Shaw v. Commissioner
| Decision Date | 06 February 2002 |
| Docket Number | Docket No. 2799-00. |
| Citation | 83 T.C.M. 1194 |
| Parties | Sidney C. Shaw v. Commissioner. |
| Court | U.S. Tax Court |
H. Craig Pitts, for the petitioner.
Edith F. Moates, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies and accuracy-related penalties with respect to petitioner's Federal income tax as follows:
Penalty, I.R.C
Year Deficiency Sec. 6662(a)
1995 ................................................ $ 75,255 $15,051
1996 ................................................ 103,514 20,703
The issues presented are: (1) Whether losses claimed by petitioner are subject to the passive activity loss limitations under section 469 and (2) whether petitioner is liable for the accuracy-related penalty under section 6662(a). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Stillwater, Oklahoma, at the time of filing the petition. He owned real estate investment properties, interests in various business entities, gasoline-hauling trailers, and an airplane.
Petitioner researched properties and operational businesses. He developed a business model and consulted with his banker, construction supervisor, and operations managers. He either purchased the property individually or purchased the property indirectly through an entity in which he held an ownership interest. Petitioner then developed the land, renovated the existing building, or inventoried the property for future development. Petitioner leased many of his properties to Shaw's Gulf, Inc. (Shaw's Gulf), or its affiliates, and Shaw's Gulf managed the day-to-day business operations.
Petitioner was a 44.9-percent shareholder of Shaw's Gulf and was its president during the years in issue. As president, petitioner reviewed the monthly financial statements, approved the annual budget, approved the remodeling projects, and signed the checks. Shaw's Gulf paid petitioner compensation of $64,883.62 and $64,884.00 for 1995 and 1996, respectively, for his services related to Shaw's Gulf.
Shaw's Gulf was in the business of operating convenience stores, gas stations, carwashes, and Western Sizzlin' restaurants. During the years in issue, Shaw's Gulf leased properties from petitioner and managed the operations of the businesses located on those properties. The convenience stores that were leased from petitioner and operated by Shaw's Gulf were: Buy N Bye #2, Buy N Bye #6, Buy N Bye #7, Buy N Bye #12, Buy N Bye #13, and Conoco Cmart #16. Shaw's Gulf also rented an office building located in Stillwater from petitioner that was used as Shaw's Gulf's headquarters. In 1996, Shaw's Gulf also leased from petitioner and operated a Western Sizzlin' restaurant located in Ponca City, Oklahoma (Western Sizzlin' PC), and a convenience store with a large carwash located in Ponca City. Shaw's Gulf paid gross rents to petitioner of $739,875 and $976,954 for 1995 and 1996, respectively.
In addition to the real estate that Shaw's Gulf leased from petitioner, Shaw's Gulf also leased properties from entities in which petitioner held an ownership interest. During the years in issue, Shaw's Gulf operated Texaco Food Mart #5, a gas station and convenience store, that was leased from RS&M Properties II (RS&M). Petitioner was a 55-percent partner and the designated tax matters partner of RS&M during the years in issue.
Shaw's Gulf leased Buy N Bye #10, a convenience store, from R&S Partnership (R&S). Petitioner was a 50-percent partner of R&S during the years in issue, and petitioner contributed the Bye N Bye #10 convenience store to R&S sometime prior to the years in issue.
In 1996, Shaw's Gulf leased the Western Sizzlin' restaurant located in Stillwater (Western Sizzlin' SW) from S.C. Shaw, Ltd. (Shaw Ltd.), an S corporation of which petitioner was the sole shareholder.
Shaw's Gulf operated a convenience store at a truck stop located in Billings, Oklahoma, that was owned by Luttrell Oil Company (Luttrell). Petitioner was a shareholder and president of Luttrell during the years in issue. He reviewed the financial statements and tax bills of Luttrell, but he did not have much involvement in the day-to-day operations of Luttrell. Petitioner's compensation from Luttrell was $34,718.30 and $34,872.00 for 1995 and 1996, respectively.
Shaw's Gulf also leased and operated four other convenience stores in which petitioner held no direct nor indirect ownership interest in the property.
Barden Kellum (Kellum), vice president of operations, managed the day-to-day operations of Shaw's Gulf and its affiliates and was responsible for the maintenance of the properties leased by Shaw's Gulf. Kellum consulted with petitioner either by telephone or in person approximately 3 to 5 hours a week.
Shaw's Gulf also leased a house located in Stillwater from R&S. Petitioner contributed the house to R&S sometime prior to the years in issue. Kellum was not responsible for any of the residential rentals because petitioner hired an agency to manage the residential rentals.
C&A Trucking was a subsidiary of Shaw's Gulf. C&A Trucking was in the transportation business; on a call-and-carry basis, it delivered petroleum products. About 25 to 35 percent of C&A Trucking's business was from Shaw's Gulf. Stephen Shaw, general manager of C&A Trucking, managed the day-to-day business operations, dispatch, and billing.
Petitioner was a shareholder and the president of C&A Trucking during the years in issue. Petitioner was not involved in the day-to-day operations of C&A Trucking but did meet with Stephen Shaw for about 3 hours three times a month to review the numbers, sign the checks, and review the business volume. C&A Trucking paid petitioner compensation of $16,180.50 and $16,221.00 in 1995 and 1996, respectively, for his services related to C&A Trucking.
C&A Trucking rented gasoline-hauling trailers (Over the Road Trailers) and a warehouse located in Stillwater from petitioner. C&A Trucking paid petitioner gross rents of $172,251 and $313,657 in 1995 and 1996, respectively.
Shaw Ltd.
Petitioner was the sole shareholder of Shaw Ltd., which was an S corporation, during the years in issue. During the years in issue, Shaw Ltd. was in the business of operating a Dairy Queen restaurant. In 1995, Shaw Ltd. owned and operated the Western Sizzlin' SW restaurant that was later leased to and operated by Shaw's Gulf in 1996.
The Dairy Queen restaurant was built and opened for business in 1994. Shaw Ltd. owned the building and the equipment of the Dairy Queen restaurant, but the land on which the Dairy Queen restaurant stood was leased from SDQ LLC. Petitioner was a 33.33-percent member and the designated tax matters partner of SDQ LLC during the years in issue. The day-to-day operations of the Dairy Queen restaurant were managed by Kent Russell (Russell).
Petitioner renovated the Dairy Queen restaurant in 1995. Petitioner purchased a new cash register system and added a salad display case. The renovations consisted of relocating the fountain area to create a separate area for customers to get their drinks, installing new tile, and adding a mop sink closet. The renovation work was done at night so that the restaurant could remain open.
During the first 14 weeks of 1995, petitioner was involved in the renovation project and operations of the Dairy Queen restaurant. He spent about 7 hours a week at the restaurant busing tables, cooking hamburgers, and fixing the balls in the playroom. Petitioner met with Russell every morning to review the food and labor costs. After the first 14 weeks of 1995, petitioner spent about 3 hours a day at the restaurant observing operations. In 1996, petitioner spent about 3 hours a week at the Dairy Queen restaurant.
Petitioner contributed Western Sizzlin' SW to Shaw Ltd. in May 1995. In 1996, Shaw Ltd. leased Western Sizzlin' SW to Shaw's Gulf, and Shaw's Gulf took over the business operations of Western Sizzlin' SW. Bob Palmer (Palmer), manager of Western Sizzlin' SW, continuously managed the day-to-day operations of the Western Sizzlin' SW restaurant during the years in issue.
In 1995, Shaw Ltd. made renovations to Western Sizzlin' SW. The renovations consisted of expanding the seating area, extending the entry to create a cashier area, relocating the restrooms, adding a cleaning closet, and expanding the parking lot. The renovation work was done at night so that the restaurant could remain open.
Petitioner met with Palmer regularly, about 14 hours a week during the 15-week construction period, to discuss the renovations and business operations of the Western Sizzlin' SW restaurant. Petitioner made the final decisions on the operations and policy of the Western Sizzlin' SW restaurant, including the type of food served, the meat quality, the seasoning used on the steaks, the use of a vacuum tumbler to marinate the steaks, the baking of fresh bread, the addition of scatter bars throughout the restaurant, and the addition of a cotton candy machine and desserts to the buffet. After the renovations were completed in August 1995, petitioner met with Palmer occasionally, about 3 hours a week, to review and discuss the financial statements. In 1996, petitioner ate dinner at the restaurant 3 nights a week.
Gregory Webb (Webb), an employee of Shaw's Gulf, was the construction supervisor responsible for overseeing the day-to-day construction of the Dairy Queen and Western Sizzlin' SW remodeling projects. Webb worked with petitioner on the design, drawings, and cost of the projects. Petitioner approved all of the details of the renovation projects, set up lines of credit with vendors, found...
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