SCHAEVITZ v. Commissioner
| Decision Date | 11 August 1971 |
| Docket Number | Docket No. 2207-69. |
| Citation | 30 TCM (CCH) 823,1971 TC Memo 197 |
| Parties | Herman Schaevitz and Stella Schaevitz v. Commissioner. |
| Court | U.S. Tax Court |
Daniel Mungall, Jr., 1300 Two Girard Plaza, Broad St. and South Penn. Sq., Philadelphia, Pa., for the petitioners. Giles J. McCarthy, for the respondent.
The Commissioner determined deficiencies of $13,997.60 and $2,016.05 in petitioners' income tax for the calendar years 1964 and 1965, respectively. The questions presented for decision are: (1) whether petitioners may deduct $13,600 as depreciation with respect to the yacht Reveille for the year 1964; (2) whether petitioners are entitled to an investment credit of $7,000 with respect to Reveille for the year 1964; and (3) whether petitioners may deduct a $9,620.17 loss which they claim was sustained by Reveille Corporation, a Subchapter S corporation wholly owned by petitioner Herman Schaevitz, in 1965.
The parties have stipulated certain facts which are incorporated herein by this reference.
Petitioners, Herman and Stella Schaevitz, are husband and wife. They filed joint Federal income tax returns for the calendar years 1964 and 1965 with the district director of internal revenue at Newark, New Jersey, and resided in Collingswood, New Jersey, at the time the petition in this case was filed. At all times pertinent herein, they kept their books and filed their Federal income tax returns on a cash method of accounting and on a calendar year basis.
Herman established Schaevitz Engineering, Inc. ("Schaevitz Engineering"), a New Jersey corporation, in 1945. Initially the corporation manufactured measurement and control devices. Subsequently it developed, manufactured, and sold a variety of other products, including centrifuges or rotary accelerators. The corporation has also had considerable experience in welding and working with metals.
During 1964 and 1965 Herman was the president and principal shareholder of Schaevitz Engineering, holding between 82 and 83 percent of its outstanding stock. The remaining shares were publicly held by some 600 stockholders. The corporation in turn was the sole owner of at least six subsidiaries, including Schaevitz Machine Works. During the years in issue Schaevitz Engineering and its subsidiaries manufactured measuring, indicating, recording, testing, and controlling devices used in electronic, mechanical, and hydraulic systems. Schaevitz Engineering had a 50,000 square foot plant located on 30 acres in Pennsauken, New Jersey. The plant had a fabrication shop, a machine shop, crane facilities, and cutting, shearing, and "vending" facilities suitable for work with metals.
During the late 1950's and early 1960's the manufacture of rotary accelerators comprised a substantial part of Schaevitz Engineering's business. The success of this operation, however, was directly dependent upon Government orders. Consequently, Herman desired to move into other types of business which would not be so dependent upon one customer. Various product lines were investigated. During 1963 orders for rotary accelerators declined and it eventually became apparent that orders then on hand would provide work for the corporation's machine shop only through the end of 1963. By the end of 1963, Schaevitz Engineering's rotary accelerator business had substantially died out.
In late 1963 a group of persons (sometimes hereinafter referred to as the "Hunter group") approached Herman with a proposal that Schaevitz Engineering construct a large, metal-hulled, ocean sailing yacht. Kent Hunter ("Hunter"), a vice-president of Lavino Shipping Company, was the principal figure in the group. Some of the other members of the group were Horace Disston ("Disston"), also an employee of Lavino Shipping Company; Marlene Hunter, Kent Hunter's wife; Don Geraghty, an experienced sailor; Dick Clark, an employee of Reynolds Aluminum; and two naval architects and a marine engineer.
Hunter and Disston had previously built one prototype of such a yacht. They had developed the idea in 1961 when they were both employees of Lavino Shipping Company. Both were involved with large-scale metal construction and both were interested in sailing and in boats. They thought that they could build a production sailing yacht which would be larger and relatively less expensive than anything else on the market at that time and hoped to establish a business to build such yachts to which they could devote their full time. The significant features of the yacht were a retractable keel and construction largely of flat metal plates. The prototype built by Hunter and Disston was completed in the spring of 1962. They placed advertisements in 1963 issues of "The Skipper" magazine in an effort to interest potential buyers in ordering construction of such yachts, which they called "North Atlantic 73s." The advertisements appeared over the name of "Hunter Ocean Yachts," a New Jersey corporation which Hunter and Disston organized on July 15, 1963. Nearly 1,000 persons responded to the advertisements. Each respondent was sent a brochure which described the prototype in greater detail.
Approximately 15 to 20 persons came to inspect or sail on the prototype in 1963. Among the visitors was Herman who inspected the yacht in the spring of 1963 but expressed no further interest at that time. Hunter and Disston were unable to procure any orders for additional North Atlantic 73s. The prototype had a steel hull, and Hunter and Disston concluded that its weight and tendency to rust might have discouraged potential customers. They decided that a second prototype should be built with an aluminum hull and which would consequently have more appeal as a racing boat.
In the fall of 1963 Hunter and Disston contacted Herman on behalf of the Hunter group in an effort to interest him or his corporations in their venture. They proposed that another prototype with an aluminum hull be built and that Hunter Ocean Yachts be continued in existence for another six months to a year to handle the advertising for the North Atlantic 73s. They showed Herman the advertisements they had placed and the responses which they had received. Herman was impressed with the design of the boat and with Hunter's ability. Moreover, because of the decline in its rotary accelerator business, Schaevitz Engineering needed metal work to keep its fabrication shop busy. Herman concluded that a profitable commercial enterprise was possible and decided to join the venture. He contemplated that North Atlantic 73s would be built and sold in quantity and would yield a large return per unit. He also expected that the venture would provide the opportunity to develop equipment which could be manufactured for the boating industry as a whole.
Discussions between Herman and the Hunter group lasted for about three weeks to one month. Eventually they reached an understanding that the Hunter group would supply the design and know-how for the new prototype and that Schaevitz Engineering would finance and build it. Subsequently a written "memorandum," dated January 7, 1964, between Hunter Ocean Yachts and Hunter, on the one hand, and Schaevitz Engineering on the other, was executed by Hunter and by Herman. The memorandum reflected the basic understanding that had been reached during the preceding discussions:
SEAL /s/ Herman Schaevitz Herman Schaevitz SEAL /s/ Kent Hunter Kent Hunter
Subsequently, however, the board of directors of Schaevitz Engineering decided that it would be undesirable for the name "Schaevitz" to be used in this connection and a corporation by the name of "Schaevitz-Hunter, Inc." was never in fact incorporated.
Herman and the members of the Hunter group considered one of the advantages of the North Atlantic 73 to be its retractable keel which would give it superior sailing speed before the wind. They decided that the best way to publicize the yacht would be by entering and winning yachting races. Indeed, even before construction of the prototype had begun, they decided that because of the importance of the Bermuda Race in yachting circles, they would enter the new prototype in that race. Consequently they planned the construction of the yacht so that it would be...
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