Beus v. Commissioner

             UNITED STATES COURT OF APPEALS NINTH CIRCUIT

In those 1952 tax returns, taxpayers claimed deductions for that year for such husbands' partnership business losses, (1) $ 20,000 for alleged abandonment that year of irrigation facilities connected with their Idaho farm and (2) $ 15,000 for alleged rental payments that year on their Oregon farm. In 1955 the Acting Commissioner, because of dissatisfaction with those deductions, notified taxpayers of deficiencies in their 1952 income tax payments in the following amounts: Ersel H. Beus and wife, $ 5,769.46 plus tax addition of $ 519.86, and W. J. Beus and wife, $ 11,920.46 plus tax addition of $ 1,791.62, and plus a penalty levied pursuant to Section 293(a) I.R.C.1939 ¹ by the Commissioner against W. J. Beus and wife because of their alleged negligent handling of their income tax deductions related to the Oregon farm operations.

Thereafter the taxpayers and their wives sought and obtained the Tax Court's redetermination of those deficiencies, but from adverse decisions of that Court, taxpayers now seek this review by this Court, which has such review jurisdiction under Section 7482 I.R.C.1954. ²

The Tax Court found (or the parties admitted):

     1. As to the Idaho Farm, that it comprised 200 acres consisting

That taxpayers W. J. Beus and wife also claimed in their 1952 income tax return a deduction for non-farming operations loss in the sum of $ 5,090.27 in connection with a purported sale of livestock that year, but the Commissioner disallowed this claimed deduction because he found such sale was not in fact made in 1952, that at least a part of the tax deficiency of this taxpayer and wife is due to their negligence or intention to disregard the applicable rules and regulations, and that the negligence assessment by the Commissioner was proper.

Upon the foregoing facts the Tax Court decided and ordered that there was a deficiency of $ 4,982.54 in the 1952 income tax paid by taxpayers Ersel Beus and his wife, and for the same year there was a deficiency of $ 10,591.36 in the income tax paid by taxpayers W. J. Beus and his wife, plus an addition to that tax of $ 529.57 for a negligence penalty against taxpayers W. J. Beus and his wife. It is of those decisions and actions of the Tax Court that all four of the taxpayers now seek this Court's review.

The record evidence now before us clearly and convincingly establishes the truth of all of the foregoing facts, and such record further so establishes that taxpayers neither abandoned nor intended to abandon in the year 1952 any of the then or previously existing irrigation facilities, particularly the headgate use, works, ditches, the Lateral and all facilities used in providing irrigation water to the taxpayers' Idaho farm from the Co-op. canal. On the other hand, all of the acts disclosed by the record and done by the taxpayers with reference to their retention of those water rights and facilities clearly show their intention to use and their actual use of such facilities up to as late as the year 1954 to supplement the larger water supply received from irrigation wells dug by them in 1952. There is no substantial evidence to the contrary except the expressed wishes of the taxpayers to have the Co-op. facilities, including the Lateral, serving their farm regarded as abandoned by them in the year 1952.

As was held by the Tax Court and as has been held by other courts including the Idaho Supreme Court, there must be a concurrence of the act of abandonment and the intent to do so, both of which may be shown from all the surrounding facts and circumstances. Belridge Oil Co., 11 B.T.A. 127; Talache Mines v. United States, 9 Cir., 218 F.2d 491; Helvering v. Jones, 8 Cir., 120 F.2d 828, 830; Carrington v. Crandall, 65 Idaho 525, 147 P.2d 1009. The mere intention alone to abandon is not, nor is non-use alone, sufficient to accomplish abandonment. It is clear from the evidence in this case that those concurrent conditions which must necessarily exist before abandonment can be effective were not proved by the defendants to have existed in the year 1952, and that the Tax Court's action in disallowing taxpayers' claimed deductions on account of abandonment of the Lateral and the Co-op.'s irrigation facilities was clearly required by the record before that Court and this Court.

The question whether so-called 'rentals' payments under the 'Farm Lease -- With Option to Buy' covering the Oregon land should be deducted as business expenses depends upon whether under that lease before the option was exercised those payments secured for taxpayers any equity in the farm ownership. If they did, such payments were not business expenses and were not deductible as such. Here again the acts and conduct of the parties to that lease disprove the taxpayers' contentions. In the first place, that farm had been listed for about a year by its 'lessor' Pederson with a number of local real estate agents for sale and not for lease. He testified in effect that he did not wish to lease the farm but used the lease-option arrangement with the taxpayers-lessees in their transaction at their request in order to benefit them in handling their taxes. Soon after the lease and option-to-buy agreement was made, that agreement at taxpayers' instance was altered so as to indicate a loan transaction instead of a possible cash purchase payment, and the sum of the so-called rental payments and the option-to-buy payments was $ 46,500, which equals the fair market value of the that sum which taxpayers-lessees to that sum which taxpayers-lessees stated on a loan application in February, 1953 was the sale price of land which they had purchased in 1952. The Tax Court's finding, in effect, that, by every payment taxpayers-lessees made under that lease and option-to-buy agreement, they intended to and did acquire an equal value of equity interest in the Oregon farm was required by the evidence and was correct. Chicago Stoker Corp., 14 T.C. 441; Haggard v. Commissioner, 9 Cir., 241 F.2d 288, affirming 24 T.C. 1124. We agree with the Tax Court in its denial of the taxpayers' claimed deduction on account of such 'rentals' and with its redetermination of deficiency taxes against taxpayers based on such denial.

We also agree with the Tax Court's sustaining of the Commissioner's assessment of a negligence penalty against taxpayers W. J. Beus and wife under Section 293(a) I.R.C.1939, ⁴ because of inexcusable and careless error on their part in claiming a loss of $ 5,090.27 on the alleged sale in 1952 of cattle when the proof showed there was no such sale in that year.

The action of the Tax Court in its decisions and orders for the above mentioned two tax deficiency assessments against all the taxpayers and for sustaining the above negligence penalty against taxpayers W. J. Beus and wife is in all respects affirmed.

JAMES ALGER FEE, Circuit Judge, although present at the argument, took no part in the consideration or decision of this case.

' Section 293. Additions to the tax in case of deficiency.

'(a) Negligence. If any part of any deficiency is due to negligence or intentional disregard of rules and regulations * * *, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall be assessed, collected, and paid in the same manner as if it were a deficiency, * * *.' 26 U.S.C.A. Section 293.

² Section 7482 I.R.C.1954, provides:

' Section 7482. Courts of review.

'(a) Jurisdiction. -- The United States Courts of Appeals shall have exclusive jurisdiction to review the decisions of the Tax Court, * * * in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury; and the judgment of any such court shall be final, * * *' 26 U.S.C.A. Section 7482, and further, in effect, providing for review by the U.S. Supreme Court upon certiorari.

³ Section 23(a)(1)(A) I.R.C.1939, provides:

' Section 23. Deductions from gross income. In computing net income there shall be allowed as deductions:

'(a) Expenses.

'(1) Trade or business expenses.

'(A) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * * * rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has noequity. * * *'

'(e) Losses by individuals. In the case of an individual, losses sustained during the taxable year and not conpensated for by insurance or otherwise --

'(1) if incurred in trade or business;' 26 U.S.C.A. 23(a)(1)(A).

⁴ 293(a) I.R.C.1939 (Please see Footnote 1)