Stamos v. Comm'r of Internal Revenue (In re Estate of Stamos)

• Decision Date: 14 December 1970
• Docket Number: Docket No. 3349-67.
• Citation: 55 T.C. 468
• Parties: ESTATE OF GEORGE STAMOS, DECEASED, EVELYN J. STAMOS, EXECUTRIX, AND EVELYN J. STAMOS, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

55 T.C. 468

ESTATE OF GEORGE STAMOS, DECEASED, EVELYN J. STAMOS, EXECUTRIX, AND EVELYN J. STAMOS, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3349-67.

United States Tax Court

Filed December 14, 1970.

Robert E. Roache, for the petitioners.

J. Patrick McElroy, for the respondent.

On their joint Federal income tax return for 1963, the taxpayers elected to capitalize certain tax and interest payments pursuant to sec. 266, I.R.C. 1954, and the regulations promulgated thereunder. After the Commissioner subsequently determined that the taxpayers were not entitled to certain unrelated deductions which they had claimed on their 1963 return and consequently increased their taxable income from a loss of $1.26 to taxable income of $4,855.48, the taxpayers attempted to revoke their election and instead deduct the tax and interest payments in 1963. Held, the taxpayers' initial election may not be revoked.

OPINION

RAUM, Judge:

The Commissioner determined deficiencies in the income tax of George and Evelyn J. Stamos (the taxpayers) in the amounts of $988.20 and $505.64 for the calendar years 1963 and 1964. Since the 1964 determination has not been contested, only the deficiency determined with respect to 1963 is before us. The sole issue remaining for decision is whether the taxpayers may revoke their prior timely election to capitalize certain interest and real property tax payments and instead deduct those payments in computing their 1963 income tax. The case was submitted under Rule 30 on a complete stipulation of facts. A summary of the facts is set forth below.

Petitioners are the Estate of George Stamos and Evelyn J. Stamos, George's wife. George and Evelyn filed a joint Federal income tax return for the calendar year 1963 with the district director of internal revenue at Jacksonville, Fla. George died on March 15, 1967, and Evelyn was appointed executrix in probate proceedings filed in Dade County, Fla.

In 1959 George agreed to purchase all the outstanding stock of General Tung Oil Corp., a Florida corporation engaged in growing tung nuts and selling tung oil produced from such nuts. The assets of the corporation consisted of 2,600 acres of land, certain improvements thereon, and various items of personal property used in the operation of the business. At the time of purchase, the corporation's only outstanding shares of stock of any type were 41,275 shares of common stock, all of which were owned jointly by Polly Carnegie and the Estate of Carter Beggs Carnegie. On December 28, 1959, George executed an agreement with Polly Carnegie, acting both individually and in her capacity ‘as executrix of the Estate of Carter Beggs Carnegie.’ Under the agreement, George agreed to pay her $283,500 for the General Tung Oil stock and also agreed to purchase for the sum of $17,000 a demand note in the principal amount of $17,500 executed by the corporation to the order of Polly Carnegie. The parties have stipulated that the total purchase price for the stock thus amounted to $300,500.

Subsequently, George, as owner of all of General Tung Oil's outstanding stock, ‘appointed’ Evelyn Stamos, Marilyn S. Close, and himself as directors of the corporation. The directors in turn elected Evelyn president of the corporation, George vice president, and Marilyn Close secretary-treasurer. George and Evelyn lived in a house owned by General Tung Oil and devoted their full time to running the business of the corporation while George held its stock.

In January 1961, George and Polly Pence (formerly Polly Carnegie) amended their original purchase agreement to reduce the overall purchase price of the 41,375 shares by $20,000.

On August 23, 1961, George sold the 41,375 shares of stock to Ralph W. Cary, Jr. The 41,375 shares represented 100-percent ownership of General Tung Oil's outstanding stock. George paid $15,100 as his portion of the closing costs, which included commissions, brokers fee, and attorneys fees. The net sale price of the stock was $298,500. Subsequently the stock and/or the assets of the corporation were sold by Cary, and the corporation's books and records for the years 1959 through 1961 were lost or misplaced. The Commissioner's agents audited the corporation, and no records for the years during which George owned the stock could be found.

On their 1961 joint Federal income tax return, George and Evelyn (the taxpayers) reported a long-term capital loss of $8,958.68 on the sale of the corporation's stock¹ computed as follows:

Apart from the sale of the corporation's stock, the taxpayers had no taxable income in 1961.

In 1961 George suffered a heart attack and was unable to engage in any substantial business activity during 1962. As a result, the taxpayers had no taxable income in 1962 and did not file a return for that year.

During 1963 the taxpayers owned unimproved, unproductive real property located in Dade County, Fla., which they had mortgaged as security for several loans. During 1963 the taxpayers paid interest on those loans amounting to $6,485 and real estate taxes on the property amounting to $951.93. On their 1963 joint Federal income tax return, the taxpayers elected, pursuant to section 266, I.R.C. 1954,² and in accordance with the regulations promulgated thereunder, to capitalize the interest and real estate taxes rather than deduct them immediately. On their return the taxpayers also reported a net long-term capital gain of $14,599 and a net short-term capital loss of $8,223.57. The latter figure was based in part upon a purported capital loss carryover of $8,958.68 which the taxpayers regarded as available to them as a result of the loss which they had reported on the sale of their General Tung Oil stock in 1961. They consequently reported net taxable capital gain in the amount of $3,187.71 (i.e., 50 percent of the excess of the net long-term capital gain over the reported net short-term capital loss). After claiming a number of deductions and exemptions, the taxpayers reported that they had no taxable income in 1963³ — notwithstanding the fact that they had elected to capitalize, rather than deduct, the interest and real estate taxes on the unimproved and unproductive land.

Upon audit of the taxpayers' joint returns for the years 1961, 1963, and 1964, the Commissioner's agents questioned the loss claimed on the sale of the General Tung Oil stock in 1961, and asked the taxpayers to substantiate the adjusted basis in the stock which they had reported on their 1961 return. The taxpayers contended that George had contributed additional capital to the corporation, in excess of that required by the agreement with Polly Carnegie and the amendment thereto, and that such contributions had increased his basis in the stock. However, the taxpayers stated that because of the passage of time, George's poor health at the time of the transaction, and the unavailability of corporate and personal records, they were unable to substantiate the alleged capital contributions. During their examination of the taxpayers' returns, the Commissioner's agents also discovered that the actual net sale price of the General Tung Oil stock was $298,500 and not $320,000, as the taxpayers had reported.⁴ As a result of the foregoing adjustments to the stock's basis and sale price, the Commissioner adjusted the taxpayers' taxable income in 1961 to reflect a long-term capital gain from the sale of the General Tung Oil stock in the amount of $2,450, rather than the loss which the taxpayers had reported. As a consequence of other adjustments, however, the taxpayers had no taxable income in 1961, and no deficiency was determined for that year. The taxpayers waived protest and accepted the adjustments made for 1961, with the result that there was no net capital loss to be carried over to subsequent years. Consequently, the Commissioner disallowed the capital loss carryover deduction which the taxpayers had claimed on their 1963 return and increased their taxable capital gain in 1963 from $3,187.71 to $8,034.61. Together with other adjustments made by the Commissioner⁵ the upward revision in taxable capital gain increased their taxable income from a reported loss of $1.26 to taxable income of $4,855.48, which in turn resulted in a deficiency of $988.20. As a consequence of the Commissioner's determination that they had taxable income in 1963, the taxpayers claimed the right to revoke the election made in their 1963 return to capitalize interest and taxes on unimproved and unproductive land and instead deduct those payments in computing their 1963 income tax. The Commissioner denied their request and issued a statutory notice of deficiency to the taxpayers.

Section 266 provides that a taxpayer may elect, pursuant to regulations prescribed by the Secretary or his delegate, to treat certain taxes and carrying charges, which would otherwise be currently deductible, as capital expenditures. On their income tax return for 1963, the taxpayers elected to capitalize certain tax and interest payments in accordance with section 266 and the regulations promulgated thereunder. When it subsequently became apparent that the Commissioner would disallow a capital loss carryover deduction claimed on their 1963 return and thereby increase their taxable income for that year, the taxpayers attempted to revoke their election to capitalize the expenditures and instead deduct those payments in computing their taxable income for 1963.

Both section 266 and the regulations promulgated under it provide that expenditures which a taxpayer has elected to capitalize may not be deducted. See Income Tax Regs., sec. 1.266-1(a). Although neither the statute nor the regulations directly address the question whether, or under what circumstances, an election to capitalize may be revoked, the regulations do state that an election under section 266 must be made by filing a statement with the taxpayer's original return, Income Tax Regs., sec....