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Corporation Claims It Made Valid S Corporation Election.

JUN. 4, 1993

Boston Car Co., Inc. v. Commissioner

DATED JUN. 4, 1993
DOCUMENT ATTRIBUTES
  • Court
    United States Tax Court
  • Docket
    Docket No. 11244-93
  • Authors
    Griffin, William F., Jr.
  • Code Sections
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-75168
  • Tax Analysts Electronic Citation
    93 TNT 148-88

Boston Car Co., Inc. v. Commissioner

====== CASE NAME ======

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

DOCUMENT ATTRIBUTES
  • Court
    United States Tax Court
  • Docket
    Docket No. 11244-93
  • Authors
    Griffin, William F., Jr.
  • Code Sections
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-75168
  • Tax Analysts Electronic Citation
    93 TNT 148-88
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