Stoltzfus v. C.I.R., 121070 FEDTAX, 3827-67

Docket Nº:3827-67,3828-67.
Opinion Judge:IRWIN, Judge:
Party Name:MORRIS A. STOLTZFUS and RUTH E. STOLTZFUS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent M. A. STOLTZFUS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Howell C. Mette and Charles B. Zwally, for the petitioners. Stephen P. Cadden, for the respondent.
Case Date:December 10, 1970
Court:United States Tax Court
 
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29 T.C.M. (CCH) 1610

MORRIS A. STOLTZFUS and RUTH E. STOLTZFUS, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

M. A. STOLTZFUS, INC., Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 3827-67,3828-67.

United States Tax Court

December 10, 1970

Morris A. Stoltzfus and corporate petitioner engaged in certain horse-related activities during the years at issue and deducted certain expenses with respect thereto which the Commissioner disallowed on the ground that neither petitioner was engaged in a trade or business in connection with these disallowed items. Respondent also included certain items as additional income to individual petitioners.

Held, individual petitioner was not engaged in the business of breeding, raising, and selling American saddle bred horses in 1961 since he lacked requisite profit-making intention. Accordingly, disallowed deductions were proper. However, he was so engaged in 1962. Disallowed amounts were improper.

Held, further, petitioner-corporation was not engaged in any profit-motivated business with respect to its horse activities during its fiscal years ended October 31, 1961, and October 31, 1962. Therefore, disallowed deductions were proper. However, redetermination necessary as to additional income to individual petitioners in 1962.

Held, further, petitioner-corporation was engaged in saddle horse business during the taxable years ended October 31, 1963, and October 31, 1964, respectively. Disallowed amounts were improper.

Howell C. Mette and Charles B. Zwally, for the petitioners.

Stephen P. Cadden, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

IRWIN, Judge:

The Commissioner determined deficiencies in the individual petitioners' income taxes as follows:

Calendar
Year Deficiency
1961 $ 4,451.55
1962 42,757.21
1963 85,793.92
He also determined deficiencies in the income taxes of petitioner-corporation in the following amounts:
FY
Ended Deficiency
10-31-61 $ 3,783.28
10-31-62 3,308.25
10-31-63 42,430.81
10-31-64 25,089.01
The primary issue[1] for our decision is whether the horse activities conducted first by Morris A. Stoltzfus and then allegedly undertaken by M. A. Stoltzfus, Inc., constituted a trade or business entered into for profit, so that the expenses attributable thereto are deductible. In the event that we resolve that issue in the negative, there are a number of subsidiary issues for our determination, all of which relate to the horse venture: DOCKET NO. 3827-67 1. Whether the individual petitioners received additional income of $600 in 1961 as a result of the purchase of a horse cart and harness by petitioner-corporation. 2. Whether the individual petitioners claimed unallowable deductions of $4,951.86 in 1961. 3. Whether the individual petitioners received additional income of $1,881.79 in 1962, as a result of the disallowance of certain deductions claimed by the corporate petitioner. 4. Whether the individual petitioners received $38,900 in 1962 as a result of petitioner-corporation's purchasing five horses. 5. Whether the individual petitioners claimed unallowable deductions of $21,518.86 in 1962, as expenses relating to horse activities. 6. Whether claimed investment credits should be disallowed to the individual petitioners to the extent of $338.35 for 1962. 7. Whether the individual petitioners received additional taxable income of $68,833.36 in 1963 growing out of horse expenses paid by M. A. Stoltzfus, Inc. 8. Whether the individual petitioners received additional taxable income of $1,512 and $37,500 in 1963 growing out of tack room improvements made by petitioner-corporation and horses purchased by it. 9. Whether the individual petitioners claimed unallowable deductions for depreciation of $2,307.65 on stable and equipment allegedly rented by the individual petitioners to M. A. Stoltzfus, Inc. 10. Whether the individual petitioners claimed investment credit of $320.54 for 1963 for depreciable furniture and fixtures for the stable, costing $4,579.20, allegedly acquired for renting said stable to M. A. Stoltzfus, Inc., in its trade or business, should be disallowed. DOCKET NO. 3828-67 11. Whether the following deductions claimed by M. A. Stoltzfus, Inc., the corporate petitioner, relating to saddle horse activities should be disallowed as being assets acquired or expenditures made primarily for the personal benefit of the controlling stockholder, Morris A. Stoltzfus:
FY
Ended Amount
10-31-61 $ 90.00
10-31-62 6,394.00
10-31-63 89,919.50
10-31-64 122,137.09
12. Whether the following claimed net operating loss deductions carrybacks by M. A. Stoltzfus, Inc., the corporate petitioner, from fiscal year ended October 31, 1964, should be disallowed, as determined:
FY
Ended Amount
10-31-61 $12,610.92
10-31-62 11,434.19
10-31-63 58,630.90
13. Whether the claimed investment credit by M. A. Stoltzfus, Inc., the corporate petitioner, of $770 and $105.84 for fiscal year ended October 31, 1963, should be disallowed. FINDINGS OF FACT The parties have stipulated some facts which, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioners Morris A. Stoltzfus (sometimes hereinafter referred to as petitioner or Stoltzfus) and Ruth E. Stoltzfus (sometimes hereinafter referred to as Ruth), husband and wife who resided in Talmage, Pa., at the time of the filing of the petition herein, timely filed joint Federal income tax returns for the calendar years 1961, 1962 and 1963, respectively, with the district director of internal revenue, Philadelphia, Pa. They reported their income for those years on the cash receipts and disbursements method. Petitioners have two daughters, Marianne E. Nordstrom (referred to sometimes as Marianne) and Ruth Louise Jones (sometimes referred to as Ruth Louise). Marianne was born on April 5, 1937, and Ruth Louise on May 14, 1940. M. A. Stoltzfus, Inc. (sometimes referred to as MAS or petitioner-corporation), was incorporated in Pennsylvania on February 6, 1957, and has its principal place of business in Talmage, Pa. MAS, which reported its income on the accrual method, timely filed U.S. corporation income tax returns for the taxable years ended October 31, 1961, through October 31, 1964, respectively, with the district director of internal revenue, Philadelphia, Pa. Petitioner Morris A. Stoltzfus and his father Daniel M. Stoltzfus had operated quarry enterprises for many years. In 1949, this business was incorporated in Pennsylvania under the name D. M. Stoltzfus & Son, Inc. (hereinafter DMS), and was operated by petitioner and his father until the latter's death in February 1956, at which time petitioner continued the management of that corporation. Prom January 1, 1960, until the time of the trial herein, petitioner was the president and primary management executive of DMS, which operates a large limestone quarry in Talmage, Pa., and other quarries in Pennsylvania and Maryland, and is also engaged in the production and sale of crushed stone, aggregates, and related products, and in the paving construction business. Petitioner has also served as president and principal management official of the following corporations which have business related to the quarry business of DMS: 1. Pennsylvania Aggregates, Inc., which is engaged in quarrying and holding quarry reserve land; 2. Becker Company, Inc., which engages in trucking and hauling stone in interstate commerce; 3. M. A. Stoltzfus, Inc., the petitioner-corporation, which is engaged in rock and earth drilling, holding quarry reserve land, and farming, grazing, and breeding cattle thereon; and 4. Lancaster Construction Company, which is engaged in paving construction business. At the time of the trial herein, the estimated sales volume of DMS and these four related companies was five or six million dollars per year. Petitioner's duties and responsibilities with respect to these companies occupy his time six or seven days a week and twelve to fourteen hours a day. The following table indicates data relevant to the capital stock of MAS;
Number of Description Par Value Date
Stockholder Shares of Stock Per Share Issued
Marianne E. Nonvoting Class A.
Nordstrom 100 Common $ 100 Nov. 1957
Ruth Louise Nonvoting Class A.
Jones 100 Common 100 Nov. 1957
Morris A. Voting Class B.
Stoltzfus 50 Common 100 Feb. 1957
TOTAL CAPITAL STOCK
Dividends may be paid to holders of class A common stock without payment of dividends on class B common stock. However, no dividends can be paid to class B common stockholders without payment of an equal or greater amount per share to class A common stockholders. Except for the different voting and dividend rights between the two classes of stock, the rights of the stockholders thereof are identical. During the calendar years 1962 to 1966, the officers of MAS were the following persons:
Name Office
Morris A. Stoltzfus President
Marianne E. Nordstrom Vice President
John Beyer Secretary
Ruth E. Stoltzfus Assistant Secretary
Morris A. Stoltzfus Treasurer
From 1966 to the date of the trial, the officers of petitioner-corporation were:
Name Office
Morris A. Stoltzfus President
Ruth E. Stoltzfus Vice President
John Beyer Secretary
Marianne E. Nordstrom Assistant
...

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