Soares v. Comm'r of Internal Revenue
| Decision Date | 19 September 1968 |
| Docket Number | Docket No. 2722-67. |
| Citation | 50 T.C. 909 |
| Parties | JAMES SOARES AND PATRICIA SOARES, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Vernon K. Deming and Lee M. Galloway, for the petitioners.
Jeffry E. Boly, for the respondent.
During 1962 and 1963, petitioner, a sole proprietor, acquired certain sec. 38 property on which he claimed investment credit pursuant to sec. 46, I.R.C. 1954, on his tax returns for those years. A portion of the credit was not used in those years and was carried over to and claimed for 1964. On Jan. 1, 1964, petitioner formed a partnership with S corporation, petitioner being a 48-percent partner. During the period Jan. 1, 1964, to July 1, 1964, the partnership acquired additional sec. 38 property with petitioner claiming his proportionate share of the investment credit on his 1964 tax return. On July 1, 1964, petitioner exchanged his partnership interest for a 7.22-percent interest in S corporation. Held, petitioner's 7.22-percent interest in S corporation was not substantial so as to make the sec. 47(b) exception to the general rule applicable. Held, further, petitioner made an early disposition of the above-described sec. 38 property and must recapture the investment credit attributable thereto under sec. 47(a)(1). Held, further, Commissioner's determination of addition to tax under sec. 6653(a), sustained.
The Commissioner determined deficiencies for the taxable years ending December 31, 1964, and December 31, 1965, in the following amounts:
+--------------------------------------+
¦ ¦ ¦Addition to tax, ¦
+------+------------+------------------¦
¦ ¦ ¦sec. 6653(a), ¦
+------+------------+------------------¦
¦Year ¦Deficiency ¦I.R.C. 1954 ¦
+------+------------+------------------¦
¦ ¦ ¦ ¦
+------+------------+------------------¦
¦1964 ¦$13,791.18 ¦$689.56 ¦
+------+------------+------------------¦
¦1965 ¦385.00 ¦ ¦
+--------------------------------------+
The issues for our determination are: (1) Whether petitioners disposed of certain section 38 property during the taxable year 1964 so as to make the recapture provision of the investment credit under section 47(a)(1), I.R.C. 1954,1 applicable, and (2) whether any part of petitioners' underpayment for the taxable year 1964 was due to negligence or intentional disregard of rules and regulations so as to make the 5-percent addition to tax under section 6653(a) applicable.
OPINIONAll the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference.
James Soares and Patricia Soares were husband and wife during the taxable years in question and filed joint Federal income tax returns with the district director of internal revenue, San Francisco, Calif., for the taxable year 1964, and with the district director of internal revenue, Los Angeles, Calif., for the taxable year 1965. On the date the amended petition to the Tax Court was filed, James Soares and his wife resided in Sacramento, Calif.
Prior to January 1, 1964, James Soares, hereinafter referred to as petitioner or Soares, operated a cement-hauling business as a sole proprietorship. During the taxable year 1962, Soares obtained $67,935.43 of new and used assets. Pursuant to section 38 of the 1954 Code, petitioner claimed $4,755.48 as an investment credit on his 1962 income tax return. One of the assets, costing $1,000 in 1962 and on which investment credit of $95.30 was claimed in 1962, was sold in 1963. Hence, $95.30 of the investment credit claimed in 1962 was indicated as recaptured on petitioner's 1963 return. During the year 1963, petitioner, as a sole proprietor, acquired $46,318.06 of new and used assets. Pursuant to section 38 of the 1954 Code, petitioner claimed $1,888.38 as an investment credit on his 1963 income tax return. In addition, $1,353.88 of investment credit was to be carried over to the next year.
On January 1, 1964, Soares formed a partnership known as Sacramento Cement Transport, hereinafter referred to as the partnership or Sacramento, with Sierra Distributing, Ltd., an electing small business corporation (subchapter S), hereinafter referred to as Sierra. As part of the agreement by which the partnership was formed, Soares contributed all of the assets of his sole proprietorship in exchange for a 48-percent interest in this partnership. Sierra owned the remaining 52 percent.
On July 1, 1964, Soares exchanged his 48-percent interest in the partnership for 7.22 percent of the outstanding stock of Sierra. Thereafter, Sierra dissolved Sacramento and caused all of the partnership assets, part of which were section 38 property, to be transferred to Sierra.
The book value of Soares' 48-percent interest in the partnership was equal to the fair market value of his 7.22-percent interest in the outstanding stock of Sierra.
During the taxable years in question, the other 92.78-percent interest in the outstanding shares of Sierra was owned by a six-member family named Duly.
During the year 1964, before the partnership was dissolved, Sacramento acquired $57,619.33 of new and used assets. Pursuant to section 38 of the 1954 Code, $5,002.27 was claimed on petitioner's 1964 return, which included $1,353.88 of investment credit carried over from 1963, less.$384.96 carried over to 1965.
The Commissioner determined a deficiency for the taxable year 1964. The total amount disputed by the petitioner includes the $5,002.27 described above and $6,548.56, the amount the Commissioner determined as recapturable prior investment credit.
In the explanation attached to the notice of deficiency, the Commissioner asserted the following:
COMPUTATION OF INVESTMENT CREDIT
On January 1, 1964, you transferred the assets from your sole proprietorship to a new partnership, Sacramento Cement Transport, and in return you received a 48% interest in the partnership. The remaining 52% of the partnership interest was held by Sierra Distributing, Limited, a subchapter ‘S' corporation. The partnership was dissolved on June 30, 1964, at which time you transferred your 48% interest to Sierra Distributing, Limited, for a 7.22% in that corporation. It is held that you did not retain a substantial interest in the trade or business represented by your sole proprietorship and the successor partnership at the time the assets initially contributed by you to the partnership were transferred to the corporation. It is therefore considered that you disposed of the assets contributed to the partnership at the date of its dissolution. Accordingly, the investment credit claimed in 1962 and 1963 on the assets which you are considered to have disposed of in this manner must be recaptured, and the amount claimed for 1964 based on your share of credit for assets purchased by the partnership is not allowable. Since it is held that no investment credit is allowable to you for the year 1964, no credit is available for carryforward to the year 1965.
The computation of the amount of investment credit to (be) recaptured in the year 1964 is as follows:
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¦1962 investment credit ¦$4,755.48¦
+-------------------------------------------------------------------+---------¦
¦1963 investment credit ¦1,888.38 ¦
+-------------------------------------------------------------------+---------¦
¦Total ¦6,643.86 ¦
+-------------------------------------------------------------------+---------¦
¦Less: 1962 purchase, sold in 1963; investment credit recaptured in ¦95.30 ¦
¦1963 ¦ ¦
+-------------------------------------------------------------------+---------¦
¦Investment credit to be recaptured, 1964 ¦6,548.56 ¦
+-----------------------------------------------------------------------------+
For the taxable year 1964, petitioner also failed to report $2,783 of business income from lease payments received from Sierra during the year 1964, and $2,299 of long-term capital gain received from the 1964 sale of a 1954 Peterbilt truck. During the same taxable year, petitioner also realized.$1,188.13 of ordinary income pursuant to section 1245 by selling a Peterbilt truck, upon which.$1,188.13 in depreciation had been allowed since December 31, 1961.
During the year 1965, Soares claimed investment credit of $764. The amount of $379 constitutes his proportionate share of the section 38 assets acquired by Sierra in 1965 and is not in dispute. The remaining $385 (this figure was rounded from.$384.96 on the return) of investment credit is a carryover from 1963 and 1964, based upon Soares' sole proprietor acquisitions in 1963 of section 38 property, and is in dispute.
Petitioner's 1964 and 1965 income tax returns were prepared by a certified public accountant.
The issues for our determination are: (1) Whether the recapture of the investment credit provisions of section 47(a)(1) are applicable to petitioner's disposition of certain section 38 property, and (2) whether petitioner is liable for the penalty under section 6653(a) because of negligence or an intentional disregard of rules and regulations.
With regard to the first issue, the Commissioner determined that when the petitioner exchanged his partnership interest for 7.22 percent of Sierra, an electing small business corporation, he disposed of his section 38 property and is liable for the recapture of the investment credit under section 47(a)(1). 2
Section 47(b) provides for an exception to the investment credit recapture provisions under section 47(a)(1). It states in part:
For purposes of subsection (a),...
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