Kurzet v. Comm'r Internal Revenue, 97-9028

• Decision Date: 16 August 2000
• Docket Number: No. 97-9028,97-9028
• Citation: 222 F.3d 830
• Parties: (10th Cir. 2000) STANLEY M. KURZET and ANNE L. KURZET, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
• Court: U.S. Court of Appeals — Tenth Circuit

Page 830

222 F.3d 830 (10th Cir. 2000)

STANLEY M. KURZET and ANNE L. KURZET, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 97-9028

UNITED STATES COURT OF APPEALS TENTH CIRCUIT

August 16, 2000

Appeal from the United States Tax Court. Tax Court No. 27982-91

[Copyrighted Material Omitted] J. Gordon Hansen of Parsons Behle & Latimer, Salt Lake City, Utah, for Petitioners-Appellants.

Alice L. Ronk (Kenneth L. Greene with her on the brief), Tax Department, Department of Justice, Washington, D.C., for Respondent-Appellee.

Before SEYMOUR,Chief Judge, BRORBY and EBEL, Circuit Judges.

EBEL, Circuit Judge.

Appellants Stanley and Anne Kurzet (the "Kurzets," with Stanley referred to individually as "Kurzet") appeal the decision of the tax court, finding deficiencies in the personal income tax paid by the Kurzets for the years 1987, 1988, and 1989. We exercise jurisdiction pursuant to I.R.C. § 7482¹ and REVERSE in part and AFFIRM in part.

BACKGROUND

In 1958, Kurzet formed ALS Corp., a company involved in the design and manufacture of sophisticated electronic and engineering equipment for the United States' military. In 1984, Kurzet sold his interest in ALS to a third party for $20 million in cash. In connection with the sale, Kurzet signed a noncompete agreement and also agreed to serve in a consulting capacity to ALS for the next seven years at a salary of $10,000 per month. Kurzet made various purchases with the proceeds from the sale of ALS. As relevant here, these included: (1) a timber farm in Oregon; (2) real property in Tahiti; and (3) a Lear jet. Other assets owned by the Kurzets also play a role in the issues presented on appeal. These are: (4) the Kurzet's 24-room mansion in Orange, California; (5) a warehouse in California; and (6) rental condominiums in Park City, Utah.

The Commissioner of Internal Revenue (the "Commissioner") brought an action against the Kurzets, alleging that they were deficient in their tax payments for the years 1987, 1988, and 1989 and also sought accuracy-related penalties. In an order dated January 29, 1997, the tax court found that the Kurzets were deficient in their tax payments because they claimed impermissible tax deductions in connection with the Tahiti property, the Lear jet, and their California home, but did not require the Kurzets to pay any accuracy-related penalties. The tax court felt that penalties were not appropriate in light of the fact that the "errors on the tax returns were attributable to the amateurish books and records that the petitioners unfortunately established to keep track of their business, investment, and personal activities" and the fact that the Kurzets had hired professional tax preparers who failed to explain the accounting problems to the couple.

The tax court made additional findings in an opinion issued from the bench on February 24, 1997, resolving a number of issues that had been omitted from the written order of January 29. As relevant here, in the bench opinion, the tax court refused to allow the Kurzets to change the manner in which they calculated depreciation for the reservoir they had constructed on their timber farm.

On appeal, the Kurzets assert four claims of error. First, the Kurzets urge that the tax court erred in determining that the expenses attributable to the use of the Kurzets' Lear jet were not deductible pursuant to I.R.C. § 162. Second, the Kurzets argue that the tax court erred in concluding that none of the expenses attributable to the Kurzets' California residence were deductible pursuant to I.R.C. § 280A(c)(1). Third, the Kurzets argue that the tax court erred in determining that the Kurzet's Tahiti property was a recreational or personal use property rather than an investment under I.R.C. § 212. Finally, the Kurzets complain that they were not entitled to change the cost recovery period on the reservoir constructed on the Kurzets' timber farm from 31.5 years to 15 years. We reverse as to the Kurzets' first claim of error but affirm as to the three remaining issues.

DISCUSSION

We review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." I.R.C. § 7482(a)(1).

We review the Tax Court's factual findings under the clearly erroneous standard and review its legal conclusions de novo. We review mixed questions of law and fact either under the clearly erroneous standard or de novo, depending on whether the mixed question is primarily factual or legal.

Anderson v. Commissioner, 62 F.3d 1266, 1270 (10th Cir. 1995) (internal citations omitted). "The Supreme Court has defined mixed questions as those in which the historical facts are admitted or established, the rule of law is undisputed, and the issue is whether the facts satisfy the statutory standard, or to put it another way, whether the rule of law as applied to the established facts is or is not violated." Love Box Co. v. Commissioner, 842 F.2d 1213, 1215 n.2 (10th Cir. 1988) (internal quotations and citation omitted).

1.Deduction of Lear Jet Expenses

Section 162 of the Internal Revenue Code allows a taxpayer to "deduct[] all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The Kurzets claimed deductions on their tax returns for the years 1987, 1988, and 1989 pursuant to § 162 for expenses related to the operation of their Lear jet. The Kurzets used their jet to travel to their properties in Oregon, Utah, and Tahiti from their home in California and to transport equipment.

The tax court denied all of the deductions sought by the Kurzets in connection with the operation of their Lear jet. In its written opinion, the tax court initially noted that the Kurzets were not entitled to deduct travel expenses for their trips to Tahiti in light of its conclusion that the Tahiti property was not held as investment property. The tax court then went on to explain that the "large transportation expenses (including significant noncash expenses such as depreciation) associated with the Lear jet appear to be out of the ordinary and unnecessary in light of the fact that petitioner's timber farm was not producing any current income (due to petitioner's decision to defer cutting any of the timber)." The tax court also regarded the "inconvenience that petitioners would have experienced a few times a year in flying to the Oregon timber farm via commercial air carrier" as minimal, ordinary, and common for individuals as well as businessmen. The tax court found that the Kurzets did not establish that they had incurred the "extravagant costs of purchasing and maintaining a Lear jet to avoid such infrequent and slight inconvenience." The tax court did not preclude the Kurzets from deducting any costs associated with their travel to Oregon from their home in California, however. Rather, relying on its earlier determination that the Kurzets held and managed the timber farm as a "for-profit business activity," the tax court allowed the Kurzets to deduct the cost of first-class travel on a commercial carrier for each of the trips. Finally, the tax court found that, although the Kurzets used the jet to transport equipment and machinery to Oregon, they had not provided a basis upon which the court could estimate what those transportation expenses would have been, and therefore denied any deduction for this use.

The taxpayer bears the burden of proving his or her expenditures are "ordinary and reasonable" under § 162. See Love Box Co., 842 F.2d at 1216. The Supreme Court has indicated that an ordinary expense is one that is "normal, usual, or customary." Deputy v. Du Pont, 308 U.S. 488, 495, 60 S. Ct. 363, 84 L. Ed. 416 (1940). Similarly, the Supreme Court has explained that an expense is ordinary if it is a "common and accepted" expense for the taxpayer, comparing the taxpayer to "the group, the community, of which he is a part." Welch v. Helvering, 290 U.S. 111, 114, 54 S. Ct. 8, 78 L. Ed. 212 (1933). Expenses are necessary if they are "appropriate and helpful." Id. at 113. For an expense to be considered ordinary and necessary, it must also be reasonable in amount. See Harmon City, Inc. v. United States, 733 F.2d 1381, 1383 (10th Cir. 1984) ("Although [§ 162] does not limit deductions . . . to a 'reasonable' amount, the reasonableness of such payments must be explored to determine whether they are 'ordinary and necessary' . . . ."); Commissioner v. Lincoln Electric Co., 176 F.2d 815, 817 (6th Cir. 1949) ("[T]he element of reasonableness is inherent in the phrase 'ordinary and necessary.'"); United States v. Haskell Eng'g. & Supply Co., 380 F.2d 786, 789 (9th Cir. 1967) (same (citing Lincoln)); see also Treas. Reg. § 1.162-2(a) ("Only such traveling expenses as are reasonable and necessary in the conduct of the taxpayer's business and directly attributable to it may be deducted.").

Both parties construe the tax court's decision in denying the deductability of Lear jet expenses in flying to and from the Kurzets' timber farm in Oregon as a finding that such expenses were not ordinary and necessary because they were "unreasonable," and we agree with this interpretation of the opinion. Thus, in this appeal, we are primarily concerned with the question of whether the actual costs of operating the Lear jet were reasonable and could therefore be considered "ordinary and necessary" business expenses in connection with travel related to the Oregon timber farm. This circuit considers the question of whether expenses are reasonable, and are therefore ordinary and necessary under § 162, to be a factual question, and we therefore review for clear error. See Harmon City, 733 F.2d at 1385; Cooke v. Commissioner, 203 F.2d 258, 262 (10th Cir. 1953); Rota-Cone Oil Field Operating Co. v. Commissioner, 171 F.2d 219, 222 (10th Cir. 1948).

The Kurzets urge that the tax court made a number of mistakes in connection...