Moore v. Comm'r of Internal Revenue , Docket No. 10637-77.
| Citation | 71 T.C. 533 |
| Decision Date | 11 January 1979 |
| Docket Number | Docket No. 10637-77. |
| Parties | ROBERT G. MOORE and W. YVONNE MOORE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: For purposes of sec. 1348, I.R.C. 1954, capital was a material income-producing factor in petitioners' retail grocery business. Consequently, only 30 percent of the net profits of their business qualify for the 50-percent maximum rate on earned income. James M. Havach, M. R. Schlesinger, and Charles W. Landerfeld, for the petitioners.
Robert N. Armen, Jr., and John R. Dorocak, for the respondent.
Respondent determined deficiencies of $12,998.38 and $23,506.31 in the Federal income tax of petitioners for the taxable years 1974 and 1975, respectively. The issue for our decision is whether within the meaning of section 1348 1 capital was a material income-producing factor in petitioners' retail grocery business.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Robert G. Moore and W. Yvonne Moore, husband and wife (hereinafter petitioners), resided in Willard, Ohio, at the time their petition was filed in this case. Petitioners filed joint Federal income tax returns for 1974 and 1975 with the Internal Revenue Service Center, Cincinnati, Ohio.
During 1974 and the first 11 months of 1975, petitioners were each partners with a 50-percent interest in a general partnership operating under the name of Bob G. and Yvonne Moore, Willard I. G. A. Foodliner (hereinafter the partnership). The partnership owned and operated a retail grocery store in Willard, Ohio (hereinafter the Willard store), under a franchise granted by the Independent Grocers' Alliance (hereinafter I. G. A.). I. G. A. is a national franchise for independent grocery stores and warehouse outlets from which I. G. A. retail stores purchase the bulk of their inventory.
Partnership income derived by petitioners during the calendar year 1974 and the first 11 months of the calendar year 1975 was $194,005.73 and $244,968.92, respectively, which petitioners reported as earned income qualifying for the maximum tax on earned income under section 1348. Effective December 1, 1975, petitioners caused the partnership's assets and business to be transferred to an Ohio corporation named Willard Foods, Inc., doing business under the name “Bob and Yvonne Moore, Willard I.G.A. Foodliner” (hereinafter referred to as the corporation). The corporation was solely owned by petitioners. In December 1975, petitioners received salaries from the corporation in the aggregate amount of $2,659.08 and reported these salaries on their 1975 joint income tax return without treating the amounts as qualifying under section 1348.
The Willard store was operated from a leased building with approximately 12,000 square feet of floor space. Rent for the building for 1974 and for the first 11 months of 1975 was $26,960.63 and $22,370.26, respectively. Much of the equipment and trade fixtures used in the store was old but well maintained. The Willard store had three checkout counters; each used mechanical cash registers rather than modern electronic scanning registers.
Approximately 20 full-time and 10 part-time employees were employed in the operation of the Willard Store. Petitioners were the sole managers of the store and made all decisions regarding personnel, purchasing, and pricing. Robert and Yvonne devoted an average of 75 hours and 42.5 hours per week, respectively, to the management operation of the store.
Except for isolated instances, sales in the store were made for cash. Daily deposit of business receipts was made to a checking account. Inventory purchases were made on a cash basis or very short-term credit.
In 1974 and 1975, petitioners reported the following financial figures for the partnership on their returns:
+-----------------------------------------------+
¦ ¦1974 ¦1975 ¦
+-------------------+-------------+-------------¦
¦ ¦ ¦ ¦
+-------------------+-------------+-------------¦
¦Gross receipts ¦$2,643,682.51¦$2,794,939.53¦
+-------------------+-------------+-------------¦
¦Cost of goods sold ¦2,191,414.82 ¦2,295,894.07 ¦
+-------------------+-------------+-------------¦
¦Gross profit ¦452,267.69 ¦499,045.46 ¦
+-------------------+-------------+-------------¦
¦Other income ¦11,810.08 ¦14,443.31 ¦
+-------------------+-------------+-------------¦
¦Total income ¦464,077.77 ¦513,488.77 ¦
+-------------------+-------------+-------------¦
¦Total deductions1 ¦410,524.05 ¦439,197.29 ¦
+-------------------+-------------+-------------¦
¦Ordinary income ¦53,553.72 ¦74,291.48 ¦
+-----------------------------------------------+
The cost of goods sold was determined as follows:
+-----------------------------------------------------------------------------+
¦ ¦1974 ¦1975 ¦
+---------------------------------------------------+------------+------------¦
¦ ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Beginning inventory ¦$60,554.47 ¦$75,211.24 ¦
+---------------------------------------------------+------------+------------¦
¦Purchases (less cost of items withdrawn for ¦2,206,071.59¦2,311,869.55¦
¦personal use) ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Cost of labor ¦0 ¦0 ¦
+---------------------------------------------------+------------+------------¦
¦Materials and supplies ¦0 ¦0 ¦
+---------------------------------------------------+------------+------------¦
¦Other costs ¦0 ¦0 ¦
+---------------------------------------------------+------------+------------¦
¦Total ¦2,266,626.06¦2,387,080.79¦
+---------------------------------------------------+------------+------------¦
¦Less: ending inventory ¦75,211.24 ¦91,186.72 ¦
+---------------------------------------------------+------------+------------¦
¦Cost of goods sold ¦2,191,414.82¦2,295,894.07¦
+-----------------------------------------------------------------------------+
Petitioners determined inventory quantity by physical count at year's end and inventory value by marking down the retail price to cost by a specified percentage.
The book value of assets owned by the partnership was as follows:
+-----------------------------------------------------------------------------------+
¦ ¦Jan. 1, 1974 ¦Dec. 31, 1974 ¦Nov. 30, 1975 ¦
+------------+----------------------+-----------------------+-----------------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Cash ¦ ¦$55,998.67¦ ¦$110,566.15¦ ¦$140,409.46¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Receivables ¦ ¦2,410.25 ¦ ¦1,500.47 ¦ ¦33,123.57 ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Inventories ¦ ¦60,554.47 ¦ ¦75,211.24 ¦ ¦91,186.72 ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Fixed ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦depreciable ¦$135,259.51¦ ¦$146,988.13¦ ¦$154,374.64¦ ¦
¦assets ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Less ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦accumulated ¦59,523.06 ¦75,736.45 ¦81,875.53 ¦65,112.60 ¦91,645.22 ¦62,729.42 ¦
¦depreciation¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Other assets¦ ¦1,797.00 ¦ ¦620.61 ¦ ¦2,735.17 ¦
+------------+-----------+----------+-----------+-----------+-----------+-----------¦
¦Total assets¦ ¦196,496.84¦ ¦253,011.07 ¦ ¦330,184.34 ¦
+-----------------------------------------------------------------------------------+
The Willard store was run very efficiently. Inventory purchases were tightly controlled to maximize turnover. Labor expenses were minimized by efficient operation and by extensive services performed directly by petitioners. As a result, the Willard store was much more profitable than some otherwise comparable stores.
OPINIONSection 13482 generally limits the maximum rate on earned taxable income to 50 percent. Earned income is defined for purposes of section 1348 as pertinent here3 as earned income within the meaning of section 911(b), which provides in part as follows:
For purposes of this section, the term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer...
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