King v. Commissioner
| Decision Date | 31 May 2006 |
| Docket Number | Dkt. No. 10334-03. |
| Citation | 91 T.C.M. 1206 |
| Parties | Hugh G. and Norma J. King v. Commissioner. |
| Court | U.S. Tax Court |
Joe Alfred Izen, Jr., for petitioners;
Anne W. Durning, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies and penalties with respect to petitioners' Federal income tax as follows:
Year Deficiency Sec. 6662 Penalty
1995 $119,377 $23,875
1996 68,663 13,733
1997 4,849 970
1998 14,382 12,876
1 Respondent concedes that petitioners are not liable for
the accuracy-related penalty for 1998
After concessions, we must decide:
1. Whether the notice of deficiency was sent timely. We hold that it was.
2. Whether petitioners had income in the amounts that respondent determined for 1995-97. We hold that they did.
3. Whether petitioners had larger costs of goods sold than respondent determined. We hold that they did not.
4. Whether petitioners may deduct larger amounts for depreciation and other expenses than respondent determined. We hold that they may to the extent provided herein.
5. Whether petitioners may deduct soil or water conservation expenses under section 175.1 We hold that they may not.
6. Whether petitioners are liable for the accuracy-related penalty under section 6662 for 1995-97. We hold that they are.
Some of the facts have been stipulated and are so found.
Hugh G. King (Mr. King) and his wife, Norma J. King (Mrs. King), resided in Dothan, Alabama, when the petition was filed.
Petitioners grew up on farms and are high school graduates. Mr. King managed his family's farm from 1939 to 1942 and served in the Air Force from 1942 to 1946.
Mr. King entered the construction and sand and gravel businesses around 1965. Petitioners bought an appliance store around 1966, discussed below in paragraph C. In 1978, Mr. King inherited a 250-acre farm, 47 acres of which were cultivated. The rest was forested. A sharecropper farmed the cultivated land.
Mr. King bought more land after 1978. Petitioners owned 537 acres of land in 1995, including 230 acres of cropland. Petitioners owned 682 acres of land in 1996-98, of which 342 acres was cropland. They sold sand mined from their land and grew timber during the years in issue.
During 1995-98, Mr. King received a peanut quota from the U.S. Department of Agriculture based on production in past years from his farm. The peanut quota allowed him to sell a specified amount of peanuts (quota peanuts) for about $600 per ton during the years in issue. During those years, peanut farmers sold peanuts produced in excess of the peanut quota (nonquota peanuts) for about $300 a ton.
Petitioners rented the cropland to Shane Roselius in 1995, to George Roselius in 1996 and 1997, and to Brian Watkins in 1998. Petitioners leased the land to Shane and George Roselius (the Roseliuses) for $40 per acre and 14 cents per pound for the peanut quota.2 Under the lease, the Roseliuses could keep the proceeds from the sale of peanuts they produced in excess of the peanut quota. Petitioners received lease income of about $30,000 in 1995.
Under the lease, the Roseliuses were required to: (1) Pay rent each year in advance by January 15; (2) plant a cover crop within 20 days after the peanuts were harvested; (3) maintain all ditches and terraces; and (4) fertilize the land.
A storm in 1994 destroyed the roof of petitioners' house, left a foot of water in it, and flooded parts of the farm. The Federal Government declared the area in which the farm was located to be a disaster area. Petitioners received assistance to repair the land.
Mr. King spent an amount of time not specified in the record working on the farm during the years in issue. He plowed terraces, planted cover crops, and cleared ditches to maintain the land.
Petitioners bought an appliance store in Jacksonville, Florida, around 1966, which they named King's Appliances. King's Appliances sold appliances and furniture. Petitioners moved King's Appliances to Dothan, Alabama, around 1977.
Mrs. King has managed King's Appliances since 1966. She makes decisions regarding inventory, record keeping, and filing tax returns. Mrs. King paid each of the store's monthly expenses by check and recorded those expenses in spiral notebooks. She kept canceled checks and most of the invoices. Mrs. King used spiral notebooks to keep those records from 1967 to 1998. She recorded payments for layaway sales on cards which she discarded when a customer fully paid for an item. For tax purposes, Mrs. King treated layaway sales as occurring in the year the customer fully paid for the item.
Petitioners maintained separate bank accounts for King's Appliances and the farm and a personal savings account during the years in issue. Mr. King worked part-time as a salesperson at King's Appliances during the years in issue.
King's Appliances was a sole proprietorship in 1995. Petitioners transferred their assets to King's Appliances, Inc., around January 1, 1996. On November 16, 1998, King's Appliances, Inc., elected to be an S corporation effective January 1, 1996. The stock of King's Appliances, Inc., was held as follows: Mr. King, 51 percent; Mrs. King, 30 percent; and petitioners' son, Howard G. King, 19 percent.
In 1977, petitioners bought a building on South Oates Street (the South Oates building) in Dothan, Alabama, for $75,000. Mr. King served as the general contractor when they added a second floor to the building in 1978. Petitioners paid a subcontractor $67,000 to build the shell of the addition and paid additional amounts to finish the interior of the addition. King's Appliances occupied the South Oates building until 1990. Petitioners used it for storage from 1990 to 1996. Petitioners sold the South Oates building in 1996 for $100,000.
Petitioners bought land in Dothan, Alabama, and built the Ross Clark building in 1988. Petitioners hired a contractor to build the shell of the building for which they paid about $500,000. After a windstorm destroyed part of the building shell, petitioners repaired it and spent about $300,000 more to finish the building. King's Appliances was located there from 1990 until the time of trial.
From 1977 to 1997, Mrs. King submitted records of sales, purchases, and expenses for King's Appliances to H&R Block. Glenda Williams (Ms. Williams) of H&R Block prepared: (1) Forms 1040, U.S. Individual Income Tax Returns, for petitioners for 1995, 1996, and 1997; and (2) Forms 1120S, U.S. Income Tax Returns for an S Corporation, for King's Appliances, Inc., for 1996 and 1997.
Ms. Williams referred petitioners to Harold C. Ingram (Mr. Ingram), a certified public accountant (C.P.A.), to prepare: (1) Form 1040X, Amended U.S. Individual Income Tax Return, for petitioners for 1997; (2) Form 1040 for petitioners for 1998; and (3) Form 1120S for King's Appliances, Inc., for 1998. Petitioners gave a power of attorney to Mr. Ingram on a date not specified in the record. Petitioners filed their Forms 1040 (1) for 1995, on October 15, 1996; (2) for 1996, on October 20, 1997; (3) for 1997, on October 19, 1998; and (4) for 1998, on October 18, 1999.
In 1998, Revenue Agent Angela Davis (Agent Davis) audited petitioners' tax years 1995 and 1996. Agent Davis asked petitioners to provide their books and records pertaining to King's Appliances. Mrs. King provided her spiral notebooks, canceled checks, and most of the invoices.
Agent Davis asked petitioners to provide records showing the cost of improvements at the South Oates building. Petitioners did not provide any records.
Respondent determined that petitioners' adjusted basis in the South Oates property was $86,487; i.e., $75,000 for the purchase of the building and $67,000 for improvements, minus $55,513 for depreciation. Respondent determined that petitioners had a $13,513 gain on the sale of the building in 1996 ($100,000 sale price less $86,487 adjusted basis).
Another revenue agent audited petitioners' tax years 1997 and 1998. Respondent determined that petitioners' adjusted basis was $760,000 for the Ross Clark building and $40,000 for the parking lot. Respondent determined that petitioners were entitled to deduct depreciation in the amount of $26,492 for 1996-98.
From 1999 to 2002, respondent asked petitioners to execute eight Forms 872, Consent to Extend the Time to Assess Tax, for the years in issue and asked King's Appliances, Inc., to execute five Forms 872 for 1996-98.
In response to respondent's request on March 5, 1999, petitioners signed and dated a Form 872 extending the time to assess tax for 1995 to April 15, 2000. In response to respondent's request on December 6, 1999, petitioners signed and dated a Form 872 extending the time to assess tax for 1995 to December 31, 2000. In response to respondent's request on December 1, 2000, petitioners signed and dated a Form 872 extending the time to assess tax for 1995 to December 31, 2001.
On April 26, 2000, Appeals Officer Sandra Norman (Appeals Officer Norman) asked Mr. Ingram to ask petitioners to agree to extend the time to assess tax for 1996. Petitioners signed and dated a Form 872 extending the time to assess tax for 1996 to December 31, 2000.
In response to respondent's request on November 20, 2000, petitioners signed a Form 872 extending the time to assess tax for 1996 and 1997 to December...
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