Wooten v. Commissioner

Hoyt B. Wooten, Petitioner, v. Commissioner of Internal Revenue, Respondent

Wooten v. Commissioner

Docket No. 11987

United States Tax Court

12 T.C. 659; 1949 U.S. Tax Ct. LEXIS 215;

April 29, 1949, Promulgated

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Decision will be entered under Rule 50.

1. Deduction -- Unpaid Expense -- Salary -- Section 24 (c). -- A taxpayer is not allowed to deduct from his gross income for 1941 certain bonuses which were merely accrued on his books in 1941 and were paid in September 1942 to his brothers and sister in his employ.

2. Deduction -- Capital Expenditure or Expense. -- The cost to a taxpayer of moving his radio tower in order to ensure improved reception for his radio listeners constituted a capital expenditure within section 24 (a) (2) of the code and not a deductible ordinary and necessary expense of his business, even though the benefit from the expenditure was derived indirectly through reciprocal changes made by another radio station.

3. Deduction -- Depreciation. -- The evidence does not show what is a reasonable allowance for exhaustion, wear, and tear (including a reasonable allowance for obsolescence) of the property used in the taxpayer's business during the taxable years.

W. G. Boone, Esq., for the petitioner.

Edward L. Potter, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined deficiencies in income tax in the amount of $ 8,423.26 for 1941 and $ 1,676.80 for 1943. The issues are (1) whether the petitioner is precluded by section 24 (c) of the Internal Revenue Code from deducting in 1941 certain bonuses which were accrued on his books in 1941 and paid in September 1942 to his brothers and sister, employed by him during 1941, (2) whether the costs incident to dismantling, moving and reerecting a radio tower in 1941 were deductible as ordinary and necessary business expenses, and (3) whether the Commissioner erred in disallowing portions of deductions for depreciation claimed in 1941, 1942, and 1943.

FINDINGS OF FACT.

The petitioner, an individual, has owned and operated a radio broadcasting station in Memphis, Tennessee, since 1922. He keeps his books and files his returns upon an accrual basis. His returns for 1941, 1942, and 1943 were filed with the collector of internal revenue for the District of Tennessee.

The petitioner employed his three brothers and a sister during 1941. He informed them two weeks before Christmas of that year that bonuses of $ 1,200 would be paid to each of the brothers and one of $ 400 to the sister. He instructed them at that time to report the amounts of the proposed bonuses in their respective income tax returns for 1941, and they did so. The record does not show that the brothers and sister reported their income other than upon a calendar year cash basis.

The bonuses were entered on the petitioner's books as of December 31, 1941, by crediting "Salaries Payable" in the amount of $ 4,000, and debiting the departmental operating expense accounts as follows:

Detail Debit
Operating Expense
A-1	$ 1,200
B-1	1,200
C-1	1,200
D-4	400

The symbols designate the operating expense accounts of the departments of the business in which the petitioner's brothers and sister were employed. No drawing accounts or separate accounts were kept for the brothers and sister.

The petitioner imposed no restrictions upon the payment of the bonuses. He had sufficient cash available at all times with which to make payment. However, he did not instruct his bookkeeper to issue the bonus checks until September 1942, when he discovered that the bonuses had not been paid. None of the four employees had requested payment in the meantime. The record does not show that any person other than the bookkeeper was authorized to issue checks on behalf of the petitioner or that the bookkeeper was authorized to issue checks unless specifically instructed by the petitioner. The employees' salaries were regularly paid by checks issued weekly by the bookkeeper. The bonuses in the total amount of $ 4,000 were paid by checks issued to the brothers and sister in September 1942.

The petitioner claimed a deduction of $ 4,000 for the bonuses in his return for 1941. The Commissioner disallowed the entire deduction as not being an allowable deduction from the petitioner's income for 1941.

The bonuses of $ 4,000 were not paid within the petitioner's taxable year 1941 or within two and one-half months after the close thereof. The amounts of the bonuses were not includible in the gross income of the petitioner's brothers and sister for their respective taxable years in which or with which the petitioner's taxable year 1941 ended. The petitioner and his brothers and sister were persons between whom losses would be disallowed under section 24 (b) of the Internal Revenue Code during 1941. The petitioner is not entitled to a deduction from his gross income for 1941 of $ 4,000 for the bonuses payable to his brothers and sister.

The petitioner's radio station and a radio station in Cedar Rapids, Iowa, operated on the same broadcasting frequency, and each interfered with the broadcasting activities of the other. The petitioner used two steel towers in connection with his radio broadcasting activities. He moved one of the towers in 1941 in order to change the alignment of the two and thus eliminate the interference of his station with the radio station in Cedar Rapids. The Cedar Rapids station later made changes which eliminated its interference with the petitioner's station. The record does not show whether those changes were made pursuant to an agreement.

The tower was dismantled in sections, repaired, moved about 125 feet, and reerected upon a new concrete foundation. The costs of the operation were as follows:

Dismantling and reerecting tower	$ 3,399.80
Labor -- cleaning up grounds	297.94
Trucking and transfer	42.23
Bolts, nuts, etc	152.24
Lead shield wire	664.84
Lumber and hardware	260.13
Copper line and fittings	1,118.00
Total	5,935.18

The items of bolts and nuts and lead shield wire were new materials used to replace the original materials which were necessarily damaged in the dismantling process. The lumber and hardware were used in the construction of the new foundation. The new foundation required several carloads of cement. The record does not show the cost of the cement or whether it was included in any of the amounts stated above. The copper line and fittings were new materials used to replace old and inadequate materials which were damaged in the dismantling process but which would necessarily have been replaced in any event. The record does not show the useful life of any of the new materials used in the reerection of the radio tower.

The petitioner claimed a deduction of $ 6,369.64 for "Antenna Expense" in his return for 1941. Included in that amount were the costs of $ 5,935.18 incident to the moving of the radio tower and $ 434.46 representing the cost of transmitter tubes. The transmitter tubes were regularly replaced about twice a year and were not in any way connected with the moving of the radio tower.

The Commissioner disallowed the entire deduction of $ 6,369.64 as being a capital expenditure, recoverable through depreciation, and not an ordinary and necessary business expense within section 23 (a) of the Internal Revenue Code.

The item of $ 434.46 representing the cost of transmitter tubes was an ordinary and necessary expense paid or incurred during 1941 in carrying on the petitioner's business. The expenditures of $ 5,935.18 incident to the moving of the radio tower in 1941 were not ordinary and necessary expenses paid or incurred in carrying on the petitioner's business.

The petitioner claimed deductions for depreciation on his radio broadcasting facilities and equipment as follows in his returns for 1941, 1942, and 1943:

1941	$ 13,148.41
1942	13,699.90
1943	13,589.68

Those amounts represented depreciation at higher rates than had been used in prior years. The Commissioner allowed deductions for depreciation in those years in accordance with the rates which had been used in prior years and disallowed as excessive deductions for depreciation the amounts of $ 1,563.59, $ 1,496.83, and $ 1,441.25 for 1941, 1942, and 1943, respectively.

The record does not show what were reasonable allowances for the exhaustion, wear and tear, and obsolescence of any property used in the petitioner's business during 1941, 1942, and 1943, or that the rates of depreciation on his business property should have been increased in those years over the rates used prior to 1941.

OPINION.

The first question is whether the petitioner's right to deduct $ 4,000 accrued as salaries on his books for 1941 is barred by section 24 (c). ¹ There is no question of the applicability of section 24 (c) (3), nor is there any real question of the applicability of section 24 (c) (1), since the amounts in question were paid by checks issued in September 1942, which was more than two and one-half months after the close of 1941, and, obviously, the mere accrual of these expenses on the books of the petitioner in 1941 was not payment within the meaning of this statutory provision. P. G. Lake, Inc., 4 T. C. 1; affd., 148 Fed. (2d) 898; certiorari denied, 326 U.S. 732">326 U.S. 732; Granberg Equipment, Inc., 11 T. C. 704. It is contended, however, that section 24 (c) (2) does not apply. It must be assumed, in the absence of proof to the contrary, that the three brothers and the sister used the cash method of accounting. It is argued that they were in constructive receipt of the bonuses in 1941 and consequently those amounts were "includible in the gross income of such person" for 1941. Michael Flynn Manufacturing Co., 3 T. C. 932; Ohio Battery & Ignition Co., 5 T.C. 283">5 T. C. 283. The evidence does not support this contention. The petitioner's brothers and sister did not have drawing accounts on his books. No separate accounts were kept for them on those books. There is nothing in the record to indicate that any of them had power to draw checks on the petitioner's bank account. Their regular salaries, as well as the bonuses, were paid to them by checks drawn by the bookkeeper. The record does not show that the bookkeeper had any authority to issue the bonus checks without specific instructions from the petitioner. There was no affirmative action or manifestation on the part of the petitioner to put the money beyond his control and within the control of the employees during 1941. He did not even know that the bookkeeper had made an entry on the books during 1941. The entry made was no more than an accrual of the bonuses as an expense of the business. The bonuses were not readily available to them so that it might be said that they turned their backs on them. The employees did not constructively receive the bonuses in 1941. Cf. McDuff Turner, 5 T.C. 1261">5 T. C. 1261. See also Regulations 103, sec. 19.42-2. The deduction does not depend upon whether or not the ultimate recipients of the bonuses actually reported them as income for 1941. Cf. Michael Flynn Manufacturing .Since all of the provisions of section 24 (c) are met, the Commissioner did not err in disallowing the deduction.

The second issue is whether the amounts paid out for dismantling, moving, and reerecting a radio tower are deductible as ordinary and necessary expenses or are capital expenditures to be recovered through depreciation. The respondent, in his brief, does not attempt to sustain his disallowance of a deduction of $ 434.46 representing the cost of transmitter tubes. Those tubes had a useful life of less than one year and were regularly charged to expenses by the petitioner. That expenditure was not made in connection with moving the radio tower, but was a part of the total deduction of $ 6,369.64 disallowed. The $ 434.46 was an ordinary and necessary expense paid or incurred in 1941 in carrying on the petitioner's business.

The radio station of the petitioner operated on the same frequency as a station in Cedar Rapids, Iowa, and each interfered with the broadcasting activities of the other. The petitioner moved his tower at an expense of $ 5,935.18, thus eliminating interference of his station with the broadcasting activities of the Cedar Rapids station, and the latter thereafter took steps which eliminated its interference with the operation of the petitioner's station. Thus both benefited. The evidence does not show whether or not these changes were made pursuant to any agreement, but it is unreasonable to assume that the petitioner would have made an expenditure of almost $ 6,000, which benefited him in no way whatsoever, unless he had some reason to believe that the other station would reciprocate. The purpose of the expenditure of $ 5,935.18 by the petitioner was not primarily to repair or replace any part of the tower, but was to bring about, indirectly, an improvement in reception for the listeners to the petitioner's radio station. He thus purchased improved reception for his radio listeners by moving the tower at a cost of $ 5,935.18. That expenditure was "for permanent improvements or betterments made to increase the value of" his property within the meaning of section 24 (a) (2). ² If the moving of this tower had directly accomplished this result, instead of indirectly, there would be no question but that the expenditure would be a capital expenditure, recoverable through depreciation, rather than an ordinary and necessary expense from the income of one year. The fact that the result was accomplished by indirection does not change the tax consequences. Cf. Oswego Falls Corporation, 46 B. T. A. 801; reversed on other points, 137 Fed. (2d) 173.

The last issue is whether the Commissioner erred in disallowing portions of deductions for depreciation claimed for 1941, 1942, and 1943. The question here is what is a reasonable amount for exhaustion, wear, and tear (including a reasonable allowance for obsolescence) of the property used in the petitioner's business. The petitioner attacks only the rate used by the respondent. That rate is the same as was used by the petitioner and accepted by the respondent for prior years. The petitioner contends that technical advancements in radio and television up to 1941 showed that his equipment would be obsolete before the end of the useful life on which the rate applied by the Commissioner was based. The petitioner thought that these advancements justified the use of a 10 per cent rate. The taxpayer's mere opinion does not justify a change in the determination. Cf. Regulations 111, sec. 29.23 (1)-6. He did not show how the developments to which he referred would affect any particular asset of his, or when any particular asset would become obsolete. Many of his depreciable assets were nearing the end of their estimated useful lives upon which the old rate was based. In other words, the testimony on this issue is too vague and inadequate to justify any change in the Commissioner's determination.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 24. ITEMS NOT DEDUCTIBLE.

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  (c) Unpaid Expenses and Interest. -- In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued --

  (1) If such expenses or interest are not paid within the taxable year or within two and one half months after the close thereof; and

  (2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and

  (3) If, at the close of the taxable year of the taxpayer or at any time within two and one half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b)↩.

• 2. SEC. 24. ITEMS NOT DEDUCTIBLE.

  (a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --

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  (2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.↩