Ticket Office Equip. Co. v. Comm'r of Internal Revenue
| Decision Date | 30 April 1953 |
| Docket Number | Docket No. 31072. |
| Citation | 20 T.C. 272 |
| Parties | TICKET OFFICE EQUIPMENT CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner's equity invested capital held properly computed by respondent on failure of proof as to value of property paid in for stock.
2. Petitioner's deductions for compensation of officers, held reasonable, on facts.
3. Cost of welding machine held a capital expenditure and not deductible as an ordinary business expense.
4. (a) Insurance proceeds from partial destruction of a building by fire held taxable to extent not expended for replacement. (b) Insurance proceeds on contents of building destroyed in fire, totally exhausted to replace various destroyed items, not being allocable to any part of unreplaced inventory and other items, loss held not compensated for by insurance proceeds. (c) Amounts expended on temporary building repairs prior to replacement of building and on other non-capital and recurrent repairs held deductible as ordinary and necessary expenses.
5. Attorney and adjuster fees paid to negotiate insurance settlement held deductible as ordinary and necessary expense. Richard W. Wilson, Esq., for the petitioner.
Arthur L. Nims, Esq., for the respondent.
Respondent determined deficiencies in petitioner's income tax, declared value excess-profits tax, and excess profits tax liability as follows:
+------------------------------------------------------------+
¦Year ending June 30¦Tax ¦Deficiency¦
+-------------------+-----------------------------+----------¦
¦1943 ¦Excess profits ¦$1,260.90 ¦
+-------------------+-----------------------------+----------¦
¦1944 ¦Income ¦154.01 ¦
+-------------------+-----------------------------+----------¦
¦ ¦Declared value excess-profits¦80.09 ¦
+-------------------+-----------------------------+----------¦
¦ ¦Excess profits ¦5,837.73 ¦
+-------------------+-----------------------------+----------¦
¦1945 ¦Declared value excess-profits¦4,500.16 ¦
+-------------------+-----------------------------+----------¦
¦ ¦Excess profits ¦25,960.65 ¦
+-------------------+-----------------------------+----------¦
¦1946 ¦Income ¦3,370.32 ¦
+-------------------+-----------------------------+----------¦
¦ ¦Excess profits ¦847.18 ¦
+-------------------+-----------------------------+----------¦
¦1947 ¦Income ¦1,264.12 ¦
+------------------------------------------------------------+
Petitioner also claims certain overpayments. Some issues are no longer contested. The remaining questions are:
1. Whether respondent properly computed petitioner's excess profits tax credit for the years involved.
2. Whether respondent's disallowance of part of deductions taken for compensation of officers of petitioner in taxable years ended June 30 of 1944 and 1945 was justified.
3. Whether the cost of a new welding machine purchased in the taxable year ended June 30, 1946, constituted a nondeductible capital expenditure.
4. (a) Whether any part of insurance proceeds recovered for the contents of a building destroyed by fire constitutes ordinary income for the year ended June 30, 1947.
(b) Whether assets which were destroyed in the fire and not replaced are deductible as casualty losses not compensated for by insurance or otherwise for the year ended June 30, 1947.
(c) Whether petitioner realized a taxable gain on the receipt of insurance proceeds covering the building partially destroyed by fire, in the year ended June 30, 1947.
(d) Whether amounts of $5,702.93 and about $2,250 expended for repairs to the building before and after permanent reconstruction of fire damage are deductible as ordinary and necessary expenses or as a casualty loss not compensated for by insurance or otherwise, for the year ended June 30, 1947.
5. Whether the adjuster and legal fees paid during the taxable year ended June 30, 1947, were properly allocated by respondent between capital and non-capital items of the insurance recovery, in computing petitioner's taxable income for that period.
6. Whether petitioner sustained a net operating loss for the taxable year ended June 30, 1947, entitling it to carry-back losses to the year ended June 30, 1945, for excess profits and declared value excess-profits tax purposes.
Petitioner is a corporation organized in 1941 under the laws of the State of New York. Its principal office was located in Bronx County, New York, during all times material herein. It filed Federal income and excess profits tax returns on the accrual basis for fiscal years ended June 30, 1943 and June 30, 1944, in the fourteenth collection district of New York. Returns also using the accrual method for years ended June 30, 1945, through 1947, were filed in the third collection district of New York.
Petitioner is in the business of manufacturing ticket office equipment and other metal products. Prior to petitioner's incorporation its president, Harold Ruscher, operated two sole proprietorships under the names of Sunvent Metal Awning Company and Ticket Office Equipment Co. The business of Ticket Office Equipment Co. was the design and sale of railroad and bus ticket office equipment. A model of the Sunvent metal awning was built by Harold Ruscher in 1935. A patent application was made thereon in that year, and a patent was issued in 1939. The Sunvent awning had no commercial value to petitioner or its predecessors, and was never actually manufactured by petitioner. One or two of the awnings were transferred to certain individuals for use on their houses for test purposes. The awnings so tested were models, and the purchase price of $15 was eventually refunded on each of the models transferred.
Prior to petitioner's incorporation Harold Ruscher kept a single set of books and records for both of his enterprises, including one set of single-entry books of account to reflect cash receipts and disbursements. No effort was made to distinguish the transactions ofone company from those of the other at the time the transactions were entered.
Respondent determined the value of the Sunvent patent at the time it was transferred to petitioner at $5,128.26.
The parties agree that the following property, transferred to petitioner on incorporation along with the Sunvent patent, should be valued as follows:
+------------------------------------------+
¦Machinery, tools, and equipment¦$9,563.32 ¦
+-------------------------------+----------¦
¦Patents, less amortization ¦57.91 ¦
+-------------------------------+----------¦
¦Inventories ¦560.00 ¦
+-------------------------------+----------¦
¦Total ¦$10,181.23¦
+------------------------------------------+
In exchange for this paid-in property, petitioner issued capital stock as follows:
+------------------------------------+
¦Name ¦Shares (common) ¦
+------------------+-----------------¦
¦Harold Ruscher ¦125 ¦
+------------------+-----------------¦
¦Dorothy M. Ruscher¦125 ¦
+------------------+-----------------¦
¦Carl Reschenberg ¦12 1/2 ¦
+------------------------------------+
The par value of petitioner's stock was $100 per share. Neither Ruscher individually nor petitioner reported any capital gain on any income tax return on the basis of this transaction.
Petitioner was required to compute its excess profits tax credit for the years in controversy by the invested capital method.
The fair market value of the Sunvent patent at the time it was paid in for stock in petitioner was not in excess of $5,128.26
During the taxable years ended June 30, 1944, and 1945, petitioner's officers received the following compensation:
+---------------------------------------------------------------------+
¦Name ¦Title ¦1944 ¦1945 ¦
+------------------+----------------------------+----------+----------¦
¦Harold Ruscher ¦President ¦$14,882.25¦$14,618.25¦
+------------------+----------------------------+----------+----------¦
¦Dorothy M. Ruscher¦Secretary ¦9,788.25 ¦12,690.25 ¦
+------------------+----------------------------+----------+----------¦
¦Carl Reschenberg ¦Vice president ¦10,602.75 ¦9,474.25 ¦
+------------------+----------------------------+----------+----------¦
¦F. H. Newhardt ¦Vice president and treasurer¦10,626.00 ¦9,451.00 ¦
+---------------------------------------------------------------------+
Petitioner's gross income for the year ending June 30, 1944, totaled $85,880.40. Its net income was $21,677.59. Dividends paid totaled $1,935. Petitioner's gross income for the year ended June 30, 1945, was $127,725.22. Its net income was $39,023.61. Dividends paid totaled $10,642.50.
Harold Ruscher was chief executive and general manager of the company. Carl Reschenberg was shop manager in charge of all sheet metal work. F. H. Newhardt was general sales manager and responsible for all matters pertaining to priorities and government regulations. All were employed on a full time basis. The services of Dorothy M. Ruscher, wife of petitioner's president, included special shopping assignments for tools and materials needed in the business which were difficult to obtain in the wartime conditions existing in 1944 and 1945. She made telephone calls from her home in efforts to obtain various merchandise, and helped her husband in preparing and verifying estimates and extensions, and in making up the payroll. She occasionally substituted as a secretary, and took customers to lunch. She spent less than half of the working days of both years at the office. She was a member of...
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