Lutz v. Comm'r of Internal Revenue
| Decision Date | 31 March 1966 |
| Docket Number | Docket Nos. 2718-64— 2720-64. |
| Citation | 45 T.C. 615 |
| Parties | ELEANOR M. LUTZ, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Donald C. Dahlgren and W. Paul Uhlmann, for the petitioners.
Norman H. McNeil, for the respondent.
1. Partnership contracted to build military housing for the Government in the State of Washington under the Capehart Act. It reported its income under these contracts on an accrual and completed-contract basis of accounting. A question arose whether the Washington retail sales tax applied to the income under Capehart contracts. Arrangements were made with State tax commissioner whereby partnership reported its receipts under these contracts on its State excise tax returns and claimed deductions of same amounts; commissioner assessed the retail sales tax due on these receipts but agreed not to collect the tax pending the outcome of litigation instituted by other Capehart contractors contesting the applicability of the tax to income received under Capehart contracts. Partnership did not join in the litigation, accrued the amount of the tax on its books, and deducted it on its Federal tax returns for the years 1960 and 1962 when due, but did not pay the tax to the State of Washington or concede that it was due until termination of the litigation. Held, the Washington retail sales tax was not properly accruable in the years 1960 and 1962 and could not be deducted in computing the taxable income of the partnership and the partners for those years.
2. Held, subchapter S corporation is entitled to amortize and deduct amounts specifically allocated to covenants not to compete in contracts whereby the corporation bought certain insurance agency businesses.
Respondent determined deficiencies in income tax for the taxable years in question as follows:
+---------------------------------------------------------------+
¦Docket No.¦Petitioner ¦Year ¦Deficiency¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1960¦$29,320.01¦
+----------+----------------------------------+------+----------¦
¦2718—64 ¦Eleanor M. Lutz ¦( 1961¦512.50 ¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1962¦33,106.07 ¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1960¦26,687.74 ¦
+----------+----------------------------------+------+----------¦
¦2719—64 ¦E. W. Lutz and Helene B. Lutz ¦( 1961¦628.16 ¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1962¦43,563.20 ¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1960¦25,202.97 ¦
+----------+----------------------------------+------+----------¦
¦2720—64 ¦Philip B. Lutz and Shirley H. Lutz¦( 1961¦478.32 ¦
+----------+----------------------------------+------+----------¦
¦ ¦ ¦( 1962¦30,942.31 ¦
+---------------------------------------------------------------+
Certain issues raised in the pleadings have been abandoned or settled by agreement between the parties. The two issues remaining for decision are:
(1) Whether certain liabilities for State of Washington retail sales tax were contingent, and therefore not properly accruable by the partnership, General Investment Co., during the taxable years in question.
(2) Whether petitioners, shareholders in the General Mortgage Agency, Inc., which elected to be taxed under subchapter S, are entitled to amortize the cost of covenants not to compete acquired by the corporation in connection with the purchase of four insurance agencies.
The stipulated facts are found as stipulated.
Petitioner Eleanor M. Lutz resides in La Jolla, Calif., and filed her individual Federal income tax returns on a calendar year basis for the taxable years in question with the district director of internal revenue Los Angeles, Calif.
Petitioners E. W. Lutz and Helene B. Lutz are husband and wife, as are petitioners Philip B. Lutz and Shirley H. Lutz, all residing in Longview, Wash. They filed joint Federal income tax returns on a calendar year basis for the taxable years in question with the district director of internal revenue, Tacoma, Wash.
Issue 1. Deductibility of Washington Retail Sales Tax
Petitioners are members of a family partnership known as the General Investment Co. of Longview, Wash. (hereinafter referred to as the partnership), the principal business activity of which was the construction of military and residential housing during the taxable years in question.
The partnership kept its books on the accrual basis of accounting and filed its Federal partnership returns (Form 1065) on a fiscal year basis for the fiscal years ended January 31, 1960, 1961, and 1962, with the district director of internal revenue, Tacoma, Wash.
On August 21, 1958, the partnership was awarded the first of two contracts for construction of military housing units at Larson Air Force Base, Moses Lake, Wash. These contracts were awarded pursuant to the provisions of the Capehart Act of 1955 (Housing Amendments of 1955, tit. IV, sec. 403, 69 Stat. 635, 651, 42 U.S.C. sec. 1594) and are sometimes referred to herein as the Capehart contracts. The first contract provided for construction of 200 housing units and was completed by the partnership in its fiscal year ended January 31, 1960. The second contract was awarded May 10, 1960, and provided for construction of an additional 330 units. This second contract was completed during the partnership's taxable year ended January 31, 1962. For Federal income tax purposes the partnership reported its profit or loss from the construction contracts under the Capehart Act on the completed contract basis. Proceeds received under the first contract were reported as gross income or sales for the partnership's fiscal year ended January 31, 1960, and proceeds received under the second contract were reported as gross income or sales for the partnership's fiscal year ended January 31, 1962. The partnership also reported costs incurred in the completion of these construction contracts in the years in which gross income was reported, and included as expenses were deductions for State of Washington retail sales tax on the first contract in the amount of $113,943.46, for the fiscal year ended January 31, 1960, and in the amount of $215,465.96 on the second contract for the fiscal year ended January 31, 1962. Their proportionate share of the net profit or loss of the partnership on these contracts was reported on the income tax returns of petitioners for the calendar years ended December 31, 1960 and 1962.
Pursuant to the Capehart Act, the Secretary of Defense is authorized to contract with a builder to construct a military housing project on land leased from the Federal Government. The builder organizes a corporation to carry out the project and the corporation is granted a lease to the land by the Government. The corporation may obtain funds with which to finance construction by mortgaging its leasehold interest, and the mortgage is eligible for FHA insurance. When construction is completed, responsibility for operation and maintenance of the housing project is transferred to the Secretary of Defense and all the stock of the corporation is also transferred to the Secretary of Defense, although the corporation remains in existence and continues to be the mortgagor.
Although the construction contract is let to a corporation formed by the contractor, because of the close participation of the U.S. Government, a question arose as to the applicability of the Washington State retail sales tax to proceeds received under Capehart Act contracts.
There were several contractors other than the partnership which were engaged in Capehart Act projects in the State of Washington prior to and at the time the partnership was awarded its first Capehart contract in August 1958. Certain of these contractors took the position that proceeds received under these contracts were not subject to the Washington State retail sales tax because the sale was made to the United States, and therefore the proceeds were exempt from the tax. In the fall of 1957 one of the contractors involved submitted the question of applicability of the sales tax to Capehart contracts to the Tax Commission of the State of Washington for determination.
The office of the attorney general for the State of Washington in an unpublished memorandum dated December 24, 1957, advised the State Tax Commission that in its opinion the State retail sales tax applied to the Capehart contracts. The attorney general concluded that the transaction involved was one between a private builder and a private corporation, that the financing corporation was a ‘consumer’ under State law, and that the State retail sales tax attaches to a charge for construction performed for a consumer.
Based on this opinion of the State attorney general and a subsequent opinion received from the State attorney general in April 1959, the State Tax Commission determined that the retail sales tax applied to Capehart contracts. Due to an expected court contest challenging the applicability of the retail sales tax to these contracts, the State Tax Commission decided to hold collection of the tax in abeyance pending final determination of the question. Subsequently in the spring of 1960 four of the Capehart contractors filed suits in the Superior Court of the State of Washington for Thurston County, contesting the applicability of the State retail sales tax on constitutional grounds, and asking that the State Tax Commission be permanently enjoined from collecting the retail sales tax...
To continue reading
Request your trial
-
O'Dell & Co. v. Comm'r of Internal Revenue
...of this Court; Ullman v. Commissioner, 264 F.2d 305, 307-308 (C.A. 2), affirming 29 T.C. 129; Henry P. Wager, 52 T.C. 416, 419; Eleanor M. Lutz, 45 T.C. 615, 634, reversed on other grounds 396 F.2d 412 (C.A. 9); Benjamin Levinson, 45 T.C. 380, 389; sec. 1.167(a)-3, Income Tax Regs. Petition......
-
Boecking v. Commissioner, Docket No. 5897-90.
...Edison Co. [61-1 USTC ¶ 9462], 366 U.S. 380 (1961); Lutz v. Commissioner [68-1 USTC ¶ 9423], 396 F.2d 412 (9th Cir. 1968) revg. [Dec. 27,896] 45 T.C. 615 (1966); Hollingsworth v. United States [78-1 USTC ¶ 9125], 215 Ct. Cl. 328, 568 F.2d 192 (1977); Dravo Corp. v. United States [65-2 USTC ......
-
Mariani Frozen Foods, Inc. v. Comm'r of Internal Revenue
...those deficiency notices. To support their position, petitioners rely on Lutz v. Commissioner, 396 F.2d 412 (9th Cir. 1968), revg. 45 T.C. 615 (1966), in which the Ninth Circuit, the circuit to which this case is appealable, held that “a ‘contest’ requires a formal, direct challenge to the ......
-
Lutz v. CIR
...and that therefore no deduction for federal income tax purposes could be taken in those years for the liabilities in question. Eleanor M. Lutz, 45 T.C. 615 (1966). The United States Supreme Court has explained the all events test as "It has long been held that, in order truly to reflect the......