Corporation Claims It Made Valid S Corporation Election.
Boston Car Co., Inc. v. Commissioner
- CourtUnited States Tax Court
- DocketDocket No. 11244-93
- AuthorsGriffin, William F., Jr.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-75168
- Tax Analysts Electronic Citation93 TNT 148-88
Boston Car Co., Inc. v. Commissioner
BOSTON CAR COMPANY, INC.,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
====== SUMMARY ======
Boston Car Co., Inc., is challenging the IRS's determination that it is not eligible to be treated as an S corporation for 1989 and that taxable income reported on form 1120S is taxable as net income from a C corporation.
BCC claims that it made a valid S corporation election on or about January 17, 1986, when it commenced business operations and filed a form 2553 with the IRS.
BCC also is disputing the disallowance of various business expenses and depreciation expenses, claiming that they were all proper as claimed.
Period and Amount at Issue: 1989 -- $87,694 plus penalties and interest to be determined
Code Section Classification: 1362, 162, 167, 6662
====== FULL TEXT ======
PETITION
The petitioner hereby petitions for redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency dated March 9, 1993 and as a basis for its case alleges as follows:
1. The petitioner is a Massachusetts corporation with a principal place of business at 1600 Soldier's Field Road, Brighton, Massachusetts 02135. The petitioner's taxpayer identification number is 04-2901269. The return for the period here involved was filed with the office of the Internal Revenue Service at Andover, Massachusetts.
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 March 9, 1993 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 1989 in the amount of $87,694, 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 is not eligible to be an S corporation for calendar
year 1989 and that taxable income reported on Form 1120S as
filed is taxable as net income from a C corporation.
(b) The Commissioner erred in determining that the amount
of $46,095 deducted on petitioner's income tax return for
calendar year 1989 was improperly deducted as items expensed
which should have been capitalized ($1,770) and items which were
not ordinary and necessary business expenses ($44,325).
(c) The Commissioner erred in determining that the
petitioner's deduction for depreciation for calendar year 1989
should be reduced by $50,337 due to items not owned by the
petitioner ($26,364), items previously expensed ($33,240) and
personal items of the petitioner's shareholder ($3,165), net of
additional depreciation allowed for capital items disallowed as
deductions ($12,432).
(d) The Commissioner erred in determining that the amount
of $23,314 deducted on petitioner's income tax return for
calendar year 1989 for legal expense was not an ordinary and
necessary business expense.
(e) The Commissioner erred in determining that the amount
of $25,525 deducted on petitioner's income tax return for
calendar year 1989 as travel and entertainment expense was not
an ordinary and necessary business expense.
(f) The Commissioner erred in determining that the amount
of $30,795 deducted on petitioner's income tax return for
calendar year 1989 for vehicle expense was not an ordinary and
necessary business expense.
(g) The Commissioner erred in determining that all or a
portion of the underpayment of income taxes for the calendar
year 1989 is due to negligence or intentional disregard of rules
and regulations.
(h) The Commissioner erred in determining that there was a
substantial understatement of income taxes for calendar year
1989 under Section 6662(a) of the Internal Revenue Code.
5. The facts upon which the petitioner relies, as the basis for its case, are as follows:
A. S Corporation Election
1. The taxpayer was incorporated as a Massachusetts
corporation on January 16, 1986. The petitioner is 80%
owned by James P. Carney and 20% owned by a grantor trust.
2. The petitioner commenced business operations on
January 17, 1986 and filed a Form 2553 (Election by a Small
Business Corporation) with the Internal Revenue Service on
or about that date. During examination, this election was
reviewed by the IRS. The IRS Agent stated that "No problems
were [sic] noted with the election, it is accepted as
provided."
3. Since the taxpayer is an S corporation it is not
subject to Federal income taxation. Therefore none of the
other adjustments to taxable income proposed by the
Commissioner are valid.
B. Other Expenses.
1. The Commissioner disallowed various deductions
totalling $46,094.51 for calendar year 1989 for various
reasons summarized below:
1/19/89 Davis, Malm & D'Agostine $ 3,269.20 (d)
2/2/89 Acura of Boston 1,475.00 (d)
3/1/89 Davis, Malm & D'Agostine 3,436.75 (d)
3/20/89 Davis, Malm & D'Agostine 4,983.70 (d)
4/12/89 Comm. of Mass. 9,701.46 (d)
5/30/89 Davis, Malm & D'Agostine 2,847.55 (d)
6/15/89 Davis, Malm & D'Agostine 6,512.65 (d)
6/19/89 City of Boston 264.00 (d)
6/3/89 Davis, Malm & D'Agostine 2,713.00 (d)
11/17/89 NCM Assoc. 600.00 (d)
11/6/89 Bruce Fisher 824.80 (a)
11/30/89 Donald A. Cormier 1,521.25 (d)
12/4/89 Crum & Foster 1,000.00 (d)
A/P Fred Bray 945.15 (a)
----------
TOTAL 1989 ADJUSTMENT $46,094.51
==========
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) 20% of entertainment adjusted as required
2. All such expenses were ordinary and necessary
business expenses incurred in the course of the
petitioner's trade or business.
3. In the alternative, such payments were compensation
to employees and therefore deductible as ordinary and
necessary business expenses.
4. In the alternative, even if the expenses in
question are not deductible by the taxpayer, they are
properly deductible by James Carney or other entities
controlled by Mr. Carney.
C. Depreciation Expense.
1. Assignment of class life to capitalized assets.
(a) The Commissioner contends that $160,294.57 of
capital expenditures classified by the petitioner as
furniture and fixtures should have been classified as
leasehold improvements in 1986.
(b) Reclassification of $160,294.57 of capital
expenditures as leasehold improvements results in a
reduction of depreciation expense of $26,364 for 1989.
(c) The capital improvements in question were
properly classified as furniture and fixtures in 1986.
2. Assets purchased in 1986 with funds provided by
Bernardi Honda.
(a) The petitioner acquired the following assets
with funds advanced by Bernardi Honda: leasehold
improvements ($22,499.84), equipment ($79,597.57),
sign ($15,942.00) and furniture ($19,425.50).
(b) In 1986, the petitioner reported the funds
advanced by Bernardi Honda on the petitioner's behalf,
as income rather than as a liability.
(c) The Commissioner has disallowed the
depreciation deductions claimed by the petitioner with
respect to the fixed assets purchased in 1986 with
funds provided by Bernardi Honda.
(d) The Commissioner's disallowance of the
deductions is in error because the fixed assets belong
to the petitioner, the petitioner has basis in the
assets, and the tax benefit theory does not apply.
3. Depreciation on property belonging to petitioner's
shareholder.
Petitioner concedes this issue.
4. Depreciation on expenditures capitalized by the
Commissioner.
(a) The Commissioner has recharacterized certain
expenses as capital items as follows:
1987 1988 1989
---- ---- ----
Leasehold improvements $47,688 $11,577 $1,770
Equipment 38,313 3,633
Furniture and fixtures 3,389 5,655
(b) The Commissioner has 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
the petitioner's trade or business.
(d) In the alternative, the expenditures are
either equipment or furniture and fixtures, and not
leasehold improvements.
D. Legal Expense.
1. During 1989, the petitioner accrued $112,000 in
legal expense.
2. The Commissioner determined that $23,314 of said
amount should be disallowed since it was not substantiated.
3. In January 1990, the petitioner received an invoice
from legal counsel for itemized services and expenses
rendered and incurred in 1989 and totalling $61,987.12.
Petitioner, as an accrual basis taxpayer, is entitled to
deduct said amount even though not paid until 1990.
Petitioner's accrual of $23,314 in 1989 as an ordinary and
necessary business expense was reasonable and proper.
E. Travel and Entertainment Expense.
1. During 1989 the petitioner incurred numerous travel
and entertainment expenses, summarized below:
1/23/89 Am. Express $ 1,486.75
2/10/89 Am. Express 4,474.55
3/20/89 Am. Express 2,138.43
4/13/89 Am. Express 4,053.22
7/12/89 Am. Express 341.72
8/10/89 Am. Express 558.12
6/13/89 Am. Express 4,260.70
9/12/89 Am. Express 2,968.19
11/6/89 Am. Express 593.82
11/15/89 Am. Express 2,120.73
12/18/89 Am. Express 2,529.14
----------
Total Travel Disallowed $25,525.37
==========
2. The Commissioner disallowed these expenses in full
on the basis that the travel and entertainment expenses
were incurred by persons who were not employees of the
taxpayer, but rather employees of Carney Management Co.,
Inc. ("Carney Management") an affiliated corporation which
provides services to various automobile dealerships owned
by Mr. Carney.
3. In fact, the employees of Carney Management with
respect to which the payments were made are also employees
of the taxpayer and the payments made by the taxpayer are
part of an "accountable plan" under Treas. Reg. Section
1.62-2.
4. All such expenses were ordinary and necessary
business expenses incurred in the course of the
petitioner's trade or business.
5. In the alternative, such payments were compensation
to employees and therefore deductible as ordinary and
necessary business expenses of the petitioner.
6. In the alternative, even if the expenses in
question are not deductible by the taxpayer, they are
properly deductible by Carney Management or other entities
controlled by Mr. Carney.
F. Vehicle Expense.
1. During 1989, the petitioner accrued $30,795 as
vehicle expense "to adjust for special promotional costs
paid through South Shore Acura."
2. The Commissioner determined that said amount should
be disallowed since it was not substantiated.
3. All such expenses were properly documented and were
ordinary and necessary business expenses incurred in the
course of the petitioner's trade or business.
4. In the alternative, such payments were compensation
to employees and therefore deductible as ordinary and
necessary business expenses of the petitioner.
WHEREFORE, petitioner prays that this Court determine that no deficiencies in income tax exist for the calendar year 1989.
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: June 3, 1993
- CourtUnited States Tax Court
- DocketDocket No. 11244-93
- AuthorsGriffin, William F., Jr.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-75168
- Tax Analysts Electronic Citation93 TNT 148-88