Mackinac Island Carriage Tours, Inc. v. CIR, 19252
| Decision Date | 06 January 1970 |
| Docket Number | No. 19252,19420.,19252 |
| Parties | MACKINAC ISLAND CARRIAGE TOURS, INC., a Michigan corporation, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. MACKINAC ISLAND CARRIAGE TOURS, INC., a Michigan corporation, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Walter J. Murray, Detroit, Mich., for Mackinac Island Carriage Tours.
Kenneth L. Gross, Tax Division, Dept. of Justice, Washington, D. C., for Commissioner of Internal Revenue; Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Jonathan S. Cohen, Kenneth L. Gross, Attys., Dept. of Justice, Washington, D. C., on the brief.
Before EDWARDS and PECK, Circuit Judges, and BROOKS*, District Judge.
These are combined appeals by the taxpayer and cross-appeal by the government from the judgment of the Tax Court.
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. The cross-appeal perfected by the Commissioner is directed against the Tax Court's method of computing the deficiency determined to be due for the years 1961 and 1963.
Before proceeding, we observe that we are not in disagreement with the various propositions of law set forth by the Commissioner nor with the authorities cited. These include the proposition that under Section 162(a) (3) of the Internal Revenue Code of 1954 (26 U.S.C. § 162(a) (3)) a deduction claimed is allowable only if actually paid for rent, rather than for something else in the guise of rent (Place v. Commissioner of Internal Revenue, 17 T.C. 199 (1951), aff'd., 199 F.2d 373 (6th Cir. 1952), cert. den., 344 U.S. 927, 73 S.Ct. 496, 97 L.Ed. 714 (1953)), and that where there is a close relationship between the lessor and lessee it is important to determine whether or not the lease represents an arm's length agreement between the parties (Stanwick's Inc. v. Commissioner of Internal Revenue, 15 T.C. 556 (1950), aff'd., 190 F.2d 84 (4th Cir.1951); Potter Electric Signal and Mfg. Co. v. Commissioner of Internal Revenue, 286 F.2d 200 (8th Cir. 1961)). There remains, however, the application of these propositions to the case at bar.
The holding of the Tax Court is unclear in several areas. With respect to the subject matter of the rental agreements, the Tax Court appears to have agreed with the determination by the Commissioner that since the period of their useful life as shown on tax return depreciation schedules had run, the vehicles no longer existed. A strong hint as to this bizarre belief on the part of the Tax Court is found in this observation in its opinion: "The carriages had probably all been replaced by the years in issue here." Undisturbed by the lack of...
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