VE WAGNER WELL SERVICE, INC. v. Commissioner, Docket No. 13423-78.
| Decision Date | 29 July 1981 |
| Docket Number | Docket No. 13423-78. |
| Citation | 42 TCM (CCH) 523,1981 TC Memo 391 |
| Parties | V.E. Wagner Well Service, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Sam G. Winstead and J. Kirk Wade, 4300 First National Bank Bldg., Dallas, Tex., for the petitioner. Gary A. Benford, for the respondent.
The Commissioner determined a deficiency of $11,772.33 in the petitioner's Federal income tax for its taxable year ending August 31, 1975. After concessions by the petitioner, the only issue to be decided is whether the investment credits received by the petitioner in prior years were subject to recapture in its taxable year ending August 31, 1975, as a result of the failure of the petitioner to file timely the assumption agreement required by section 1.47-4(b), Income Tax Regs., after it made the election to be taxed as a small business corporation under subchapter S of the Internal Revenue Code of 1954.1
All of the facts have been stipulated, and those facts are so found.
The petitioner, V.E. Wagner Well Service, Inc., a Texas corporation, maintained its principal place of business in Pampa, Tex., when it filed its petition in this case. It filed its income tax returns on the basis of a taxable year ending August 31, and we shall refer to each of its taxable years by the calendar year in which it ended. The petitioner filed its corporate Federal income tax return for its taxable year 1975 with the Internal Revenue Service Center, Austin, Tex.
Prior to its taxable year 1975, the petitioner received investment credits under section 38 on property purchased for the business. The useful lives of some of the items of such section 38 property had not expired prior to the beginning of the petitioner's taxable year 1976. In September 1975, the petitioner made a valid election to be taxed as a small business corporation under subchapter S, and such election was effective September 1, 1975, the first day of the petitioner's taxable year 1976.
In making the election under subchapter S, the petitioner relied upon the assistance and advice of J.G. Doggett. Mr. Doggett was an experienced accountant, had dealt with numerous matters involving the Federal income tax, and had been employed by the petitioner as its accountant and tax advisor for approximately 15 years. At the time the petitioner made the election under subchapter S, Mr. Doggett was not aware that under section 1.47-4(b), Income Tax Regs., when a corporation makes the election under subchapter S, investment credits received by such corporation in prior years are subject to recapture. Nor was he aware that under such section, the corporation is permitted to avoid recapture by filing, on or before the date for filing the tax return for the taxable year immediately prior to the effective date of the subchapter S election, an assumption agreement as specified in such section.
In June 1976, the petitioner sold an item of section 38 property, and in June 1977, the petitioner sold another item of such property. In the case of each item, the useful life which was taken into account in computing the investment credit for the item had expired prior to the time of the sale.
Sometime between June 1977 and November 30, 1977, the petitioner was audited by the IRS, and at such audit, Mr. Doggett first learned of the provisions of section 1.47-4(b), Income Tax Regs. As a result, on November 30, 1977, the petitioner mailed to the District Director of the IRS in Dallas, Tex., an amended corporate Federal income tax return for its taxable year 1975. Attached to the amended return was the following statement (the assumption agreement), executed by a representative of the petitioner and by the petitioner's shareholders:
WE, THE UNDERSIGNED, each for himself or itself, do hereby agree that, in the event any section 38 property the basis (or cost) of which was taken into account in computing the undersigned corporation's qualified investment in taxable years prior to the taxable year beginning September 1, 1975 (the first taxable year for which an election under I.R.C. Sec. 1372 has heretofore been filed by said corporation), which section 38 property has not been disposed of or otherwise ceased to be section 38 property with respect to said corporation prior to August 31, 1975, is later disposed of by, or ceases to be section 38 property with respect to said corporation during any taxable year of said corporation for which the election under I.R.C. Sec. 1372 is effective, we shall (a) immediately notify the director of such disposition or cessation, as the case may be, and (b) shall, jointly and severally, be liable to pay to the district director an amount equal to the increase in tax provided by I.R.C. Sec. 47.
In a cover letter attached to the amended return, the petitioner stated:
At the time of filing the amended return, the petitioner also notified the District Director of the sales of section 38 property in 1976 and 1977.
The assumption agreement filed by the petitioner met all the requirements of section 1.47-4(b), Income Tax Regs., as to content. However, immediately upon its filing, or soon thereafter, it was rejected by the District Director on the ground that it was untimely.
In 1978, the petitioner disposed of a third item of section 38 property. As with the other items, the useful life of the third item had expired by the time of the sale. The petitioner did not inform the District Director of the sale. From the time of the petitioner's subchapter S election to the time of trial, the petitioner sold no other items of section 38 property purchased prior to the effective date of its subchapter S election.
In his notice of deficiency, the Commissioner reiterated the position of the District Director that the assumption agreement had not been filed timely. On that basis, he determined that the investment credits received by the petitioner in prior years were subject to recapture in the petitioner's taxable year 1975 as a result of the election by the petitioner to be taxed as a small business corporation.
Such section of the regulations also includes an exception to the foregoing rule; the section provides that recapture will not result from an election under subchapter S if the electing corporation files with the District Director the agreement specified in section 1.47-4(b)(2)(i), Income Tax Regs. In such agreement, the corporation and its shareholders must undertake to be liable for any recapture tax resulting from the disposition of section 38 property by the corporation while the corporation is a small business corporation and to inform the District Director of all sales of section 38 property. The regulations provide that such agreement must be filed on or before the due date of the income tax return for the taxable year immediately preceding the first taxable year for which the subchapter S election is effective, but that District Director of the IRS "may, if good cause is shown, permit the agreement to be filed on a later date." Sec. 1.47-4(b)(2)(ii), Income Tax Regs.
In this case, the petitioner concedes that the assumption agreement filed by it was untimely. However, the petitioner argues that its reliance on Mr. Doggett was good cause for the late filing and that, therefore, the District Director should not have rejected the agreement. The petitioner argues alternatively that section 1.47-4(b), Income Tax Regs., is invalid in requiring the recapture of investment credits when a corporation elects to be taxed as a small business corporation. On the other hand, the Commissioner takes the position that the District Director acted reasonably in rejecting the assumption agreement and that the regulation is not invalid. The Commissioner also argues that the petitioner raised the issue of the validity of the regulation for the first time on brief and that, for that reason, the Court should not consider the petitioner's argument.
Initially, irrespective of whether the issue of the validity of the regulation was raised properly, it is clear that the regulation is not invalid. In Tri-City Dr. Pepper Bottling Co.v. Commissioner Dec....
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