Martens v. C.I.R.

• Citation: 934 F.2d 319
• Decision Date: 11 July 1991
• Docket Number: No. 90-3104,90-3104
• Parties: Unpublished Disposition NOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit. Vernon E. MARTENS, Lucille E. Martens, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 319

934 F.2d 319

Unpublished Disposition

NOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit.

Vernon E. MARTENS, Lucille E. Martens, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 90-3104.

United States Court of Appeals, Fourth Circuit.

Submitted Feb. 8, 1991.

Decided May 28, 1991.

As Amended July 11, 1991.

Appeal from the United States Tax Court. B. John Williams, Tax Court Judge. (Tax Ct. No. 39439-87)

William Jordan Temple, Alexandria, Va., for appellants.

Shirley D. Peterson, Assistant Attorney General, Gary R. Allen, Ann B. Durney, David A. Hubbert, Tax Division, United States Department of Justice, Washington, D.C., for appellee.

U.S.T.C.

AFFIRMED.

Before ERVIN, Chief Judge, WILKINSON, Circuit Judge, and REBECCA BEACH SMITH, United States District Judge for the Eastern District of Virginia, Sitting by Designation.

PER CURIAM:

Vernon Martens and Lucille Martens filed a petition in the United States Tax Court contesting deficiencies in their income tax liability for 1982 and 1983 which the Commissioner of Internal Revenue proposed to assess against them. The Tax Court entered a decision in favor of the Commissioner on April 10, 1990. The taxpayers timely appealed from the Tax Court's decision to this court. We affirm.

I

Vernon Martens is a pathologist who owned three medical laboratories in the Washington, D.C., metropolitan area. ¹ Martens reported net profits from the laboratories of $548,739.76 for 1982 and $340,953.89 for 1983. Martens used the cash basis of accounting.

Martens operated several farms and resided on one farm in Haywood, Virginia. Martens reported net losses from his farming operations in the amount of $213,936 in 1982 and $191,241.77 in 1983. The IRS allowed these losses.

Martens began purchasing construction equipment in the early to mid 1970's, intending to lease the equipment. Prior to purchasing the equipment, Martens discussed construction equipment with a friend who was a farmer and a farm equipment distributor. He also talked about equipment leasing with another acquaintance.

Martens purchased equipment at various times from 1973 to 1982. He leased the equipment to R.J. Martens Contracting Co., Inc. (Contracting). Contracting was wholly owned by Martens' son, Robert J. Martens, who had been a construction supervisor prior to forming Contracting in 1973. Contracting was the only customer to whom Martens leased his equipment. Martens did not attempt to lease his equipment to any other person or entity other than Contracting.

At the beginning of the relationship between Martens and Contracting, the parties operated under an oral agreement. Under that agreement, Contracting was to pay 30% of its monthly net proceeds to Martens as rent for the equipment. Sometime prior to 1978, the parties entered into a written contract whereby Contracting would pay 50% of its monthly net income to Martens as rent for the equipment. This written agreement had no starting date, but by its terms, the agreement ended on January 1, 1978. This agreement was entitled "Machinery and Equipment Lease Agreement." In addition to setting out the amount of rent to be paid for the equipment, the agreement provided that Contracting would maintain the equipment and bear the expense of any repairs, while Martens would procure insurance against loss or damage due to fire, explosion, or other casualties. This agreement was the only written agreement entered into between Contracting and Martens.

Around 1981, Contracting began to experience financial difficulties, eventually ceasing operations in 1982. In 1982, equipment that Contracting owned was auctioned for the benefit of creditors of Contracting. At the auction, Martens purchased some of this equipment. Martens also assumed the notes secured by other equipment, thereby purchasing more of Contracting's equipment. Martens did not admit liability for any of the debts of Contracting, nor was any of Martens' property subject to the claims of Contracting's creditors.

In 1982, Martens started his own construction company, called Vemart Contracting, Inc. (Vemart). Vemart was wholly owned by Martens and engaged in the same construction activities as had Contracting. Martens hired his son, Robert Martens, as general manager and put him in charge of the day-to-day operations. In 1983, Martens leased some equipment to Vemart, while simply transferring other equipment directly to Vemart. Martens did not attempt to lease his equipment to any other person or entity other than Vemart.

Martens never maintained books or records for his leasing activities, and he did not prepare any business plans before entering into the leasing business. Martens did not maintain an office for the leasing activities, nor did he hire any employees other than Robert. Martens did not maintain a separate bank account for his leasing activities either.

In the years 1977 through 1982, Martens reported net losses from his construction leasing activities. The losses were as follows: $25,995.14 in 1977; $16,438.98 in 1978; $30,984.92 in 1979; $33,868.60 in 1980; $110,516 in 1981; $168,302 in 1982; and $80,490 in 1983. ² Martens has never reported a profit from the equipment leasing activities. The equipment was not expected to appreciate, and Martens never sold any equipment at a gain. Martens reported $20,920 of income in 1982 and $44,260 in income in 1983 from these activities, although he has never received these amounts.

During 1982 and 1983, Martens claimed deductions for salaries paid to several of his relatives. They included his sons, Gary Martens and Vernon Martens, Jr., his daughters Carolyn Zugata and Elita Martens, and his son-in-law, James Tapocik. The Commissioner disallowed portions of the amounts claimed as follows:

                                      AMOUNT CLAIMED    AMOUNT ALLOWED
                                      1982     1983     1982     1983
                Vernon Martens, Jr.  $20,090  $18,650  $5,000   $5,000
                Gary Martens          13,000   25,200   2,500      600
                Carolyn Zugata         4,000          2,000
                Elita Martens                 2,000            500
                James Tapocik         11,053    1,000   6,527      500
                

Martens issued a Form 1099 to Vernon, Jr., Gary, Carolyn, and James for each of the years when he claimed a deduction. The amounts paid to Vernon, Jr., Gary, and Elita, and the $1,000 to James in 1983 were substantiated. Vernon, Jr., was a tax attorney; he allegedly performed services for Martens including preparing tax returns, negotiating contracts, advising on investments, and giving legal advice to Martens. Neither Martens nor Vernon, Jr., kept records of the hours worked and amount paid for the legal services. Further, Martens kept no books or records pertaining to the employment of the other family members.

During 1982 and 1983, Martens rented an apartment in Washington, D.C. Martens stayed at the apartment during the week to be closer to his laboratories rather than returning all the way to Haywood, Virginia. Martens claimed deductions for apartment rental in the amounts of $4,800 in 1982 and $6,000 in 1983. It was established that these amounts were actually paid. The apartment did not have a separate business telephone. No customers, patients, or clients of the medical laboratories were received there.

The IRS reviewed Martens' tax returns for 1982 and 1983, disallowing some of the claimed deductions. The IRS disallowed expenses relating to the equipment leasing activities because they did not occur during an activity engaged in for profit under Section 183 of the Internal Revenue Code. The IRS disallowed some of the payments to Martens' children because they constituted unreasonable compensation for services actually rendered under Section 162 of the Internal Revenue Code. Finally, the IRS disallowed the deduction for the Washington apartment under Section 280A of the Internal Revenue Code. The IRS mailed a notice of deficiency to Martens on September 30, 1987.

Martens filed a petition with the United States Tax Court on December 23, 1987. In the petition, Martens contested the deficiency determinations. A trial was held on December 15, 1988 in the Tax Court with Judge Williams presiding. The Tax Court entered a decision in favor of the Commissioner.

The court first held that the leasing activities of Martens were not an activity engaged in for profit. The court gave greater weight to objective factors than to Martens' statement of his intent. After discussing the factors set out in Treasury Regulation Sec. 1.183-2(b), the court determined that Martens had not engaged in the leasing activities for profit.

Next, the court determined that the Commissioner correctly disallowed some of the compensation paid to the Martens children because the amounts constituted unreasonable compensation. Finally, the court held that the deductions for the Washington apartment were properly disallowed.

II

At the outset, we note that findings of fact by the Tax Court are not to be set aside unless they are clearly erroneous. I.R.C. Sec. 7482(a), 26 U.S.C. Sec. 7482(a); Fed.R.Civ.P. 52(a); Friedman v. Comm'r, 869 F.2d 785, 791 (4th Cir.1989); Rutter v. Comm'r, 853 F.2d 1267, 1272 (5th Cir.1988); Charles Schneider & Co. v. Comm'r, 500 F.2d 148, 150 (8th Cir.1974), cert. denied, 420 U.S. 908 (1975). Martens raises three issues on appeal. Each involves findings of fact; therefore, we review each under the clearly erroneous standard.

A

The first issue presented is whether the Tax Court erred in determining that Martens did not engage in the equipment leasing activities for profit. The general rule is that an assessment of the Commissioner is presumptively correct; the taxpayer has the burden of proving it wrong. Faulconer v. Comm'r, 748 F.2d 890, 893 (4th...