MACKINAC ISLAND CARRIAGE TOURS, INC. v. Commissioner
| Decision Date | 22 December 1970 |
| Docket Number | Docket No. 5253-66. |
| Citation | 1970 TC Memo 345,29 TCM (CCH) 1668 |
| Parties | Mackinac Island Carriage Tours, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Walter J. Murray, 1 Woodward Ave., Detroit, Mich., for the petitioner. Robert T. Hollohan, for the respondent.
Preliminary Statement
Our Memorandum Findings of Fact and opinion in this case was filed June 26, 1968 (Dec. 29,020(M) T. C. Memo. 1968-128). Decision pursuant to said Memorandum Findings of Fact and Opinion was entered by this Court on November 5, 1968 Dec. 30,285(M). The case was appealed to the Court of Appeals for the Sixth Circuit by both parties. On January 6, 1970, the Court of Appeals rendered its opinion (70-1 USTC ¶ 9158 419 F. 2d 1103, (1970)), which ordered the case remanded to the Tax Court for "further action" in accordance with its opinion. Hearing after remand was had in this Court. No new evidence with respect to the issues in this case was submitted by the parties at said hearing and no motion was made by either party for any additional trial or for the taking of any additional evidence. After said hearing we rendered our Supplemental Memorandum Opinion which was filed August 11, 1970, ordering the same decision that had been entered on November 5, 1968, which decision was entered on August 14, 1970. Thereafter on August 28, 1970, petitioner filed its "Motion for Further Hearing and Vacation of Decision" wherein it moved that said decision be vacated and the case reopened to permit it to introduce additional evidence. We granted petitioner's motion by our order of September 8, 1970, vacating the decision entered on August 14, 1970 and setting the case for further hearing for additional testimony. That hearing was had on October 13, 1970 and at said hearing petitioner introduced the additional testimony of three witnesses who had testified in the original trial, and the testimony of five other witnesses and also some documentary evidence. After said hearing the parties filed a "Supplemental Stipulation of Facts" which corrected misstatements in the original Stipulation (filed December 5, 1967) as to the number of leasing agreements and amounts petitioner paid as rents under said agreements during the three years involved. The parties filed briefs and the case is now before us for opinion and decision on the record containing the new evidence and the correcting Supplemental Stipulation of Facts. The following is our new opinion in the case and order for decision.
Respondent determined deficiencies in petitioner's income tax for the fiscal years ended October 31, 1961, 1962 and 1963 in the respective amounts of $15,673.09, $20,540.45, and $27,379.91. The issue is the amount of payments to stockholders petitioner is entitled to deduct as rent in the fiscal years ended October 31, 1961, 1962, and 1963, where the payments were made under leases wherein the stockholders leased assets to petitioner.
Some of the facts were stipulated and they are so found.
Mackinac Island Carriage Tours, Inc. is a Michigan corporation organized on November 24, 1947. Its principal office was at Mackinac Island, Michigan, at the time its petition was filed. The corporation filed its income tax returns for the taxable years ending October 31, 1961, 1962, and 1963, with the district director of internal revenue, Detroit, Michigan.
Mackinac Island is a summer tourist island in Lake Michigan, located off the shores of the lower peninsula of Michigan about 300 miles north of Detroit. No automobiles have ever been allowed on the island and the primary means of transportation has always been horse-drawn vehicles.
Beginning sometime around the turn of the century the Mackinac Island State Park Commission began granting licenses to owners of horse-drawn vehicles to transport passengers for hire around Mackinac Island State Park. Sometime, in a year prior to 1941, these individual operators associated themselves together under the name of Mackinac Island Carriagemen's Association. Thereafter the Commission would enter into a contract with the said association setting forth the license fee for each vehicle, the routes through the park to be traveled and the per passenger charge. These contracts also set forth in much detail the rules and regulations of the Commission that were to be observed by the individual operators, with respect to equipment, liability insurance, and conduct of the drivers. Around 1947 the Commission froze the number of sight-seeing carriages it would license at 55. By the time of the 1947 contract, covering the period May 1, 1947 to May 1, 1948, the name of the drivers' association had been changed to Mackinac Island Carriage Association. This contract provided the license granted by the Commission for each vehicle should be displayed on the rear of each carriage. Paragraph 17 provided in part:
It is further agreed and mutually understood by and between the parties hereto that a carriage owner may hold more than one (1) carriage license, to be issued to him in the regular and usual manner as herein prescribed * * *. It is further agreed that the Park Commission or its agent will not permit any carriage whose owner is not a member of the Carriage Association to engage in the business of transporting passengers through State Park property.
At this time all of the sight-seeing carriages had to have a city license issued by the City of Mackinac Island costing $120 each.
The Commission received many complaints from tourists and members of the public about such things as overcharging, price cutting, using short cuts on established routes, poor equipment and horses not in a proper condition. The Commission felt the service to the public would be improved if the transportation was carried on by a corporation rather than a number of individual operators who were difficult to control. Consequently, the Commission required the individual carriage owners in the Mackinac Island Carriage Association to incorporate. The result was the formation of the petitioner, Mackinac Island Carriage Tours, Inc., on November 24, 1947. The stated purposes of the corporation were as follows:
To acquire, own, maintain and operate a system of transportation of persons and property on Mackinac Island; and for such purpose to buy, sell, lease and encumber real and personal property.
The corporation operated its transportation business under a 30-year franchise given to it by the Commission as a result of special legislation enacted by the Michigan legislature upon the petition of the Commission. The capitalization of the corporation consisted of 55 shares of common stock, one for each set of city and state sight-seeing licenses, having a par value of $20 per share. The Articles of Incorporation provided that the original shareholders of the corporation were those individuals who held the 55 city and state sight-seeing carriage licenses. For each set of sight-seeing carriage licenses (one city and one state) that an individual had he became entitled to one share of stock. Most of the individual operators held but one set and therefore became entitled to but one share of stock. However, those who were operating more than one sight-seeing carriage under separate sets of city and state licenses became entitled to purchase shares of stock equal in number to their licensed sight-seeing carriages. During the first year of the corporation there were some 20-odd stockholders holding all of petitioner's 55 shares of stock.
The Articles of Incorporation limited the transfer of shares of stock by the original stockholders to other stockholders or to members of the transferor stockholder's immediate family or his heirs, without first offering such share or shares to the corporation at the then fair cash value.
Petitioner commenced its sight-seeing business with the 1948 season by leasing the 55 sight-seeing carriages from its stockholders. These 1948 leases with stockholders recited that lessor owned a share or shares of stock in petitioner lessee "a corporation organized under the laws of Michigan, to acquire, own, maintain and operate a system of transportation" on Mackinac Island and that lessor owned a carriage or carriages that he had been operating as a member of the Mackinac Island Carriage Association. The leases provided that in consideration of the rent provided in the lease "the Lessor does hereby discontinue the use and operation of said carriage(s) as an individual, and does hereby agree to lend his good will toward the successful operation of the business of the Lessee; and the Lessor does hereby let and lease said carriage(s) to the Lessee for the use and benefit of said corporation." The leases provided that Lessee was to "keep said carriage(s) in constant repair" at its expense and in the event of Lessee's dissolution return same to Lessor.
These leases provided the annual rent would be $1,000 per carriage provided, however, that it could be reduced in any year to "rental within the profits of the Lessee." The last paragraph of the lease provided it should "continue for and during the term of the corporate existence and operation of the Lessee." These leases were used until just prior to the 1958 season when a new 20-year lease was executed by each shareholder and petitioner.
The lease form used in 1958 and thereafter provided, in part, as follows:
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