Jerry Lipps, Inc. v. Commissioner

• Decision Date: 12 June 1990
• Docket Number: 7990-79,14021-79,14020-79,Docket No. 11452-78,1368-80.,11453-78
• Citation: 59 TCM (CCH) 849,1990 TC Memo 293
• Parties: Jerry Lipps, Inc., et al. v. Commissioner.
• Court: U.S. Tax Court

59 TCM (CCH) 849

1990 TC Memo 293

T.C. Memo. 1990-293.

Jerry Lipps, Inc., et al.¹ v. Commissioner.

Docket Nos. 11452-78, 11453-78, 7990-79, 14020-79, 14021-79, 1368-80.

United States Tax Court.

Filed June 12, 1990.

Richard J. Sheehan, 7733 Forsyth Blvd., St. Louis, Mo., Ronald U. Lurie, 8182 Maryland Ave., St. Louis, Mo., and Peter L. Clark, One Metropolitan Square, St. Louis, Mo., for the petitioners. David T. Karzon, Jr., and Reid M. Huey, for the respondent.

Memorandum Findings of Fact and Opinion

CHABOT, Judge:

Respondent determined deficiencies in Federal corporate income tax and deficiencies in Federal individual income tax against the respective petitioners for the years and in the amounts as follows:

                Taxable Year
                Petitioner Docket No. Ended Deficiency
                  Jerry Lipps, Inc................. 11452-78     8/31/75      $133,278.58
                                                     1368-80     8/31/76       117,266.292
                  Astro Rentals, Inc............... 11453-78     4/30/75       114,692.89
                                                    14021-79     4/30/76       122,156.423
                  Jerry Lipps and
                     Ruth Lipps                      7990-79    12/31/75       275,543.00
                  Astro Mfg. Co.................... 14020-79     5/31/76         1,082.10
                

These cases have been consolidated for trial, briefs, and opinion.

After concessions by all parties (see n. 6, infra), and deemed concessions by petitioners,⁴ the issues for decision are as follows:

(1) Whether this Court has jurisdiction to consider increased deficiencies claimed by respondent in amendments to answers.

(2) As to (i) amounts paid in 1975 and 1976 by Jerry Lipps, Inc. (hereinafter sometimes referred to as "JLI") to Astro Rentals, Inc. (hereinafter sometimes referred to as "ARI") as "management fees", (ii) amounts paid in 1975 and 1976 by ARI to petitioner Jerry Lipps (hereinafter sometimes referred to as "Lipps") as "management fees", and (iii) amounts paid in 1975 and 1976 by JLI to Lipps as "terminal agent's fees"—

(a) whether the payors' deductions are not allowable because amounts exceed reasonable compensation (sec. 162(a)(1)⁵) or because income and expenses are properly reallocable under section 482;

(b) whether the payments by JLI to ARI give rise to constructive dividends to Lipps; and

(c) whether those 1975 payments that are includable in Lipps' income are earned income to him for "maxitax" purposes (sec. 1348).

(3) Whether, under section 482, respondent properly reallocated to JLI $6,500 per year of overhead charges billed by ARI to JLI for 1975 and 1976.

(4) Whether $5,200 per year of overhead charges paid by ARI to Lipps in 1975 and 1976 are ordinary and necessary business expenses deductible by ARI under section 162.

(5) Whether Lipps received constructive dividends in 1975 on account of (i) the $6,500 billed to JLI by ARI, (ii) the $5,200 paid by ARI to Lipps, or (iii) both.

(6) Whether ARI must accrue into income for its taxable year ended April 30, 1975, amounts of airplane and building rent attributable to periods ending April 30, 1975, but not billed to JLI until August 31, 1975.

(7) Whether ARI must accrue into income for its taxable year ended April 30, 1976, amounts of trailer demurrage attributable to periods ending April 30, 1976, but not billed to JLI until August 31, 1976.

(8) Whether ARI must accrue into income for its taxable year ended April 30, 1976, amounts of weekly trailer rent it received from JLI on Monday, May 3, 1976.

(9) Whether ARI must accrue into income for its taxable year ended April 30, 1976, six other miscellaneous items.

(10) Whether certain shipments were received by consignees on or before August 31, 1976, so that the income from these shipments must be accrued by JLI for its taxable year ended August 31, 1976.

Findings of Fact

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petitions were filed in the instant cases, petitioners JLI, ARI, and Astro Manufacturing Company⁶ (hereinafter sometimes referred to as "AMC") had their principal places of business and principal offices in Cape Girardeau, Missouri, and petitioners Lipps and Ruth Lipps husband and wife, resided in Cape Girardeau.

General; Reasonable Compensation

In 1975, Lipps was 46 years old and had been in the trucking business for about 29 years.

Lipps formed JLI, a Florida corporation, in 1959. During all relevant times, JLI was a common and contract motor carrier on irregular routes, primarily hauling building materials, paper and paper products, and some iron and steel articles. Lipps formed ARI, a Missouri corporation, about 1969.

JLI used the accrual method of accounting and used a taxable year ending on August 31. At all relevant times, ARI and AMC used the accrual method of accounting, ARI used a taxable year ending on April 30, and AMC used a taxable year ending on May 31. Lipps and Ruth Lipps used the calendar taxable year.

Neither JLI, ARI, nor AMC has ever paid any dividends to its shareholders.

At all relevant times, Lipps owned 88.9 percent of JLI's stock; the remaining 11.1 percent was owned by William Morrow, a JLI employee. At all relevant times, Lipps owned 90 percent of the stock of ARI and AMC.⁷ At all relevant times, Lipps was president of JLI, ARI, and AMC. At some point, petitioner Ruth Lipps was secretary-treasurer of JLI, but she did not perform the duties of that office and was not paid for holding that office. At all relevant times, the only other officer or employee of ARI was Hazel Seabaugh (hereinafter sometimes referred to as "Seabaugh"), who was secretary-treasurer and did general office work and bookkeeping. During 1975 and 1976 the directors of JLI were Lipps, petitioner Ruth Lipps, and William Morrow.

JLI does not employ drivers, nor does it own tractors or trailers. Rather, it contracts with owner-operators of tractors, many of whom also own and provide trailers. The standard arrangement is for JLI to hire an owner-operator (hereinafter sometimes referred to as a "lessor-driver"), who is paid a portion of the gross revenues from each of the shipments carried by that owner-operator. An owner-operator who does not furnish a trailer is paid 65 percent of the gross revenue; one who does furnish a trailer is paid 75 percent.

When JLI has to furnish a trailer, it rents the trailer from ARI for 10 percent of the gross revenues from the shipment. This 10-percent rent charge is standard in the industry. Before Lipps formed ARI, Lipps leased trailers to JLI at the standard 10-percent rent. After Lipps formed ARI, he leased trailers to ARI. Also, ARI bought some trailers.

During ARI's taxable year ended April 30, 1976, Lipps leased 27 trailers to ARI for periods ranging from 19 days to the entire year. ARI in turn leased these trailers, and also 47 trailers that ARI owned, to JLI.

AMC had its subsidiary, Cape Trailer Sales, Inc., perform maintenance services for the trailers.

JLI entered into two types of trailer leases, permanent leases and trip leases. The trip lease is a lease entered into for the purpose of making one shipment using that particular lessor. Entering into a trip lease involves a safety inspection and the completion of certain paperwork for each trip, much of which is not necessary for a permanent lease.

JLI operated about 15 trucking terminals during 1975. Except for the terminals in Pensacola (Fla.), St. Louis (Mo.), Cape Girardeau (Mo.), Wickliffe (Ky.), and Taylorville, (Ill.), all JLI terminals were operated by terminal agents during 1975 and 1976. JLI terminal agents performed the following functions:

(a) kept office hours to meet the shippers' requirements;

(b) issued JLI checks to lessor-drivers as advances on loads;

(c) reported any service failures or complaints to JLI's main office;

(d) covered all shippers' loads at all times (i.e., matched lessor-drivers and trailers with shippers' needs);

(e) inspected trucks to ensure compliance with all State and Department of Transportation regulations;

(f) paid with their own funds terminal expenses such as telephone, utilities, and rent;

(g) hired and paid with their own funds whatever terminal personnel they desired;

(h) filled out the paperwork required under the trip lease system; and

(i) solicited new business and checked on existing customers to ensure they were receiving good service.

JLI's terminal agents were forbidden to own any trailers; they customarily did not hire any people to assist them but personally performed all of their duties as terminal agents. In 1975 and 1976, with regard to the Cape Girardeau terminal, three dispatchers maintained office hours to meet shippers' requirements, covered all shippers' loads, made advances to lessor-drivers, serviced failures and complaints, and filled out the necessary paper work. At the Cape Girardeau terminal, safety inspections were performed by the dispatchers, by Jack Gleason (hereinafter sometimes referred to as "Gleason"), by personnel employed by AMC's subsidiary, or by Lipps. In 1975 and 1976, JLI paid two employees to perform the terminal agent duties at the Pensacola terminal. The Pensacola terminal was owned by ARI; JLI paid that terminal's telephone and utility costs for 1975 and 1976.

JLI paid to its terminal agents 6 percent of the gross receipts from freight that was derived from their respective areas. This was a standard rate for the industry.

The revenue attributable to certain terminals for each of the periods indicated is as shown on table 1.

Table 1Sep. 1, 1974-Sep. 1, 1975-TerminalAug. 31, 1975Aug. 31, 1976
                  Cape Girardeau, Mo............................... $  867,672.108          $1,074,078.26
                  ("Nielly's Landing")
                  Wickliffe, Ky....................................      NA8                   116,821.59
                  Taylorville, Ill.................................    347,927.54                  437,388.50
                  Burlington, Iowa, and Reading, Va. ..............     NA9                     85,369.97

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