Turco v. Comm'r of Internal Revenue , Docket Nos. 1486-68

• Decision Date: 08 July 1969
• Docket Number: 1487-68.,Docket Nos. 1486-68
• Citation: 52 T.C. 631
• Parties: JOHN E. TURCO, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTLOUIS B. SULLIVAN, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

52 T.C. 631

JOHN E. TURCO, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTLOUIS B. SULLIVAN, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 1486-68

1487-68.

Tax Court of the United States.

Filed July 8, 1969.

Donald G. Daiker, for the petitioner.

Richard D. Worsley, for the respondent.

Petitioners leased property to the California Highway Patrol under a 10-year lease beginning in January 1963. Later in that year problems with the septic tank used for the property developed which petitioners sought to remedy in various ways. Petitioners sold the property, subject to the lease, in June 1964. Soon thereafter there was a recurrence of the septic tank trouble and petitioners voluntarily took over the problem. In 1965 petitioners paid $7,281.26 in connection with the installation of a connecting sewer pipe from the property to the municipal sewage system. Held: The expenditures are not deductible as ordinary and necessary business expenses by petitioners in 1965. Respondent's determination that the expenditures were deductible as capital losses in 1965 approved.

DRENNEN, Judge:

Respondent determined deficiencies in the petitioner's income taxes for 1965 in the following amounts:

+-----------------------------------+
                ¦Docket  ¦                 ¦        ¦
                +--------+-----------------+--------¦
                ¦No.     ¦Petitioner       ¦Amount  ¦
                +--------+-----------------+--------¦
                ¦        ¦                 ¦        ¦
                +--------+-----------------+--------¦
                ¦1486-68 ¦John E. Turco    ¦$702.74 ¦
                +--------+-----------------+--------¦
                ¦1487-68 ¦Louis B. Sullivan¦946.35  ¦
                +-----------------------------------+
                

The issue in these consolidated cases is whether petitioners are entitled to deduct as ordinary and necessary business expense certain costs incurred by them in 1965 in the installation of a sewerage system on property which had been sold by them in 1964. Concessions made by both parties in docket No. 1487-68 (Louis B. Sullivan) will be given effect in the Rule 50 computation.

FINDINGS OF FACT

Some of the facts were stipulated and they are so found.

John E. Turco and Louis B. Sullivan were both residents of San Jose, Calif., at the time of the filing of their respective petitions in these cases. John E. Turco and Louis B. Sullivan each filed an individual Federal income tax return for 1965 with the district director of internal revenue at San Francisco, Calif.

At the date of trial both Turco and Sullivan were principally employed as insurance brokers in San Jose, Calif. Turco had been so engaged for about 12 years and Sullivan for about 16 years. In 1961 petitioners entered the business of constructing and leasing real properties to the California Highway Patrol (hereinafter Highway Patrol), a department of the State Government. When the department needed a new facility, it would first invite interested parties to submit site proposals and then invite the successful applicants to submit lease proposals on the contemplated facility. The department presented the successful applicants with a basic outline of plans and specifications for the building to be constructed, the applicants then submitted lease proposals, and the low bid (for rental) was almost always accepted by the State. The successful bidder then submitted a final set of plans and specifications for approval.

In 1961 petitioners constructed and leased such a facility in San Jose, Calif., to the Highway Patrol; in 1962 they constructed and leased a second such facility in Santa Cruz; and they constructed and leased a third facility in Vallejo which was occupied by the Highway Patrol on January 15, 1963, under a 10-year lease expiring on January 1, 1973. Subsequently the petitioners made several unsuccessful bids to construct similar facilities for the Highway Patrol at various locations, and finally, in about the year 1967, the petitioners ceased their efforts to obtain such work because of the refusal by the State of California to enter leases that contained a tax escalation clause.

Sometime in 1963 it was discovered that the septic tank installation on the Vallejo facility did not function properly. Petitioners undertook to correct the septic system problem by reconstructing the leach fields in order to properly handle the effluent, and also constructed a berm, which was an asphalt mound designed to divert water from the property.

In the latter part of June 1964 petitioners sold the Vallejo facility to Grace Lerner subject to the 10-year lease, and the Highway Patrol was promptly advised of the sale. About 2 months after the sale of the property to Grace Lerner the Solano County Department of Public Health found that the septic tank system on the property was inadequate. Grace Lerner's attorney notified petitioners of the recurring difficulties with the septic tank and petitioners undertook to remedy the problem without permanent success.

On June 7, 1965, the Solano County Department of Public Health notified Grace Lerner and petitioners that the existing septic tank and drain lines were still inadequate and constituted a health hazard and that it would be necessary to connect the sewage effluent from the Vallejo property to the municipal sewage system.

In 1965 petitioners paid $6,372 with respect to the installation of a sewerline connecting the Vallejo facility to the municipal sewage system of Vallejo. In the same year they also paid legal fees of $175 and engineering fees of $734.26 in connection with the installation. A connection fee of $797.26 incurred as part of the cost of the new sewer installation was paid by Grace Lerner in 1965.

Although the various efforts to remedy the sewage problem and finally the installation of the connecting sewerline was voluntarily undertaken by petitioners when the problems arose, it was always the stated position of Grace Lerner that petitioners were at all times fully liable and responsible for the sewage facility problems on the Vallejo property.

Each petitioner claimed a deduction as an ordinary and necessary business expense in 1965 of one-half of the total costs and expenses ($7,281.26) incurred in the sewage line installation for the Vallejo property in that year. Respondent determined that these expenditures were not allowable as ordinary deductions but that petitioners were entitled to deduct these amounts in 1965 as capital losses; the capital losses were allowed to reduce capital gains realized and reported by both petitioners for 1965.

OPINION

Petitioners argue that they undertook in 1965 to correct the septic tank problems on the Vallejo property sold by them in 1964 for the purpose of fostering the goodwill of the Highway Patrol; that the expenditures incurred were in furtherance of their business of leasing property; and that consequently they are entitled to deduct such amounts as ordinary and necessary business expenses under section 162, I.R.C. 1954.¹ Respondent contends that the expenditures incurred in 1965 were not ordinary and necessary...