The Challenger, Inc. v. Commissioner
| Citation | 1964 TC Memo 338,23 TCM (CCH) 2096 |
| Decision Date | 31 December 1964 |
| Docket Number | Docket No. 88427,90742-90746. |
| Parties | The Challenger, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Valentine Brookes and Paul E. Anderson, 1600 International Bldg., St. Mary's Square, San Francisco, Calif., for the petitioners. Leon Yudkin, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in income taxes as follows:
FY Ended Amount
The Challenger, Inc., Docket
No. 88427 ................ 9-30-55 $30,986.51
9-30-56 81,023.31
9-30-57 59,403.42
9-30-58 59,134.26
The Pub, Inc., Docket No
90743 ..................... 8-31-57 9,859.20
8-31-58 5,462.79
8-31-59 9,184.80
Saratoga Club, Inc., Docket
No. 90744 ................. 10-31-56 6,162.58
10-31-57 6,142.46
10-31-58 5,589.18
10-31-59 8,899.71
Caldwell Sport Shop, Inc
Docket No. 90745 ......... 5-31-59 6,944.94
United Waldorf, Inc., Docket
No. 90746 ................ 6-30-56 5,355.83
6-30-57 6,856.93
6-30-58 5,742.60
6-30-59 8,986.65
By amended petitions in docket Nos. 90743 through 90746, the petitioners therein claim overpayments as follows:
FY Ended Amount
The Pub, Inc., Docket No
90743 .................... 8-31-57 $ 2,723.54
8-31-58 13,340.79
8-31-59 22,233.93
Saratoga Club, Inc., Docket
No. 90744 ................ 10-31-56 8,949.95
10-31-57 8,495.33
10-31-58 7,690.70
10-31-59 13,014.84
Caldwell Sport Shop, Inc
Docket No. 90745 ......... 5-31-59 1,950.00
United Waldorf, Inc., Docket
No. 90746 ................ 6-30-56 11,874.78
6-30-57 6,549.07
6-30-58 8,560.54
6-30-59 13,085.61
Respondent determined deficiencies in income taxes of Twin Falls Brunswick, Inc., as follows:
FY Ended Amount
8-31-55 ....................... $30,256.54
8-31-56 ....................... 43,538.24
Period 9-1-56 to 5-31-57 ...... 196.12
Respondent further gave notice that Carson City Nugget, Inc., docket No. 90742, was liable as transferee for the entire deficiencies of Twin Falls Brunswick, Inc. Carson City Nugget, Inc., first admitted, but by amended petition denied, its asserted transferee status. That issue has been severed for trail at a later date if we should hold that there are deficiencies in income taxes of Twin Falls Brunswick, Inc. The above-listed dockets have been consolidated for trial and briefing as to all other issues.
The issues remaining for decision are:
1. Whether respondent properly allocated to the Challenger certain slot machine income reported as rent income by the Pub, Saratoga, and Waldorf and deducted as rent expense by the Challenger;
2. If so, whether the taxable incomes of the Pub, Saratoga, and Waldorf should be reduced by the amounts allocated to the Challenger;
3. Whether the Pub, Saratoga, and Waldorf are entitled to surtax exemptions;2
4. Whether respondent properly disallowed portions of the rent deductions taken by the Challenger and Nugget Enterprises with regard to realty leased by them;
5. Whether respondent properly disallowed a portion of the rent deductions taken by Twin Falls with regard to realty leased by it from Caldwell and, if so, whether such receipts are includible in Caldwell's income;
6. Whether respondent properly disallowed a portion of the rent deductions taken by Twin Falls with regard to realty leased by it from Waldorf and, if so, whether such receipts are includible in Waldorf's income; and
7. Whether respondent properly disallowed a portion of the rent deductions taken by Twin Falls with regard to property acquired by it under leases.
Some of the facts have been stipulated and are hereby found as stipulated.
The Challenger, Inc., Twin Falls Brunswick, Inc., Saratoga Club, Inc., Caldwell Sport Shop, Inc., and United Waldorf, Inc. (hereinafter sometimes referred to as "the Challenger," "Twin Falls," "Saratoga," "Caldwell," and "Waldorf," respectively), were incorporated in Idaho on December 18, 1947. The Pub, Inc., (hereinafter sometimes referred to as "the Pub") was incorporated in Idaho on December 12, 1947.
Carson City Nugget, Inc., is a Nevada corporation with its principal place of business in Carson City, Nevada. It is before the Court only as an alleged transferee of Twin Falls.
For the years before us: all the Idaho corporations kept their books and records on an accrual basis and filed their income tax returns with the district director of internal revenue at Reno, Nevada; Twin Falls had its principal place of business in Carson City, Nevada; the other corporations had their principal offices or places of business in Sparks, Nevada; and Caldwell filed its returns for taxable years ending on May 31, Waldorf on June 30, Twin Falls and the Pub on August 31, the Challenger on September 30, and Saratoga on October 31.
Richard L. Graves (hereinafter sometimes referred to as "Graves") owned all the outstanding stock of the Challenger since December 14, 1954, of Twin Falls from February 15, 1954, through September 5, 1956, of the Pub since September 20, 1950, of Saratoga since December 21, 1949, and of Waldorf since December 15, 1953. From its incorporation until December 14, 1954, the Challenger's stock was held equally by Graves and W. L. Winn, who at one time had also held stock in all the other corporations. From December 29, 1948, until December 15, 1953, Graves held two of Waldorf's three outstanding shares of stock. Since May 24, 1948, Graves owned two of Caldwell's three outstanding shares and his wife, Flora Graves (hereinafter sometimes referred to as "Flora"), owned the third. During the years before us, (until October 1, 1956, in the case of Twin Falls) Graves was president and manager of all the Idaho corporations.
On September 5, 1956, Graves sold all his Twin Falls stock to Carson City Nugget, Inc., for not less than the fair market value of Twin Falls' assets. On or about October 1, 1956, Carson City Nugget, Inc., completely liquidated Twin Falls, receiving all its assets.
The Challenger operated a cocktail lounge and slot machines in Boise, Idaho, from 1948 until slot machines were made illegal in Boise. The Challenger then transferred its operations to Sandpoint, Idaho. It discontinued its Idaho operations in 1953. Twin Falls operated a cigar store in Twin Falls, Idaho, and a sporting goods store in Kimberly, Idaho. Both stores had slot machines. Twin Falls discontinued both businesses in Idaho in 1953. The Pub operated a beer tavern and slot machines in Boise, Idaho. About 1951, when slot machines were made illegal in Boise, the Pub's business was closed down and its equipment put in storage. The Pub was not in business thereafter until its 1954 taxable year in Nevada. Saratoga operated a small club, including a restaurant, a bar, and slot machines, in Caldwell, Idaho. Caldwell sold beer and sporting goods and operated a cigar store, a restaurant, a coffee shop, and slot machines in Caldwell, Idaho. It discontinued operations when slot machines were outlawed in the town of Caldwell, about December 31, 1950, and thereafter did no business in Idaho. Waldorf operated a cigar store with food, sporting goods, and slot machines in Nampa, Idaho.
Each of these businesses involved slot machines, the operation of which was legal under local option at the time, and each business was closed down when slot machines were made illegal in the relevant locality or by action of the Idaho Supreme Court. State v. Village of Garden City, 74 Ida. 513, 265 P. 2d 328 (1953). When the business assets were thereafter sold, the corporations retained their slot machines and certain restaurant equipment, which were later moved to Nevada.
On February 20, 1954, Saratoga, Waldorf, and James H. Kelley (hereinafter sometimes referred to as "Kelley") purchased for $15,000 all the stock of a Reno, Nevada, corporation which was thereupon named Nugget, Inc. Hickok, the seller of the stock, assigned to Nugget, Inc., his leasehold interest in the property on which Nugget, Inc.'s business was conducted. Kelley and Graves guaranteed the payment of the leasehold purchase price. Nugget, Inc., opened for business on March 11, 1954. On January 1, 1955, Nugget, Inc.'s capital stock was held by Kelley (87 shares), Waldorf (43 shares), Saratoga (42 shares), and Graves (2 shares). On that date, Kelley bought the interests of the others in Nugget, Inc. Kelley agreed to: assume Graves' leasehold purchase guarantee obligation (the unpaid balance was approximately $90,000 on January 1, 1955); pay $3,750 each to Waldorf and Saratoga for their stock; pay $2 to Graves for his stock; pay Buhl Sport Shop, Inc., (a company in which Graves had an interest and which company was liquidated shortly after this transfer) the $20,000 it had lent to Nugget, Inc.; and pay Caldwell the $7,500 it had lent to Nugget, Inc. The payments to Waldorf and Saratoga and $5,000 of the payment to Caldwell were to be made by transferring 30, 30, and 40 slot machines, respectively, to those corporations. The 40 slot machines were to be transferred to...
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