1990 Tax Ct. Memo LEXIS 69 | Tax Ct. | 1990
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN,
Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After a concession by respondent, the issues for decision are (1) whether petitioner-husband was engaged in a trade or business in 1985 for purposes of
FINDINGS OF FACT
Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Roy A. McKnight (petitioner) and Leola McKnight are husband and wife and resided in West Bloomfield, Michigan, at the time the petition in this case was filed.
During 1985, petitioner served as chief1990 Tax Ct. Memo LEXIS 69">*71 executive officer of Colt Industries Operating Corp., Haber Operations (Colt), for which he received compensation in the amount of $ 342,538.95. During 1985, petitioner was the vice president, secretary, treasurer, and a member of the Board of Directors of Hi-Vol Products, Inc. (Hi-Vol), for which he received compensation in the amount of $ 141,600.
In 1984, petitioner served on the Board of Directors of Taylor Made Products, Inc. (Taylor Made), and received $ 16,125 as director's fees. Petitioner received no fees from Taylor Made in 1985. Petitioner sold 1,250 shares of Taylor Made stock in 1985 and reported $ 48,750 as gain from the sale.
In 1985, petitioner owned a .0547-percent interest in the Carlyle Real Estate Limited Partnership-75 (Carlyle). Carlyle claimed depreciation deductions for financial statement purposes in the amount of $ 1,153,333 for the year ended December 31, 1985.
Petitioner, in 1985, owned a .594-percent limited partnership interest in Petrotech Energy '75 Limited Partnership (Petrotech). Petrotech was engaged in a trade or business and claimed depreciation deductions in the amount of $ 24,207 for 1985.
During 1985, petitioner participated in two1990 Tax Ct. Memo LEXIS 69">*72 oil and gas ventures with Merrill Drilling Company (Merill). One of the ventures was in Michigan and the other was in Indiana. Petitioner entered into a written agreement with Merrill for each of the working interests he owned during 1985. One agreement was entered into in June 1985 and one in October 1985. In both agreements, the parties agreed to elect out of the provisions of Subchapter K of Chapter 1 of the Internal Revenue Code. In 1985, petitioner deducted $ 31,625 in intangible drilling costs and $ 1,487 in legal and other professional fees with respect to the ventures.
On September 27, 1985, petitioner purchased a 5-percent interest in the First of Michigan Leasing Trust 1985-1 (Michigan Trust), a grantor trust formed as an investment vehicle for the purchase of certain computer equipment manufactured by Cray Research, Inc. The Purchase Agreement between Michigan Trust and First of Michigan Leasing, Inc. (Michigan Leasing), the seller of the equipment, was executed as of September 1, 1985. The Agreement of Lease between Michigan Trust, the lessor, and CIS Corporation, the lessee, was executed as of September 1, 1985. The Agreement of Lease commenced on September 1, 1985, and1990 Tax Ct. Memo LEXIS 69">*73 was to expire on August 31, 1992. The computer equipment was placed in service on September 1, 1985, the date the first fixed rental payment was to be paid to Michigan Trust.
On his 1985 Federal income tax return, petitioner claimed an Accelerated Cost Recovery System (ACRS) depreciation deduction in the amount of $ 61,710 with respect to his interest in the computer equipment. The depreciation deduction was based on 5-year recovery property with a basis of $ 411,400 and a 15-percent cost recovery percentage. Petitioner also claimed deductions for interest expense of $ 17,717, legal and other professional fees expense of $ 1,031, and "equity expenses" of $ 556.
Respondent determined that petitioners were not entitled to the entire claimed depreciation on the computer equipment, but rather could claim only three-twelfths of the depreciation pursuant to the short taxable year provisions of
OPINION
Respondent contends that petitioner is only entitled to four-twelfths of his claimed depreciation deduction pursuant to the "short taxable year" provision of former
In the case of a taxable year that is less than 12 months, the amount of the deduction under this section shall be an amount which bears1990 Tax Ct. Memo LEXIS 69">*75 the same relationship to the amount of the deduction, determined without regard to this paragraph, as the number of months in the short taxable year bears to 12. In such case, the amount of the deduction for subsequent taxable years shall be appropriately adjusted in accordance with regulations prescribed by the Secretary. The determination of when a taxable year begins shall be made in accordance with regulations prescribed by the Secretary. * * *
Respondent also relies on
For purposes of this section, a taxable year of a person placing property in service does not include any month prior to the month in which the person begins engaging in a trade or business * * *
As of the time of this opinion, no final regulations have been issued.
Petitioner asserts that he was engaged in a trade or business in 1985 and, accordingly, is entitled to the full year's depreciation deduction on the computer equipment.
Prior to and during trial, respondent argued that, to avoid the short taxable year provisions of
Petitioner's brief attached a copy of
Respondent does not dispute that for some purposes a taxpayer may be engaged in a trade or business solely due to his activity as a director or officer of a corporation. Respondent asserts, however, that in the case of a claimed1990 Tax Ct. Memo LEXIS 69">*77 depreciation deduction, as in the present case, an employee is not considered engaged in a trade or business by virtue of his employment. Respondent relies on
In July 1983, D, who has been an employee of Corporation N since 1982, purchases an automobile for use in the performance of his employment for N. On June 5, 1984, D purchases a truck for use in another business. D begins the new business on June 5, 1984. In 1984, D holds no other depreciable or recovery property for the production of income. D does not have a short taxable year for the automobile purchased in 1983 since the automobile is used by D in his trade or business as an employee. Since an employee is not considered engaged in a trade or business1990 Tax Ct. Memo LEXIS 69">*78 by virtue of employment, however, for purposes of determining when a taxable year begins with respect to property not used in the trade or business of employment, D has a short taxable year in 1984 for the truck purchased in that year. The recovery allowance permitted D in 1984 with respect to the truck must be adjusted in accordance with the provisions of
Respondent contends that the illustration in the proposed regulations is analogous to the present case because petitioner was not engaged in another trade or business within the meaning of the proposed regulations, other than his employment by the two corporations, Hi-Vol and Colt. Accordingly, respondent maintains that the short taxable year provision applies in the present case. Proposed regulations, however, "carry no more weight than a position advanced on brief by the respondent."
Petitioner asserts that his activities as a corporate director constitute a "trade or business" for purposes of
In
The Court of Claims in
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Finally, petitioner relies on
In
The Internal Revenue Service National Office (National Office) determined that the taxpayer's ACRS deduction was not subject to the short taxable year rules of former
In
An affirmative response can be drawn from a literal reading of paragraphs (b), (c), and (d) [of the regulations under section 167] 1990 Tax Ct. Memo LEXIS 69">*83 which do not specify that the business activity must be related to the subject property later placed in service. We believe that the wording of the section 167 regulations and the intent of
Taxpayer, as a director, actively engaged in the management of real estate during all of [19X1]. The facts demonstrate that Taxpayer was already engaged in a business prior to [December 1, 19X1], 1990 Tax Ct. Memo LEXIS 69">*84 when he purchased an undivided interest in the computer equipment. Based on the information provided, this business activity extended throughout [19X1].
Whether an activity is a trade or business may vary from one case to another depending on which section of the Code is involved. See
Respondent has conceded the issue on which we had previously indicated an inclination to agree with his position. He now attempts to require an unspecified degree of "continuous and regular involvement in the affairs of a corporation" as the element determining whether a corporate director is engaged in a trade or business. On this record, and using that criterion, we are persuaded that petitioner*85 was engaged in a trade or business in 1985 prior to his investment in the depreciable equipment and is entitled to a full year's depreciation under ACRS.
Our conclusion makes unnecessary consideration of petitioner's other arguments, i.e., that he was engaged in the trades or businesses of his limited partnerships, oil and gas exploration ventures, or that he held depreciable property for the production of income. Our decision also makes unnecessary consideration of the addition to tax under