Sam Goldberger, Inc. v. Comm'r of Internal Revenue
| Decision Date | 23 June 1987 |
| Docket Number | Docket Nos. 3936-84,20040-84. |
| Citation | 88 T.C. 1532,88 T.C. No. 87 |
| Parties | SAM GOLDBERGER, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. International, a wholly owned subsidiary of Goldberger, Inc. (parent), elected Domestic International Sales Corporation (DISC) status. During its taxable year ended October 31, 1979, International made advances to parent that were to be used to purchase merchandise to be sold by International. The Commissioner mailed a statutory notice of deficiency to parent in which he made adjustments for disqualification distributions under sec. 995(b)(2), I.R.C. 1954. These adjustments resulted from a prior determination by the Commissioner that International did not qualify as a DISC for its taxable year ended October 31, 1979. HELD, we have jurisdiction to decide whether International qualified as a DISC for its taxable year ended October 31, 1979. HELD FURTHER, International did not qualify as a DISC for its taxable year ended October 31, 1979. The advances to parent were not qualified export assets under sec. 993(c)(1) or 993(b)(4), I.R.C. 1954, and, therefore, International failed to meet the asset test under sec. 992(a)(1)(B), I.R.C. 1954. Validity of sec. 1.993-2(e)(4), Income Tax Regs., upheld.
2. HELD, wages paid by parent for secretarial services are deductible.
3. Sam operated a meat brokerage business as a sole proprietorship. He valued the inventory at the lower of cost or market. HELD, although Sam valued the inventory in accordance with generally accepted accounting principles, he failed to establish that he valued the inventory in accordance with sec. 1.471-4(b), Income Tax Regs., and the Commissioner did not abuse his discretion by reducing the cost of goods sold and restoring to income the amount by which Sam reduced the value of the inventory. Secs. 446 and 471, I.R.C. 194. HELD FURTHER, Sam failed to establish that he valued the inventory that had been frozen for 6 months under sec. 1.471-2(c), Income Tax Regs.
4. HELD, rent Sam paid for a residence from which he conducted the business of his sole proprietorship is not deductible because he failed to establish that any portion of the residence was used exclusively for business purposes.
5. HELD, travel and entertainment expenses claimed as expenses of the sole proprietorship are disallowed for lack of substantiation.
6. HELD, proceeds from the sale of a cabin situated on land that Sam owned are includible in income. Sam introduced no evidence as to the basis of the cabin or any reason why apportionment of the basis could not be made.
7. HELD, parent and Sam are not liable for the additions to tax under section 6653(a)(1) and (2). Frank R. Berman, James E. Kelly, and Scott G. Harris, for the petitioners.
David R. Smith, for the respondent.
The Commissioner determined deficiencies in petitioners' Federal income taxes and additions to tax under section 6653(a)(1) 1 and (2) as follows:
+----------------------------------------------------------------+
¦ ¦Taxable ¦ ¦Additions to tax ¦
+----------+----------+----------+-------------------------------¦
¦Docket No.¦year ended¦Deficiency¦Sec. 6653(a)(1)¦Sec. 6653(a)(2)¦
+----------+----------+----------+---------------+---------------¦
¦3936-84 ¦09/30/77 ¦$4,292.00 ¦--- ¦--- ¦
+----------+----------+----------+---------------+---------------¦
¦ ¦09/30/78 ¦11,149.00 ¦--- ¦--- ¦
+----------+----------+----------+---------------+---------------¦
¦ ¦09/30/79 ¦46,636.00 ¦$200.00 ¦--- ¦
+----------+----------+----------+---------------+---------------¦
¦ ¦09/30/82 ¦1,411.00 ¦71.00 ¦1 ¦
+----------+----------+----------+---------------+---------------¦
¦20040-84 ¦12/31/77 ¦62,302.00 ¦3115.10 ¦--- ¦
+----------+----------+----------+---------------+---------------¦
¦ ¦12/31/80 ¦27,248.01 ¦1,362.40 ¦--- ¦
+----------+----------+----------+---------------+---------------¦
¦ ¦12/31/81 ¦810.00 ¦40.50 ¦2 ¦
+----------------------------------------------------------------+
These cases were consolidated for trial, briefing, and opinion. After concessions, the issues for decision are: (1) whether we have jurisdiction to decide if Sam Goldberger International, Inc., qualified as a Domestic International Sales Corporation for its taxable year ended October 31, 1979, and if we do, whether it so qualified; (2) whether Sam Goldberger, Inc., is entitled to a deduction for salary paid to Emma Sterner; (3) whether Sam Goldberger properly valued the ending inventory of meat products of his sole proprietorship; (4) whether the sole proprietorship of Sam Goldberger is entitled to deductions for rent; (5) whether the sole proprietorship of Sam Goldberger is entitled to a deduction for travel and entertainment expenses; (6) whether the proceeds from the sale of a cabin are includible in the gross income of Sam Goldberger; and (7) whether petitioners are liable for the additions to tax under section 6653(a)(1) and (2).
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits are incorporated by this reference.
Petitioner, Sam Goldberger (Sam), resided in Miami, Florida, at the time he filed his petition in this case. He filed his Federal income tax returns for the taxable years 1977, 1980, and 1981 with the Internal Revenue Service Center in Chamblee, Georgia.
Petitioner, Sam Goldberger, Inc. (Goldberger, Inc.), filed Federal income tax returns based upon a taxable year ended September 30, using the accrual method of accounting. Goldberger, Inc., filed Federal income tax returns for its taxable years ended September 30, 1977 through September 30, 1982, with the Internal Revenue Service Center in Ogden, Utah. We conclude that the principal office of Goldberger, Inc., was in Miami, Florida at the time it filed its petition in this case.
During the taxable years in issue, Sam operated a meat brokerage business, as a sole proprietorship, under the name Sam Goldberger. Sam was also president and 100-percent shareholder of Goldberger, Inc., whose activities consisted of the brokerage and sale of meat products. Sam Goldberger International, Inc. (International), was a wholly owned subsidiary of Goldberger, Inc. It was involved in selling meat overseas, primarily to Japan. International elected Domestic International Sales Corporation (DISC) status on July 18, 1978, and filed a Form 1120-DISC, Domestic International Sales Corporation Return, for the period July 18, 1978 through October 31, 1978. It also filed a Form 1120-DISC for its taxable year ended October 31, 1979.
In 1972, Sam met Emma Sterner (Emma), who was working as a nurse at Miami Heart Institute, where he was a patient. In 1973, he hired Emma to be his nurse and secretary. She had been a secretary for 21 years before becoming a nurse in 1972. Emma administers medication and injections to Sam daily, and also provides foot care and leg therapy for him. With respect to the sole proprietorship and Goldberger, Inc., she answers the telephone, opens the mail, prepares the paperwork for purchases and sales of meat, picks up meat samples at the airport, picks up individuals at the airport who are in town for business meetings with Sam, and attends the meetings. In addition, she makes airline and hotel reservations and accompanies Sam on all of his trips. During the taxable years ended September 30, 1980 through September 30, 1982, Goldberger, Inc., paid Emma wages of $9,000 per year and deducted the salary on its Federal income tax returns.
In 1978, Sam moved the offices of his sole proprietorship and Goldberger, Inc., to the personal residence of Emma at 5195 S.W. 64th Avenue, Miami, Florida. During the taxable years in issue, there was a telephone listing at this address for the sole proprietorship and Goldberger, Inc. Approximately one-third of the house was used in the business of the sole proprietorship and Goldberger, Inc.; a portion of the main living area or ‘Florida‘ room contained his desk and supplies and an alcove off of the bedroom was used as an office. Sam also conducted business meetings at the house. A meat freezer was moved to the house in which meat samples were kept. In January 1980, Sam moved into the house and maintained it as both an office and his residence. Rent of $2,500 and $6,500 was paid to Emma for the taxable years 1980 and 1981, respectively, and Sam deducted the rent on his Federal income tax returns as an expense of his sole proprietorship. Although Sam deducted the rent as an expense of his sole proprietorship, the rent payments for the taxable year 1980 were made pursuant to a lease between Emma and Goldberger, Inc. The lease was for a 3-year term, commencing on November 1, 1977, and ending on October 30, 1980.
Sam made all decisions concerning the valuation of the inventory of meat products held by the sole proprietorship. He valued the inventory using the lower of cost or market method for the taxable years 1980 and 1981. He valued the ending inventory on December 31, 1980, as follows:
+---------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Purchase ¦ ¦
+--------+---------------+------+--------+---------+------------¦
¦Purchase¦ ¦Lot ¦Number ¦price per¦Valuation2 ¦
+--------+---------------+------+--------+---------+------------¦
¦date ¦Item ¦number¦of boxes¦pound ¦per pound ¦
+--------+---------------+------+--------+---------+------------¦
¦01/08/80¦Pastrami ¦3770 ¦94 ¦$0.95 ¦$0.50 ¦
+--------+---------------+------+--------+---------+------------¦
¦01/16/80¦Pastrami ¦1891 ¦501 ¦0.95 ¦0.50 ¦...To continue reading
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