Johnson Inv. & Rental Co. v. Comm'r of Internal Revenue
| Decision Date | 11 September 1978 |
| Docket Number | Docket No. 834-76. |
| Citation | 70 T.C. 895 |
| Court | U.S. Tax Court |
| Parties | JOHNSON INVESTMENT & RENTAL COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
P “leased” certain property to X, which operated a quarry thereon and paid P 5 cents for each ton of rock sold by it from stone quarried on the premises. Held, the payments by X were mineral royalties within the meaning of sec. 543, I.R.C. 1954, and as a result, P was a personal holding company subject to tax under sec. 541, I.R.C. 1954. Held, further, the amount of P's deduction for qualified indebtedness determined. Terence C. Porter, for the petitioner.
James E. Cannon, for the respondent.
The Commissioner determined the following deficiencies in the petitioner's Federal corporate income taxes:
+---------------------------+
¦Year ending ¦ ¦
+--------------+------------¦
¦Jan. 31— ¦Deficiency ¦
+--------------+------------¦
¦ ¦ ¦
+--------------+------------¦
¦1966 ¦$14,927.21 ¦
+--------------+------------¦
¦1967 ¦10,394.73 ¦
+--------------+------------¦
¦1968 ¦8,394.88 ¦
+--------------+------------¦
¦1969 ¦13,228.97 ¦
+--------------+------------¦
¦1970 ¦12,036.84 ¦
+--------------+------------¦
¦1971 ¦3,198.80 ¦
+---------------------------+
Each party has conceded certain issues. The issues remaining for decision are: (1) Whether the petitioner received royalties within the meaning of section 543 of the Internal Revenue Code of 19541 as a result of a “lease” allowing the tenant to quarry minerals on the leased premises and requiring a payment of 5 cents for each ton of rock sold from the stone quarried thereon; and (2) if the petitioner is a personal holding company, whether it is entitled to a deduction for payment of qualified indebtedness in excess of the amount allowed by the Commissioner.
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Johnson Investment & Rental Co. (Johnson), is a Missouri corporation whose principal place of business was in Columbia, Mo., at the time it filed its petition in this case. It filed its Federal corporate income tax returns on the basis of a taxable year ending January 31, and we shall identify each taxable year by the calendar year in which it ended. For its taxable years 1966, 1967, 1968, and 1969, it filed its Federal corporate income tax returns with the District Director of Internal Revenue, St. Louis, Mo. For the taxable years 1970 and 1971, such returns were filed with the Internal Revenue Service Center, Kansas City, Mo.
During the years in issue, the petitioner held a number of investment properties. Harold E. Johnson, Sr.; his wife, Nancy; his children, Sally Johnson Grice and Harold E. Johnson, Jr.; and his grandchildren owned all but 1 share of the outstanding stock of the petitioner. Harold E. Johnson, Sr., also owned, directly or indirectly, 992;3 percent of the stock of Boone Quarries, Inc. (Boone).
On July 18, 1957, Boone purchased an unimproved tract of land, known as Semon farm, for the purpose of operating a quarry thereon. Boone spent approximately $8,000 removing overburden and otherwise preparing Semon farm, before actually commencing its quarrying operation in 1959. Since then, Boone has successfully operated a quarry on Semon farm.
Such business involves locating the rocks, removing the overburden, hauling the rocks to the mill where they are crushed and screened into various gradations of size and hardness, and stockpiling the crushed rock on the premises for sale. In 1959, 25 to 30 percent of Semon farm was used in some aspect of Boone's quarrying operation. Over the ensuing years, Boone gradually expanded its quarrying operation to include 60 to 75 percent of Semon farm. By 1977, Boone had on the Semon farm, in addition to the quarry, two mills, three shops, a State highway inspector's office, two scales, numerous items of equipment, a scrap area for used equipment, and an inventory of crushed rock, which generally fluctuated between 60,000 and 110,000 tons. During the entire period that Boone conducted its quarrying business on Semon farm, no one else used, or was authorized to use, Semon farm for any purpose. Furthermore, because of the quarrying operation, no part of Semon farm was suitable for most other contemporaneous uses.
In 1961, Boone decided to expand its quarrying operation. To obtain the necessary financing, Boone sold Semon farm to Johnson on July 12, 1961, for $36,000. On August 15, 1961, Johnson and Boone entered into the following agreement:
1. * * * (Johnson) does hereby lease unto * * * (Boone) and * * * (Boone) does hereby lease from * * * (Johnson) for the purpose of operating a stone quarry thereon the following described tract of land known as the Semon farm: * * *
2. The term of this lease shall be for a period of two (2) years commencing August 15, 1961 and ending August 14, 1963.
3. The consideration for this lease shall be an annual rental equal to Five Cents (.05) for each ton of rock sold by * * * (Boone) from the stone quarried on the above described real estate.
4. At the termination of this lease * * * (Boone) shall have the right to remove from the premises and retain as its own all equipment, fixtures, machinery and inventory owned by it.
At the expiration of the lease on August 15, 1963, Boone and Johnson continued such arrangements on a monthly basis until March 31, 1964, when they agreed to extend the term of the lease to August 15, 1965. Later, Johnson and Boone agreed to a 1-year lease, effective as of August 15, 1965, which otherwise was the same as the prior leases except that it would be renewed automatically for additional 1-year terms, unless one of the parties gave notice of its intention to terminate the lease at least 60 days before the expiration date. Such agreement was in effect during each of the years in issue.
For its taxable years 1963 through 1971,2 Boone made the following payments to Johnson, and each year such payments were denominated “Royalties Paid” and were included in its cost of goods sold:
+-----------------+
¦Year ¦Amount ¦
+------+----------¦
¦ ¦ ¦
+------+----------¦
¦1963 ¦$7,675.02 ¦
+------+----------¦
¦1964 ¦12,443.31 ¦
+------+----------¦
¦1965 ¦12,797.27 ¦
+------+----------¦
¦1966 ¦17,643.80 ¦
+------+----------¦
¦1967 ¦15,905.93 ¦
+------+----------¦
¦1968 ¦13,431.49 ¦
+------+----------¦
¦1969 ¦15,670.89 ¦
+------+----------¦
¦1970 ¦23,955.62 ¦
+------+----------¦
¦1971 ¦18,366.85 ¦
+-----------------+
Johnson reported such amounts in its gross income as “royalties” for its taxable years 1963 through 1971. In addition, both Johnson and Boone referred to such payments as royalties in protests which were filed on their behalf with the Internal Revenue Service for their 1963, 1964, and 1965 taxable years.
Johnson incurred indebtedness of $28,000 in 1958 and $132,000 in 1961. For its taxable years 1965 through 1971, the petitioner made principal payments with respect to such indebtedness, was allowed deductions for depreciation, and had net long-term capital gains and taxes imposed attributable to such gains as follows:
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¦ ¦Repayment of ¦ ¦ ¦Taxes ¦
+------+--------------+--------------+---------------+--------------¦
¦ ¦qualified ¦Depreciation ¦Net long-term ¦attributable ¦
+------+--------------+--------------+---------------+--------------¦
¦Year ¦indebtedness ¦deduction ¦capital gain ¦to gain ¦
+------+--------------+--------------+---------------+--------------¦
¦ ¦ ¦ ¦ ¦ ¦
+------+--------------+--------------+---------------+--------------¦
¦1965 ¦$14,705.71 ¦$6,915.99 ¦5,067.00 ¦$1,418.77 ¦
+------+--------------+--------------+---------------+--------------¦
¦1966 ¦15,588.23 ¦9,382.56 ¦--- ¦--- ¦
+------+--------------+--------------+---------------+--------------¦
¦1967 ¦16,524.12 ¦18,085.66 ¦--- ¦--- ¦
+------+--------------+--------------+---------------+--------------¦
¦1968 ¦16,718.68 ¦21,006.77 ¦76,773.25 ¦19,356.32 ¦
+------+--------------+--------------+---------------+--------------¦
¦1969 ¦14,881.15 ¦20,278.25 ¦47,905.17 ¦13,173.92 ¦
+------+--------------+--------------+---------------+--------------¦
¦1970 ¦15,808.37 ¦16,929.70 ¦4,004.76 ¦1,198.25 ¦
+------+--------------+--------------+---------------+--------------¦
¦1971 ¦16,793.55 ¦16,128.44 ¦--- ¦--- ¦
+-------------------------------------------------------------------+
The petitioner had no net short-term capital losses during the years in issue.
The parties agreed that for its taxable years 1963 and 1964, Johnson was not a personal holding company under the law then in effect, but that it would have been such a company if the personal holding company provisions as amended by the Revenue Act of 1964, Pub. L. 88-272, 78 Stat. 79, had been in effect for such years.
The petitioner did not file personal holding company returns for any of the years in issue; nor did it, in its Federal corporate income tax return for each of the years in issue, indicate that it was a personal holding company. In his notice of deficiency, the Commissioner determined that the petitioner was a personal holding company with the following amounts of undistributed personal holding company income subject to tax under section 541:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦ ¦ ¦
+------+-----------¦
¦1966 ¦$22,015.12 ¦
+------+-----------¦
¦1967 ¦15,175.61 ¦
+------+-----------¦
¦1968 ¦12,161.06 ¦
+------+-----------¦
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