Lead Opinion
The Commissioner determined the following deficiencies in the petitioners’ Federal income taxes:
Petitioner Year Deficiency
John B. Hynes, Jr., and Marie T. Hynes.1973 $4,992.70
1974 16,259.26
1975 12,502.76
1976 20,966.51
Wood Song Village Trust.1975 30,571.84
After concessions by the parties, the issues for decision are: (1) Whether the trust created by the petitioner for the purpose of developing and selling real estate for profit is an association taxable as a corporation; (2) whether the petitioner is entitled to a deduction for a business loss resulting from the foreclosure of a mortgage executed by the trust and guaranteed by him; (3) whether the petitioner may deduct in 1976 the interest and real estate taxes owed by the trust when the bank foreclosed on its mortgage; (4) whether the petitioner is entitled to deduct as business expenses under sections 162 and 274(d) of the Internal Revenue Code of 1954
Some of the facts have been stipulated, and those facts are so found.
The petitioners, John B. Hynes, Jr., and Marie T. Hynes, husband and wife, resided in Chatham, Mass., at the time they filed their petitions in this case. They filed their joint Federal income tax returns for 1973, 1974, 1975, and 1976 with the Internal Revenue Service Center, Andover, Mass. The petitioner, Wood Song Village Trust (Wood Song or the trust), was organized under the laws of Massachusetts and had its principal office in Boston, Mass., at the time it filed a petition in this case. The trust filed Federal income tax returns (Forms 1041) for 1973, 1974, and 1975 with the Internal Revenue Service Center, Andover, Mass. Mr. Hynes will sometimes be referred to as the petitioner.
During the years in issue, the petitioner was employed as a staff announcer and television newswriter by Boston Broadcasters, Inc., WCVB-TV (the station), in Needham Mass. His contract with the station required him to appear 5 days a week, 48 weeks during the year, on the 6 p.m. and 11 p.m. newscasts. During such years, such contract also required that he maintain “a physical appearance suitable for services as a television announcer.” The petitioner wore regular business clothing on his television appearances, but his selection of such attire was limited to colors and patterns which would televise well. He often changed his shirt between the 6 p.m. and 11 p.m. broadcasts, and he had his hair cut once every 4 weeks to maintain a neat appearance. The petitioner was not reimbursed by the station for the costs of his wardrobe, dry cleaning and laundry, or haircut and makeup during the years in issue. The petitioner’s employment contract with the station for 1978 does provide him with a clothing allowance.
It was approximately 90 miles between the petitioner’s home and the station, and therefore, during the years in issue, he lived in hotels near the station during the work week. He drove to his home in Chatham on weekends and often once during the workweek. The rooms in which he stayed were ordinary hotel rooms and did not have kitchen or office facilities. The station provided a large workroom with desks and typewriters for the use of all newsroom employees, and the petitioner worked wherever there was an empty desk. However, since the petitioner
The petitioner also used a room at his home in Chatham as his office and library. The room had a desk, filing cabinet, typewriter, and a telephone. He kept his personal papers in the room as well as his trade journals and some of the materials that he used as sources for his stories. Mrs. Hynes was a licensed real estate broker and had an office in Chatham, but she also used the room in the residence to deal with clients on the telephone and kept some of her records there.
The station provided transportation when the petitioner left from the station with a news crew to cover a story. However, on some occasions, he used his personal automobile in the course of his employment with the station. At times, he drove his car to the scene of a news story to meet a film crew, or he used his car to meet with some of his news sources. He was not reimbursed by the station for such travel. The petitioner also used his car to drive to work each day and to drive to Chatham during the week and on weekends.
The petitioner is also a licensed real estate broker. On August 11, 1973, he entered into an agreement with the trustees of the Nauset Realty Trust (Nauset Trust) under which he agreed to purchase from the trust 67 lots of real estate located in Brewster, Mass. (Brewster property). The purchase and sale agreement was subsequently modified on September 7, 1973, and the purchase price for the land was set at $335,000 plus various amounts which were to be paid to Frank Ireland of Orleans, Mass., who was designated as the broker for the land. On August 14, 1973, the petitioner applied to the Bass River Savings Band (Bass River Bank) for a mortgage loan of $497,000 to finance the purchase of the Brewster property. The Bass River Bank sent a commitment letter to the petitioner on September 7, 1973, approving his request for a $500,000 mortgage, but as a condition of such mortgage, the bank required that the petitioner personally guarantee the note. The petitioner accepted the bank’s terms for such mortgage on September 8, 1973.
On September 7, 1973, the Wood Song Village Trust was
As to the continuity of the trust, article 14 of the Wood Song trust agreement states in part:
This Trust shall terminate upon the expiration of twenty (20) years after the death of all of the original Trustees, and may be sooner terminated by vote of, or by an instrument or instruments in writing signed by a majority of the Trustees and by the holders of a majority of each class and series of the voting shares outstanding * * *
Article 2 of such agreement provides that “The death [,] resignation or incapacity of any of the Trustees shall not terminate the Trust or in any way affect its continuity”; such article also provides for the replacement of trustees by the remaining trustees. Article 9, paragraph II, of such agreement provides in part:
II The death, insolvency, or incompetency of one or more of the beneficiaries, or the transfer of shares shall not terminate the Trust. * * *
With respect to the management of the trust, article 3 of the Wood Song trust agreement provides that a majority vote of the trustees is required for “the validity of any action taken by them.” Article 5 of such agreement provides in part:
The Trustees shall have full and absolute power, control and authority over the Trust property held by them at any time hereunder and over the business of the Trust to the same extent as if the Trustees were the sole owners of such property and business in their own right, exercisable without the consent of the Beneficiaries * * *
In connection with the personal liability of the trustees and shareholders, articles 7, 8, and 10 of the Wood Song trust agreement provide in part:
ARTICLE SEVEN: Rights of Third Persons.
I Every act or thing done or omitted, and every power exercised or obligation incurred by the Trustees or any of them in the administration of the Trust or in connection with any business, property or concerns of the Trust and the Trust estate, whether ostensibly in their own names or in their capacity as Trustees hereunder, shall be done, omitted, exercised or incurred by them as Trustees, and not as individuals; and every person contracting or dealing with the Trustees, or any agent or representative of the Trustees acting within the scope of this authority, or any person having any claim against the Trustees, their authorized agent and representatives, whether founded in contract, replevin or tort shall look only to the Trust estate for the payment or satisfaction of the same; and no shareholder or Trustee, and no agent or representative of the Trustees acting within the scope of his authority, shall ever be personally liable for or on account of any contract, debt, tort, claim, damage, judgment or decree arising out of or connected with the administration or preservation of the Trust estate or the conduct of the business of the Trust. A stipulation or notice to this effect shall be inserted in every contract, order or other instrument signed by the Trustees or their duly authorized agent and representatives, but the omission thereof shall not constitute a waiver of the foregoing provisions and shall not render the Trustees, their authorized agent or representatives, or any shareholder, personally liable.
* * * * * * *
ARTICLE EIGHT: Protection of Trustees and Shareholders.
* * * * * * *
II No shareholder shall be personally liable for any obligation or liability incurred by this Trust or by the Trustees, and the Trustees shall have no right of indemnity or exoneration against the shareholders in respect thereof.
III Subject to Paragraph V of this Article, no Trustee shall be personally liable for any obligation or liability incurred by this Trust or by the Trustees, and each Trustee shall be entitled to reimbursement and exoneration out of the Trust estate according to law.
IV The Trust estate alone shall be liable for the payment or satisfaction of all obligations and liabilities incurred in carrying on the affairs of this Trust.
V Proceedings against this Trust may be brought against the Trustees as Trustees hereunder but not personally. The Trustees shall be parties thereto only insofar as necessary to enable such obligation or liability to be enforced against the trust estate.
VI No trustee shall be liable to this Trust or the shareholders except for his own acts, neglects and defaults in bad faith.
* * * * * * *
ARTICLE TEN: Personal Liability of the Beneficiaries.
The Trustees shall have no power to bind the Beneficiaries personally. All persons dealing with the Trustees or with any agent of the Trustees shall look only to the Trust property for the payment of any sum due as a result of such dealing. In every instrument executed by the Trustees and creating an obligation of any kind, the Trustees shall in substance provide that no Beneficiary shall be held to any personal liability under such instrument.
III A certificate of beneficial interest may not be transferred by the holder thereof except upon the unanimous decision of the Trustees. The acceptance by the transferee of a certificate transferred to him, or of any certificate issued in place thereof shall constitute such transferee a party to this Agreement and shall bind him to the provisions thereof. No such transfer shall be binding upon the Trustees until it has been recorded on the transfer books of the Trust.
In addition to the powers conferred on the Wood Song trustees under the articles of the trust, the trustees unanimously voted on September 30, 1973, that any one trustee could execute documents which would bind the trust on all matters regarding the sale of the Brewster property.
On September 7, 1973, the Wood Song trust entered into an exclusive agreement with Frank Ireland Real Estate Co. of Orleans, Mass., for brokerage services for the sale of the Brewster property. Under such agreement, Mr. Ireland would receive a 10-percent commission on the sale of each lot, but such agreement did not give him the authority to bind the trust. The trust also entered into an agreement with Richard W. Hynes which provided that he would act as its conveyancing attorney. Such agreement provided that he would receive $200 plus expenses for his assistance in the sale of each lot. Wood Song also contracted with Boston Personal Resources, Inc. (Boston Resources), for investment planning, accounting, and other management services. Under its agreement with the trust, Boston Resources would receive 20 percent of the net contract price on a sale of land as defined in such agreement.
On September 12, 1973, the Wood Song trust purchased the Brewster property from the Nauset Trust for approximately $357,000. On the same day, the trustees of Wood Song signed a $500,000 mortgage note with the Bass River Bank. Such note was personally guaranteed by the petitioner who waived demand and notice, and such note was secured by a mortgage on the Brewster property.
During the years 1973 through 1975, the Wood Song trust engaged in the development of the Brewster property for resale. During such time, the petitioner worked with various contractors to construct roads on the property and to install utilities; he assisted the broker in the promotion of sales; he had prepared a brochure for the sale of the lots in the property; and he placed
On August 2, 1974, the trust signed an agreement with David A. Bourne for his purchase of five lots of the Brewster property for $48,195, but the trust agreed to reduce the purchase price by approximately 10 percent if roads were not constructed on the property within a specified period of time. There is no evidence as to when the property was transferred to Mr. Bourne. However, on January 28,1975, he executed a mortgage securing his note to the trust; later the amount of such mortgage was reduced because the roads were not built. The sale to Mr. Bourne was not reported by Wood Song on its Federal income tax returns for 1974 or 1975.
On November 4, 1975, a judgment of foreclosure sale was entered for the Bass River Bank against the trustees of Wood Song for the balance of $506,448.34 due on the mortgage note at that time. Such balance included $43,668.12 in interest and $14,312.10 in real estate taxes owed by the trust on such date. The bank subsequently acquired the Brewster property in 1975 for $200,000 at a public auction. The adjusted proceeds of such foreclosure sale were $192,491.46. The petitioner received no money when the property was foreclosed upon by the Bass River Bank. On February 17, 1976, the bank made demand against the Wood Song trustees for the balance of $313,956.88 outstanding on the note after the foreclosure sale, and on March 2, 1976, the bank made demand against the petitioner individually for such balance. The Bass River Bank then brought suit against the petitioner when the balance was not paid by March 16, 1976. As of the date of trial of this case, such suit had not been concluded, and the petitioner had not paid anything to the Bass River Bank on his guarantee.
On their Federal income tax returns for 1973, 1974, 1975, and 1976, the petitioners, Mr. and Mrs. Hynes, deducted the following amounts as business expenses which are
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In his notices of deficiency, the Commissioner disallowed in full the petitioners’ deductions for wardrobe, haircuts and makeup, laundry, dry cleaning, and shirt cleaning, hotels, and a home office on the ground that they were not ordinary and necessary business expenses. He also disallowed a portion of the deductions for automobile expenses, automobile depreciation, and meals, on the ground that the petitioners did not substantiate the claimed deductions beyond the amounts allowed by him.
On its Federal income tax returns for 1973, 1974, and 1975, the Wood Song trust reported gross receipts and losses in the following amounts:
Year Gross receipts Losses
1973 $26,820 $8,497
1974 35,000 40,530
1975 — 19,674
On their Federal income tax returns for such years, the petitioners, Mr. and Mrs. Hynes, claimed deductions for the losses reported by the trust.
On their Federal income tax return for 1976, the petitioners, Mr. and Mrs. Hynes, deducted $313,957 as a business bad debt arising from the bank’s foreclosure on the Brewster property. On such return, they also deducted interest of $43,668 and real estate taxes of $14,312. Such amounts represent the interest and real estate taxes owed by the Wood Song trust when the bank foreclosed on its mortgage. On April 15, 1977, such petitioners filed an application requesting tentative refunds of $10,894 for 1973, $228 for 1974, and $2,648 for 1975 based on the carryback of a net operating loss of $313,957 in 1976. Such refunds were made to the petitioners. In his notice of deficiency, the Commissioner disallowed such deductions claimed for 1976 and the carryback of the net operating loss.
In his notice of deficiency to the Wood Song trust for 1975, the Commissioner determined that the trust failed to report on its
OPINION
The first issue in this case is whether the Wood Song trust is an association taxable as a corporation. The petitioners maintain that the Wood Song trust is not such an association and that under section 671, the petitioner is required to report the income or losses of such a trust.
Ordinarily, a trust and- its beneficiaries are subject to the provisions of subchapter J of the Code (secs. 641 et seq.), which, generally speaking, provide for “passthrough” treatment of the trust. However, section 7701(a)(3) provides that for Federal tax purposes, the term corporation includes associations. The question of when a trust constitutes an association taxable as a corporation has long been the subject of controversy. In Crocker v. Malley,
In 1924, the Supreme Court ruled once again on the issue and limited its holding in Crocker to situations where trustees merely hold property for the passive production of income. In Hecht v. Malley,
About a decade later, the Supreme Court elucidated this distinction in Morrissey v. Commissioner,
In Morrissey, the Supreme Court held that the trust was taxable as an association since it was a venture organized for the operation of a business for the benefit of the beneficiaries. The Court set the tone of its reasoning by stating that “The inclusion of associations with corporations implies resemblance; but it is resemblance and not indentity.”
What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization? A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. The designation of trustees, who are charged with the conduct of an enterprise, — who act “in much the same manner as directors” — may provide a similar scheme, with corresponding effectiveness. Whether the trustees are named in the trust instrument with power to select successors, so as to constitute a self-perpetuating body, or are selected by, or with the advice of, those beneficially interested in the undertaking, centralization of management analogous to that of corporate activities may be achieved. An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, as does corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants. The trust method also permits the limitation of the personal liability of participants to the property embarked in the undertaking. [ 296 U.S. at 359 ; emphasis supplied.]
Centralization of management, continuity of life, transferability of interests, and limited liability were thus established by Morrissey as the benchmarks for judging corporate resemblance. The Treasury regulations have relied on such criteria for determining when an organization is to be classified as an association for Federal tax purposes. In part, section 301.7701-2(a)(1), Proced. & Admin. Regs., provides:
There are a number of major characteristics ordinarily found in a pure corporation which, taken together, distinguish it from other organizations. These are: (i) Associates, (ii) an objective to carry on business and divide the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v) liability for corporate debts limited to corporate property, and (vi) free transferability of interests. Whether a particular organization is to be classified as an association must be determined by taking into account the presence or absence of each of these corporate characteristics. The presence or absence of these characteristics will depend upon the facts in each individual case. * * * An organization will be treated as an association if the corporate characteristics are such that the organization more nearly resembles a corporation than a partnership or trust. See Morrissey et al. v. Commissioner (1935)296 U.S. 344 .
The petitioner argues that the Wood Song trust fails to meet
1. and 2. Associates — Objective to Carry on a Business for Joint Profit
Section 301.7701-2(a)(2), Proced. & Admin. Regs., declares in part:
(2) Since associates and an objective to carry on business for joint profit are essential characteristics of all organizations engaged in business for profit (other than the so-called one-man corporation and the sole proprietorship), the absence of either of these essential characteristics will cause an arrangement among co-owners of property for the development of such property for the separate profit of each not to be classified as an association. * * * [Emphasis supplied.]
A careful reading of such regulation shows that it does not support the petitioner’s position. In referring to the plural “associates” and the division of profits, the provision expressly excepts a one-man corporation from such references. By implication, the regulation recognizes that when there is a single owner, there will not be associates or a sharing of the profits among associates. The requirements of associates and the division of a profit serve to distinguish a taxable association from a coownership of property in which the coowners are entitled to their separate shares of the income from the property. It is clear that
Whether an organization has associates and an objective to carry on business for joint profit are related characteristics. The term “associates” refers to those persons who have a beneficial ownership in a business. Crocker v. Malley,
For his own reasons, the petitioner chose not to carry on the business of developing and selling the Brewster property in his own name; instead, he set up the trust, managed the business as one of the trustees, and took all the shares of beneficial ownership. Thus, the trust was not merely protecting property and collecting the income for the beneficiaries; it was engaged in carrying on a business for profit. Hecht v. Malley, supra. Although the trust stood to realize, in the first instance, any profits from the business, such profits were under the control of the petitioner, and he could demand their distribution to him at any time. An associate is like a shareholder of a corporation who provides the capital for the business carried on by the corporation and who has a right to receive the profits of the business. The petitioner stood in exactly that same relationship to the business carried on by the Wood Song trust. Morrissey v. Commissioner,
3. Continuity of Life
Section 301.7701-2(b), Proced. & Admin. Regs., provides in part:
(b) Continuity of life. (1) An organization has continuity of life if the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member will not cause a dissolution of the organization. * * *
* * * * * * *
(3) An agreement establishing an organization may provide that the organization is to continue for a stated period or until the completion of a stated undertaking or such agreement may provide for the termination of the organization at will or otherwise. * * * if the agreement provides that the organization is to continue for a stated period or until the completion of a stated transaction, the organization has continuity of life if the effect of the agreement is that no member has the power to dissolve the organization in contravention of the agreement. * * *
The petitioner contends that the Wood Song trust lacked continuity of life “because the death of any member, namely the last living original trustee, would dissolve the trust at that time.” We must disagree, for the petitioner’s contention is clearly contrary to the articles establishing the trust.
Article 2 of the trust agreement provides that “The death[,] resignation or incapacity of any of the Trustees shall not terminate the Trust or in any way affect its continuity.” Article 9, paragraph II, of such agreement provides that the death, insolvency, or incompetancy of one or more of the beneficiaries
Under these provisions of the trust agreement, it is clear that the trust is to continue for a stated period, that is, until 20 years after the death of all the original trustees. It is not to terminate on the death of any single trustee, nor can the petitioner dissolve it at will. Accordingly, the Wood Song trust had continuity of life within the meaning of section 301.7701-2(b).
4. Centralization of Management
Section 301.7701-2(c), Proced. & Admin. Regs., defines centralization of management by providing in part:
(c) Centralization of management. (1) An organization has centralized management if any person (or any group of persons which does not include all the members) has continuing exclusive authority to make the management decisions necessary to the conduct of the business for which the organization was formed. Thus, the persons who are vested with such management authority resemble in powers and functions the directors of a statutory corporation. * * *
* * * * * * *
(3) Centralized management means a concentration of continuing exclusive authority to make independent business decisions on behalf of the organization which do not require ratification by members of such organization. Thus, there is not centralized management when the centralized authority is merely to perform ministerial acts as an agent at the direction of a principal.
The petitioner takes the position that the Wood Song trust lacked centralization of management because the other two trustees served as his agents and merely performed ministerial acts. He relies on A. A. Lewis & Co. v. Commissioner,
These provisions of the trust agreement show that the trustees had broad powers to act on behalf of the trust, that their authority was not limited to purely ministerial acts, and that their actions did not require ratification by the beneficiary. It is immaterial whether, in reality, the petitioner could make the decisions for all the trustees; the significant fact is that the trustees had the power to act for the trust. See Helvering v. Coleman-Gilbert,
5. Limited Liability
Section 301.7701-2(d)(l), Proced. & Admin. Regs., states in part:
(d) Limited liability. (1) An organization has the corporate characteristic of limited liability if under local law there is no member who is personally liable for the debts of or claims against the organization. * * *
It is unclear whether the word “member” in the regulations refers to trustees or beneficiaries of a trust. The general rule of trusts provides that the trustees and not the beneficiaries may be liable for debts incurred in the administration of a trust. G. Bogert, Trusts and Trustees, ch. 14, sec. 247G, p. 163 (2d ed. 1977 rev.). However, the Supreme Court, in its opinion in Morrissey v. Commissioner,
The petitioner contends that the trustees of Wood Song could not limit their liability under Massachusetts law, despite the
That a trustee can exempt himself from personal liability by stipulation or agreement is well established, Shoe & Leather National Bank v. Dix,123 Mass. 148 ,25 Am. Rep. 49 , Carr v. Leahy,217 Mass. 438 ,105 N.E. 445 , Neville v. Gifford,242 Mass. 124 ,136 N.E. 160 ; but a signature as “trustee” or a description of himself as “trustee” does not constitute such an agreement. Philip Carey Co. v. Pingree,223 Mass. 352 ,111 N.E. 857 . * * *
Thus, a trustee in Massachusetts can limit his liability if the trust instrument so provides, if he stipulates to that effect when contracting on the part of the trust, and if the contracting party is aware of such provision. James Stewart & Co. v. National Shawmut Bank,
In addition, we are of the opinion that the petitioner also limited his liability as sole beneficiary under the trust agreement and that such limitation would be recognized under Massachusetts law. In Greco v. Hubbard,
If the Winthrop Club Associates had been a corporation, no one would contend that the relation of the defendants to it by electing new officers after they became the stockholders would render them personally liable for its debts. Instead of being stockholders in a corporation, they are the cestuis que trust of a valid trust because they held all its shares. Every intendment of the law is toward the protection of cestuis que trust under a valid trust. [147 N.E. at 275 .]
See also Helm & Smith Syndicate v. Commissioner,
It has been held that where beneficiaries have the power to remove and replace trustees and to modify the terms of the trust agreement, then liability can be imposed upon them in many jurisdictions. G. Bogert, Trusts and Trustees, ch. 14, sec. 247H, p. 167 (2d ed. 1977 rev.); G. Bogert, Trusts and Trustees, ch. 33, sec.
Furthermore, the fact that the petitioner is personally liable on the mortgage note to the Bass River Bank does not vitiate his limited liability as a trustee or as the beneficiary of Wood Song. He undertook the guarantee in his individual capacity and not as trustee or beneficiary. It is not uncommon for a lender to require a sole shareholder to personally guarantee a corporate loan. Accordingly, we hold that both the trustees and the beneficiary of the Wood Song trust had limited liability under Massachusetts law.
6. Free Transferability of Interests
Section 301.7701-2(e), Proced. & Admin. Regs., provides in part:
(e) Free transferability of interests. (1) An organization has the corporate characteristic of free transferability of interests if each of its members or those members owning substantially all of the interests in the organization have the power, without the consent of other members, to substitute for themselves in the same organization a person who is not a member of the organization. In order for this power of substitution to exist in the corporate sense, the member must be able, without the consent of other members, to confer upon his substitute all the attributes of his interest in the organization. * * *
The Commissioner concedes that the Wood Song trust has only a modified form of transferability of interests since the trust shares could only be transferred upon the unanimous decision of the trustees, but he does maintain that the trust does have a modified form of such characteristic since a transfer did not require the approval of other beneficiaries.
We need not decide whether the Wood Song trust has even a
The second issue for decision is whether the petitioners, Mr. and Mrs. Hynes, are entitled to deduct the $313,957 balance outstanding on the mortgage against the Wood Song trust after the foreclosure and sale of the Brewster property by the Bass River Bank. On their tax return for 1976, the petitioners referred to such deduction as both a “business bad debt” and a “business loss.” In their brief, they now maintain that such loss is deductible as a business loss under section 165(c)(1). We disagree on several grounds.
Section 165(a) allows a deduction for any loss sustained during the taxable year that is not compensated for by insurance or otherwise, but section 165(c) limits the deductions allowable to individuals. Section 165(c)(1) allows an individual a deduction for a loss incurred in a trade or business. However, the deduction for bad debts is governed by section 166(a), which allows a deduction for a debt which becomes worthless during the taxable year.
In Putnam v. Commissioner,
Moreover, for several reasons, the petitioner is not entitled to any deduction under section 166. As a first matter, the petitioner admitted that, as of the time of trial, he had paid nothing to the Bass River Bank under his guarantee. In addition, to deduct a business bad debt under section 166, the petitioner must establish that his “dominant motivation” for guaranteeing the loan had a “proximate” relationship to his trade or business. United States v. Generes,
The third issue for our consideration is whether the petitioners, Mr. and Mrs. Hynes, are entitled to deduct in 1976 the interest and real estate taxes owed by the Wood Song trust on the date of the foreclosure of its property by the Bass River Bank. The bank included $43,668.12 for interest and $14,312.10 for real estate taxes as part of the total amount due under the mortgage note executed by the trust and guaranteed by the petitioner. As such, the amounts for interest and real estate taxes represent a component of the total amount which the bank seeks to collect from the petitioner under his guarantee.
Section 163(a) allows a deduction for “all interest paid or accrued within the taxable year on indebtedness.” It has long been established that for interest to be deductible under section 163(a), the interest must be on the taxpayer’s own indebtedness and not on the indebtedness of another. The interest must be paid or accrued on a valid obligation of the taxpayer claiming the deduction. Golder v. Commissioner,
The petitioner relies on the provisions of section 1.163-l(b), Income Tax Regs., which provides in part: “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.” In the first place, the record shows that the petitioner was not the legal or equitable owner of the Brewster property; the Wood Song trust was the owner of such property. Moreover, as the Ninth Circuit stated in Golder v. Commissioner,
Furthermore, there is no evidence that the petitioner ever paid the interest at issue. Such amount was merely part of the total obligation the petitioner owed to the Bass River Bank under his guarantee, and he testified that he had paid nothing to the bank under such guarantee as of the date of trial. Consequently, we must hold that the petitioners, Mr. and Mrs. Hynes, are not entitled to a deduction for the amount of interest due under the mortgage note of the trust on the date of foreclosure.
With respect to the claimed deduction for real estate taxes, section 164(a) allows “as a deduction for the taxable year within
The facts in this case demonstrate that the Wood Song trust purchased the Brewster property from the Nauset Trust and that the Wood Song trust was the owner of such property. Therefore, under the law of Massachusetts, the petitioner was neither the legal nor equitable owner of the property in his individual capacity. Hence, we must hold that the petitioners, Mr. and Mrs. Hynes, may not deduct the real estate taxes imposed on the trust.
The fourth issue we consider is whether the petitioner is entitled to deduct as business expenses certain expenditures for his wardrobe, laundry and dry cleaning of such attire, haircuts and makeup, hotels and meals, and the operation of his automobile. The resolution of this issue requires us to reconcile the provisions of sections 262 and 162. Section 262 expressly denies a deduction for all “personal, living, or family expenses.” On the other hand, section 162(a) allows a deduction for “all the ordinary and necessary expenses paid or incurred * * * in carrying on any trade or business.” Whether expenditures are for ordinary and necessary business expenses is a question of fact (Commissioner v. Heininger,
In deciding this issue, we first consider the petitioner’s
There are recognized exceptions to the general rule, and this Court has allowed a deduction for the cost of clothes which were useful only in the business environment. For example, a deduction was allowed in Harsaghy v. Commissioner,
In the present case, the petitioner contends that he is entitled to deduct the expense of his business wardrobe because he was restricted in his selection of colors and patterns of such clothes and because he did not wear the clothes when he was not at the station on camera. We cannot agree with the petitioner. The restriction on the petitioner’s selection of his business attire is not significantly different from that applicable to other business people who must limit their selection of business clothes to conservative styles and fashions. The petitioner testified that his clothes were essentially suitable for use in any professional capacity. This case is thus distinguishable from Yeomans v. Commissioner, supra at 768, where this Court allowed a taxpayer to deduct the cost of her business attire which we found to be “of the most advanced styles and fashions * * * which were not suited for her private and personal wear.” The fact that the petitioner chose not to wear his business clothes when he was away from the station does not mean that such clothes were not suitable for his private and personal wear. Indeed, most people do not wear their business clothes at home. It is also irrelevant that the petitioner’s employment contract with the station for 1978 now provides him with a clothing allowance. Such fact does not establish that the petitioner’s expenses were business expenses during the years in issue.
The petitioner asserts that he is entitled to deduct the cost of maintaining his business wardrobe because he incurred excessive expenses in doing so, but he has failed to establish that his expenses were excessive. The petitioner occasionally may have changed his shirt between the 6 and 11 p.m. news broadcasts, thus resulting in a larger laundry bill than otherwise would have been incurred, but his practice is not different from other professional people who work long hours and prefer to freshen up by changing their shirts and otherwise making themselves comfortable before facing the evening ahead. Accordingly, we sustain the Commissioner’s determination that the petitioner may not deduct the cost of his business wardrobe or the cost of cleaning and laundering such attire.
We next consider the petitioner’s deductions for the cost of his haircuts and makeup. In Drake v. Commissioner,
As for the expenses for hotel rooms during 1974, 1975, and 1976, the petitioner appears to maintain that such expenditures are deductible as business expenses because it was more convenient for him to stay in hotels closer to the station, rather than commute the 90 miles from Chatham each day, and because he sometimes used such rooms to meet with people and to keep his filing box and personal papers there.
Again, we must draw a distinction between business expenses deductible under section 162(a) and personal expenses made nondeductible by section 262. More specifically, section 162(a)(2)
The facts of the present case clearly demonstrate that the hotel rooms rented by the petitioner were merely to provide him with a place to live which was closer to the station than his home 90 miles away in Chatham. The petitioner undoubtedly found it more convenient to be closer to his place of business during the work week, and he chose, as a matter of personal preference, not to commute from Chatham each day. Under such circumstances, his hotel expenses are nondeductible personal expenses. Nor do the facts support his contention that he used such rooms as a business office in which to conduct business meetings. It is clear from the petitioner’s testimony that he lived in such rooms during the week and regarded them as his local residence. Furthermore, he presented no evidence regarding how often he used such rooms for business meetings, and thus, he has failed to demonstrate that he is entitled to deduct any portion of the rent as a business expense. Compare sec. 1.262-l(b)(3), Income Tax
The petitioner maintains that his expenses of $4,080 for meals in 1976 were deductible because such expenses were incurred in connection with his work at the station. The Commissioner allowed a deduction of $2,640 for such expenses, but he disallowed the remainder for lack of substantiation. We must agree with the Commissioner, for such business expenses are subject to the substantiation requirements of section 274(d), which provides in part:
(d) Substantiation Required. — No deduction shall be allowed—
(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),
(2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, or
* * * * * * *
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility * * * , (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility * * * [Emphasis added.]
Under such provision, the elements of the petitioner’s expenditures for meals must be substantiated by either “adequate records” or other “sufficient evidence” (sec. 1.274r-5(c)(l), Income Tax Regs.), and any such expenditures not thus substantiated will be disallowed in full. Sanford v. Commissioner,
Section 1.274r-5(c)(2), Income Tax Regs., describes “adequate records” as consisting of “An account book, diary, statement of expense or similar record * * * made at or near the time of the expenditure,” and “documentary evidence * * * [such as bills or receipts] which, in combination, are sufficient to establish each element of an expenditure.” In the absence of such records, “the taxpayer may alternatively satisfy the substantiation requirements by coming forward with ‘corroborative evidence sufficient’ to support his own statement containing specific information in detail as to each element of the expenditure, or such elements as have not been substantiated by adequate records.”
The petitioner presented no evidence, other than his relatively vague testimony, to support his contention that the full amount claimed by him for meal expenses is deductible under sections 162 and 274(d). He failed to present any evidence which establishes the amount, time, or place of his expenditures, and he presented no account book, diary, statement of expense, or similar record corroborating his testimony. Bradley v. Commissioner,
Next, we consider the amounts deducted by the petitioner for the use and depreciation of his automobile during 1975 and 1976. He maintains that he often used his car to cover a story in connection with his work as a newsman at the station, to travel between his hotel and the station, and to travel between Needham and either Chatham or Brewster in connection with the development of the land for the trust. The Commissioner allowed a portion of the petitioner’s expenses for automobile use and depreciation and disallowed the remainder for lack of substantiation.
We must uphold the Commissioner’s determination on this issue, for the petitioner introduced no evidence to support his claim that the automobile expenses were incurred for business purposes. Indeed, his testimony revealed that a portion of the use of the car was for commuting between his hotel and work and for commuting between the station and his home in Chatham. It is well established that expenses incurred by a
The fifth issue for decision is whether the petitioners, Mr. and Mrs. Hynes, are entitled to a deduction under section 280A for expenses incurred for the use of a room in their residence as a home office. They maintain that Mr. Hynes used such room in connection with his business as a TV newsman and that Mrs. Hynes used such room in connection with her real estate business.
Section 280A was added to the Internal Revenue Code of 1954 by the Tax Reform Act of 1976, sec. 601(a), Pub. L. 94 — 455, 90 Stat. 1569,
(a) General Rule. — Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.
(c) Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use.—
(1) Certain business use. — Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—
(A) as the taxpayer’s principal place of business,
(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or
(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.
In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer.
The Commissioner urges that Mr. Hynes’ principal place of business was at the station where he performed his duties as a newsman, and that the principal place of business of Mrs. Hynes was at her real estate office in Chatham. Therefore, he concludes that the petitioners are not entitled to a deduction under section 280A for any part of the expenses attributable to maintaining such office during 1976, and the petitioners have the burden of proving otherwise. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,
In our recent decision in Curphey v. Commissioner,
The record in this case also does not support the petitioners’ contention that their home office was the principal place of
The last issue for our decision is whether the Wood Song trust failed to report income in 1975 from the sale of five lots of land to David A. Bourne. The Commissioner determined that Wood Song realized $48,195 of income in 1975 from such sale, but he also allowed the trust a deduction, which it had not claimed, of $19,252 as the cost of real estate sold. The burden is on the trust to prove that the Commissioner’s determination is incorrect. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering,
The Wood Song trust contends that it did not receive the full price stated in the sales contract in 1975 because it had an agreement with Mr. Bourne to reduce the price of the property if it did not construct roads on the land within a specified period of time and because the price was later reduced in accordance with the agreement. The trust also claims that the Commissioner’s determination regarding its gain on such sale fails to take into account various costs of transferring the land which totaled approximately $8,500. In addition, in its brief, the trust argues for the first time that such sale is entitled to the installment method of reporting gain under section 453. Again, we must reject the contentions of the trust for several reasons.
In the first place, it is well settled that this Court will not consider issues raised for the first time on brief when to do so prevents the opposing party from presenting evidence that he might have if the issue had been timely raised. Estate of Horvath v. Commissioner,
Finally, the contention that the Commissioner overlooked the costs of selling the real estate in determining the amount of gain on the sale is contradicted by the evidence. It is clear from the deficiency notice issued to the trust that the Commissioner allowed the trust a $19,252 deduction for such purpose. On this record, we must hold that the trust has failed to meet its burden of proving that the determination of the Commissioner was incorrect, and therefore, we sustain the Commissioner’s determination on this issue.
Decisions will be entered under Rule 155.
Notes
All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue, unless otherwise indicated.
The petitioner does not contend that he had his principal place of business in Chatham or Brewster where he conducted his trust activities; therefore, we do not consider whether he could deduct his expenses in Needham in connection with a second place of business.
Sec. 162(a)(2) provides:
(a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
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(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; * * *
Mr. Hynes does not contend that he used the room in connection with his activities for the Wood Song trust. In his testimony at trial and in his argument on brief, he only maintained his entitlement to a home office deduction with relation to his trade or business as a newsman. Therefore, we do not consider his possible use of such room as an office for the trust. See Curphey v. Commissioner,
See. 280A was made effective for taxable years, beginning after Dec. 31, 1975.