Uri v. Commissioner, Docket No. 16880-86
| Decision Date | 07 February 1989 |
| Docket Number | 16881-86.,Docket No. 16880-86 |
| Parties | Lawrence R. Uri, Jr. and Cathaleen T. Uri v. Commissioner. Stevens J. Townsdin and Renate Townsdin v. Commissioner. |
| Court | U.S. Tax Court |
Lawrence R. Uri, Jr., 613 Washington St., Concordia, Kan., for the petitioners. Allan M. Jacobson, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes as follows:
Petitioner Taxable Year Ended Deficiency
Lawrence R. Uri, Jr. and Cathaleen T. Uri .... December 31, 1982 $10,180.00
December 31, 1983 10,680.00
Stevens J. Townsdin and Renate Townsdin ...... December 31, 1983 7,697.00
The issues for decision are: (1) Whether for taxable years 1982 and 1983, petitioners have sufficient basis to allow them to deduct net operating losses from an electing small business corporation under subchapter S of the Internal Revenue Code; (2) whether the small business corporation is entitled to deductions for depreciation and accrued interest for its taxable year ended July 31, 1983; and (3) whether in 1983 petitioners must recapture investment tax credits claimed on prior years' returns for the assets of the small business corporation.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners resided in Concordia, Kansas, at the time they filed their petitions in this case. Petitioners Lawrence R. Uri, Jr. and Cathaleen T. Uri filed joint Federal income tax returns for taxable years 1981, 1982, and 1983, as did petitioners Stevens J. Townsdin and Renate Townsdin.1
Petitioners Cathaleen Uri (Mrs. Uri) and Stevens Townsdin (Mr. Townsdin) were Certified Public Accountants. Mrs. Uri and Mr. Townsdin were partners in an accounting practice, and they were the only shareholders of Townsdin & Uri, Chartered, a professional corporation consisting of their accounting practice. Mrs. Uri and Mr. Townsdin were the only partners in a partnership which owned an office building and leased it to Townsdin & Uri, Chartered.
The Old Opera House Mall Company (hereinafter referred to as the corporation) was incorporated in August 1980, under the laws of the State of Kansas. The only shareholders were petitioners Mrs. Uri and Mr. Townsdin. Mrs. Uri and Mr. Townsdin each owned 50 percent of the outstanding stock of the corporation, and each contributed capital in the amount of $10,000.
On August 11, 1980, the corporation elected to be taxed as a small business corporation under subchapter S of the Internal Revenue Code. The corporation, an accrual basis taxpayer, elected a taxable year ending on July 31.
The corporation was in the business of renovating a building which it owned in downtown Concordia, Kansas, and operating a small shopping mall on the premises. On August 7, 1980, the corporation applied for a loan with the Small Business Administration (SBA). In early 1981, the corporation, SBA, and Cloud County Bank and Trust (hereinafter referred to as "the bank") reached an agreement that the bank would provide all interim financing to the corporation until the renovation of the premises was completed. Mrs. Uri and Mr. Townsdin contemplated that upon completion of the renovation, the SBA would guarantee a new loan and that the new loan would be under the SBA's "502 Program," a program which provided loans at a special 8½ percent interest rate. Proceeds of the new loan would be used to pay the interim loans. In July 1981, Mrs. Uri and Mr. Townsdin were informed that the SBA would not guarantee a new loan under the 502 Program, at the special 8½ percent interest rate.
On September 17, 1981, after negotiating terms with the SBA and the bank, the corporation executed a promissory note in favor of the bank in the amount of $210,000. Ninety percent of this loan was guaranteed by the SBA. The loan required fixed monthly payments and had a fixed maturity date. On the same date, Mrs. Uri and Mr. Townsdin executed personal guarantees for the loan on forms provided by the SBA. Neither Lawrence Uri nor Renate Townsdin signed the guarantees. The interest rate on the new loan was 18 percent. The proceeds of this loan were used as follows:
(1) Approximately $150,000—to retire interim notes payable to Cloud County Bank
and Trust the proceeds of which were used for purchase
and renovation of business real estate
(2) Approximately $ 31,500—to retire interim notes payable to Cloud County Bank
and Trust the proceeds of which were used for purchase
of inventory, machinery, and equipment
(3) Approximately $ 11,000—to retire accrued interest on interim construction notes
(4) Approximately $ 4,000—for retirement of accounts payable
(5) Approximately $ 9,500—for working capital
Total: ...... $210,000
In its loan application to the SBA, the corporation attached a forecast of its receipts, expenses, and profits for the years 1981, 1982, and 1983. This forecast, signed by Mrs. Uri on August 31, 1980, indicated that the corporation would have sufficient cash flow to make the payments in amounts required by the note executed on September 17, 1981. During the renovation project, the corporation was required to submit quarterly financial statements to the SBA.
The corporation's retail operations opened for business in July 1981. The business was comprised of retail shops, a delicatessen, and a dinner theater. The corporation operated each of the separate aspects of the business, and Mr. Townsdin devoted full time to the corporation in fiscal years 1981 and 1982.
Between July 1981 and July 1982, the local economy experienced a severe decline. During this time, the corporation's income was insufficient to pay expenses and to repay the SBA loan. On July 31, 1982, the Board of Directors (Mrs. Uri and Mr. Townsdin) voted to cease all retail activity until further decision by the Board of Directors, and the corporation ceased operation of the retail portion of its business. At the time of the resolution, the corporation was indebted to the SBA in the amount of $234,593 and to Townsdin & Uri, Chartered, in the amount of $25,843. The corporation earned gross receipts of $294 during the taxable year ended July 31, 1983, which was generated by the rental of the dinner theater on several occasions prior to December 31, 1982.
On June 28, 1982, the Board of Directors of the corporation resolved that the corporation should propose a settlement to the SBA. The Board of Directors proposed that the SBA reduce the amount of liability of the corporation, the amount of the accrued interest and the principal of the note, to ten percent of the original note. Under this proposal, the corporation would retain all of its assets and pay off all other creditors as originally contracted. The corporation made several settlement offers after the June 28, 1982 resolution. The corporation agreed to offer to liquidate all its equipment and inventory, to use the proceeds to pay the interest on the note, and to purchase the real estate for $60,000. Mr. Townsdin spent a substantial amount of time negotiating on the corporation's behalf to reach a settlement agreement with the SBA.
On August 10, 1982, the SBA sent letters to Mrs. Uri and Mr. Townsdin stating that the promissory note in the amount of $210,000 was in default, that all installments were accelerated, and that the entire unpaid balance was then due and payable. The letters made no reference to personal guarantees.
On December 6, 1982 and December 13, 1982, the SBA wrote letters to the attorney for the corporation stating that the SBA would not permit the obligors to retain title to the business real estate without full settlement of the loan balance, and that the obligors could liquidate the collateral themselves or permit liquidation by the SBA. The December 13, 1982 letter further stated that if satisfactory arrangements were not made by January 10, 1983, the SBA would proceed with foreclosure action.
In December 1982, Mrs. Uri filed a petition under Chapter 7 of the Bankruptcy Code in the Bankruptcy Court for the District of Kansas, and in January 1983, Mr. Townsdin also filed a petition under Chapter 7 in the Bankruptcy Court. In these bankruptcy proceedings, Mrs. Uri on May 26, 1983, and Mr. Townsdin on June 30, 1983, were each discharged from any liability for his or her personal guarantee of the SBA loan to the corporation. Mrs. Uri and Mr. Townsdin never paid any amounts as a result of their personal guarantee of the SBA guaranteed loan.
On June 24, 1983, the corporation filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. On January 5, 1984, Mrs. Uri, Mr. Townsdin, and the corporation filed suit against the SBA in the United States District Court for the District of Kansas for the alleged breach of a contract obligating the SBA to lend funds to the corporation under the 502 Program. They were unsuccessful in their litigation against the SBA. Throughout the corporation's fiscal year ended July 31, 1983, the corporation and petitioners were attempting to rejuvenate the corporation's business operations. On February 2, 1984, the corporation's bankruptcy case was converted to a case for liquidation under Chapter 7 of the Bankruptcy Code. The real estate, equipment, and inventory of the corporation were sold at a Marshal's sale on March 11, 1987.
The corporation filed a Form 1120S, U.S. Small Business Corporation Income Tax Return, for taxable years ended July 31, 1981, July 31, 1982, and July 31, 1983. The corporation also filed a short period return for August 1, 1982 through January 8, 1983. This short period...
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