DocketNumber： Docket No. 4606-73.
Filed Date： 9/15/1975
Status： Non-Precedential
Modified Date： 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
FAY,
| FYE | Deficiency |
| September 30, 1965 | $28,241.10 |
| September 30, 1966 | 30,077.49 |
| September 30, 1967 | 2,997.46 |
| September 30, 1968 | 3,685.35 |
Concessions having been made, it remains for us to decide:
1. if amounts which Albert B. Maloney was required to pay in satisfaction of guarantees which he had given with respect to the obligations of a corporation in which he held a controlling stock interest were deductible as business bad debts or non-business bad debts;
2. if an amount loaned by Albert B. Maloney for which he was not reimbursed was deductible as a business bad debt or non-business bad debt;
3. if petitioners claimed excessive depreciation deductions with respect to improved real estate purchased in 1965;
4. if petitioners claimed excessive depreciation deductions with respect to improved real estate*92 purchased in 1967; and
5. if petitioners were entitled to claim an interest expense deduction in the amount of $12,900 for the fiscal year ended September 30, 1965.
GENERAL FINDINGS OF FACT
Petitioners Albert B. and Ethel L. Maloney are husband and wife. They filed joint Federal income tax returns for the years in issue with the Southeast Service Center, Chamblee, Georgia. They reported income and expenses in accordance with the cash receipts and disbursements method of accounting.
Statutory notice of the deficiencies in issue was mailed on March 22, 1973. Petitioners were residents of Nashville, Tennessee, when they filed their petition with this Court.
FINDINGS OF FACT
Albert became a certified public accountant in 1939. In the following year he organized the firm of Albert B. Maloney & Co. to engage in the practice of his profession in Nashville, Tennessee. In 1956 Albert B. Maloney & Co. was merged into Ernst & Ernst, a national firm of certified public accountants. For several years Ernst & Ernst employed Albert to manage the practice which he had developed. He was admitted to the firm as a partner in 1960. On September 30, 1966, he*93 retired.
While he was actively engaged in the practice of his profession, Albert invested in several enterprises, both incorporated and unincorporated, which either had been availing themselves of his services as an accountant or were to do so after he acquired an interest in them. These clients regularly compensated Albert B. Maloney & Co. and later Ernst & Ernst for the accounting services rendered by Albert and his staff.
Albert not only served the clients in which he invested as an accountant, he also participated actively in the formulation of their policy and procured loans for them on the strength of his personal guarantee. Albert did not require a fee for these additional services unless the client on whose behalf the services were rendered was realizing such a profit from its operations that payment of such a fee would not have been burdensome.
In June 1960 Albert acquired a controlling (84 1/2 percent) interest in the Wedgewood Corporation, a client of long standing. Wedgewood owned and operated a furniture manufacturing concern which had been profitable at one time but which had been declining for several years when Albert invested in the corporation.
In an attempt*94 to revitalize Wedgewood Albert procured several loans for it from the Third National Bank of Nashville in the years 1960 through 1964. As an inducement to the bank Albert personally guaranteed that the loans would be repaid. Albert did not require a fee for these guarantees in view of Wedgewood's insecure financial position.
Albert's effort to revitalize Wedgewood proved unavailing. The corporation ceased its operations in November 1964; and in the following year Albert was required to honor the guarantees which he had made on Wedgewood's behalf.
OPINION
The parties to this controversy agree that petitioners are entitled by
*95 Of singular significance in this controversy is that Albert did not regularly require a fee from clients in which he had invested when he guaranteed the repayment of loans made to them. Whether or not he was compensated for this service depended upon the financial condition of the client on whose behalf the guarantee was given. This forecloses our holding that in and of itself, the guaranteeing of loans constituted a business within the intendment of
Insofar as we can ascertain from the record, Albert's sole business activity was the practice of accounting, first independently, then as an employee of Ernst & Ernst, and lastly as a partner in that firm. If petitioners are to prevail on this issue, Albert's dominant purpose in guaranteeing Wedgewood's obligations must have been to promote his practice of accounting.
Petitioners contend that Albert's purpose in procuring loans for Wedgewood by personally guaranteeing that they would be repaid, was to insure that Wedgewood's patronage of his firm could continue. The burden*96 of proving this contention is on petitioners.
The record discloses that Albert was willing to commit himself substantially in guaranteeing loans made to clients, such as Wedgewood, in which he had invested. As in the case of Wedgewood, he did not require compensation for such guarantees if payment of a fee would be financially burdensome to the client. In our opinion such behavior is characteristic of an investor seeking to protect his investment.
FINDINGS OF FACT
Albert owned a 50 percent stock interest in the Broad Street Corporation. Broad Street leased equipment to the West Coast Tapering*97 Company. In October 1964 Albert loaned $25,000 to William H. Brown, the president of West Coast. In September 1966 Brown filed a petition in bankruptcy. As of that time Brown's obligation to Albert was wholly worthless.
OPINION
The parties are agreed that petitioners are entitled under
FINDINGS OF FACT
On December 31, 1965, Albert purchased real estate located at 219 Sixth Avenue North, Nashville, Tennessee. When Albert purchased the property it was improved by a building which contained heating and air conditioning equipment and an elevator. The contract for the sale of the real estate provided that the purchase price would be paid as follows: $65,000 on the delivery of the deed; $61,666.67 on December 31, 1966, and on December 31, 1967; and $61,666.66 on December 31, 1968. Albert agreed to keep the building insured for no less than $185,000 until his obligations under the contract of sale were fully discharged.
Shortly before Albert purchased the property he had his insurance agent obtain an estimate of the present cost of replacing the building at 219 Sixth Avenue North. On the basis of this estimate, Albert insured*99 the building for $227,080.
For the year 1966 the division of assessment of the metropolitan government of Nashville and Davidson County appraised the land at $101,750 and the building at $130,750.
OPINION
Sec. 1. 167(a)-5, Income Tax Regs., provides:
In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. * * *
In applying this regulation to 219 Sixth Avenue North, Albert allocated $227,379.50 of the purchase price to the building and the balance of $22,620.50 to the land. Respondent determined that $130,750 should have been allocated to the improvements and $119,250 to the land.
Petitioners have the burden of proving that the relative values of the land and improvements at 219 Sixth Avenue North justify the allocation which Albert made; and to sustain*100 that burden they rely on the estimate of the costs of replacing the improvements which was obtained for Albert by his insurance agent. In view of the countervailing weight of the appraisal made by the division of assessments, such evidence as petitioners rely on would not justify our resolving this issue in their favor. Neither does the record fully support respondent's determination. On the basis of the relative values of the land and building as determined by the division of assessments, we allocate $109,408.60 of the purchase price to the land and $140,591.40 to the building.
For the purpose of computing the depreciation allowable annually with respect to the property, Albert allocated the basis which he assigned to the improvements in the following manner: $192,379.50 to the building itself, and $25,000 and $10,000, respectively, to the heating and air conditioning equipment and to the elevator which the building contained. To the building he then assigned a 20-year useful life, while to the heating and air conditioning equipment and to the elevator he assigned 10-year useful lives. Furthermore, with respect to the heating and air conditioning equipment and to the elevator, petitioners*101 claimed a deduction for additional first-year depreciation under
For purposes of
This definition of tangible personal property plainly excludes elevators. We therefore hold with respect to the elevator in the building at 219 Sixth Avenue North petitioners were not entitled to claim additional first-year*102 depreciation under
FINDINGS OF FACT
On October 2, 1967, Albert purchased land and a building at 2800 West End Avenue, Nashville, Tennessee, for $110,000.
For the year 1966, the division of assessments of the metropolitan government of Nashville and Davidson County appraised the land at $37,500 and the building at $62,500.
The owners of the property previous to Albert had insured the building for $74,700 under policies written with an 80 percent co-insurance clause.
OPINION
In applying
In support of the allocation, petitioners direct our attention to the amount of insurance maintained by the previous owners of the property. In our opinion such evidence is insufficient as a counterweight to the appraisal made by the division of assessments. On the basis of the relative values of the land and building determined by the division of assessments in that appraisal, we allocate $41,250 of the purchase price to the land and $68,750 to the building.
FINDINGS OF FACT
On September 27, 1965, Albert executed, pursuant to a loan agreement, a promissory note in the amount of $180,000 payable to the Third National Bank in Nashville. The note was due on December 1, 1966, and provided that interest be paid at the rate of six percent annually.
When the note was issued, the bank credited only $167,100 to Albert's account.
OPINION
On the return which they filed*105 for the taxable year ended September 30, 1965, petitioners deducted $12,900 as interest paid on the loan of $180,000. Respondent disallowed this deduction, claiming that $12,900 in interest had not been paid by Albert, a cash basis taxpayer, during the year in issue.
1.
(a) General Rule.--
(1) * * * There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
* * *
(d) Nonbusiness Debts.--
(1) General rule.--In the case of a taxpayer other than a corporation-- * * *
(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months.↩
2. At trial petitioners suggested that Brown's obligation may have become worthless in the fiscal year ended September 30, 1965. On brief they reverted to the position of their pleadings, that the obligation became worthless in the following fiscal year. In our opinion, the position taken in the brief is in accord with the record.↩
3. Even if the elevator and temperature control equipment were tangible personal property within the intendment of
4.
(a) General Rule.--There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.↩