WHITE TOOL AND MACHINE CO., v. Commissioner
| Decision Date | 30 September 1980 |
| Docket Number | 1867-78.,1866-78,Docket No. 1209-78,1861-78 |
| Citation | 41 TCM (CCH) 116,1980 TC Memo 443 |
| Parties | White Tool and Machine Co., et al. v. Commissioner. |
| Court | U.S. Tax Court |
James D. O'Connell, 13818 Woodward Ave., Highland Park, Compton, Calif., for the petitioners. Thomas E. Ritter, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases, respondnet determined deficiencies and additions to tax under section 6651(a)2 in the following amounts:
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Docket Addition to Tax
No. Petitioner Year Deficiency (sec. 6651(a))
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1209-78 White Tool and 21973 $34,346.42 $ 1,717.32
Machine Co.1 ..... 21974 76,360.87 19,090.22
1861-78 Roger S. White and 1973 2,514.41 —0—
Elaine J. White ....... 1974 4,282.64 —0—
1866-78 Stephen White and 1973 29,758.23 2,517.89
Elaine D. White ....... 1974 63,765.58 —0—
1867-78 Gary R. White and 1973 2,656.00 —0—
Kathryn M. White ...... 1974 4,638.99 —0—
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Due to concessions by the parties, the issues remaining for decision are:
1. Whether respondent abused his discretion under section 482 by allocating to White Tool and Machine Co. (Tool and Machine) rents which exceed an arm's length rate, as computed under the regulations, paid by that corporation (a) to White & Sons Rental, Inc. (Rental) in fiscal 1974 for the use of equipment and (b) to White Charter Services, Inc. (Charter) in fiscal 1973 and 1974 for the use of vehicles and an airplane. Alternatively, whether the rents allocated under section 482 are deductible as ordinary and necessary business expenses within the meaning of section 162.
2. Whether respondent abused his discretion under section 482 by allocating to Tool and Machine, Rental, and Stephen White (Stephen) for the tax years in issue interest income and deductions, as computed under the regulations, which are attributable to non-interest-bearing promissory notes given by Rental to Tool and Machine and by Stephen to Rental in exchange for real property.
3. Whether the rents allocated to Tool and Machine under section 482 constitute constructive dividends under sections 301 and 316 to Stephen, Gary R. White (Gary), and Roger S. White (Roger) in proportion to each of their ownership of Tool and Machine stock.
4. Whether respondent properly determined delinquency penalties under section 6651(a)(1) against Tool and Machine for fiscal 1973 and 1974 and against Stephen and Elaine D. White (Elaine) for 1973.
Petitioner Tool and Machine, a Michigan corporation, was located in Taylor, Michigan, when it filed its petition. Tool and Machine filed both its Federal income tax return for the fiscal year ended November 30, 1973, and, together with Rental and Charter, a purported amended consolidated return for the fiscal year ended November 30, 1974, with the Internal Revenue Service Center, Covington, Kentucky.
When they filed their petitions, the individual petitioners were all legal residents of Michigan. They filed their Federal income tax returns for 1973 and 1974 with the Internal Revenue Service Center, Covington, Kentucky.
In 1956, Tool and Machine was incorporated by Stephen, its sole shareholder. As of November 30, 1970, and during fiscal 1973 and 1974, its stock was held 80 percent by Stephen and 10 percent each by Stephen's sons, Gary and Roger. Tool and Machine, which was engaged in the fabrication of metal parts, maintained production facilities at Taylor and at Gaylord, Michigan, during all times relevant here.
On November 24, 1970, Rental was incorporated. During 1970 through 1974, its stock was held 80 percent by Stephen, and 10 percent each by Gary and Roger. On November 25, 1970, Charter filed articles of incorporation. During 1970 through 1974, stock was held 80 percent by Stephen, and 10 percent each by Elaine, Gary, and Roger.
The principal place of business for each of the corporate entities was 8135 South Telegraph Road, Taylor, Michigan. Tool and Machine, Rental, and Charter each maintained its books and records on the basis of a fiscal year ended. November 30. In 1970, Stephen, Gary, and Roger comprised the board of directors of each company. They were, respectively, president, vice-president, and secretary of each company. During the periods in issue, these three individuals comprised the board of directors of Tool and Machine, and continued to hold the same offices in Tool and Machine and Charter. Stephen was also president of Rental.
At a board of directors meeting of Tool and Machine held November 28, 1970, Stephen, Gary, and Roger voted unanimously to transfer to Rental operating equipment of Tool and Machine with a cumulative cost of $255,595.86 and cumulative book value of $170,227.71. At the same meeting, they authorized transfer of vehicles and an airplane with a cumulative cost basis of $21,274.48 and a cumulative book valeu of $16,478.39 from Tool and Machine to Charter. At a board of directors meeting held December 1, 1970, Rental authorized acquisition of certain personal property from Tool and Machine. At a board of directors meeting held December 8, 1970, Charter authorized purchase of certain vehicles and an airplane from Tool and Machine. Tool and Machine received no consideration for the transfer of any of these items. Both Rental and Charter depreciated the items on the same basis as had Tool and Machine.
During fiscal 1973 and 1974, Rental's sole business was leasing equipment to Tool and Machine. During that period, Charter's sole business was leasing trucks, automobiles, and an airplane to Tool and Machine. In those years, Rental leased to Tool and Machine property including all of the items transferred on November 28, 1970, as well as three additional items with a cumulative cost basis of $12,535.13. Rental was responsible for major repairs. In 1973 and 1974, Charter leased to Tool and Machine property which included the following items:
Date
Item Acquired Cost
72 pickup truck ........ Jan. 1972 $ 2,712.14
70 Piper aircraft ........... 1970 31,500.00
Ford Wagon ............. Aug. 1972 1,800.00
Mercury ................ Dec. 1971 4,600.00
Ford pickup ............ Apr. 1973 2,800.00
__________
$43,412.14
At the board of directors meeting on November 28, 1970, Tool and Machine approved the sale of real estate located at 8135 South Telegraph Road, Taylor, Michigan (Taylor real estate) to Rental in exchange for a promissory note, dated December 1, 1970, in the amount of $200,000. The note provided for monthly payments of $1,000 beginning December 1, 1980. No interest was payable. Rental transferred the Taylor real estate to Stephen in exchange for a promissory note dated December 2, 1970, in the amount of $200,000. The note provided for monthly payments of $1,000 beginning December 1, 1980. No interest was payable.
Stephen owned an airplane which he leased to Rental for $5,800 in 1974. He also owned certain pieces of operating equipment which he provided to Tool and Machine without charge in 1973 and 1974.
On its fiscal 1973 and 1974 Federal corporate income tax returns, Tool and Machine paid and deducted as rental expenses the following amounts:
1973 1974
Charter ................ $110,000 $140,000
Rental ................. 15,000 91,000
Stephen and Elaine ..... 2,400 2,4001
Lakeside Fence Co. ..... 3,000 3,000
________ ________
$130,400 $236,400
Of the fiscal 1974 payments to Charter, $30,000 was paid on November 29, the day before the end of the fiscal year.
On their fiscal 1973 and 1974 returns and purported returns, Tool and Machine, Rental, and Charter reported the following amounts as taxable income or losses, and as current year income or net operating losses:
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1973 1974
Taxable Income (or Taxable Income (or
Loss) Before Loss) Before
Taxable Income Net Operating Taxable Income Net Operating
(or Loss) Loss (or Loss) Loss
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Tool and Machine .... ($18,862.66) ($ 7,085.32)1 ($ 2,526.43) $12,142.92
Rental ............... (45,199.43) (13,691.63) 2,098.102 47,297.53
Charter .............. (8,412.30) (2,099.63) (17,212.67) (8,880.37)
Consolidated ......... (55,315.66) (5,717.85) 25,324.423 80,640.08
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1 In a document given the revenue agent during audit, Tool and Machine...To continue reading
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