E.W. Richardson v. Commissioner
| Decision Date | 12 August 1996 |
| Docket Number | Docket No. 27308-92. |
| Citation | 72 T.C.M. 348 |
| Court | U.S. Tax Court |
| Parties | E.W. Richardson v. Commissioner. |
Patricia Tucker, Albuquerque, N.M., for the petitioner. Thomas F. Eagan, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in, additions to, and a penalty on petitioner's Federal income tax for taxable years 1988 and 1989 as follows:
Additions to Tax and Penalty
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Year Deficiency Sec. 6653(a)(1) Sec. 6661 Sec. 6662(a)
1988 ................................. $656,486 $11,971 $5,704 -0-
1989 ................................. 323,343 -0- -0- $34,003
All section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
After concessions,1 the issues for decision are: (1) Whether Richardson Investments, Inc. (Investments), made an unauthorized change in method of accounting. We hold it did. (2) Whether Investments, method of inventory accounting clearly reflected income. We hold it did not. (3) Whether respondent abused her discretion in determining that Investments should define its items of inventory for dollar-value LIFO purposes by model code. We hold she did not. (4) Whether Investments' claimed deductions arising from the ownership and operation of an airplane are allowable. We hold that such deductions are allowable.
Some of the facts have been stipulated. The stipulated facts and the accompanying exhibits are incorporated into our findings by this reference. Petitioner, E.W. Richardson, resided in Albuquerque, New Mexico, on the date the petition was filed.
During the taxable years 1988 and 1989, petitioner was the sole shareholder of Investments, a subchapter S corporation. Investments was incorporated under the laws of the State of New Mexico on February 21, 1961. Investments elected the status of an S corporation on January 1, 1986. Prior to 1986, Investments owned three subsidiaries: Rich Ford Sales, Rich Ford Leasing, and Richardson Properties. In 1986, the subsidiaries were liquidated into Investments and thereafter operated as divisions of Investments. During the years at issue, Investments, through its Rich Ford Sales division, operated a franchised Ford Motor Co. (Ford) automobile and truck dealership in Albuquerque, New Mexico, and also held franchises for the sale of Daihatsu automobiles and Daihatsu and Isuzu trucks.
Prior to the taxable year 1974, Investments valued its new car and new truck inventory on the specific identification, lower of cost or market, first-in, first-out (FIFO) method. With its Federal income tax return for the taxable year 1974, Investments filed Form 970, Application to Use LIFO Inventory Method, electing to use the last-in, first-out (LIFO) method of valuing its inventory. Specifically, Investments elected to use the dollar-value, link-chain, earliest-acquisition method of inventory valuation with a single LIFO inventory pool for both its new cars and new trucks.2
Investments' 1974 Federal corporate income tax return was audited by the Commissioner. As a result of that audit, the Commissioner issued a notice of deficiency. The adjustments in the notice of deficiency were redetermined by this Court in Richardson Invs., Inc. v. Commissioner [Dec. 37,894], 76 T.C. 736 (1981) (Richardson I).
The primary issue in Richardson I was whether Investments "properly adopted the use of a single LIFO inventory pool in computing inventory values pursuant to the dollar-value, link-chain LIFO method". Id. at 737. Investments argued that it was entitled to use a single pool for new cars and new trucks, and the Commissioner argued that each model line3 should constitute a separate dollar-value pool. Id. at 745. The Court rejected Investments' method of utilizing a single pool for new cars and new trucks, and it rejected the Commissioner's single pool per model line argument. Id. at 747. Rather, the Court held that "new cars and new trucks should be placed in separate pools." Id. at 748.
After the opinion in Richardson I was filed (May 11, 1981), Investments recomputed its taxable year 1974 LIFO inventory calculation, placing new cars and new trucks in separate pools. The calculation was submitted to the Court under the Court's Rule 155 procedure, and a decision was entered. Investments and the Commissioner reached an agreement on Investments' inventory calculations for taxable years 1975, 1976, and 1977, conforming those calculations to the decision in Richardson I. For taxable years 1978, 1979, and 1980, Investments amended its tax returns to conform its inventory calculations to the decision in Richardson I.
In its recomputations for the taxable years 1974 through 1980, Investments defined the units used to compute beginning of the year value of ending inventory for its new car pool by vehicle body size (body size).4 For example, in 1980, Investments separated its new cars into six categories: Full size, luxury, midsize, compact, subcompact, and Escort. The full-size category included eight model codes of full-size LTD automobiles. The luxury category included one model code of Thunderbird automobiles. The midsize category included four model codes of midsize LTD automobiles and two model codes of Granada automobiles. The compact category included four model codes of Fairmont automobiles. The subcompact category included four model codes of Mustang automobiles and three model codes of Pinto automobiles. The Escort model line was introduced for the first time in 1980.
Starting in 1981, Investments defined its new car pool inventory units by model line. Thus, each model line was a different category, e.g., Mustang model line, Escort model line, Tempo model line, etc. After it began defining its new car pool inventory units by model line, in place of body size, Investments did not restate its LIFO indexes for 1974 through 1980 based on the model line classification. Furthermore, Investments did not file Form 3115, Application for Change in Accounting Method, or otherwise request respondent's consent to change its LIFO inventory valuation method.
In its new truck pool for years 1979 through 1985, Investments treated all of its vans (E series) and extended body vans (S series) as one inventory unit, but separated its full-size pickups (F series), extended cab full-size pickups (X series), and four-door full-size pickups (W series) into three different inventory units by load-carrying ability (i.e., 1/2-ton, 3/4-ton, and 1-ton).
For 1986, 1987, and 1988, Investments treated all of its full-size pickups (the F, X, and W series) as one inventory unit and all of its vans (E series) and extended body vans (S series) as another inventory unit. For 1989, Investments treated each of its E series vans, its S series vans, its F series pickups, its W series pickups, and its X series pickups as separate inventory units.
For its Ranger trucks (R series) and Aerostar vans (A series), Investments always treated each of those model lines as one inventory unit, regardless of any submodels that were introduced; but it always separated its Bronco trucks (U series) by size; i.e., the full-size model (U15) and the Bronco II models (U12 and U14).
In addition to operating its automobile dealership through its Rich Ford Sales division, Investments, among other things, provided management consulting services to its operating divisions and certain "other entities". The "other entities" were Pioneer Ford Sales, Inc. (Pioneer), Fiesta Lincoln-Mercury, Inc. (Fiesta Lincoln), Heritage Auto Center, Inc. (Heritage), Fiesta Dodge, Inc. (Fiesta Dodge), Sunland Ford, Inc. (Sunland), Imports of Albuquerque, Inc. (Imports), Deep Seal International, Inc. (Deep Seal), Horizon Life Insurance Co., Inc. (Horizon), Ranch Partnership (Ranch), Valley Ford Sales, Inc. (Valley), Warranty Protection Co., Inc. (Warranty), Theft-Shield International, Inc. (Theft-Shield), and Arizona Aftermarket Associates, Inc. (Aftermarket).
Pioneer, Fiesta Lincoln, Heritage, Fiesta Dodge, Sunland, and Imports each owned and operated dealerships for the sale of new automobiles and trucks. Deep Seal provided paint sealant to be applied on new vehicles at the time of sale. Horizon sold credit life insurance on financed vehicles at the time of sale. Theft-Shield provided theft protection for new vehicles. Warranty provided extended service warranties for new vehicles at the time of sale. Valley and Aftermarket provided accessory parts for new vehicles at the time of sale. Ranch owned and operated a large cattle ranch.
Petitioner had an ownership interest in each of the other entities, except Sunland. Petitioner was a special trustee of a business trust which owned Sunland. Petitioner's interest in the other entities varied from 15 percent of Warranty to 100 percent of Imports. Petitioner owned 50 percent or more of 7 of the 13 other entities.
The management services provided by Investments included consulting in the following areas: Accounting, finance, legal, sales, marketing, and personnel management. These services were provided both periodically and on an as-needed basis.
The fees Investments charged for management services were billed and paid monthly. During the taxable years 1988 and 1989, Investments billed management fees of $814,452 and $970,997, respectively.
During 1988 and 1989, Investments owned a Lear Jet Model 25D airplane (airplane). Investments used the airplane for travel associated with the operating divisions and travel associated with its management services activity.
In regard to the operating divisions, the airplane was used by Rich Ford Sales to transport its employees to...
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