Mackinac Island Carriage Tours, Inc. v. CIR, 71-1452.

• Decision Date: 09 February 1972
• Docket Number: No. 71-1452.,71-1452.
• Citation: 455 F.2d 98
• Parties: MACKINAC ISLAND CARRIAGE TOURS, INC., a Michigan corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

455 F.2d 98 (1972)

MACKINAC ISLAND CARRIAGE TOURS, INC., a Michigan corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 71-1452.

United States Court of Appeals, Sixth Circuit.

February 9, 1972.

Walter J. Murray, Detroit, Mich., for petitioner.

James H. Bozarth, Dept. of Justice, Tax Div., Washington, D. C., for respondent; Fred B. Ugast, Acting Asst. Atty. Gen., Meyer Rothwacks, Richard W. Perkins, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief.

Before MILLER and KENT, Circuit Judges, and O'SULLIVAN, Senior Circuit Judge.

KENT, Circuit Judge.

This case has been previously before this Court. 419 F.2d 1103 (6th Cir., 1970). The facts are sufficiently stated in the previous opinion:

The taxpayer is a Michigan corporation which operates horse drawn carriage tours on Mackinac Island. Such carriages, except for bicycles, constitute virtually the only means of transportation on the island. For many years the State of Michigan and the City of Mackinac granted yearly licenses to individuals to operate the carriage tours. In 1948, following complaints about bad service, the State required the individual operators to form a corporation with the hope that the State could more easily regulate the operation if it was conducted in corporate form. Thereupon all the individual operators formed a corporation, receiving one share of stock for each license owned upon payment of $20 per share. The former individual operators retained their individual licenses from the City, however, and each year the license holders rented their licenses to the corporation. Over the years it developed that a few non-stockholders acquired licenses from the City, and the corporation likewise rented these licenses each year.

For the fiscal years 1961, 1962 and 1963 the corporation (hereinafter usually referred to as the "Taxpayer") paid its stockholder lessors $1,200, $1,550 and $1,500 respectively, and its non-stockholder lessors $1,600. These payments were reflected in Taxpayer\'s income tax returns for the years stated. The Commissioner disallowed all amounts claimed to have been paid as rentals in excess of $600 per lessor, and on the basis of such disallowance imposed deficiency assessments for the three years in the amounts of $18,876.58, $20,540.45 and $20,729.05. Taxpayer filed this action in the Tax Court and upon that court\'s determination that Taxpayer had failed to sustain its burden of showing its entitlement to a greater allowance Taxpayer perfected this appeal. (pages 1104, 1105).

Because of the inadequacy of the record this Court remanded the case to the Tax Court for further action. Additional witnesses were presented on behalf of the taxpayer. The Commissioner presented no further testimony.

From the record it appears that the petitioner, during the years involved, leased 55 touring licenses from its Class A stockholders; 3 livery licenses and 1 taxi license from its Class B stockholders, and 1 livery license and 2 taxi licenses from persons who were strangers to the corporation. It appears without any question that licenses are issued only to individuals. There is nothing in the record to indicate that the touring licenses leased from the Class A stockholders were of less value than the livery licenses and taxi licenses leased from Class B stockholders and strangers to the corporation. In fact the evidence forces the conclusion that the touring licenses should command at least as great a rental as the taxi and livery licenses¹.

The Tax Court properly concluded that negotiations with nonstockholders for taxi and livery licenses were "arm's length" negotiations and that the amount paid was "required" to be paid and, therefore, properly deductible under Section 162(a) (3) of the Internal Revenue Code of 1954². The Tax Court found what appears to us to be an illusory difference between Class A and Class B stock which difference we find to be unsupported by the evidence. The only real difference between the classes of stock referred to participation in assets on dissolution.

The Tax Court properly stated the test to be applied in a quotation from Roland P. Place, 17 T.C. 199, at p. 203, aff'd. 199 F.2d 373 (6th Cir., 1952) cert....