Kenner v. Commissioner
| Decision Date | 21 October 1974 |
| Docket Number | 2763-62.,2762-62,Docket No. 2761-62 |
| Citation | 33 TCM (CCH) 1239,1974 TC Memo 273 |
| Parties | William H. Kenner and Eleanor V. Kenner, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Charles A. Boyle and William M. Phelan, for the petitioners. Alan M. Jacobson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined income tax deficiencies and additions to tax in these consolidated cases as follows:
Docket No. 2761-62 Additions to Tax
I. R. C. 1954
Year Deficiency Sec. 6651(a) Sec. 6654
1955 ....... $ 59,786.06
1956 ....... 52,479.60 $ 22.55
1957 ....... 52,507.79
1958 ....... 57,507.62 $16,466.16 $178.24
Docket No. 2762-62
1955 ....... $ 42,434.27 $10,608.57
1956 ....... 19,027.86 4,756.97
1957 ....... 22,765.93 5,691.48
1958 ....... 25,006.51 6,251.63
1959 ....... 63,959.63 15,989.91
Docket No. 2763-62
1959 ....... $109,784.01 $144.59
On August 21, 1968, we filed our original opinion in these consolidated cases as T.C. Memo. 1968-185. Petitioners appealed from our decisions to the United States Court of Appeals for the Seventh Circuit. On June 17, 1971, the Court of Appeals reversed and remanded for a new trial. 445 F. 2d 19. Pursuant to the mandate of the appellate court, a new trial was held on January 17 through 19, 1973. Following the trial, the parties filed a new series of briefs and the Court heard their oral arguments.
The following issues have been presented for our decision:
(1) Whether or not any part of the net earnings of petitioner Kenner's Charitable Hospital, Inc., inured to the benefit of any private shareholder or individual during the years 1955 through 1959, thereby disqualifying it from exemption from taxation under section 501(c)(3);3
(2) If petitioner Kenner's Charitable Hospital, Inc., was not exempt from taxation during the years 1955 through 1959, what was the amount of its taxable income for those years;
(3) If petitioner Kenner's Charitable Hospital, Inc., was not exempt from taxation during the years 1955 through 1959, whether or not it is liable for additions to the tax for failure to file tax returns for such years pursuant to section 6651(a);
(4) Whether or not petitioner William H. Kenner realized taxable income from Kenner's Charitable Hospital, Inc., by reason of payments which it made to him or on his behalf during the years 1955 through 1959 (5) Whether or not petitioner William H. Kenner is entitled to various deductions for the years 1955 through 1959; and
(6) Whether or not petitioner William H. Kenner is liable for an addition to tax for the year 1958 pursuant to section 6651 (a) for failure to timely file a Federal income tax return for that year.4
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.5
Petitioner William H. Kenner (hereinafter referred to as Kenner) joined his wife Eleanor V. Kenner in filing Federal income tax returns for the years 1955 through 1958 and filed a separate income tax return for 1959 with the district director of internal revenue, Chicago, Illinois. The return for 1958 was not filed until October 27, 1959.
Petitioner Kenner's Charitable Hospital, Inc. (hereinafter referred to as the Hospital or the Hospital corporation) had its principal office in Chicago, Illinois during the years 1955 through 1959. It did not file any Federal income tax returns for those years.
Kenner is a physician who began the private practice of medicine at 716 Wellington Avenue in Chicago during 1930. In 1932 he purchased the premises located at that address.
In 1933 the Hospital was organized and incorporated under the laws of the State of Illinois. Its articles of incorporation generally provided that its purpose was to provide free, charitable hospital rooms and treatment and not to operate for pecuniary profit. The articles of incorporation were amended in 1949 to conform to the requirements of the Illinois General Not For Profit Corporation Act. During all the years of the Hospital's existence, Kenner was in complete control of its affairs and served in various capacities such as president, director, administrator, and house physician.
Kenner converted his Wellington Avenue property into a hospital and conveyed it to the Hospital corporation in 1936. In 1946 the Hospital sold the Wellington Avenue premises as a going concern for $60,000.
On October 1, 1946, Kenner purchased the premises at 3150 Lake Shore Drive in Chicago for $155,000. At that time the property was improved with a residence and a garage. Kenner immediately began to convert the former into a hospital and the latter into a nurses' home. He conveyed the property to the Hospital corporation on March 12, 1947, and the corporation thereafter operated a hospital at that location until some time in 1959.
On August 26, 1949, the Hospital filed an exemption affidavit, claiming exemption from Federal income tax under section 101(6) of the Internal Revenue Code of 1939. By letter dated October 10, 1949, the Bureau of Internal Revenue ruled that the Hospital was entitled to the exemption. By letter dated September 11, 1951, the exemption ruling was revoked.
On March 17, 1950, Kenner organized Altar Land and Cattle Company (hereinafter referred to as Altar) under the laws of Arizona with 886 shares of stock outstanding, of which Kenner owned 884 shares and two other individuals each held a single share as Kenner's nominees.
In 1950 Altar acquired the land, buildings, and personal property known as the Lazy-V Ranch and located some 25 miles from Tucson, Arizona. In 1953 Kenner purchased 10.8 acres of land which was known as the Hill House property and adjoined the southeast edge of the Lazy-V Ranch. The Hill House property was conveyed to the Hospital corporation in March 1957.
In the southeast corner of the Lazy-V Ranch, adjoining the Hill House property, were 10 acres known as the Rincon property. During the years 1950 through 1954, the Rincon property was improved by converting a garage into a coffee shop, adding several rooms to the servant's quarters, tearing down barns and outbuildings, and erecting a commissary.
Kenner and the Hospital previously petitioned this Court in the case of William H. Kenner Dec. 24,664(M), T.C. Memo. 1961-37, affd. 63-2 USTC ¶ 9519 318 F. 2d 632 (C.A. 7, 1963). That case involved the Federal income tax liability of Kenner and the Hospital for the years 1944 through 1954 and will sometimes be referred to herein as "the prior case." We held there that the Hospital did not qualify for tax exemption during the years 1944 through 1954 under sections 101(6) and 501(c)(3) of the Internal Revenue Codes of 1939 and 1954, respectively, because part of the Hospital's net earnings inured to the benefit of Kenner during each of those years by reason of the payments which the Hospital made to him or on his behalf. Among such payments were expenditures of the Hospital for improvements to the Rincon property during the years 1950 through 1954.
In the prior case, we further held that the taxable income of the Hospital for each of the years at issue therein was as follows:
1944 ................ $ 70,625.75
1945 ................ 70,625.75
1946 ................ 70,625.75
1947 ................ 70,625.76
1948 ................ 58,255.91
1949 ................ 58,442.53
1950 ................ 76,141.91
1951 ................ 96,687.47
1952 ................ 68,925.19
1953 ................ 136,120.50
1954 ................ 108,892.04
___________
Total ............. $885,968.56
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In the absence of adequate records of the Hospital, we approved respondent's computation of the Hospital's taxable income for the years 1944 through 1947 by use of a net worth method. As part of such computation, we approved respondent's determination that the Hospital's net worth as of January 1, 1944 was $60,000.
In decisions entered on January 15, 1962, we decided in the prior case that the following deficiencies and additions to tax were due from the Hospital:
INCOME TAX
Addition to Tax
Sec. 291 Sec. 6651(a)
Year Deficiency I. R. C. 1939 I. R. C. 1954
1945 .... $ 5,430.52 $ 1,357.63
1946 .... 26,837.79 6,709.45
1947 .... 26,837.79 6,709.45
1948 .... 22,125.85 5,531.46
1949 .... 14,984.60 3,746.00
1950 .... $30,197.60 $ 7,549.40
1951 .... 54,297.19 13,574.30
1952 .... 42,397.63 10,599.41
1953 .... 91,168.51 22,792.13
1954 .... 51,123.86 $12,780.97
DECLARED VALUE EXCESS
PROFITS TAX
1944 .... $ 9,322.60 $ 2,330.65
1945 .... 9,322.60 2,330.65
EXCESS PROFITS TAX
1944 .... $47,344.14 $11,836.04
1945 .... 42,900.22 10,725.06
We also decided that there was an overpayment of $33,021.51 in the Hospital's income tax for 1944 and an overpayment of $8,451.75 in the addition to such tax under section 291 of the Internal Revenue Code of 1939. The United States Court of Appeals for the Seventh Circuit affirmed our decisions in the prior case on June 4, 1963.
During the years 1955 through 1959, the Hospital continued to make expenditures for improvements to the Rincon property. As set forth more fully below, the Hospital recorded these expenditures on its books and records as appropriations for the so-called Rincon Sanitarium. No sanitarium or other activity of the Hospital was ever operated on the...
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