Stout v. Comm'r of Internal Revenue, Docket Nos. 61555
| Citation | 31 T.C. 1199 |
| Decision Date | 25 March 1959 |
| Docket Number | 58593,Docket Nos. 61555,61556. |
| Parties | JOE W. STOUT AND EUDORA STOUT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FLORENCE L. ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
N. A. Townsend, Jr., Esq., Herman Wolff, Jr., Esq., J. Duane Gilliam, Esq., and J. O. Tally, Jr., Esq., for the petitioners.
Ralph V. Bradbury, Esq., for the respondent.
1. A partnership, pursuant to the partnership agreement, paid ‘salaries' to petitioner Stout and some of the other partners, the amount paid as salaries being a charge to the capital account of each partner proportionately to the extent the payments exceeded net income of the partnership. The partners had contributed relatively small amounts to the partnership and the salaries were paid principally from a construction loan obtained by the partnership. Held, the amount received by petitioner Stout is taxable to him except to the extent it represented a return of his capital investment. Held, further, that he is entitled to a deduction to the extent his capital contribution was applied in payment of salaries to other partners. Held, further, that petitioner Rogers is entitled to a deduction as a result of the salary payments, but limited to the amount of her capital contribution. Augustine M. Lloyd, 15 B.T.A. 82, applied.
2. Held, that Federal social security and unemployment taxes on wages paid by a partnership in the course of construction of buildings are deductible under section 23(a)(1)(A), I.R.C. 1939, and section 39.24(a)(6) of Regulations 118 and section 29.24-5 of Regulations 111. Held also that North Carolina unemployment taxes paid on such wages and North Carolina use taxes are deductible under section 23(c)(1), I.R.C. 1939. Held, further, that the North Carolina sales taxes imposed upon the vendor and passed on to the vendee partnership are not deductible, but are capital expenditures.
3. Held, that petitioners Stout have failed to sustain the burden of proof that they are entitled to a deduction in 1952 of a net operating loss carryback from the year 1953.
4. Addition to tax under section 294(d)(1)(A) approved upon failure of the petitioners to show that their failure to file a declaration of estimated tax for the year 1952 was due to reasonable cause and not to willful neglect.
The respondent determined deficiencies in income tax and additions to tax against the petitioners as follows:
+------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Additions to tax ¦
+----------+------+----+----------+--------------------------------¦
¦ ¦Docket¦ ¦ ¦ ¦ ¦ ¦
+----------+------+----+----------+---------+------------+---------¦
¦Petitioner¦No. ¦Year¦Income tax¦ ¦ ¦ ¦
+----------+------+----+----------+---------+------------+---------¦
¦ ¦ ¦ ¦ ¦Sec. 291 ¦Sec. ¦Sec. ¦
+----------+------+----+----------+---------+------------+---------¦
¦ ¦ ¦ ¦ ¦ ¦294(d)(1)(A)¦294(d)(2)¦
+----------+------+----+----------+---------+------------+---------¦
¦Stout ¦61555 ¦1952¦$16,512.28¦ ¦$2,491.89 ¦ ¦
+----------+------+----+----------+---------+------------+---------¦
¦Rogers ¦58593 ¦1951¦593.17 ¦ ¦ ¦ ¦
+----------+------+----+----------+---------+------------+---------¦
¦Rogers ¦61556 ¦1952¦9,220.36 ¦$2,305.09¦829.84 ¦$553.22 ¦
+----------+------+----+----------+---------+------------+---------¦
¦Rogers ¦61556 ¦1953¦992.92 ¦ ¦ ¦ ¦
+------------------------------------------------------------------+
The principal issue presented for decision in Docket No. 61555 is whether an amount paid to petitioner Joe W. Stout as ‘salary’ pursuant to the terms of a partnership agreement, is taxable to him in full. Other issues relate to the deductibility by the partnership of various taxes paid in the course of construction of two apartment projects; whether the petitioners are entitled to a deduction in 1952 of a net operating loss carryback from 1953; and whether they are liable for an addition to tax under section 294(d)(1)(A) for failure to timely file a declaration of estimated tax.
In Docket No. 58593, relating to the year 1951, petitioner Florence L. Rogers and the respondent have entered into a stipulation which completely disposes of all issues except the amount of any net operating loss carryback from 1952 to which the petitioner may be entitled (and the proper amount of deduction for contributions), as a result of our decision of issues in Docket No. 61556. In Docket No. 61556, which relates to the years 1952 and 1953, the respondent concedes error in his determination of all additions to tax and in his failure to treat certain gains from sales of property as long-term capital gains, and also concedes on brief that he failed to carry the burden of proof in respect to an issue involving section 112(k) for the year 1953, which was raised by amendment to his answer. The issues remaining for decision in Docket No. 61556 are whether the petitioner, as one of the partners, is entitled to a deduction in 1952 on account of the payment by the partnership of salaries to petitioner Stout and other partners in that year, and whether as to both 1952 and 1953, in computing net income of the partnership, the taxes above mentioned may be deducted.
All the facts were stipulated either orally or in writing, except for certain documents submitted in evidence at the hearing. The stipulations are incorporated herein by this reference.
Petitioners Joe W. Stout (hereinafter referred to as Stout) and Eudora Stout are husband and wife who reside at Fayetteville, North Carolina. For the taxable year 1952 they filed their joint income tax return with the director of internal revenue for the district of North Carolina.
Petitioner Florence L. Rogers is an individual who maintains her principal residence at Fayetteville, North Carolina. For each of the taxable years 1952 and 1953, she filed her individual income tax returns with the director of internal revenue for the district of North Carolina.
On November 1, 1951, Joe W. Stout, Florence L. Rogers, Terry A. Lyon, C. B. McNairy, and Raymond A. Bryan formed a partnership under the name of Fayetteville Building Company, to engage in the business of dealing in real estate and building houses, apartment houses, etc. The partnership agreement provides in part as follows:
6. The net profits of the partnership shall be divided and the net losses of the partnership shall be borne in the following proportions:
+-----------------------+
¦Florence L. Rogers ¦30%¦
+-------------------+---¦
¦Terry A. Lyon ¦10%¦
+-------------------+---¦
¦Joseph Stout ¦20%¦
+-------------------+---¦
¦C. B. McNairy ¦20%¦
+-------------------+---¦
¦Raymond Bryan ¦20%¦
+-----------------------+
8. It shall be the special duty and obligation of Joseph Stout, C. B. McNairy and Raymond Bryan to plan and supervise all construction work done by the partnership. Such work shall be supervised and managed in detail by Joseph Stout and by this agreement, he undertakes to give to such supervision and management all the time reasonably required according to the work on hand. Accordingly, salaries shall be fixed and paid as follows:
(a) Joseph Stout, for the services described above, shall be entitled to a salary equivalent to an amount which equals five per cent (5%) of the actual cost of all construction work performed by the partnership.
(b) Messrs (sic) McNairy and Bryan, for the services described above, each shall be entitled to a salary equivalent to an amount which equals two and one-half per cent (2 1/2%) of the actual cost of all construction work performed by the partnership.
(c) Florence L. Rogers and Terry A. Lyon shall receive no salaries.
9. All the above mentioned salaries shall be deducted from the net profits of the partnership as an expense thereof in determining the partners' distributive shares of the net profit of the partnership. If during any year the salary paid shall exceed the net income of the partnership, computed without the deduction of such salaries, the excess shall be treated as a loss of the partnership to be borne by the partners in the proportions stated in paragraph 6 of this agreement.
19. By mutual consent of all partners the partnership may be dissolved at any time. All funds and assets of the partnership after the debts are paid shall be divided among the partners in the proportions provided for by paragraph 6 of this agreement.
At the time of the organization of Fayetteville Building Company the several partners contributed capital to the partnership in amounts as follows:
+----------------------------+
¦Partner ¦Amount ¦
+-------------------+--------¦
¦Florence L. Rogers ¦$750 ¦
+-------------------+--------¦
¦Terry A. Lyon ¦250 ¦
+-------------------+--------¦
¦Joe W. Stout ¦500 ¦
+-------------------+--------¦
¦C. B. McNairy ¦500 ¦
+-------------------+--------¦
¦Raymond A. Bryan ¦500 ¦
+----------------------------+
On November 24, 1951, the partnership acquired a tract of land consisting of 22.65 acres, located between Fayetteville and Fort Bragg, North Carolina, from Florence L. Rogers for $5,600 and built thereon a group of rental housing units known as ‘Eutaw Apartments.’ To finance this construction the partnership borrowed the amount of $1,075,700 from a bank. The housing units were 53 per cent complete on the last day of February 1952. They were completed on June 30, 1952. The first occupancy was in April 1952. By July 1, 1952, the entire project was rented.
The partnership used an accrual method in keeping its books of account and filing its tax...
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