Petrich v. Commissioner
| Decision Date | 05 May 1980 |
| Docket Number | 3990-78,3991-78.,Docket No. 3989-78 |
| Citation | 40 TCM (CCH) 303,1980 TC Memo 161 |
| Parties | Kurt Petrich, et al v. Commissioner. |
| Court | U.S. Tax Court |
Jesse H. Petrich, 1090 Dexter Horton Bldg., Seattle, Wash., for the petitioners. Matthew W. Stanley, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner, in his statutory notices of deficiency, determined the following deficiencies in Federal income tax against petitioners:
Docket No. Petitioner Taxable Year Deficiency in Tax
3989-78 Kurt Petrich ......................... 1974 $ 432.45
1975 2,206.38
3990-78 William A. Petrich and Resa Petrich .. 1975 $ 514.20
1976 1,466.74
3991-78 Henriette Owens Ori .................. 1974 $1,962.81
Due to concessions, one issue remains to be decided: whether petitioners are entitled to the net operating loss carryovers that they claimed for the years in issue, which depends entirely on the amount of the casualty loss which was sustained when a fishing vessel owned by petitioners was damaged on December 4, 1972.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.
Petitioner Kurt Petrich (hereinafter Kurt) filed his Federal income tax returns for the taxable years 1974 and 1975 with the Internal Revenue Service Center, Ogden, Utah. Petitioners William A. Petrich (hereinafter William) and Resa Petrich filed joint Federal income tax returns for the taxable years 1975 and 1976 with the Internal Revenue Service Center, Ogden, Utah. Petitioner Henriette Owens Ori (hereinafter Henriette) filed a joint Federal income tax return for the taxable year 1974 with her former husband. All of the petitioners resided in North Bend, Washington, when they filed their petitions in this proceeding. Resa Petrich is a party to this action only because she filed a joint return for the taxable years 1975 and 1976 with her husband. Therefore, the term "petitioners" hereinafter will refer to Kurt, William, and Henriette.
On June 2, 1967, petitioners purchased a fishing vessel, the Hoquiam, for $6,500. At that time, the Hoquiam was licensed for mackerel fishing only. Petitioners desired to rebuild and outfit the Hoquiam so that it could be used to catch shrimp and crab off the coast of Alaska. However, petitioners lacked the experience necessary to rebuild the vessel and to operate the vessel as a fishing boat. Captain Jesse H. Petrich, who is the father of Kurt, William, and Henriette, possessed the necessary experience, and petitioners asked him to rebuild the Hoquiam and teach them how to operate the vessel for the purpose of fishing.
Petitioners wanted to compensate their father for his efforts and intended to do so out of the profits of their fishing operations. To memorialize their intent, Kurt, William, and Henriette entered into the following Memorandum of Agreement on June 27, 1969:
While Captain Jesse Petrich worked on the Hoquiam, he and his wife did receive some financial support from petitioners, but that amount is indeterminable.
By May 14, 1971, the Hoquiam had been completely rebuilt by Captain Petrich. In addition to the structural repairs which had been made, the vessel had been outfitted with a new main diesel generator, engine, propeller, crab pots, hydraulic pumps, compressors, brine tanks, kitchen, electronic navigation gear, and other equipment. Petitioners' out-of-pocket expenses for rebuilding the Hoquiam were $29,135. Therefore, as of May 14, 1971, petitioners had a cost basis of $35,635 in the vessel.
On May 14, 1971, the Hoquiam departed for Alaska. The voyage was undertaken to accomplish the second part of Captain Petrich's task, that of teaching petitioners how to operate the vessel, fish, and process the catch. After fulfilling the purpose of the voyage, the Hoquiam left Ketchikan, Alaska, on December 3, 1972, bound for Seattle, Washington. During the preparations for departure, a portion of the hauling gear fell, causing a large leak in the vessel's outer hull. The damage was discovered on December 4, 1972, when heavy seas caused water to seep into the vessel; the Hoquiam was forced to come ashore in British Columbia. The vessel was inoperable and ultimately was abandoned. On December 27, 1972, Captain Jesse Petrich reported the casualty to the United States Coast Guard as a total loss.
Petitioners were not in the trade or business of fishing during 1971 or 1972. The Hoquiam was never placed in service by petitioners as an asset used in their trade or business or for the production of income.
On their Federal income tax returns for the taxable year 1972, petitioners each claimed a casualty loss of $26,100 resulting from the loss of the Hoquiam, sharing equally in the claimed loss of $78,300. The Commissioner determined that petitioners' adjusted basis in the Hoquiam for purposes of allowing a casualty loss deduction under section 165, Internal Revenue Code of 1954,2 was $33,997. The amount so allowed represents petitioners' cost basis of $35,635 as of May 14, 1971, less allowable depreciation of $854.50 for 1971 and $783.29 for 1972. One-third of the adjusted basis was allocated to each petitioner as a casualty loss. Petitioners' net operating loss carryovers to the years in issue were adjusted accordingly. In this proceeding, petitioners have claimed that the total amount of the casualty loss was $107,275 rather than $78,300 as claimed on their Federal income tax returns for the taxable year 1972.
OpinionPetitioners purchased a fishing vessel, the Hoquiam, for $6,500. Their father, Captain Jesse Petrich, agreed to rebuild the vessel, teach petitioners how to operate her, teach them how to catch shrimp and crab, and teach them how to process their catch. In exchange for those valuable services, petitioners agreed to give their father 25 percent of the net profits earned by them after they began to operate the vessel themselves.
By May 14, 1971, Captain Jesse Petrich had rebuilt the Hoquiam. By December 3, 1972, he had taken the vessel and petitioners into Alaskan waters and had taught his children how to operate the vessel, how to catch shrimp and crab, and how to process their catch. While preparing to return home for the winter, a portion of the Hoquiam's hauling gear fell, causing a large leak in the vessel's outer hull. The damage was discovered on December 4, 1972, when heavy seas caused water to seep into the Hoquiam. She came ashore in British Columbia and was a total loss.
Section 165(a) allows the deduction of losses sustained. Petitioners sustained a loss in 1972 when the Hoquiam was damaged beyond repair. By the date of the casualty, petitioners had finished their training voyage and were preparing to return to Seattle, but they had not...
To continue reading
Request your trial