Whitcomb v. Commissioner, Docket No. 3546-72.
| Decision Date | 09 June 1976 |
| Docket Number | Docket No. 3546-72. |
| Citation | 35 TCM (CCH) 793,1976 TC Memo 181 |
| Parties | Martin F. Whitcomb and Romaine B. Whitcomb v. Commissioner. |
| Court | U.S. Tax Court |
Rubin Sapperstein, for the petitioners. Eli H. Schmukler, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined a deficiency in petitioners' Federal income tax for the taxable year 1967 in the amount of $2,189.03. Some of the issues have been settled. The issues remaining for decision are:
1. Whether the activities of petitioners involving real property owned by them constituted a trade or business or whether petitioners held such property for the production of income so that legal fees paid with respect to such property are deductible and they are entitled to deduct depreciation with respect to such property; and,
2. Whether petitioners are entitled to the amounts of depreciation they claimed on miscellaneous personal property.
Some of the facts have been stipulated. The stipulation of facts and exhibits are incorporated by this reference.
Martin F. and Romaine B. Whitcomb, husband and wife, resided in Baltimore, Maryland when they filed their petition in this case. They filed a timely joint Federal income tax return for the taxable year 1967 with the District Director, Internal Revenue Service, Baltimore, Maryland. They filed an amended Federal income tax return for 1967 with the Internal Revenue Service, Philadelphia, Pennsylvania on April 15, 1971.
In 1960 petitioners began acting as manufacturer's representatives for the sale of electronic equipment under the name of Whitcomb Associates. They have actively conducted this business through the taxable year in question. During 1967 Whitcomb Associates conducted business from an office at 730 Deepdene Road, Baltimore, Maryland. The building located at this address is a two-story residential type building containing six rooms — a kitchen, two bathrooms, and a basement. The first floor is used for the storage of machinery and packing equipment. Several desks and copying machines are also housed on the first floor. The second floor is used for the storage of packing boxes. A sign bearing the name "Whitcomb Associates" is on the building. It was the only location of "Whitcomb Associates" listed in the Baltimore area telephone directory for 1967.
During 1967, the petitioners used a portion of their personal residence which was located at 635 St. Johns Road, Baltimore, Maryland for the purpose of conducting Whitcomb Associates business.
The Log Inn Co. of Anne Arundel County, Maryland (hereinafter referred to as the Log Inn Co.), was incorporated under the laws of Maryland in December 1912 and had as its purpose the operation of a hotel and restaurant. The Log Inn Co. operated successfully until May of 1958 when the board of directors determined that the corporation was operating at a loss and that there was no prospect for improving the conditions of the business operation in the near future. Accordingly, the board of directors unanimously voted to liquidate the corporation.
Petitioners purchased the real property owned by the Log Inn Co. at an auction on December 6, 1958 for $19,500 and title was transferred to them on February 4, 1959. The building itself will be hereinafter referred to as the Log Inn and the land and building combined will be referred to as the Log Inn property.
In addition to receiving the Log Inn property, petitioners also received all of the stock of the Log Inn Co. and the former shareholders agreed to hold the petitioners harmless from any liability arising from the corporation's prior activities.
Immediately following the purchase of the Log Inn property, petitioners negotiated for the purchase of an adjacent tract of property owned by William T. Emory, a former officer-shareholder of the Log Inn Co. Petitioners refinanced the debt on the Log Inn property and the debt on the Emory property. Upon refinancing they disclosed that they were very fortunate in soliciting one of their friends to be a corporate officer of the Log Inn Co. and that their friend and his wife had been spending much time renovating the Log Inn during the summer months.
The Log Inn property fronts on Chesapeake Bay and is located near Annapolis, Maryland, approximately 1 mile from Route 50, near the location of the Bay Bridge, and approximately 28 miles from the petitioners' home in Baltimore, Maryland.
The Log Inn is a modified "L" shaped structure which was originally constructed from chestnut logs. It is a rather large and rambling building and its roof is approximately 10,000 square feet in size. Prior to being modified by the taxpayers, the Log Inn had approximately 23 to 27 separate rooms. These rooms were all attached and formed a single structure which consisted of one main floor with a second story which covered the front portion of the building.
The ground floor contained a relatively large dining space, a kitchen and a wing with a number of individual small rooms that had been used as bedrooms when the building was being operated as a hotel. On the ground floor, along the front of the building, there were four relatively large rooms which had been used, when the building was operated as a hotel, as dining rooms for entertainment and dances. Behind these four dining rooms was a very large area, half of which was used as a kitchen and pantry.
After acquiring the Log Inn petitioners installed telephones. One of the telephones was located near the kitchen. The second telephone was located in the front left corner of the first floor of the Log Inn building. A third telephone was located in a second floor room which was used by petitioners as a bedroom. These telephones were connected with telephones located in the Whitcomb Associates office in Baltimore and in petitioners' office in their home in Baltimore. The telephones installed in the Log Inn were disconnected during the colder months of the year.
Shortly after acquiring the Log Inn property, petitioners started to consider various uses to which this property could be put. After serious consideration, petitioners decided that they would use the structure for the operation of a high-quality restaurant. When petitioners purchased the Log Inn property, it did not have an adequate heating system. The Log Inn had no direct water supply but, instead, depended upon a well and water system located in the house adjacent to the Log Inn which was owned by the former shareholders of the Log Inn corporation. At one time the water supply to the Log Inn was cut off, and it was necessary for petitioners to haul water from Chesapeake Bay to the Log Inn. Except for certain rooms which had been vandalized, the Log Inn had electricity in each room.
After petitioners acquired the Log Inn property and decided to make it a restaurant, they realized that many repairs and improvements would be required before the building could be used for that purpose. Up until that time, the building had suffered from years of neglect. At the time they acquired the Log Inn it was in need of repairs to the roof, the foundation, and the walls. Dry rot and termites damaged the structure. Petitioners believed the building to be structurally unsafe and were very concerned with whether the second floor could safely handle the load which they expected to be there.
Mr. Whitcomb had been a safety engineer for many years and was an expert in restaurant kitchen facilities. The kitchen equipment in the Log Inn had been there for many years and it contained an old stove which was coal or wood fired. It fell apart when petitioners attempted to remove it. The kitchen also contained a large commercial range which would have been sufficient for the operation of a restaurant. There was an adequate supply of tables, chairs, napkins and tablecloths. While the kitchen sinks were old and rusty in spots, they were perfectly safe. The refrigeration units located in the kitchen were completely unsuitable for use by a restaurant. The only refrigerator which was usable was a small apartment size refrigerator. Petitioners planned on buying a new commercial size refrigerator and other kitchen equipment for the restaurant when the restaurant was nearly ready for operation.
During the year in question and prior years, petitioners and their children traveled to the Log Inn property on the weekends during warm weather. In mid-June, petitioners and their children would travel to the Log Inn to live and work there throughout the summer months. When petitioners stayed overnight at the Log Inn, they usually slept in one of the small rooms located on the second floor of the building. Two more of the small rooms on the second floor were used for the children to sleep in. The remaining four bedrooms which were located on the second floor of the Log Inn were in a condition which would make them usable as bedrooms if the petitioners had so desired; however, they used them for storage of tools and construction materials used to repair or make improvements to the building or which they anticipated using in the future. Petitioners and their two children, who were approximately ages 12 and 14 in 1967, worked together as a family in making repairs and improvements to the Log Inn. In addition, petitioners spent some time working on their Whitcomb Associates business while at the Log Inn.
As part of their effort to prepare the Log Inn for operation as a restaurant, Martin F. Whitcomb, president, Raymond G. Stinchcomb, vice president, and Romaine B. Whitcomb, secretary-treasurer, corporate officers of the Log Inn Co., applied for a liquor license for the Log Inn. On April 19, 1960, the Board of License Commissioners for Anne Arundel County, held a hearing on the application for a liquor license. They concluded that the Log Inn Co. would qualify for the granting of a license but that the premises needed substantial improvement...
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