Clapp v. Commissioner , 36 T.C. 905 ( 1961 )

Austin Clapp and Gloria Clapp, Petitioners, v. Commissioner of Internal Revenue, Respondent. Stuart R. Clapp and Virginia M. Clapp, Petitioners, v. Commissioner of Internal Revenue, Respondent

Clapp v. Commissioner

Docket Nos. 85567, 88043

United States Tax Court

36 T.C. 905; 1961 U.S. Tax Ct. LEXIS 91;

August 29, 1961, Filed

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Decisions will be entered under Rule 50.

1. Held, partnership operating a private beach sustained deductible casualty loss as a result of loss of substantially all the sand that was washed away during unusually heavy rains. Amount of loss determined.

2. Held, partnership not entitled to file return on fiscal year basis where individual partners filed returns on calendar year basis and where prior permission of the Commissioner was not sought. Sec. 706(b)(1), I.R.C. 1954; sec. 1.706-1(b)(1)(ii), Income Tax Regs.

Austin Clapp, for the petitioners.

Joseph D. Holmes, Jr., Esq., for the respondent.

Raum, Judge.

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RAUM

Respondent determined the following deficiencies in income tax:

Petitioners	Year	Amount
Austin Clapp and Gloria Clapp	1955	$ 731.27
	1956	976.38
Stuart R. Clapp and Virginia M. Clapp	1955	538.48
	1956	321.62

The issues in controversy are:

(1) Did a partnership composed of Austin Clapp and Stuart R. Clapp sustain a casualty loss during the year 1955, and, if so, what was the amount of that loss?

(2) Are petitioners Austin Clapp and Stuart R. Clapp entitled to adopt a taxable year for their partnership which differs from the taxable year of the individual partners without having obtained the prior consent of the Commissioner?

Other issues raised by the pleadings have been settled by stipulation, by concession of petitioners, or depend upon mathematical computations based on the determination of the issues before the Court.

FINDINGS OF FACT.

The facts stipulated by the parties are incorporated herein by reference.

The petitioners in each case are husband and wife and reside in Woodside, California.

For a number of years prior to 1955 Ernst Brandsten had been the lessee of several hundred acres of land from Leland Stanford University. The land was adjacent to a lake, and Brandsten operated it as a beach resort, outfitting it with various structures and personal property such as entrance signs, ticket-collecting booths, tables, lavatory buildings, floats, boats, outboard motors, boathouse, tools, pumps, dump truck, tractor with bulldozer, and a variety of other structures and equipment. Since the land adjacent to the lake was not naturally sandy he purchased and spread large quantities of sand over the ground in order to make it suitable for use as a beach. Each year, due to normal rains, winds, and other factors, approximately 20 to 25 percent of the sand disappeared and had to be replaced. The entire area and business became known as Searsville Lake Park. Most of the revenue from the operation of the enterprise is derived from admission charges entitling patrons to swim, picnic, sunbathe, and engage in like activities.

On or about January 3, 1955, Austin Clapp and his wife, Gloria Clapp, purchased from Ernst and Greta Brandsten "the business known as Searsville Lake Park, including the equipment and tools necessary for its operation, its goodwill, and their license to occupy and use the premises in and upon which the business has been conducted" for the amount of $ 30,000.

Prior to February 1, 1955, petitioners Austin Clapp and Stuart R. Clapp entered into an agreement to operate Searsville Lake Park as a partnership. Stuart R. Clapp was to contribute his full-time services to the business of the partnership and Austin Clapp was to contribute to the partnership all of the assets of the business purchased from Brandsten and also any rights to occupy the Searsville Lake Park premises which he might acquire under a proposed lease of those premises to himself and his wife from the board of trustees of Leland Stanford University. Austin Clapp and Stuart R. Clapp operated Searsville Lake Park as partners at all times material herein.

On or about February 1, 1955, Austin Clapp and Gloria Clapp entered into a written lease of the Searsville Lake Park premises with the board of trustees of Leland Stanford University. It provided that the term of the lease would commence on February 1, 1955, and terminate on January 31, 1957, and that payment of rental was to be made on August 31 of each year "based on the actual receipts and profit for the period from the preceding February 1 to said August 31 and the estimated receipts and profit for the month of September, and after the close of each operating season but not later than December 1, the rental shall be adjusted finally on the basis of the actual receipts and profit for said preceding operating season." It also provided that the lessee pay, as a part of the consideration for the lease and as additional rental, all taxes accruing on the leased property and improvements thereon during the term of the lease. It also contained the following provision:

(c) Upon the termination of this lease, Lessee may remove from the leased premises all buildings and trade fixtures except underground piping but including, without being limited thereto, sewer lines, barbecue pits and concrete foundations, acquired by Lessee from Brandsten or constructed or installed on the leased premises by Lessee regardless of the manner in which they are affixed to the leased premises; provided, however, that Lessee shall leave the premises in a good, clean and neat condition. * * *

Although the lease ran only for a 2-year term, it has been extended and the partnership has continued to operate the enterprise until the present time.

During December 1955, 19.90 inches of rain fell at Searsville Lake Park, 14.5 inches of which fell in 1 week. This was the greatest rainfall for December shown in 33 years of official Department of Commerce weather records. The rain which fell during 1 week in December 1955 was greater than the entire rainfall for December in 29 of these years. In 23 of these years the entire rainfall for December was less than half of the 14.5 inches of rain which fell in 1 week in 1955.

A few days after the storm the beach area was inspected and approximately 98 percent of the sand was observed to have been washed away into the lake. In 1956 the partnership spent approximately $ 1,065 to replace the sand which had disappeared from the beach during the year 1955. The partnership sustained a loss in the amount of $ 800 by reason of the unusual rains which fell in December 1955.

Austin and Stuart Clapp, doing business as Searsville Lake Park, filed partnership returns on a fiscal year basis for years ending January 31, 1956, and January 31, 1957. On or about March 13, 1959, the partnership for the first time filed with a representative of the district director of internal revenue, San Francisco, California, an application (Form 1128) for permission to adopt a taxable year ending January 31, 1956, and each January 31 thereafter for the partnership doing business as Searsville Lake Park. This application was denied by the representative of the district director.

Petitioners Austin and Gloria Clapp and petitioners Stuart R. and Virginia M. Clapp filed joint income tax returns for the calendar years 1955 and 1956 with the district director of internal revenue for the San Francisco, California, district. The returns filed by them for the calendar year 1955 did not include any of the income earned during that year by the Searsville Lake Park partnership.

Respondent determined that the returns of the partnership for 1955 and 1956 should have been filed on a calendar year basis and that the partners should have included in their individual returns for those years their distributive shares of the income of the partnership.

OPINION.

1. In connection with the casualty loss item, a lively controversy exists between the parties as to whether the 1955 sale of the Searsville Lake Park enterprise to the Austin Clapps included the sand which Brandsten had spread over the land to create the artificial beach. The materials before us in this connection are not entirely satisfactory, but on the basis of the entire record, we conclude, without strong conviction, that the Clapps did acquire the sand, and that the partnership therefore did sustain a casualty loss as a result of the unusual December 1955 rainstorms.

However, we reject petitioners' contention that the loss amounted to $ 4,000. It took only $ 1,065 in 1956 to restore all the sand on the beach, and nothing in the evidence suggests that such replacement was inferior in quality or quantity to the sand that was on the beach when Brandsten sold the business in January 1955. Moreover, the evidence establishes that about 20 to 25 percent of the sand would disappear annually as a result of normal causes, and it is reasonable to conclude that the sand restored in 1956 replaced not only the sand washed away during the unusual December 1955 storms but also the sand which disappeared as a result of normal causes during the preceding 11 months. Using our best judgment we have found as a fact that the loss due to the December 1955 casualty was $ 800 and we are satisfied that this amount is not in excess of the basis for the sand lost. A deduction in this amount is proper.

2. The issue as to whether the partnership was entitled to file returns on a fiscal year basis is governed by section 706(b)(1) of the 1954 Code which provides:

Partnership's taxable year. -- The taxable year of a partnership shall be determined as though the partnership were a taxpayer. A partnership may not change to, or adopt, a taxable year other than that of all its principal partners unless it establishes, to the satisfaction of the Secretary or his delegate, a business purpose therefor. [Italic supplied.]

These provisions have been implemented by Income Tax Regulations section 1.706-1(b)(1)(ii), approved May 23, 1956 (T.D. 6175, 1 C.B. 211">1956-1 C.B. 211, 239), which provide:

A newly formed partnership may adopt a taxable year which is the same as the taxable year of all its principal partners (or the same as the taxable year to which all of its principal partners are concurrently changing) without securing prior approval from the Commissioner, or it may adopt a calendar year without securing prior approval from the Commissioner if all its principal partners are not on the same taxable year. In any other case, a newly formed partnership must secure prior approval from the Commissioner for the adoption of a taxable year. [Italic supplied.]

These regulations were first proposed on August 12, 1955 (20 Fed. Reg. 5863), and they appear to be in accord with the applicable statute.

Although Austin and Stuart Clapp, doing business as Searsville Lake Park, filed partnership returns for the fiscal years ending January 31, 1956 and 1957, they had never obtained permission to do so, notwithstanding that, as individuals, they filed returns on a calendar year basis. It was not until March 13, 1959, that they sought permission to use a fiscal year for the partnership. But this was too late. Their explanation that they were previously unaware of the requirement does not justify failure to comply therewith. The Commissioner must be sustained on this issue.

Decisions will be entered under Rule 50.