33 T.C.M. (CCH) 956
STONEGATE OF BLACKSBURG, INC., Petitioner
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
August 20, 1974
LeRoy Katz, for the petitioner.
J. Doyle Tumbleson, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies and additions to petitioner's Federal income taxes:
|| Sec. 6651(a)1
|| Sec. 6653(a)
The issues presented for decision are as follows: (1) Whether petitioner's taxable year was a fiscal year ending March 31 or a calendar year during the years in issue; (2) Whether petitioner was an electing small business corporation for the period from April 1, 1967 through March 31, 1968 pursuant to Subchapter S; (3) Whether certain payments made by petitioner to its shareholders constituted deductible travel expenses; (4) Whether the cost to be allocated to lots sold by petitioner during the years in issue was properly determined by respondent; and (5) Whether petitioner is subject to the additions to tax prescribed in sections 6651(a) and 6653(a). Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner is a Virginia corporation which was organized on April 23, 1963 and went by the name of Classmate Apartment Corporation until February 25, 1965. Its principal place of business at the time it filed the petition herein was in Pulaski, Virginia. Of the original organizers and shareholders, only Paul C. Roop (hereinafter ‘ Roop’ ) remained after the name change. During the years in issue, Roop was petitioner's president. In addition to his activities for petitioner, Roop was active as a real estate developer in several partnerships and corporations. T. Rodman Layman, an attorney, served as petitioner's vice president and John W. Layman, a mathematics teacher at Virginia Polytechnic Institute, was secretary-treasurer. Petitioner issued no stock and remained inactive until the early part of 1965. By deed dated February 3, 1965, petitioner purchased 29.460 acres of unimproved land. During 1965 and the early part of 1966, petitioner improved the land and subdivided it in preparation for sale. On April 7, 1965, petitioner borrowed in excess of $100,000 in order to provide funds to finance the purchase of the property, costs of development, and related expenses. Petitioner began the sale of lots in the early part of 1966. Prior to June 25, 1969, no income tax returns were filed by petitioner. In the latter part of 1968, an Internal Revenue Agent requested Roop to have income tax returns prepared for petitioner for the taxable years 1963 through 1967. Roop then consulted a tax return preparer, who prepared: (1) a corporate income tax return (Form 1120) for the period April 1, 1966 through March 31, 1967 and (2) a small business corporate income tax return (Form 1120-S) for the period April 1, 1967 through March 31, 1968. These returns were delivered to the Internal Revenue Agent for examination in late 1968 or early 1969. By letter dated March 21, 1969, Roop requested return of the two returns and on March 25, 1969, the agent delivered them to petitioner's counsel. Petitioner next consulted a firm of Certified Public Accountants, who prepared corporate income tax returns for: (1) the calendar year 1965, (2) the period from January 1, 1966 through March 31, 1966, and (3) the period from April 1, 1966 through March 31, 1967. Petitioner filed these three returns with the district director of internal revenue in Richmond, Virginia, on June i5, 1969. The record contains the following two letters purportedly written and mailed by petitioner at or about the dates thereof: ‘ April 15, 1966 District Director Internal Revenue Service Richmond, Virginia Re: Stonegate of Blacksburg, Inc. Gentlemen: The above corporation, successor in 1965 to Classmate Apartment Corporation, a 1963 corporation which never conducted any business, has requested that I inform you that it desires to follow the fiscal year period of April 1-March 31 selected by Classmate at the time of its inception, if not objectionable to you. Stonegate began doing business for the first time in 1966 and you should shortly receive its return. Information of the fiscal year period for accounting purposes of Stonegate has been sent to the Director of the Virginia Department of Taxation on each of the last two years, but I did not recall your having ever been notified. Yours very truly, T. Rodman Layman Counsel and Registered Agent Stonegate of Blacksburg, Inc.' (2) ‘ July 15, 1966 District Director Internal Revenue Service Richmond 15, Virginia Re: Stonegate of Blacksburg, Inc. Dear Sir: This corporation has elected to use the period April 1-March 31, as their fiscal year. The corporation is now active in the development of Stonegate of Blacksburg Subdivision and as of March 31, 1966 had not completed a real estate transaction. The corporation will file a tax return for the period of April 1, 1966-March 31, 1967 prior to July 15, 1967. Yours very truly, T. Rodman Layman Registered Agent' The record also contains a Form 2553 (Election by Small Business Corporation) bearing a date of March 10, 1967 and purportedly electing Subchapter S status effective April 1, 1967. Annual Accounting Period The first issue involves the question whether petitioner is entitled to use a March 31 fiscal year for tax purposes. The governing provisions are contained in section 441.
Initially, petitioner seems to contend that it was inactive at least until April 1, 1966, so that the first return which it was required to make was for the fiscal year ended March 31, 1967. Under section 441(c), an annual accounting period is determined by ‘ the annual period on the basis of which the taxpayer regularly computes his income in keeping his books'. See also section 1.441-1(c), Income Tax Regs. The evidence herein contains no indication that such records were kept on a March 31 fiscal year basis. Cf. Great West Printing Co. v. Commissioner, 60 F.2d 749
(C.A. 8, 1932); Albert L. Dougherty, 60 T.C. 917
, 932-933 (1973). Not only...