Taxpayers Dispute Additional Income Of $930,029.
Carney, James P. v. U.S.
- CourtUnited States Tax Court
- DocketDocket No. 6561-93
- AuthorsGriffin, William F., Jr.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-72987
- Tax Analysts Electronic Citation93 TNT 98-82
Carney, James P. v. U.S.
JAMES P. AND LINDA F. CARNEY,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
====== SUMMARY ======
James and Linda Carney argue that the commissioner erred in determining that they had additional income of $498,657 and $431,372 in 1987 and 1988, respectively, and maintain that they did not receive boot of $1.2 million from a like-kind exchange in 1987. Further, the Carneys say that the commissioner erred in determining that they received interest income on a $21,000 note and that they did not incur a loss on the complete liquidation of Carney Buick, Inc.
The Carneys add that they did not receive dividend income of $1 million in 1987 from Boston Car Co. and Bernardi Cycles or millions of dollars in distributive shares from S corporations in 1987 and 1988.
Period and Amount at Issue: 1987 -- $3,812,869; 1988 -- $829,188
Code Section Classification: 61, 1368, 331
====== FULL TEXT ======
PETITION OF JAMES P. CARNEY
The petitioner hereby petitions for redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency dated December 31, 1992 and as a basis for his case alleges as follows:
1. Petitioner James P. Carney an individual with a legal residence at 117 Jacob Amdsen Circle, Westborough, Massachusetts 01581, with a mailing address in care of Donald F. Cowles, 5 E. Main Street, Suite 4, Westborough, Massachusetts 01581. The joint returns for the periods here involved were filed by the petitioner and his then-spouse, Linda F. Carney, with the office of the Internal Revenue Service at Andover, Massachusetts, using Mr. Carney's taxpayer identification number 022-38-6001.
2. The notice of deficiency (a copy of which, including so much of the statement and schedules accompanying the notice as is material, is attached and marked Exhibit A), was mailed to the petitioner on December 31, 1992 and was issued by the District Director, Boston, Massachusetts.
3. The deficiencies as determined by the Commissioner are in income taxes for the calendar year 1987 in the amount of $3,812,869 and in income taxes for the calendar year 1988 in the amount of $829,188, all of which are in dispute.
4. The determination of tax set forth in said notice of deficiency is based upon the following errors:
(a) The Commissioner erred in determining that the
petitioner received additional income in the amount of $498,657
in calendar year 1987 which he failed to include on his income
tax return.
(b) The Commissioner erred in determining that the
petitioner received interest on loans to James DiCostanzo in
calendar year 1987 in the amount of $1,899 which he failed to
include on his income tax return.
(c) The Commissioner erred in determining that the
petitioner received unqualified property (boot) in the amount of
$1,200,000 from a like-kind exchange in calendar year 1987, all
of which is included in income as gain on the exchange which
petitioner failed to include on his income tax return.
(d) The Commissioner erred in determining that the
petitioner received interest income on a note from Helmut
Schmidt and Walter Webber in the amount of $21,000 in calendar
year 1987 which he failed to report on his income tax return.
(e) The Commissioner erred in determining that the
petitioner did not incur a loss on the complete liquidation of
Carney Buick, Inc. in calendar year 1987, since a complete
liquidation did not take place in that year, and that
petitioner's taxable income should be increased by $926.
(f) The Commissioner erred in determining that the
petitioner received $40,000 in consulting income in calendar
year 1987 which he failed to report on his income tax return.
(g) The Commissioner erred in determining that petitioner
received additional income from salaries of $1,122,006 from
Bernardi Honda, Inc. ($1,022,006) and Bernardi Cycle, Inc.
($100,000) in calendar year 1987 which he failed to report on
his income tax return.
(h) The Commissioner erred in determining that Boston Car
Company, Inc., d/b/a Acura of Boston, is not eligible as a
Subchapter S corporation and that petitioner's taxable income
for calendar year 1987 should be reduced by $383,525.
(i) The Commissioner erred in determining that the
petitioner received dividend income of $1,011,057 in calendar
year 1987 from Boston Car Company, Inc. ($762,618) and Bernardi
Cycles, Inc. ($249,439) which he failed to report on his income
tax return.
(j) The Commissioner erred in determining that the
petitioner received interest income of $9,650 from Shawmut Bank
in calendar year 1987 which he failed to report on his income
tax return.
(k) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income from
Bernardi Cycles, Inc. for calendar year 1987 should be increased
by $167,276.
(l) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of
Carney Buick, Inc. for calendar year 1987 should be increased by
$1,641,051.
(m) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of
Bernardi Honda, Inc. for calendar year 1987 should be increased
by $2,957,094.
(n) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of Crown
Chevrolet Trust for calendar year 1987 should be increased by
$1,321,752.
(o) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of Crown
Oldsmobile Toyota Trust for calendar year 1987 should be
increased by $616,881.
(p) The Commissioner erred in determining that the
petitioner received additional income in the amount of $431,372
in calendar year 1988 which he failed to include on his income
tax return.
(q) The Commissioner erred in determining that the
petitioner received interest on loans to James DiCostanzo in
calendar year 1988 in the amount of $7,340 which he failed to
include on his tax return.
(r) The Commissioner erred in determining that the
petitioner did not incur a loss on the complete liquidation of
Carney Buick, Inc. in calendar year 1987, since a complete
liquidation did not take place in that year, and therefore the
$3,000 capital loss carryforward claimed by petitioner for
calendar year 1988 was not an allowable deduction.
(s) The Commissioner erred in determining that the
petitioner received $100,000 in consulting income in calendar
year 1988 which he failed to report on his income tax return.
(t) The Commissioner erred in determining that petitioner
received additional rental income in the amount of $30,000 in
calendar year 1988 which he failed to report on his income tax
return.
(u) The Commissioner erred in determining that Boston Car
Company, Inc., d/b/a Acura of Boston is not eligible as a
Subchapter S corporation and that petitioner's taxable income
for calendar year 1988 should be reduced by $48,530.
(v) The Commissioner erred in determining that the
petitioner received dividend income of $360,907 in calendar year
1988 from Boston Car Company, Inc. which he failed to report on
his income tax return.
(w) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income from
Bernardi Cycles, Inc. for calendar year 1988 should be increased
by $145,623.
(x) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of
Bernardi Honda, Inc. for calendar year 1988 should be increased
by $1,805,376.
(y) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of Crown
Chevrolet Trust for calendar year 1988 should be reduced by
$383,668.
(z) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of Crown
Oldsmobile Toyota Trust for calendar year 1988 should be
increased by $409,404.
(aa) The Commissioner erred in determining that the
petitioner's distributive share of S corporation income of
Norwell Cars, Inc. for calendar year 1988 should be increased by
$100,561.
(ab) The Commissioner erred in determining that all or a
portion of the underpayment of income taxes for the calendar
years 1987 and 1988 is due to negligence or intentional
disregard of rules and regulations.
(ac) The Commissioner erred in determining that there was
substantial understatement of income taxes for calendar years
1987 and 1988 under Section 6661(c) of the Internal Revenue
Code.
5. The facts upon which the petitioner relies, as the basis for his case, are as follows:
A. Schmidt and Weber Interest
1. During 1986, James Carney effected a like-kind
exchange with Prestige Imports, Inc., pursuant to which
Carney received a promissory note of Helmut Schmidt and
Walter Weber dated December 31, 1986 in the principal
amount of $1,200,000. This note was paid, less certain
adjustments due Carney, on or about March 12, 1987.
Included in the amount paid was $21,000 in interest for the
period January 1, 1987 to March 12, 1987, computed at 9%
per annum.
2. Petitioner admits that the amount of $21,000 was
taxable as interest income for calendar year 1987.
B. Other Income
1. The Commissioner determined that checks totalling
$498,656.04 deposited to James Carney's bank accounts at
The First National Bank of Boston in 1987 were income in
that year.
Date Amount
---- ------
3/12/87 $ 12,086.68
3/26/87 97,961.12
8/26/87 9,156.92
4/8/87 101,305.93
6/4/87 31,154.00
7/8/87 48,837.00
8/7/87 46,404.89
11/9/87 1,749.50
11/9/87 150,000.00
-----------
$498,656.04
===========
2. The Commissioner determined that $431,372 in checks
deposited to Mr. Carney's account at The First National
Bank of Boston in 1988 were income in that year.
Date Amount
---- ------
3/24/88 $ 4,231.39
3/4/88 242,708.63
3/4/88 5,000.00
5/6/88 7,925.00
6/3/88 26,663.46
7/14/88 46,838.00
8/15/88 2,750.00
12/9/88 95,256.00
-----------
$431,372.48
===========
3. The amounts in question represent non-taxable S
corporation distributions, taxable income reported by the
petitioner on his Federal income tax return, taxable income
adjusted elsewhere by the Commissioner, transfers of funds
between bank accounts, sales of assets offset by basis,
refunds of amounts escrowed by the petitioner and
repayments of amounts advanced by the petitioner to third
parties.
C. Interest Income - Loans
1. In 1987 and 1988 James Carney lent money to James
DiCostanzo.
2. Petitioner admits that the amount of $1,898.29 for
1987 and $7,339.72 for 1988 was taxable to him as interest
income from these loans.
D. Consulting Income
1. On December 31, 1986, James Carney signed a
Consulting Agreement in connection with the sale of the
assets of Carney Buick, Inc. The agreement called for
payments for $20,000 per quarter for five years.
2. Petitioner admits that he received $40,000 in
consulting income for 1987 and $80,000 in consulting income
in 1988. Petitioner denies that he received an additional
$20,000 in consulting income in 1988.
3. Petitioner states that the amounts in question were
reported by him as income on his 1987 and 1988 Federal
income tax return.
4. Petitioner further states that the adjustments
proposed by the Commissioner duplicate other adjustments
made by the Commissioner.
E. Rental Income
1. In 1988, James Carney leased property in Natick,
Massachusetts to Bernardi Cycles, Inc. and Bernardi's, Inc.
Bernardi Cycles, Inc. paid rent to Carney of $102,000 and
Bernardi's, Inc. paid rent in 1987 of $216,000. Carney
reported a total of $318,000 in rent from the Natick
properties.
2. The amount of $30,000 included in the notice of
deficiency was paid to "Canary Realty Co.", an entity
entirely unrelated to the petitioner, and is therefore not
taxable income to the petitioner.
F. Other Salaries
1. During 1986, a year not at issue, Bernardi Honda
made certain advances to related corporations which
Bernardi Honda deducted as business expenses:
Other Salaries $244,020.94
Other Salaries 260,000.00
Used Veh. Expense 257,985.27
Professional Services 260,000.00
-------------
$1,022,006.21
=============
2. The Commissioner determined that these amounts were
improperly expensed by Bernardi Honda in 1986.
3. The Commissioner also determined that a $100,000
accrual for professional services payable to Mr. Carney in
1986 resulted in recognition of income to Mr. Carney in
1987.
4. No transaction giving rise to income or gain
occurred in 1987 and any claims by the Commissioner with
respect to 1986 are barred by the applicable Statute of
Limitations.
5. In the alternative, any payment made to or for the
benefit of the petitioner constituted a distribution by an
S corporation to its shareholder of previously taxed income
and is not taxable to the distributee.
6. In the alternative, the adjustments proposed by the
Commissioner duplicate other adjustments made to
petitioner's income.
7. In the alternative, the transaction described in
Paragraph F(3) above was not an accrual to or for the
benefit of Mr. Carney and does not constitute income to
him.
G. Distributive Share: Boston Car Company
1. Boston Car Company, Inc. ("Boston Car Company") is
a Massachusetts corporation wholly owned by Mr. Carney and
a grantor trust. It operates an Acura dealership in
Brighton, Massachusetts, under the name "Acura of Boston".
Boston Car Company, Inc. filed an S corporation election on
January 17, 1986 and filed income tax returns on Form 1120S
reporting $383,525 and $48,530, respectively, as Mr.
Carney's distributive share of the corporation's income for
1987 and 1988.
2. Boston Car Company's S corporation election was
reviewed and approved by the IRS in connection with its
examination of that corporation. The IRS agent stated that
"No problems were [sic] noted with the election, it is
accepted as provided."
3. Since Boston Car Company is a valid S corporation,
the petitioner must report his distributive share of net
income from that corporation.
H. Dividend Income
1. In 1987, Boston Car Company made payments to or for
the account of Mr. Carney which the Commissioner
characterized as dividend distributions rather than
distributions of previously taxed S corporation income:
Expenses of setting up
Norwell Car Company $ 128,242.62
Various personal expenses 76,583.00
Remodeling vacation home 60,623.24
Other distributions 14,000.00
Personal travel expenses 1,169.00
Cash distributions (net) 482,000.00
-------------
$ 762,617.86
=============
2. During 1987 Bernardi Cycles, Inc. ("Bernardi
Cycles") made a distribution of $1,227,773.57 in cash to
Mr. Carney. A cash distribution of $475,000 was also made
to the petitioner in that year from Bernardi Honda. The
Commissioner erroneously determined that the total amount
of $1,702,773.57 was made by Bernardi Cycles.
3. In 1988, Boston Car Company made certain payments
which the Commissioner characterized as dividends, rather
than as distributions of previously taxed S corporation
income:
Various personal expenses $109,829.00
Personal travel expenses 1,078.00
Cash distribution: Crown
Security Fund 250,000.00
-----------
$360,907.00
===========
4. Since Boston Car Company and Bernardi Cycles are
both S corporations, any distributions to shareholders were
distributions from S corporation income and are therefore
not taxable to Mr. Carney.
5. In the alternative, the expenses incurred by Boston
Car Company constituted ordinary and necessary business
expenses incurred in the ordinary course of its business,
rather than distributions to shareholders.
6. In the alternative, even if the expenses in
question are not deductible by Boston Car Company because
they were made on account of expenses of other related
taxpayers, then a corresponding deduction should be allowed
to the related taxpayer. As a consequence of said
deduction, the petitioner's share of distributable S
corporation income from such other corporation should be
correspondingly reduced.
7. In the alternative, the sum of $250,000 described
in Paragraph 2 above was not paid to or for the benefit of
Mr. Carney.
I. Interest Income (Shawmut)
1. During 1987 and 1988, the petitioner earned
interest on funds held in escrow with respect to the sale
of a business.
2. The Commissioner determined that the petitioner
received $9,650 in interest income from this account in
1987.
3. According to the Forms 1099-INT provided to the
petitioner by Shawmut Bank, N.A., the petitioner's share of
income from the account was $5,931 in 1987 and $4,462.92 in
1988. Petitioner reported these amounts as interest income
on his Federal income tax returns for 1987 and 1988.
J. Distributive Share - Bernardi Cycles
Bernardi Cycles, Inc. ("Bernardi Cycles") is a
Massachusetts corporation wholly-owned by James Carney.
During the period in question, it operated a motorcycle,
all-terrain vehicle, snowmobile and other small engine
products dealership in Natick, Massachusetts. It filed
income tax returns as an S corporation on Form 1120S for
calendar years 1987 and 1988.
The total proposed adjustment for 1987 is $167,276;
for 1988, $145,623, summarized as follows:
1987 1988
---- ----
1. Other Deductions $ 30,071 -
2. Cost of Goods Sold 100,000 $100,000
3. Other Expenses 34,043 42,996
4. Miscellaneous Deductions 6,182 -
5. Depreciation expense (3,020) 2,627
-------- --------
$167,276 $145,623
======== ========
J-1. Other Deductions
(a) During 1987, the bookkeeper for Bernardi Cycles
made a series of mathematical errors in posting entries to
cash. The cumulative effect of the errors at December 31,
1987 was $30,071.39. This amount was reflected on the books
and records of Bernardi Cycles as a reconciling item
between cash per the bank statement and cash per the
accounting books. In his year end adjusting entries for
1987, the petitioner's accountant, Thomas Bergin, made an
entry to reduce cash per the accounting books and increase
other deductions by $30,071. Mr. Bergin erroneously added
the following description to his journal entry, "To adjust
cash for money taken out by J.C.". This description never
appeared in the books of Bernardi Cycles.
(b) The $30,071.39 reconciling item represents
ordinary and necessary expenses incurred in the course of
Bernardi Cycles' trade or business and is not a dividend to
the petitioner.
J-2. Cost of Goods Sold
(a) In 1987 and 1988, a year end journal entry for
Bernardi Cycles deducts as "cost of sales" $100,000 in each
year "to adjust for obsolete merchandise."
(b) The amounts in question represent adjustments made
as a result of physical inventories and the disposition or
segregation of obsolete items of merchandise.
(c) In any event, Bernardi Cycles disposed of all of
its inventory by sale in 1989. The amounts in question, if
disallowed in 1987 and 1988, should be allowed as a cost of
goods sold deduction in 1989.
J-3. Other Expenses
(a) The Commissioner determined that numerous
deductions taken by Bernardi Cycles totalling $34,043 for
1987 and $42,996 for 1988 should be disallowed, for various
reasons, summarized below:
2/6/87 Automatic Security $ 408.00 (a)
2/11/87 Oakleaf Corp. 11,025.00 (b)
2/12/87 Automatic Security 2,000.00 (a)
3/10/87 Natick Glass 432.00 (a)
4/10/87 Cash 500.00 (d)
7/2/87 Wentworth Bus. Mach. 1,340.85 (b)
7/17/87 Global Equip. Co. 1,145.32 (e)
9/2/87 Texas Instruments 1,349.65 (b)
10/2/87 Fixture Distrib. 663.75 (d)
10/21/87 Reynolds & Reynolds 2,610.38 (d)
11/2/87 Automatic Security 865.50 (a)
11/9/87 N.E. Trailer Sales 2,295.00 (d)
11/18/87 PFC Products 434.00 (d)
11/23/87 Global Equip. 719.33 (d)
12/9/87 Crown Chevrolet 8,254.00 (d)
----------
$34,042.78
==========
2/11/88 Computer Tele Corp. $ 780.60 (b)
4/19/88 Precision Inventory 9,890.00 (d)(c)
4/19/88 Computer Tele Corp. 1,257.83 (b)
5/11/88 Bryar Motor Sports 1,775.00 (d)
6/24/88 Adv. World Travel 2,142.94 (d)
6/28/88 Reynolds & Reynolds 5,727.37 (d)
7/12/88 IRS 4,564.89 (f)
8/16/88 Reynolds & Reynolds 8,944.00 (d)
10/4/88 Carney Mgt. 1,866.81 (d)
10/13/88 Advanced World Travel 925.00 (d)
10/27/88 N.E. Equip. Co. 329.53 (b)
12/29/88 ITT 4,792.35 (d)
----------
$42,996.00
==========
Key
(a) capitalized leasehold improvement
(b) capitalized equipment
(c) non-deductible, not this taxpayer's expense
(d) unallowable deduction, substantiation, etc.
(e) capitalized furniture and fixtures
(f) this payment was subsequently determined not to be
an expense by the IRS and was refunded, no record
of the refund has been found and therefore it is
disallowed in full until such a record is
produced.
(b) Each of the foregoing payments were made on
account of ordinary and necessary business expenses
incurred by Bernardi Cycles in the ordinary course of
business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Bernardi
Cycles because they were made on account of expenses of
other related taxpayers, then a corresponding deduction
should be allowed to the related taxpayer. As a consequence
of said deduction, the petitioner's share of distributable
Subchapter S income from such other corporation should be
correspondingly reduced.
J-4. Miscellaneous Deductions
(a) The 1987 year end journal entries for Bernardi
Cycles charged $6,182.22 to "misc deductions", closing out
a "cash sales" account in a similar amount.
(b) These entries were made to correct other
bookkeeping entries erroneously double-counting sales and
therefore accurately reflect the income of Bernardi Cycles.
J-5. Depreciation Expense
(a) Reduction of depreciable assets.
(i) The Commissioner has disallowed depreciation
on the following assets placed in service in 1988:
machinery and equipment ($7,270), company vehicles
($44,100) and leasehold improvements ($3,010).
(ii) The 1988 Bernardi Cycles fixed asset
additions are correctly stated.
(iii) In the alternative, any expenditure that is
not classified by the Commissioner as a fixed asset is
allowable as an ordinary and necessary business
expense incurred in Bernardi Cycles' trade or
business.
(b) Depreciation on expenditures capitalized by the
Commissioner.
(i) The Commissioner has recharacterized certain
expenses as capital items as follows:
1987 1988
---- ----
Leasehold improvements $ 3,706 $-0-
Equipment 13,716 2,370
Furniture and fixtures 1,145 -0-
(ii) The Commissioner has calculated depreciation
expense allowable with respect to the capitalized
expenses.
(iii) The expenses are ordinary and necessary
business expenses incurred in the course of Bernardi
Cycles' trade or business.
(iv) In the alternative, the expenditures are
either equipment or furniture and fixtures, and not
leasehold improvements.
K. Distributive Share - Carney Buick
Carney Buick, Inc. ("Carney Buick") is a Massachusetts
corporation wholly-owned by James Carney. From 1984 to
1987, it operated a Buick dealership in Hanover,
Massachusetts. It filed a final S corporation income tax
return on Form 1120S for the calendar year 1987.
The total adjustments proposed by the Commissioner for
1987 are $1,641,051, summarized below:
1. Sales income $ 131,954
2. Cost of goods sold 61,356
3. Other expenses 48,681
4. Rent expense 15,363
5. Income-acct. rec. 55,919
6. Sales income 213,803
7. Cost of goods sold 2,929
8. Cost of goods sold 94,307
9. Gain on sale of vehicles 23,086
10. Cost of goods sold 786,548
11. Loss on disposition (1,743)
12. Gain on sale of parts 57,994
13. Cost of goods sold 150,854
----------
$1,641,051
==========
K-1. Sales Income
(a) The Commissioner determined that Carney Buick
failed to report nine sales of vehicles during March 1987
totalling $131,954.
(b) The sales of the said vehicles were properly
reported on Carney Buick's books of account.
K-2. Cost of Goods Sold
(a) The Commissioner determined that when the assets
of Carney Buick were sold to Prestige Buick, Inc. in March
1987, the records of the Buick division of GMC showed that
14 new vehicles were owned by Carney Buick. Of these 14,
four vehicles are attributed to Carney Buick and unsold to
Prestige. The Commissioner determined that the cost of
these vehicles, $61,356, should be eliminated from Carney
Buick's cost of goods sold.
(b) The vehicles in question were included in Carney
Buick's inventory and sold in the ordinary course of
business. Carney Buick properly recorded these transactions
on its books and records.
K-3. Other Expenses
(a) The Commissioner determined that fourteen invoices
of Carney Buick were not properly substantiated.
Attorney Flynn $ 500.00
Confectioners, Inc. 975.00
E-2 Mini Storage 397.00
Southern Auto Sales 1,260.00
Telecheck 914.00
Reynolds & Reynolds 3,340.00
W.M. Flynn 1,000.00
Ira Fulton 200.00
M.C. 1,474.00
Meruel Assoc. 5,223.00
Prestige Buick 29,467.00
Lux Lim 1,000.00
Kunz Assoc. 1,000.00
Woodcome Ins. 1,931.00
----------
$48,681.00
==========
(b) The foregoing payments were made for ordinary and
necessary business expenses incurred by Carney Buick in the
ordinary course of business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Carney
Buick because they were made on account of expenses of
other related taxpayers, then a corresponding deduction
should be allowed to the related taxpayer. As a consequence
of such deduction, the petitioner's share of distributable
Subchapter S income from such other corporation should be
correspondingly reduced.
K-4. Rent Expense
(a) A $15,363 deduction was claimed for 1987 rent
expense paid by Carney Buick to Wolfgang Rietzl. The
Commissioner determined that these payments were principal
and interest payments on a loan from Mr. Rietzl.
(b) The petitioner admits that the amounts in question
represent loan payments, but states that all or a portion
of those payments constitute interest which is deductible
by Carney Buick.
(c) The petitioner further states that the amounts
disallowed by the Commissioner duplicate other adjustments
made by the Commissioner.
K-5. Income/Accounts Receivable
(a) In connection with the sale of assets of Carney
Buick in 1987, the corporation wrote off $55,918 of
accounts receivable against income.
(b) During 1987, Carney Buick discovered that a former
employee had engaged in a scheme to defraud the corporation
by embezzling funds. As a result of this scheme, various
assets of the corporation were recorded at overstated
values.
(c) The amounts written off represent accounts
receivable which became worthless in the year of sale and
were properly deductible as losses or business expenses
under the Code.
K-6. Sale Income
(a) In connection with the sale of the assets of
Carney Buick in 1987, Carney Buick wrote off $213,802.71
against income as follows:
Holdbacks and new veh. insp. $ 73,512.85
Finance income receivable 87,351.65
Warranty claims receivable 52,938.21
-----------
$213,803.71
===========
(b) During 1987, Carney Buick discovered that a former
employee had engaged in a scheme to defraud the corporation
by embezzling funds. As a result of this scheme, various
assets of the corporation were recorded at overstated
values.
(c) The amounts written off represent claims which
were rejected by automobile manufacturers, or for which
offsets and chargebacks were asserted by banks, finance
companies and others, or claims which otherwise became
worthless in the year of sale.
K-7. Cost of Goods Sold: Auto Supply
(a) In connection with the sale of the assets of
Carney Buick in 1987, the corporation wrote off the cost of
its investment in Automotive Supply. The amount of the
investment, $2,929.17, was included in cost of goods sold.
(b) This asset was an investment in a purchasing
cooperative for Buick products which became worthless upon
the sale of Carney Buick's assets.
K-8. Cost of Goods Sold: Accounts Receivable
(a) In connection with the sale of the assets of
Carney Buick in 1987, its accountant wrote off $94,306.80
in accounts payable with a debit balance as cost of goods
sold.
(b) These amounts represent ordinary and necessary
business expenses incurred in the ordinary course of Carney
Buick's business which were erroneously booked as accounts
payable.
K-9. Gain on Sale of New Vehicles
(a) Carney Buick sold substantially all of its assets
to Prestige Buick, Inc. on or about March 12, 1987. On that
date, Carney Buick transferred all of its new vehicles,
parts and accessories, demonstrators, sublet repairs and
work in process and fixed assets to Prestige Buick, Inc. in
consideration of $350,000 in cash and the payment of Carney
Buick's floor plan debt of $2,489,747.95. The purchase
price was later adjusted by the payment of additional
consideration of $31,454.
(b) The basis of the assets sold by Carney Buick,
according to its books and records, was as follows:
New Vehicles
Floor Plan $2,489,747.95
Other 251,405.86
-------------
$2,741,153.81
Parts and Accessories 243,083.73
Demos 213,029.90
Rentals 150,854.63
Sublet 58,508.26
Work in process 4,053.80
Fixed Assets 109,459.11
-------------
$3,520,143.24
=============
(c) The Commissioner determined that Carney Buick's
gain on the sale of new vehicles was $23,086.49
(d) Petitioner states that no adjustment to Carney
Buick's income is necessary because Carney Buick accurately
reflected any gain in computing its income for 1987.
K-10. Cost of Goods Sold
(a) In connection with the asset sale, Carney Buick
wrote off the basis of certain assets as cost of goods
sold:
Demos $213,029.90
New vehicles 251,405.86
Used vehicles 14,932.33
Parts and accessories 243,083.73
Gas, oil and grease 1,534.45
Sublet 58,508.26
Work in process 4,053.80
-----------
Gain $786,548.33
===========
(b) The Commissioner determined that these amounts
should be disallowed in full. However, all of these assets
(other than used vehicles) are clearly included in the
assets sold and their basis should be taken into account in
determining the gain on the sale.
(c) In addition, Carney Buick is entitled to write off
the basis of its fixed assets sold to Prestige, totalling
$109,459.11.
K-11. Loss on Disposition
(a) The Commissioner determined that in connection
with the asset sale, Carney Buick sustained a loss on the
disposition of demos and rental vehicles.
(b) Petitioner states that no adjustment to Carney
Buick's income is necessary since Carney Buick accurately
reflected any loss in computing its income for 1987.
K-12. Gain on Sale of Parts
(a) The Commissioner determined that in connection
with the sale of its assets, Carney Buick recognized a gain
on the disposition of parts and accessories inventory.
(b) Petitioner states that no adjustment to Carney
Buick's income is necessary since Carney Buick accurately
reflected any gain in computing its income for 1987.
K-13. Costs of Goods Sold: Rental Vehicles
(a) The Commissioner determined that the write-off of
$150,854.63 in basis of rental vehicles as costs of goods
sold in connection with the sale of Carney Buick's assets
should be disallowed.
(b) Since rental vehicles were clearly among the
assets sold to Prestige, their basis should be taken into
account in computing gain or loss on the sale.
L. Distributive Share - Bernardi Honda
Bernardi's, Inc. d/b/a Bernardi Honda ("Bernardi
Honda") is a Massachusetts corporation wholly owned by Mr.
Carney. It operates a Honda dealership in Natick,
Massachusetts. It filed income tax returns as an S
corporation on Form 1120S for calendar years 1987 and 1988.
The total adjustments proposed are $2,957,094 for 1987
and $1,805,376 for 1988, summarized as follows:
1987 1988
---- ----
1. Professional fees $ 518,533 $ 691,260
2. Advance on commissions 162,317 -
3. Aircraft lease 728,575 451,667
4. Finance income - 158,712
5. Interest income 41,149 21,443
6. Depreciation expense (2,233) (4,865)
7. Cost of goods sold 122,019 -
8. Interest expense 38,166 -
9. Other income 1,142,530 -
10. Other expenses 206,038 487,159
---------- ----------
$2,957,094 $1,805,376
========== ==========
L-1 Professional Expense
(a) During 1987, Bernardi Honda charged to expense the
sum of $518,532.71 as professional and management fees.
(b) The amounts in question represent ordinary and
necessary business expenses incurred in the course of
Bernardi Honda's business.
(c) At year end 1988, Bernardi Honda charged to
expense the sum of $691,260.07 as a professional expense.
(d) The amount in question represented ordinary and
necessary business expenses incurred in the course of
Bernardi Honda's business.
L-2 Advance on Commissions
(a) During 1987, Bernardi Honda recorded an account
"advance on commissions" representing amounts due Bernardi
Honda from James Carney for advances to pay his personal
Federal and state income taxes.
(b) At year end 1987, Bernardi Honda charged this
$167,317 account against retained earnings.
(c) This amount was a distribution to the petitioner
of previously taxed S corporation income and was not
claimed as an expense by Bernardi Honda.
L-3 Aircraft Lease
(a) In 1984, Bernardi Honda invested in a Beechcraft
aircraft leased to Lockheed Corporation.
(b) The aircraft was purchased for $2,195,711, and
financed through a $1,500,536 secured recourse note payable
to a bank. The equity portion of Bernardi Honda's
investment ($695,175) was payable by an equity installment
note payable over four years.
(c) The aircraft is leased to Lockheed Corporation
under a long-term lease paying $245,435 in rent per year.
(d) As an investor, Bernardi Honda was entitled to
deductions for depreciation and interest which were
projected to exceed the rental income during the early
years of the investment. For the years in question, these
items were:
1987 1988
---- ----
Rental income $ 245,435 $ 245,435
Interest expense (215,869) (211,309)
Depreciation (457,949) (457,949)
Other (1,071) (1,071)
---------- ----------
$(429,454) $(424,894)
========== ==========
(e) In addition, Bernardi Honda is entitled to accrue
interest on the equity installment note at the rate of
12.5% per annum. The note was payable in accordance with
the following schedule.
Payment Equity Annual
Date Investment Interest Cash Outlay
------- ----------- ----------- -----------
Closing $ 80,955.00 $ 0 $ 80,955.00
3/15/85 133,200.00 28,397.00 151,597.00
3/15/86 103,900.00 60,128.00 164,028.00
3/15/87 177,020.00 47,140.00 224,160.00
3/15/88 200,100.00 25,013.00 225,113.00
----------- ----------- -----------
$695,175.00 $160,678.00 $855,853.00
=========== =========== ===========
(f) Bernardi Honda claimed a $728,974.73 deduction for
1987 and a $451,667.28 deduction for 1988 as a result of
the activity.
(g) The Commissioner disallowed these deductions in
full because of a lack of proper records.
(h) The amount of loss allowable on Bernardi Honda's
investment (including interest on the equity investment
note) is $476,594 in 1987 and $449,907 in 1988.
L-4 Finance Income
(a) During 1988, Bernardi Honda wrote off a
$158,712.32 asset account entitled "finance income rec".
(b) This asset represents previously earned income
from assigned customer financing which was adjusted when
customers defaulted or prepaid their car loans.
L-5 Interest Income
(a) Bernardi Honda invested its excess cash from time
to time in short-term instruments which it rolled over as
the investments matured. The Commissioner determined that
some $41,149 and $21,443 in interest was unreported in 1987
and 1988, respectively.
(b) This amount was duly reported by petitioner on his
Federal income tax returns for 1987 and 1988.
L-6 Depreciation Expense
(a) The Commissioner has recharacterized certain
expenses of Bernardi Honda as capital items as follows:
1987 1988
---- ----
Leasehold improvements $13,509 $1,175
Equipment 9,112 7,420
Furniture and fixtures 1,391
(b) The Commissioner has calculated depreciation
expense allowable with respect to the capitalized expenses.
(c) The expenses are ordinary and necessary business
expenses incurred in the course of Bernardi Honda's trade
or business.
(d) In the alternative, the expenditures are either
equipment or furniture and fixtures, and not leasehold
improvements.
(e) In the alternative, the depreciation computed by
the Commissioner omits the depreciation on the furniture
and fixtures of $200 in 1989 and $340 in 1988.
L-7 Cost of Goods Sold
(a) During 1987, Bernardi Honda wrote off against
earnings $14,519.34 "to adjust parts inventory per Ernest
Harrison."
(b) The amount in question was determined to be
obsolete or unusable on the basis of a physical inventory
and the items of merchandise were physically segregated or
disposed of.
(c) In addition, Bernardi Honda on January 9, 1987
issued a $107,500 check to obtain a treasurer's check from
South Shore Bank payable to Wolfgang Rietzl, the former
owner of Carney Buick. This amount was added to inventory
and thus increased the cost of goods sold deduction.
(d) The amount in question was used to purchase used
vehicles sold by Bernardi Honda in the usual course of
business.
L-8 Interest Expense
(a) In 1987, Bernardi Honda accrued $38,166.19 in
interest expense.
(b) This amount represents interest accrued on a loan
incurred to purchase aircraft and is properly deductible
under the Code.
L-9 Other Income
The Commissioner determined that several additional
adjustments should be made to Bernardi Honda's income for 1987.
(a) Savings account $ 127,327.00
(b) Rental expense 244,463.00
(c) Retained earnings 203,822.00
(d) Miscellaneous 116,407.00
(e) American Honda 400,000.00
(f) Bad debt 50,511.00
-------------
$1,142,530.00
=============
(a) Savings Account
(i) In 1987, Bernardi Honda charged $127,326.54
against retained earnings as "int. pd. A/C 902". The
journal entry indicates that this was done "to adjust
cash balance per 12/31/87 analysis."
(ii) This amount represented an adjustment to
correct previous incorrect entries which overstated
income.
(b) Rental Expense
(i) In 1987, Bernardi Honda made a $244,462.81
adjustment to increase retained earnings (prior
periods).
(ii) This entry had no effect on income and
merely reclassified balance sheet items. No adjustment
to taxable income is necessary.
(iii) Moreover, the amount in question is already
included in the Commissioner's proposed adjustments
described in Paragraph L-3 above.
(c) Retained Earnings
(i) In 1987, Bernardi Honda charged current
retained earnings with $101,911.24 and increased prior
period retained earnings by a similar amount.
(ii) This entry had no effect on income and was
merely a reclassification of balance sheet items.
(iii) Moreover, the Commissioner erroneously
proposes to adjust this item twice.
(d) Miscellaneous
(i) During 1987, several adjustments to the
retained earnings account were made
(A) On May 31, 1987, $7,900 in deposits due
customers by an affiliated corporation were
reclassified; and
(B) On September 30, 1987, $108,507 was
charged to the employee 401(k) account
($14,809.18) and to taxes payable ($93,698) and
added to retained earnings as a correction.
(ii) These entries had no effect on income and
were merely reclassifications of balance sheet items.
(e) American Honda
(i) During May 1987, Bernardi Honda eliminated a
$400,000 payable due to American Honda and added
$400,000 to amounts due stockholder.
(ii) This entry had no effect on income and was
merely a reclassification of balance sheet items.
(f) Bad Debt
(i) In 1987, a journal entry was made reducing
the balance of Bernardi Honda's allowance for doubtful
accounts by $50,511. The Commissioner claims that 1987
income was thereby understated.
(ii) The $50,511 entry in question had no income
tax effect and no bad debt deduction was claimed by
Bernardi Honda on its income tax return for 1987.
Accordingly, the 1987 income for Bernardi Honda is
properly reported.
L-10 Other Expenses
(a) The Commissioner identified numerous Bernardi
Honda expenditures which were disallowed as ordinary and
necessary business expenses.
1/9/87 Integrated Resources $ 7,803.00 (d)
1/12/87 Fred Bray 837.00 (g)
2/3/87 Lincoln National Life 3,232.00 (c)
2/3/87 Kathleen Bernardi 4,967.00 (c)
2/11/87 Am. Express 676.00 (d)
2/13/87 Lincoln National 7,810.00 (d)
2/27/87 Davis, Malm & D'Agostine 8,379.00 (c)(d)
3/3/87 Computer Tele. 626.00 (b)
3/3/87 Mark Freedman 1,373.00 (a)
3/3/87 Thompson Door 630.00 (a)
3/3/87 F. Diehl & Son 1,295.00 (a)
3/9/87 Finally Michaels 975.00 (d)
3/13/87 Winning Window Wear 261.00 (g)
3/12/87 Federal Glass And M. 489.00 (a)
3/25/87 F. Diehl & Son 1,862.00 (a)
3/24/87 Federal Glass 343.00 (a)
3/25/87 GMAC 79,689.00 (d)(c)
3/31/87 Dave Mathews 209.00 (d)
4/7/87 342 Madison Ave. 3,263.00 (d)(c)
4/10/87 Computer Tele 429.00 (b)
4/9/87 Lincoln National 3,236.00 (c)
4/14/87 Lincoln National 2,000.00 (c)
4/14/87 Lincoln National 2,000.00 (c)
4/20/87 Davis, Malm & D'Agostine 9,586.00 (d)
4/29/87 Lawrence W. Forshner 680.00 (b)
5/13/87 Hazco International 1,150.00 (c)
5/27/87 Lincoln National 8,580.00 (d)
5/4/87 Brochu Landscaping 1,933.00 (c)
5/5/87 Bernardi Cycle 980.00 (d)
5/17/87 Jim Fisher 233.00 (b)
6/30/87 James Brochu 280.00 (c)
7/10/87 Multibank International 2,957.00 (d)
7/15/87 James Brochu 477.00 (c)
7/21/87 Jim Fisher, Elect. 400.00 (b)
7/30/87 Staples, Inc. 3,684.00 (d)
7/30/87 Texas Instruments 252.00 (b)
8/10/87 Texas Instruments 252.00 (b)
8/10/87 Jim Fisher, Elect. 297.00 (a)
8/10/87 Computer Tele. 340.00 (b)
9/1/87 Staples, Inc. 1,842.00 (d)
9/10/87 Davis, Malm & D'Agostine 350.00 (d)
9/8/87 Texas Instruments 339.00 (b)
9/8/87 Texas Instruments 252.00 (b)
9/10/87 Fred Bray Co. 298.00 (b)
9/11/87 Lincoln National 900.00 (d)
9/15/87 James Brochu 2,383.00 (c)
9/16/87 Lincoln National 630.00 (d)
9/25/87 John Falat 760.00 (d)
10/2/87 James Brochu 708.00 (c)
10/2/87 Jim Fisher 550.00 (b)
10/5/87 Multibank International 1,151.00 (d)
10/5/87 Lincoln National 3,236.00 (c)
10/15/87 James Brochu 1,094.00 (c)
10/21/87 Finally Michaels 975.00 (c)
10/26/87 Davis, Malm & D'Agostine 219.00 (d)(c)
10/27/87 Integrated Sec. 3,912.00 (d)
11/9/87 Computer Tele 429.00 (b)
11/16/87 Jim Fisher 1,410.00 (a)
11/16/87 John Falat 3,535.00 (a)
11/18/87 Oakleaf 4,032.00 (b)
11/19/87 F. Diehl & Son 293.00 (b)
11/24/87 James Brochu 4,000.00 (g)
11/24/87 Davis, Malm & D'Agostine 350.00 (c)
11/29/87 James Brochu 3,664.00 (c)
12/15/87 Lincoln National 1,000.00 (d)
12/22/87 John Falat 1,975.00 (a)
12/22/87 Bruce Saluk 300.00 (a)
12/31/87 James Brochu 986.00 (c)
-----------
$206,038.00
===========
(a) Capitalized leasehold improvement
(b) Capitalized equipment
(c) Non-deductible, not this taxpayer's expense
(d) Unallowable deduction, substantiation, etc.
(e) Capitalized furniture and fixtures
(f) 20% of entertainment adjusted as required
(g) Capitalized fixtures and furniture
1/4/88 Lincoln National 987.00 (d)
1/8/88 Carney Management 838.00 (b)
1/13/88 Alvin Huberman 675.00 (d)
1/15/88 Lincoln National Life 3,236.00 (d)
1/25/88 Multibank International 691.00 (d)
1/25/88 James Brochu 760.00 (d)
2/3/88 Integrated Resources 2,982.00 (d)
2/2/88 John Falat 1,260.00 (d)
2/18/88 Ducas 975.00 (d)
2/29/88 Independent Compres. 1,500.00 (b)
2/29/88 Heller Financial 2,014.00 (b)
2/29/88 Dick Reynolds 861.00 (b)
3/7/88 John Fallat, Arch. 1,411.00 (d)
3/21/88 Independent Compres. 513.00 (b)
3/22/88 Goodman, Goguen 765.00 (d)
3/28/88 David Olsen 161.00 (d)
4/8/88 Ducas 975.00 (d)
4/11/88 Lincoln National 1,062.00 (c)
4/13/88 Lincoln National 3,237.00 (c)
4/20/88 Multibank International 691.00 (d)
5/3/88 Roberts Fiduciary 2,500.00 (d)
5/10/88 Lincoln National 930.00 (c)
5/23/88 John Falat, Arch. 6,996.00 (c)
6/29/88 Davis, Malm & D'Agostine 438.00 (d)
6/30/88 Ducas 1,651.00 (d)
7/6/88 Robert Giargiari 569.00 (d)
5/25/88 Multibank Intnl. 364.00 (d)
5/27/88 Davis, Malm & D'Agostine 750.00 (d)
5/1/88 Charles Caron 11,675.00 (c)
6/3/88 Jim Fisher, Elect. 1,175.00 (a)
6/14/88 Charles Caron 25,000.00 (c)
5/22/88 Ducas 975.00 (d)
6/22/88 Charles Caron 49,469.85 (c)
7/7/88 Bonazzoli Corp. 1,674.00 (d)
7/7/88 Bergin & Crotty 27,100.00 (c)
7/11/88 Lincoln National 3,236.00 (c)
7/11/88 ProCall 1,429.00 (d)
7/12/88 Jim Fisher Electric 274.00 (b)
7/13/88 R.P. Reynolds Const. 1,420.00 (b)
7/15/88 Charles Caron 76,645.00 (c)
8/2/88 Robert Giargiari 321.00 (c)
8/10/88 Charles Caron 24,744.00 (c)
8/16/88 Goodman, Goguen 405.00 (c)
8/18/88 Ducas 975.00 (d)
8/31/88 Charles Caron 59,992.00 (c)
9/19/88 Charles Caron 44,471.21 (c)
9/28/88 John Falat 11,240.00 (c)
10/11/88 Charles Caron 13,212.00 (c)
10/19/88 Lincoln National 3,236.00 (c)
10/28/88 Charles Caron 15,000.00 (c)
11/7/88 Fitzgerald & Vaughn 3,900.00 (c)
11/9/88 Charles Caron 20,310.00 (c)
11/16/88 Davis, Malm & D'Agostine 905.00 (c)
11/29/88 Central Air System 17,000.00 (c)
11/29/88 Charles Caron 27,360.00 (c)
11/29/88 John Falat 1,820.00 (c)
12/20/88 Molly Webster 975.00 (d)
12/30/88 Wocester Business 954.00 (d)
4/8/88 Pierre Jerome 475.00
-----------
$487,159.00
===========
(a) Capitalized leasehold improvement
(b) Capitalized equipment
(c) Non-deductible, not this taxpayer's expense
(d) Unallowable deduction, substantiation, etc.
(e) Capitalized furniture and fixtures
(f) 20% of entertainment adjustment as required
(b) Each of the foregoing payments were made on
account of ordinary and necessary business expenses
incurred by Bernardi Honda in the ordinary course of
business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Bernardi
Honda because they were made on account of expenses of
other related taxpayers, then a corresponding deduction
should be allowed to the related taxpayer. As a consequence
of said deduction, the petitioner's share of distributable
S corporation income from such other corporation should be
correspondingly reduced.
M. Distributive Share - Crown Chevrolet Trust
Crown Chevrolet Trust ("Crown Chevrolet") is a
Massachusetts business trust taxable as a corporation for
Federal income tax purposes. It operates a Chevrolet and
Hyundai dealership in Framingham, Massachusetts. It is
wholly owned by James Carney and filed income tax returns
as an S corporation on Form 1120S for calendar years 1987
and 1988.
The proposed adjustments to income are $1,321,752 for
1987 and ($383,668) for 1988, summarized as follows:
1987 1988
---- ----
1. Amortization expense $ 42,500 $ 170,000
2. Other expenses 80,040 114,941
3. Other income 62,242 -
4. Other income - inventory 1,134,849 (712,609)
valuation
5. Other expense - Federal tax 3,888 -
6. Other expense - ret. earnings - 39,309
7. Other selling expenses - 11,854
8. Depreciation expense (1,767) (7,163)
---------- ---------
$1,321,752 $(383,668)
========== =========
M-1 Amortization Expense
(a) In 1987, James Carney acquired all of the shares
of two Massachusetts corporate trusts, Crown Chevrolet and
Crown Oldsmobile-Toyota Trust ("Crown Olds-Toyota"). The
purchase price for the shares was $3,012,000, the net book
value of the corporations.
(b) At the same time, Crown Chevrolet and Crown
Olds-Toyota entered into agreements with Mr. Glick, the
former owner of the businesses, providing for the payment
of $2,210,000 in consideration of a covenant not to compete
for a period of 54 months. Crown Chevrolet amortized
$1,000,000 of the cost of the covenant over 54 months,
claiming deductions of $55,556 in 1987 and $222,224 in
1988.
(c) The Commissioner determined that the value of the
business purchased was $4,700,000 rather than $3,012,000
and that the portion of the purchase price allocated to the
covenant not to compete was reduced from $2,210,000 to
$522,200.
(d) Accordingly, Crown Chevrolet's amortization
deduction was reduced to $13,056 for 1987 and $52,224 for
1988.
(e) The price paid by Mr. Carney for the shares of
Crown Chevrolet and the related covenant not to compete
represented the fair market value of those assets,
determined by arms' length negotiations between unrelated
parties.
(f) The cost to Crown Chevrolet of the covenant not to
compete was $1,105,000, which cost may be amortized over
the 54 month life of the covenant.
M-2 Other Expense
(a) The Commissioner determined that numerous Crown
Chevrolet expenditures should be disallowed as ordinary and
necessary business expenses for various reasons set forth
below.
Hyundai
-------
11/6/87 Prof. Inventory Assoc. 457.00 (c)
11/30/87 Sun Electric Co. 1,114.00 (b)
12/22/87 Riemer & Braunstein 3,705.00 (c)
12/31/87 Crown Properties 10,000.00 (g)
----------
1987 Hyundai Total $15,276.00
==========
Chevrolet
---------
10/22/87 Des Lauriers & Assoc. 1,000.00 (c)
10/22/87 Donald A. Carvin, Atty. 11,021.00 (c)
10/22/87 Davis, Malm & D'Agostine 4,175.00 (c)
10/31/87 Jim Fisher Elect. 575.00 (b)
11/06/87 Professional Inventory 2,295.00 (c)
11/17/87 Robert Pellegrini 875.00 (c)
11/19/87 Sun Electric Corp. 1,114.00 (d)
11/24/87 Davis, Malm & D'Agostine 11,096.00 (c)
11/24/87 Reimer & Braunstein 5,935.00 (c)
11/24/87 Thomas Bergin 9,000.00 (c)
11/25/87 Pellegrini & Sons 842.00 (c)
12/17/87 William Flynn 1,000.00 (d)
12/8/87 Carney Mgt. 2,856.00 (b)
12/16/87 John Falat Arch. 440.00 (a)
12/16/87 Texas Instruments 350.00 (b)
12/16/87 Jim Fisher Elect. 279.00 (b)
12/16/87 Davis, Malm & D'Agostine 2,478.00 (c)
12/21/87 Seder & Chandler 2,134.00 (c)
12/31/87 Reimer & Braunstein 3,705.00 (c)
12/31/87 Carney Mgt. 3,594.00 (b)
----------
1987 Chevrolet Total $64,764.00
1987 Hyundai Total 15,276.00
----------
1987 Combined Total $80,040.00
==========
Hyundai
-------
12/31/88 Crown Properties (10,000.00)(g)
1/8/88 Carney Management Co. 3,527.00 (d)
2/2/88 Dick Reynolds 1,084.00 (b)
2/3/88 Electrical Design 829.00 (a)
2/12/88 Louis Perez, Jr. 975.00 (a)
2/18/88 Dick Reynolds 3,424.00 (a)
3/7/88 Dick Reynolds 1,939.00 (a)
3/22/88 Precision Communications 570.00 (d)
3/25/88 Dick Reynolds 2,195.00 (a)
4/5/88 Electrical Design 2,003.00 (a)
4/11/88 Travel Agents Intl. 541.00 (c)
5/10/88 ADS Dealer Services 738.00 (d)
6/10/88 The Godfrey Group 1,529.00 (b)
7/11/88 Heritage Mgt. Corp. 58,721.00 (c)
11/17/88 Percision Inventory 2,250.00 (d)
11/28/88 Automotive Warehouse 609.00 (b)
----------
1988 Hyundai Total $70,934.00
==========
Chevrolet
---------
1/14/88 Expert Fence Co. 429.00 (a)
1/19/88 Rick Bobideaux 918.00 (d)
1/22/88 Davis, Malm & D'Agostine 548.00 (c)
2/10/88 Jim Fisher Elect. 1,315.00 (b)
2/26/88 Riemer & Braunstein 250.00 (c)
2/26/88 Davis, Malm & D'Agostine 1,153.00 (c)
3/8/88 Expert Fence 871.00 (a)
3/10/88 NYNEX Business Info. 1,110.00 (b)
3/22/88 Kappy's Liquor Gift 225.00 (d)
3/24/88 Rockingham District Court 65.00 (d)
3/28/88 Vishnu Patel 500.00 (d)
3/28/88 Percision Communications 905.00 (b)
4/11/88 Carney Mgt. 2,550.00 (b)
4/22/88 Fred Bray 1,821.00 (c)
4/28/88 St. Lumber Co. 262.00 (a)
5/2/88 Carney Mgt. 530.00 (b)
5/9/88 Robert W. King 500.00 (c)
5/12/88 Am. Network Leasing Co. 1,917.00 (c)
5/31/88 Davis, Malm & D'Agostine 994.00 (c)
6/30/88 Carney Mgt. 577.00 (b)
7/28/88 Mr. Brown Inc. 1,613.00 (e)
8/10/88 Norman Paint & Wall 325.00 (b)
8/15/88 Percision Comm. 497.00 (b)
8/29/88 Percision Comm. 761.00 (b)
8/31/88 Percision Comm. 1,081.00 (b)
9/7/88 Framingham Dist. Ct. 65.00 (d)
9/29/88 Texas Instruments 516.00 (b)
11/7/88 Percision Inventories 4,950.00 (c)
11/14/88 Lappen Auto Supply 937.00 (b)
11/14/88 Truck Equip. of Bos. 5,343.00 (d)
11/30/88 Percision Comm. 754.00 (b)
11/30/88 Electronic Data 3,043.00 (d)
12/6/88 Charles Caron 600.00 (c)
12/6/88 Percision Comm. 782.00 (b)
12/19/88 Davis, Malm & D'Agostine 810.00 (c)
12/20/88 Charles Caron 2,042.00 (a)
A/P Texas Instruments 420.00 (b)
A/P Percision 2,091.00 (b)
-----------
1988 Chevrolet Total 44,007.00
1988 Hyundai Total 70,934.00
-----------
1988 Combined Total $114,941.00
===========
(a) Capitalized leasehold improvement
(b) Capitalized equipment
(c) Non-deductible, not this taxpayer's expense
(d) Unallowable deduction, substantiation, etc.
(e) Capitalized furniture and fixtures
(f) 20% of entertainment adjusted as required
(g) Non-deductible cost of another period
(h) Gifts to customers in excess of the $25.00 limit
(b) Each of the foregoing payments were made on
account of ordinary and necessary business expenses
incurred by Crown Chevrolet in the ordinary course of
business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Crown
Chevrolet because they were made on account of expenses of
other related taxpayers, then a corresponding deduction
should be allowed to the related taxpayer. As a consequence
of said deduction, the petitioner's share of distributable
S corporation income from such other corporation should be
correspondingly reduced.
M-3 Other Income
(a) In 1987, Crown Chevrolet wrote off a total of
$60,121.19 due from finance companies.
(b) The Commissioner disallowed these expenses on the
basis that they were in fact a distribution to Allen Glick,
the previous owner of Crown Chevrolet and not corporate
expenses.
(c) The amount in question was in whole or in part
previously earned income from assigned customer financing
which was adjusted when customers defaulted or prepaid
their car loans.
(d) In 1987, Crown Chevrolet wrote off $2,120 against
income, reflecting a write-off of an asset consisting of a
Genway franchise. Genway was a General Motors leasing
program which was discontinued by GM just prior to Mr.
Carney's acquisition of Crown Chevrolet. The expense in
question was a writeoff of a worthless business asset.
M-4 Other Income - Inventory Valuation
(a) At year end 1987, Crown Chevrolet made adjustments
to its LIFO reserve of $248,238 for its Chevrolet inventory
and $219,558 for its Hyundai inventory.
(b) In prior years, the "link chain" method of LIFO
inventory valuation had been used under prior ownership.
The prior owner had computed the LIFO adjustment to October
8, 1987 in accordance with the election under Section
1377(a) of the Code, which permits an S corporation to
terminate its fiscal year on a change of control. That
computation is not in question.
(c) The new accountant made computational errors in
determining the LIFO adjustment for the short fiscal period
ended December 31, 1987.
(d) The Commissioner adjusted income for 1987 by
adding
Chevrolet increase in LIFO reserve $248,238
Hyundai increase in LIFO reserve 219,558
LIFO reserve from 10/8/87 667,053
---------
$1,134,849
==========
(e) In 1988, Crown Chevrolet reduced its Chevrolet
LIFO reserve by $493,050 and its Hyundai LIFO reserve by
$219,559. These adjustments reduced cost of goods sold and
increased income. The Commissioner disallowed these
adjustments in full, resulting in a $712,609 deduction.
(f) The 1987 and 1988 Crown Chevrolet LIFO inventory
should be recalculated correctly and the taxable income in
each year adjusted accordingly. Crown Chevrolet's books and
records are available with respect to its LIFO inventory
which can be used as a basis for recalculation. The
petitioner further asserts that under Rev. Proc. 79-23,
1979-1 C.B. 565, the following situations do not warrant
disallowance or termination of a LIFO election:
(i) Computational errors made by the taxpayer in
computing the value of its LIFO inventory and other
computational errors made incident to the LIFO
election;
(ii) Selection by the taxpayer of a fewer or
greater number of inventory pools than those
determined by an examining agent; and
(iii) The taxpayer improperly including (or
excluding) a specific item in a particular inventory
pool.
(g) The errors in the computation of the Crown
Chevrolet LIFO reserve are identified in items (i), (ii)
and (iii) above and as such do not justify termination of
the LIFO election.
M-5 Other Expense - Federal Tax
(a) During 1987, Crown Chevrolet charged off as a
business expense a $3,888 account receivable representing
prepaid income taxes.
(b) This was in fact a Federal tax refund which was
never received because the refund claim was untimely filed.
(c) Petitioner admits that the amount in question was
deducted in error by Crown Chevrolet.
M-6 Other Expense - Retained Earnings (Finance Income)
(a) During 1988, Crown Chevrolet expensed $39,308.50
from the GMAC Reserve Account.
(b) This amount represented previously earned income
from assigned customer financing which was adjusted when
customers defaulted or prepaid their car loans.
M-7 Other Selling Expense - Retained Earnings
(a) During 1988, Crown Chevrolet deducted $11,854 as
other selling expense "to adjust and reflect proper
retained earnings A/C balance at 1/1/88."
(b) This entry was made to correct a previous
incorrect entry which overstated income.
M-8 Depreciation Expense
(a) The Commissioner recharacterized certain expenses
of Crown Chevrolet as capital items as follows:
1987 1988
---- ----
Leasehold Improvements $ 440 $14,249
Equipment 8,768 19,551
Furniture and Fixtures -0- -0-
(b) The Commissioner calculated depreciation expense
allowable with respect to the capitalized expenses.
(c) The expenses in question are ordinary and
necessary business expenses incurred in the course of Crown
Chevrolet trade or business.
(d) In the alternative, the expenditures are either
equipment or furniture and fixtures, and not leasehold
improvements.
N. Distributive Share - Crown Oldsmobile - Toyota Trust
Crown Oldsmobile-Toyota Trust ("Crown Olds-Toyota") is
a Massachusetts business trust taxable as a corporation for
Federal income tax purposes. It operates an Oldsmobile and
Toyota dealership in Framingham, Massachusetts. It is
wholly owned by James Carney and filed income tax returns
as a S corporation on Form 1120S for calendar years 1987
and 1988.
The proposed adjustments to income are $616,881 for
1987 and $409,404 for 1988, summarized as follows:
1987 1988
---- ----
1. Amortization expense $ 42,500 $170,000
2. Other expenses 92,711 81,936
3. Other interest expense 39,538 -
4. Equipment expense - (48,738)
5. Depreciation expense 2,132 3,078
6. Cost of goods sold -
inventory valuation 440,000 203,128
-------- --------
$616,881 $409,404
======== ========
N-1 Amortization Expense
(a) In 1987, James Carney acquired all of the shares
of two Massachusetts corporate trusts, Crown Chevrolet and
Crown Olds-Toyota. The purchase price for the shares was
$3,012,000, the net book value of the corporations.
(b) At the same time, Crown Chevrolet and Crown
Olds-Toyota entered into agreements with Mr. Glick, the
former owner of the businesses, providing for the payment
of $2,210,000 in consideration of a covenant not to compete
for a period of 54 months. Crown Olds-Toyota amortized
$1,000,000 of the cost of the covenant over 54 months,
claiming $55,556 in 1987 and $222,224 in 1988.
(c) The Commissioner determined that the value of the
business purchased was $4,700,000 rather than $3,012,000
and that the portion of the purchase price allocated to the
covenant not to compete should be reduced from $2,210,000
to $522,200.
(d) Accordingly, Crown Olds-Toyota's amortization
deduction was reduced to $13,056 for 1987 and $52,224 for
1988.
(e) The price paid by Mr. Carney for the shares of
Crown Olds-Toyota and the related covenant not to compete
represented the fair market value of those assets,
determined by arms' length negotiations between unrelated
parties.
(f) The cost to Crown Olds-Toyota of the covenant not
to compete was $1,105,000, which cost may be amortized over
the 54 month life of the covenant.
N-2 Other Expenses
(a) The Commissioner determined that numerous Crown
Olds-Toyota expenditures should be disallowed as ordinary
and necessary business expenses for the reasons set forth
below.
10/30/87 Simplex Time Recorder 428.09 (e)
11/5/87 Richard Reynolds 7,000.00 (a)
11/6/87 Professional Inv. Assoc. 3,530.93 (c)
11/17/87 Robert Pellegrini 875.00 (c)
11/19/87 Dick Reynolds 1,025.00 (a)
11/19/87 Design, Renovation 1,923.77 (a)
11/25/87 Pellegrini & Son 872.00 (c)
11/27/87 Dick Reynolds 1,527.50 (a)
11/30/87 Shawmut Bank 19,125.00 (d)
11/30/87 Auto Equip. Service 600.00 (d)
12/4/87 Dick Reynolds 5,977.42 (a)
12/15/87 R.M.R.S. 500.00 (d)
12/15/87 Dick Reynolds 2,726.00 (a)
12/17/87 Dick Reynolds 6,046.02 (a)
12/23/87 Staples 375.92 (e)
12/28/87 Riemer & Braunstein 3,705.09 (c)
12/20/87 Lee Imports 3,000.00 (d)
12/30/87 Dick Reynolds 4,301.67 (a)
12/31/87 Carney Mgt. Co. 3,960.50 (b)
----------
Total Adjustment to Expenses $67,499.91
1/6/87 Dick Reynolds 1,281.86 (a)
1/6/87 Jim Fisher 12,012.00 (a)
1/6/87 Dick Reynolds 5,394.65 (a)
1/1/87 Dick Reynolds 6,522.58 (a)
----------
Total Post 10/8/87 Adjustments $92,711.00
==========
(a) capitalized leasehold improvement
(b) capitalized equipment
(c) Non-deductible, not this taxpayer's expense
(d) Unallowable deduction, substantiation, etc.
(e) capitalized furniture and fixtures
(f) 20% of entertainment adjusted as required
1/14/88 Corporate Risk Consult. 650.00 (c)
2/6/88 Racquetime 588.00 (d)
2/15/88 Kay Gee Sign 1,444.00 (e)
2/15/88 Corporate Risk Consult. 650.00 (c)
3/29/88 Davis, Malm & D'Agostine 2,071.00 (d)
4/26/88 Paul Gately 453.00 (d)
5/3/88 Electronic Design 620.00 (a)
6/10/88 Godfry Group 1,529.00 (e)
8/7/88 Am. Express 603.00 (d)
8/7/88 Am. Express 1,448.00 (d)
9/21/88 Fred Bray Co. 548.00 (b)
9/28/88 Am. Express 1,382.00 (d)
10/19/88 Electronic Data Sys. Co. 1,617.00 (b)
10/31/88 Kuzzins Mfg. Co. 510.00 (b)
11/4/88 Am. Express 827.00 (d)
12/28/88 Brokerage Profess. 345.00 (d)
12/29/88 Am. Express 1,449.00 (d)
----------
1988 Total Expenses Disallowed $16,734.00
==========
(a) Capitalized leasehold improvement
(b) Capitalized equipment
(c) Non-deductible, not this taxpayer's expense
(d) Unallowable deduction, substantiation, etc.
(b) Each of the foregoing payments were made on
account of ordinary and necessary business expenses
incurred by Crown Olds-Toyota in the ordinary course of
business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Crown
Olds-Toyota because they were made on account of expenses
of other related taxpayers, then a corresponding deduction
should be allowed to the related taxpayer. As a consequence
of said deduction, the petitioner's share of distributable
S corporation income from such other corporation should be
correspondingly reduced.
N-3 Other Interest Expense
(a) In 1987, Crown Olds-Toyota wrote off $39,538.42
due from a finance company.
(b) The amount in question represented previously
earned income from assigned customer financing which was
adjusted when customers defaulted or prepaid their car
loans.
N-4 Equipment Expense
(a) During 1987, Crown Olds-Toyota made substantial
renovations to its facilities.
(b) Some $48,739.47 in expenditures were expensed on
the corporation's books in 1987. However, these entries
were then later reversed in 1988 and the amount in question
was added to income in that year.
(c) To the extent that these expenditures are
disallowed as deductions in 1987 (see Paragraph N-2 above)
taxable income of the corporation should be correspondingly
decreased in 1988.
N-5 Depreciation Expense
(a) The Commissioner has recharacterized certain
expenses as capital items as follows:
1987 1988
---- ----
Leasehold improvements $55,738 $ 620
Equipment 3,960 2,675
Furniture and Fixtures 804 2,973
(b) The Commissioner has calculated depreciation
expense allowable with respect to the capitalized expenses.
The Commissioner's depreciation adjustments should reduce
rather than increase Crown Olds-Toyota's ordinary income.
(c) The expenses are ordinary and necessary business
expenses incurred in the course of Crown Olds-Toyota's
trade or business.
(d) In the alternative, the expenditures are either
equipment or furniture and fixtures, with applicable
recovery periods of 5 years and 7 years, respectively.
N-6 Cost of Goods Sold - Inventory Valuation
(a) At year-end 1987, Crown Olds-Toyota made
adjustments to its LIFO reserve of $160,900.
(b) In prior years, the "link chain" method of LIFO
inventory valuation had been used under prior ownership.
The prior owner had computed the LIFO adjustment to October
8, 1987 in accordance with the election under Section
1377(a) of the Code, which permits an S corporation to
terminate its fiscal year on a sale of control. That
computation is not in question.
(c) The new accountant made computational errors in
determining the adjustment for the short fiscal period
ended December 31, 1987.
(d) The Commissioner adjusted income for 1987 by
adding
Total increase in LIFO reserve $160,900
LIFO reserve from 10/8/87 279,180
--------
$440,080
========
(e) In 1988, Crown Olds-Toyota increased its LIFO
reserve by $203,128, all of which was disallowed by the
Commissioner.
(f) The 1987 and 1988 Crown Olds-Toyota LIFO inventory
should be recalculated correctly and the taxable income in
each year adjusted accordingly. Crown Olds-Toyota's books
and records are available with respect to its LIFO
inventory which can be used as a basis for recalculation.
The petitioner further asserts that under Rev. Proc. 79-23,
1979-1 C.B. 565, the following situations do not warrant
disallowance or termination of a LIFO election:
(i) Computational errors made by the taxpayer in
computing the value of its LIFO inventory and other
computational errors made incident to the LIFO
election;
(ii) Selection by the taxpayer of a fewer or
greater number of inventory pools than those
determined by an examining agent; and
(iii) The taxpayer improperly including (or
excluding) a specific item in a particular inventory
pool.
(g) The errors in the computation of the Crown Olds
Toyota LIFO reserve are identified in items (i), (ii) and
(iii) above and as such do not justify termination of the
LIFO election.
O. Distributive Share - Norwell Cars, Inc.
(a) Norwell Cars, Inc. ("Norwell") is a Massachusetts
corporation wholly owned by James Carney. It operates an
Acura dealership in Norwell, Massachusetts. It filed an
income tax return on Form 1120S for the calendar year 1988.
(b) The proposed adjustments to income for 1988 are
$100,561, as summarized below:
1. General expenses $ 22,454
2. Other expenses 30,532
3. Training expense 5,928
4. Depreciation expense 10,360
--------
$ 69,274
5. Recalculation of distributive share 31,287
--------
$100,561
========
O-1 General Expenses
(a) During 1988, Norwell charged retained earnings
$10,427.90 for a payment to Lappen Auto Supply. At the same
time, the company charged additional payments of $12,026.00
to retained earnings.
(b) These amounts represented repairs and maintenance
expenditures deductible as ordinary and necessary business
expenses.
O-2 Other Expenses
(a) The Commissioner determined that certain
expenditures by Norwell for calendar year 1988 should be
disallowed as ordinary and necessary business expenditures,
as set forth below:
5/12/88 Creative Interior $ 500.00 (a)
5/13/88 Corp Risk Consult 675.00 (b)
5/19/88 Suburb Plantscape 840.00 (a)
2/24/88 Air Compressor Exp. 2,197.25 (a)
5/31/88 Sun Electric Corp. 1,113.63 (a)
6/1/88 Carney Management 3,786.54 (a)
8/3/88 BSC Group 382.50 (b)
6/10/88 Sentry Protection 2,490.00 (a)
6/12/88 Ed Ferrelli 168.00 (a)
6/20/88 Fred Bray Co. 770.00 (a)
6/29/88 Computer Telephone 1,557.40 (a)
7/18/88 W.S. Mason Co. 5,153.40 (a)
7/20/88 Creative Interiors 299.00 (a)
7/21/88 Carney Management 1,678.72 (e)
7/21/88 Davis, Malm & D'Agostine 70.95 (d)
7/21/88 Davis, Malm & D'Agostine 212.85 (e)
8/8/88 Davis, Malm & D'Agostine 75.00 (a)
8/10/88 Noonan Paint & Wall 750.00 (a)
8/20/88 Joel Richards 487.50 (a)
8/24/88 Computer Telephone 326.00 (a)
9/19/88 R.P. Reynolds Const. 399.75 (a)
10/11/88 Sentry Protective 2,460.50 (a)
11/9/88 Charles R. Caron 450.00 (a)
11/15/88 Davis, Malm & D'Agostine 325.00 (d)
11/30/88 Joel Richards 506.71 (e)
12/5/88 Joseph Moore 400.00 (e)
12/15/88 Prestige Motors 2,300.00 (c)
----------
1988 Total $30,532.60
==========
(b) Each of the foregoing payments were made on
account of ordinary and necessary business expenses
incurred by Norwell in the ordinary course of business.
(c) In the alternative, if it is determined that any
of said payments were not properly deductible by Norwell
because they were made on account of expenses of other
related taxpayers, then a corresponding deduction should be
allowed to the related taxpayer. As a consequence of said
deduction, the petitioner's share of distributable
Subchapter S income from such other corporation should be
correspondingly reduced.
O-3 Training Expenses
(a) During 1988, Norwell purchased video service
training equipment from Honda for $5,928.10. This amount
was deducted over several months in 1988 as "training
expense."
(b) The petitioner admits that this amount should be
capitalized and depreciated over a five year period under
the MACRS system.
O-4 Depreciation
(a) The Commissioner disallowed $10,360 of
depreciation expense claimed by Norwell in 1988.
(i) The depreciation expense claimed on Norwell's
1988 tax return, as filed, is correct.
(ii) In the alternative, additional depreciation
is allowable on expenditures capitalized by the
Commissioner.
(b) Depreciation on expenditures capitalized by the
Commissioner.
(i) The Commissioner recharacterized certain
expenses of Norwell as capital items as follows:
1988
----
Leasehold Improvements $12,026
Equipment 20,437
Furniture and Fixtures 21,424
(ii) The Commissioner calculated depreciation
expense allowable with respect to the capitalized
expenses.
(iii) The expenses are ordinary and necessary
business expenses incurred in the course of Norwell's
trade or business.
(iv) In the alternative, the capitalized
expenditures are properly classified as having
recovery periods of 5 or 7 years.
(c) Additional Boston Car Company expenditures.
(i) The Commissioner has disallowed $128,344 of
expenditures made by Boston Car Company in 1987.
(ii) The $128,344 of Boston Car Company
expenditures are ordinary and necessary expenses
incurred in the course of Boston Car Company's trade
or business.
(iii) In the alternative, the $128,344 of Boston
Car Company expenditures represent funds advanced on
behalf of Norwell to acquire capital assets that are
subject to an allowance for depreciation under Section
167 of the Code.
O-5. Recalculation of Distributive Share
(a) The Commissioner determined that petitioner's
distributable share of Norwell's S corporation loss for
1988 was 62.6%, since another person was a 50% shareholder
for 273 days during that year.
(b) Norwell's 1988 taxable year commenced on April 1,
1988, when it commenced operations and therefore the other
shareholder only held stock in the corporation for 182 days
during that year.
P. Capital Gains and Losses
P-1. Capital Loss on Liquidation of Carney Buick.
(a) As described in Paragraph K above, Carney Buick
sold substantially all of its assets to Prestige Buick in
March 1987. In connection with this transaction, all of the
assets of Carney Buick (after payment of its liabilities)
were distributed to Mr. Carney, its sole shareholder. As a
result, Mr. Carney recognized a $112,273 loss, measured by
the difference between his basis in his stock ($125,000)
less the liquidation proceeds ($12,727).
(b) The Commissioner determined that the liquidation
was not "complete", since the stock was not surrendered and
the corporation remained in existence. Accordingly, he
disallowed the loss on the transaction.
(c) The Commissioner's determination is in error
because a dissolution of the corporation and a physical
surrender of stock certificates are not prerequisites for a
complete liquidation under the Code.
(d) In the alternative, petitioner states that the
basis in the Carney Buick stock held by him will be
affected by his distributable share of S corporation income
from that corporation as to which many adjustments are
proposed.
P-2. Boot on Like-Kind Exchange.
(a) On December 31, 1986, James Carney entered into an
agreement to transfer certain real estate owned by him in
Hanover, Massachusetts, in exchange for property located in
Norwell, Massachusetts, plus $1,200,000. Deeds were
executed and delivered and documentary tax stamps affixed
on that date.
(b) The owner of the Norwell property was Prestige
Imports, Inc. Pursuant to a prearranged plan, Prestige
transferred the Norwell property to Weber and Schmidt who
immediately conveyed the property to Mr. Carney. In
substance, the conveyance was made by Prestige to Mr.
Carney.
(c) A $1,200,000 promissory note secured by the
Norwell property was given to Mr. Carney by Weber and
Schmidt on December 31, 1986. Prestige Imports, Inc., the
transferor of the property, was not liable on the note. The
note was not an obligation of the transferee of the Hanover
property and therefore did not qualify for installment sale
treatment.
(d) The transaction was structured in this manner so
that Mr. Carney could recognize a capital gain on the
transaction in 1986 rather than 1987.
(e) In the alternative, the note received by Mr.
Carney in 1986 was payable on demand and was therefore not
indebtedness qualifying for the installment method.
(f) Accordingly, taxable income was recognized by Mr.
Carney in 1986, the year of the transaction in question,
and not in 1987, as alleged by the Commissioner. Any claims
by the Commissioner with respect to 1986 are barred by the
applicable Statute of Limitations.
WHEREFORE, petitioner prays that this Court determine that no deficiencies in income tax exist for the calendar years 1987 and 1988.
William F. Griffin, Jr.
Attorney for Petitioner
Davis, Malm & D'Agostine, P.C.
One Boston Place
Boston, Massachusetts 02108
(617) 367-2500
T.C. Bar No. GW0286
Dated: March 30, 1993
- CourtUnited States Tax Court
- DocketDocket No. 6561-93
- AuthorsGriffin, William F., Jr.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-72987
- Tax Analysts Electronic Citation93 TNT 98-82
