Rodebaugh v. Commissioner
| Citation | 33 TCM (CCH) 169,1974 TC Memo 36 |
| Decision Date | 06 February 1974 |
| Docket Number | Docket No. 4913-70 — 4920-70. |
| Parties | Ruth C. Rodebaugh, et al. v. Commissioner. |
| Court | United States Tax Court |
Albert B. Arbaugh, 1200 Harter Bank Bldg., Canton, Ohio, for the petitioners. John P. Graham, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income tax and additions to the tax under section 6651(a).2
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Docket Taxable year
No. Petitioner ended Deficiency Addition
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4914-70 Canton Sand & Gravel Co.......................... 5/31/61 ......... $ 191.32
5/31/62 $ 3,026.22 1,322.08
5/31/65 41,715.31
4916-70 Stark Sand & Gravel Co........................... 5/31/62 2,212.05 553.01
5/31/63 1,122.70
5/31/64 264.12
5/31/65 314.27
4918-70 United Sand & Gravel Co.......................... 10/31/62 423.47 105.87
10/31/63 6,629.10
10/31/64 25,662.38 .........
10/31/65 2,344.63 .........
4920-70 Donald G. Rodebaugh and Ruth C. Rodebaugh ....... 12/31/61 861.35 .........
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Petitioners in Docket Nos. 4914-70, 4916-70, and 4918-70 have conceded that they are liable for additions to tax under section 6651(a) in amounts depending upon the deficiencies decided to be due in those respective dockets.
In Docket No. 4913-70, petitioner Ruth C. Rodebaugh has conceded that she is a transferee of assets of Canton Sand & Gravel Company and as such is liable under section 6901 for any deficiencies and additions to tax decided to be due in Docket No. 4914-70.
In Docket No. 4915-70, petitioner Donald G. Rodebaugh has conceded that he is a transferee of assets of Stark Sand & Gravel Company and as such is liable under section 6901 for any deficiencies and additions to tax decided to be due in Docket No. 4916-70.
In Docket Nos. 4917-70 and 4919-70, petitioners Donald G. Rodebaugh and Ruth C. Rodebaugh have conceded that they are transferees of assets of Lake Cable Sand & Gravel Company, which was a transferee of assets of United Sand & Gravel Company, and as such are liable under section 6901 for any deficiencies and additions to tax decided to be due in Docket No. 4918-70.
Petitioners have conceded some of the adjustments contained in the notices of deficiency. The following issues remain to be decided:
1. Whether certain income and deductions are to be allocated among the corporate petitioners in accordance with the purported partnership agreement among them or as determined by respondent under section 482;
2. Whether the corporate petitioners must recognize ordinary income under section 1245 resulting from the sale of certain assets;
3. Whether petitioner Stark Sand & Gravel Co. is entitled to depletion deductions for its taxable years 1962 through 1964;
4. Whether petitioner United Sand & Gravel Co. is entitled to deduct expenses it paid in connection with the condemnation of certain property;
5. Whether petitioner United Sand & Gravel Co. is entitled to depreciation deductions in excess of those allowed by respondent for its taxable years 1961 through 1964 on an automobile it owned and made available to its president Donald G. Rodebaugh; and
6. Whether petitioner Donald G. Rodebaugh's gross income for 1961 includes amounts expended by United Sand & Gravel Co. and the purported partnership of which it was a member for certain travel and entertainment expenses and life insurance premiums.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
The individual petitioners (hereafter referred to as Rodebaugh and Mrs. Rodebaugh) are husband and wife who resided in Solvang, California, at the time they filed their petitions herein. They filed a joint Federal income tax return for 1961 with the district director of internal revenue, Cleveland, Ohio.
The corporate petitioners (hereafter referred to as Canton, Stark, and United) were each Ohio corporations and had their principal offices in Canton, Ohio, during the years involved herein. They each filed Federal income tax returns for their taxable years 1961 through 1965 with the district director of internal revenue, Cleveland, Ohio.3
Lake Cable Sand & Gravel Co. (hereinafter referred to as Lake Cable), not a petitioner herein, was also an Ohio corporation and had its principal office in Canton, Ohio.
At all pertinent times, Rodebaugh was the sole shareholder of Stark, Mrs. Rodebaugh was the sole shareholder of Canton (either individually or as custodian for the Rodebaughs' minor children), the Rodebaughs together were the sole shareholders of Lake Cable, and Lake Cable was the sole shareholder of United. Rodebaugh was the president of all four corporations.
Stark was incorporated in July 1958. It owned certain machinery and equipment at a location hereafter referred to as the Stark site. Such machinery and equipment were purchased from a company previously engaged in the sand and gravel business at that same location. On October 30, 1958, Stark obtained a long-term4 lease from the fee owner of the Stark site, granting it the right to mine, process, and remove sand and gravel from the leased premises in consideration of a tonnage royalty payable to the lessor.
Canton was incorporated on August 1, 1959. It owned certain machinery and equipment at a location hereafter referred to as the Canton site. Such machinery and equipment were formerly owned and used in the sand and gravel business at that same location by a corporation of which Rodebaugh was the president and a principal shareholder. Rodebaugh individually held a long-term lease (hereafter referred to as the Canton lease) from the fee owner of the Canton site, granting him the right to mine, process, and remove sand and gravel from the leased premises in consideration of a tonnage royalty payable to the lessor. Canton never received an assignment or sublease of such rights from Rodebaugh.
Lake Cable was incorporated on October 1, 1959. It owned certain machinery and equipment at a location hereafter referred to as the Lake Cable site. Such machinery and equipment were purchased from an individual previously engaged in the sand and gravel business at that same location. Since August 28, 1959, Rodebaugh individually held a long-term lease (hereafter referred to as the Lake Cable lease) from the fee owner of the Lake Cable site, granting him the right to mine, process, and remove sand and gravel from the leased premises in consideration of a tonnage royalty payable to the lessor. Lake Cable never received an assignment or sublease of such rights from Rodebaugh.
United was incorporated in 1929. It owned certain machinery and equipment at a location hereafter referred to as the United site. Lake Cabel purchased all the stock of United on October 1, 1959. On September 1, 1959, the fee owner of the United site granted a long-term lease (hereafter referred to as the United lease) to the Ohio Sand & Gravel Co. (an organization identified below), allowing it to mine, process, and remove sand and gravel from the leased premises in consideration of a tonnage royalty payable to the lessor.
On August 1, 1959, Stark and Canton executed a partnership agreement, which provided as follows:
1. The parties agreed to form a partnership to be known as Ohio Sand & Gravel Co. (hereafter referred to as Ohio).
2. Ohio would employ all personnel necessary to process sand and gravel on behalf of each partner and would be responsible for all sales, management, production, maintenance of equipment, and billing.
3. Rodebaugh was employed as general manager of the partnership. The partners agreed to compensate him for his services on behalf of the partnership and to reimburse him for all travel and entertainment expenses incurred in connection with the proper discharge of his duties.
4. Ohio would have the right to the use of all machinery and equipment of each partner and would be responsible for the proper maintenance and operation of such machinery and equipment.
5. Each partner granted to Ohio the right to excavate and remove sand and gravel from any lands from which they were authorized to do so by lease or other agreement. It was expressly understood and agreed that Ohio would not be obligated or responsible for the payment of any royalties for the removal of sand and gravel from any lands which might be under lease by the respective partners or for the performance of any of the terms of such leases.
6. The partners agreed that the net profits of the partnership would be distributed, and any losses would be borne, in the following proportions:
Canton ................... 70%
Stark .................... 30%
7. The partnership was to continue for a period of one year from the date of the agreement and be renewed from year to year unless changed by...
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