 24,911.94 10,615.47 35,527.41
4-30-68 116,793.92 ...... 116,793.92 29,198.48 ...... 29,198.48
Various concessions have been made by the parties both before and after trial, and will be given effect in the Rule 155 computations. The issues remaining for decision are as follows: 1. Whether LeBaron Corporation is entitled to a net operating loss deduction for the taxable year ended October 31, 1960, following its Chapter X (Bankruptcy Act) reorganization when the losses were incurred prior to the reorganization; and, if so, the amount of the net operating loss. 2. The depreciable useful lives of two motels owned by Jacqueline, Inc. and LeBaron Corporation and the basis for depreciation of the LeBaron Corporation property. 3. Whether Southland Inns, Inc. is entitled to deductions for depreciation, taxes, and interest incurred on or with respect to certain real estate and improvements thereon, legal title to which was held by Jacqueline, Inc. and LeBaron Corporation; and, if so, whether it may use a stepped-up basis for depreciation purposes. 4. Whether Southland Inns, Inc. is entitled to file consolidated returns with Motor Hotels of Louisiana, Inc. and Motels, Inc. in the fiscal years ended April 30, 1967 and 1968, and is entitled to a full surtax exemption of $25,000. 5. Whether the failure of LeBaron Corporation, Jacqueline, Inc., and Motor Hotels of Louisiana, Inc. to file timely corporate income tax returns was due to willful neglect under section 6651(a). 6. Whether any part of the underpayment of tax of LeBaron Corporation, Jacqueline, Inc., and Motor Hotels of Louisiana, Inc. was due to negligence or intentional disregard for rules and regulations under section 6653(a). FINDINGS OF FACT The stipulated facts are so found and, together with the exhibits attached thereto, are incorporated herein by this reference. Net Operating Loss Deduction Petitioner LeBaron Corporation (hereinafter called LeBaron) is a corporation organized under the laws of Louisiana since November 27, 1957. LeBaron's principal offices were located in New Orleans, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, LeBaron filed its U.S. Corporation Income Tax Return (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana. During the periods here involved, LeBaron operated on a fiscal year basis ending October 31st of each year, except for the fiscal year ended April 30, 1964. The capitalization of LeBaron from November 27, 1957, until confirmation of a plan of reorganization under Chapter X of the Bankruptcy Act, consisted of 100 shares of capital stock of a value of $100 per share, or a total of $10,000. The stock ownership of LeBaron from November 27, 1957, until confirmation of a plan of reorganization under Chapter X was as follows: Lionel S. Boulmay, Jr., president and organizer of the corporation-98 shares; Elva P. Boulmay, wife of Lionel-1 share; and Segrid L. Boulmay-1 share. LeBaron constructed the LeBaron Motel located in New Orleans, Louisiana. The motel began operation under the management of Lionel S. Boulmay, Jr., on May 17, 1958. On October 10, 1958, LeBaron filed a petition with the United States District Court for the Eastern District of Louisiana, for corporate reorganization under Chapter X of the Bankruptcy Act. On July 31, 1959, Roy Occhipinti and Frank Occhipinti (hereinafter referred to as the ‘ Occhipinti group’ ) submitted a plan of reorganization to the Bankruptcy Court for approval. An amendment to the plan was filed by the Occhipinti group on August 31, 1959. The plan, as amended, was approved on September 4, 1959, and confirmed on October 7, 1959. From October 10, 1958 until October 7, 1959, the LeBaron Motel was operated by the trustee in bankruptcy. According to the plan of reorganization, the Occhipinti group received all the stock and assets of LeBaron in exchange for $690,000 in cash. The book value of the assets as of October 31, 1959, was $796,965.05. All levies, mortgages, and other encumbrances on the real and movable property of LeBaron were canceled. The issued and outstanding stock certificates of LeBaron were declared canceled and void as of the date of transfer to the Occhipinti group. New certificates were ordered for the authorized and outstanding shares in the manner directed by the Occhipinti group. However, LeBaron was not liquidated after the reorganization. The Occhipinti group continued the operations of LeBaron while seeking a Holiday Inn franchise. On November 12, 1959, the Occhipinti group entered into a licensing agreement with Holiday Inns of America, Inc. The agreement provided that the existing LeBaron Motel was to be converted into a Holiday Inn. A completion date of April 15, 1960, was contemplated with operation under the Holiday Inn system to begin on that date. In order to comply with the conversion specifications, the swimming pool, kitchen, lounge, and restaurant of the old LeBaron Motel were demolished sometime during the 1960 fiscal year. While in reorganization, LeBaron reported net operating loss deductions of $80,896.01 and $23,853.50 for the fiscal years 1958 and 1959, respectively. For the fiscal year 1960, LeBaron claimed a net operating loss deduction of $104,749.51. Respondent disallowed the claimed deduction and determined that $60,660 of the net operating loss deduction for fiscal years 1958 and 1959 was for capital expenditures. These disallowed expenditures were for:
Salary $32,500
Financial Services 23,500
Appraisals 1,000
Finders' Fee 2,640
Inspection Fee 1,320
Useful Lives of Motels Petitioner Jacqueline, Inc. (hereinafter called Jacqueline) is a corporation organized under the laws of Louisiana since October 28, 1958. Jacqueline's principal offices were located in Metairie, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, Jacqueline filed its U.S. Corporation Income Tax Return (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana. Petitioner Southland Inns, Inc. (hereinafter called Southland) is a corporation organized under the laws of Louisiana since May 14, 1964. Southland's principal offices were located in Orleans Parish, Louisiana, when the petitions were filed herein. For each of the taxable years in issue, Southland filed its U.S. Corporation Income Tax Return (Form 1120) with the District Director of Internal Revenue, New Orleans, Louisiana. A corporation known as Carbone-West No. 1 Hotel Builders, Inc. (hereinafter referred to as Carbone-West) obtained a franchise from Holiday Inns of America, Inc., pursuant to which it built a motel at 5733 Airline Highway, Jefferson Parish, Louisiana (U.S. Highway 61). This motel, known as Holiday Inn West, was constructed in accordance with the specifications and requirements of the Holiday Inn...

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