1982 Tax Ct. Memo LEXIS 592 | Tax Ct. | 1982
MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS,
1975 | $ 2,584 |
1976 | 3,345 |
Petitioners claim an overpayment of "minimum tax" under section 56(a) 1 in the amount of $ 61,031.
The sole issue for decision attributable to the asserted deficiencies is the deductibility under
After the filing of the petition in this case, petitioners filed an amended return for the year 1976 in which they sought a refund of the $ 61,031 they paid for the tax imposed by section1982 Tax Ct. Memo LEXIS 592">*594 56(a). Respondent rejected this claim for refund. By proper amendments to the pleadings, the parties now bring before the Court the following additional issues for decision: 1) whether the tax imposed by section 56(a), the "minimum tax," is unconstitutional because it is not an income tax but rather is a direct tax not apportioned among the several states or in proportion to the census in violation of the
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation together with the exhibits attached thereto is incorporated herein by reference.
Petitioners Duane Stranahan, Jr. ("Stranahan") and Cecily S. Stranahan, husband and wife, resided at Perrysburg, Ohio, at the time they filed the petition in this case. They timely filed joint income tax returns1982 Tax Ct. Memo LEXIS 592">*595 for the taxable years 1975 and 1976.
Petitioners' principal sources of income in 1975 and 1976 were investment income from domestic and foreign securities, income from partnership oil and gas exploration and development activities and income from Stranahan's law practice.
Between 1964 and 1973, Stranahan, in gradual amounts, invested over $ 2 million in the American Aviation Corporation, a struggling company in the light or very small airplane business (primarily single-engine airplanes) located in Cleveland, Ohio. This investment represented between 10 and 20 percent of petitioner's assets during the years in question. In 1973, the Grumman Corporation ("Grumman"), a New York corporation engaged primarily in the military aircraft business, transferred a corporate business jet, an agricultural airplane and substantial manufacturing facilities to the American Aviation Corporation in exchange for 80 percent of the latter corporation's stock. At the same time, the name of American Aviation Corporation was changed to GrummanAmerican Aviation Corporation ("GAAC"). As a result of these transactions, Stranahan was left with a roughly four percent stock interest in GAAC, plus warrants1982 Tax Ct. Memo LEXIS 592">*596 to acquire a proportionate amount of additional shares five years later at $ 1 per share.
Prior to this combination, Stranahan had been a member of the Executive Committee of American Aviation Corporation. In the first year after the merger, he was invited to attend directors meetings of GAAC as a guest. In 1974, Stranahan was elected a director of GAAC. He remained an uncompensated director in 1975 and 1976, the years before the Court, and served in that capacity on the Audit Committee of the Board.
During 1975 and 1976, Stranahan at various times rented a small plane at the rate of $ 100 per hour to fly to meetings where GAAC business was discussed. These meetings were either meetings of the Board of Directors of GAAC, meetings with other minority directors and shareholders immediately prior to Board of Directors meetings or meetings with corporate officers of GAAC. The subject matter of each of these meetings included reviewing operating reports, budgets, financial statements and the routine administerial matters with which directors customarily deal. But the principal problem of these meetings was the ongoing disagreement between the minority shareholders and directors1982 Tax Ct. Memo LEXIS 592">*597 of GAAC and the Grumman-sponsored directors of GAAC over how the company should be run.
It was the minority's position that Grumman was operating GAAC like a division and that, as a result, the minority's stock was in danger of losing its considerable value. In particular, the minority shareholders, including Stranahan, complained that Grumman 1) was charging excessive management fees to GAAC, 2) was causing GAAC to pay unnecessary distributor's fees to Page Airways in connection with the sale of GAAC planes and 3) was neglecting business opportunities of GAAC. Through his attendance at these various meetings in 1975 and 1976, Stranahan attempted to alter this state of affairs. Ultimately, in 1978, the minority shareholders as well as Grumman itself disposed of all the stock of GAAC to a third party. On this sale of GAAC stock in 1978, Stranahan realized gain in the amount of roughly $ 1 million.
Stranahan never asked for, nor did he receive, reimbursement from GAAC for the cost of the above-mentioned airplane rentals.
GAAC paid no dividends to its shareholders in 1975 or 1976.
The respondent disallowed deductions for aircraft rental expenditures to fly to the meetings1982 Tax Ct. Memo LEXIS 592">*598 described above in the amounts of $ 3,883 and $ 5,166 in 1975 and 1976, respectively. The respondent allowed deductions for aircraft rental expenditures of $ 4,367 and $ 2,526 for the years 1975 and 1976, respectively, relating to 16 other trips taken by Stranahan in those years. These meetings were as follows:
January 10, 1975 | Attend Michigan Council Trout |
Unlimited (C) | |
February 14, 1975 | Meeting H. G. Davis, D. Linder, |
D. Stranahan re: Stock Investment | |
Advisors | |
April 18, 1975 - | Meeting O. B. Mobley, Jr., |
April 20, 1975 | D. Linder, S. Stranahan, |
M. Stranahan, re: Hydro Carbon | |
Limited Partnerships | |
June 19, 1975 - | Hearing at Court of Appeals for |
June 20, 1975 | Sixth Circuit, J. Mattimoe, |
R. Kelsey | |
July 22, 1975 | Meeting H. G. Davis, D. Stranahan, |
re: Stock Advisor | |
September 3, 1975 - | Meeting O. B. Mobley, S. S. Stranahan, |
September 5, 1975 | R. Krechman, R. Kronbach, re: |
Hydro Carbon Financial Records | |
October 8, 1975 | Meeting with Elasta-Turf Rep., |
re: Tennis Court Surface with | |
Dean Bailey, K. Bailey | |
October 17, 1975 | Meeting with Wadsworth, S. Stranahan, |
C. Stranahan, re: Restructuring | |
Family Charitable Activities (C) | |
November 10, 1975 | Meeting Cincinnati Floor Rep., |
re: Paddle Tennis Courts Shadow | |
Valley Development Corporation | |
with Dean Bailey | |
November 20, 1975 - | Cleveland Bar Association Tax |
November 21, 1975 | Institute, P. McKenzie, Sam Young, |
R. Krechman | |
February 4, 1976 | Meeting O. B. Mobley, Jr., and |
R. Kronbach, re: Improved productions | |
and financial reports | |
February 13, 1976 | Family money management meeting. |
April 20, 1976 - | Interviews with potential security |
April 22, 1976 | investment advisors, Morgan |
Guaranty, Neuberger & Berman, | |
F. Eberstadt & Co. and Templeton | |
& Debrow | |
May 4, 1976 | Preparation for Appellate review |
of charitable deduction, S. R. Young | |
P. R. McKenzie, N. Miles, A. Wiedeman | |
September 30, 1976 | Ohio Council of Foundation panel |
member, re: Private Foundations | |
November 11, 1976 - | Cleveland Tax Institute with MMBB |
November 14, 1976 | representatives |
1982 Tax Ct. Memo LEXIS 592">*599 At sometime during 1975 or 1976, Stranahan made trips to New York City to confer with an investment banker regarding the possibility of finding an "industrial minority" to replace the existing minority stockholders. 2
OPINION
The first issue for decision is the deductibility under
Petitioners assert that the above expenses were ordinary and necessary expenditures1982 Tax Ct. Memo LEXIS 592">*600 made to protect the value of Stranahan's substantial investment in GAAC -- that without these expenditures the majority shareholder, Grumman, would have seriously jeopardized the value of the holdings of the minority shareholders.
Respondent, on the other hand, argues that the expenses are not deductible under
Notwithstanding respondent's reliance upon the above four arguments, he places most of his emphasis on the contention that Stranahan was conducting corporate rather than personal business, thereby converting1982 Tax Ct. Memo LEXIS 592">*601 his expenditures from personally deductible expenses to contributions to the corporation. Inherent in respondent's position on this point, however, is the thought that involvement in corporate affairs through board membership fatally taints, insofar as
As stated in our findings of fact, Stranahan's roughly $ 2 million investment in GAAC represented only 10 to 20 percent of his assets. This, plus the nature of many of the trips for which respondent did in fact allow deductions, reflect the substantiality of Stranahan's investments and his activities related thereto. Stranahan's GAAC role, in other words, was only one of a multi-faceted business and investment activity conducted by Stranahan during the years in question.
As we have said in a different factual context, "[t]he line of demarcation between currently deductible and capital expenditures is often a shadowy one * * *."
For example, in
Stranahan testified that at one point Grumman offered the GAAC minority shareholders $ 4 per share for their stock. Later Grumman attempted a "freeze-out" merger at $ 5 per share. That Stranahan was ultimately able to realize $ 8.50 per share for his stock, amounting to a net profit of about $ 1 million, is eloquent testimony to the success of his efforts. 5 Unless we were willing to conclude (which we are not), that the words of
1982 Tax Ct. Memo LEXIS 592">*604 With regard to point 3 of respondent's basis for disallowance, he asserts on brief merely that "[t]he reasonableness of the expenses with respect to the choice of mode of transportation was also not shown," without further elaboration. Since respondent makes no further mention of this point, and in fact allowed expenses for exactly the same mode of transportation related to Stranahan's other business, investment and charitable activities, we conclude that the expenditures in question were reasonable.
We turn now to the question of whether the claimed expenses were "ordinary and necessary" within the intendment of
In
It seems clear that the analogy which the Court in
But that is not our case. Unlike the taxpayer in
As indicated above, the concerted efforts of Stranahan and his fellow minority stockholders to preserve their investment in GAAC was ultimately successful. We think these efforts, including Stranahan's, were obviously necessary, and since they were what any investor similar situated might reasonably have done, they were "ordinary." "The situation [may be] unique in the life of the individual affected, but not in the life of the group, the community, of which he is a part."
Accordingly, we hold for petitioners on this issue.
The second issue involves both the constitutionality and the deductibility of the minimum tax. On their 1976 returns, petitioners paid $ 61,031 attributable to the tax imposed by section 56(a), the minimum tax. Petitioners' items of tax preference for purposes of the minimum tax amounted to $ 528,605, composed1982 Tax Ct. Memo LEXIS 592">*608 of $ 63,971 of depletion, $ 195,386 of capital gain and $ 269,248 of intangible drilling costs. Petitioners now seek a refund of the minimum tax they paid on the following grounds: 1) the minimum tax is a direct tax not apportioned among the states or in proportion to the census in violation of the
In
Petitioners attempt to distinguish these prior cases on the grounds that they focused primarily on the capital gain item of tax preference when concluding that the minimum tax merely adjusted the rate of income tax on net gain measured elsewhere in the Code. Petitioners argue that items of tax preference such as excess intangible drilling costs under
However, we do, at least initially, see some merit in petitioners' argument as regards the intangible drilling cost tax preference item. The intangible drilling cost deduction of
Having reaffirmed our position that the minimum tax is constitutional because it is not a direct tax (whether or not it is truly an income tax for purposes of constitutional analysis) we next proceed to petitioners' Due Process and
Petitioners' final argument is that the minimum tax is an excise tax, and is therefore deductible by them under section 162 or
Accordingly, petitioners have not made an overpayment of minimum tax.
Footnotes
1. All section references are to the Internal Revenue Code of 1954 in effect during the years before the Court, unless otherwise indicated.↩
2. The record is not clear as to whether these trips were included among those for which respondent allowed deductions.↩
3.
SEC. 212 . EXPENSES FOR PRODUCTION OF INCOME.In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year--
(2) for the management, conservation, or maintenance of property held for the production of income; * * *.↩
4. We would observe that respondent has not attempted to invoke the so-called "defense of title" regulations; i.e.,
sec. 1.212-1(k), Income Tax Regs. Cf. (1978), affd.Cruttenden v. Commissioner, 70 T.C. 191">70 T.C. 191644 F.2d 1368">644 F.2d 1368↩ (9th Cir. 1981).5. The term "income" in
section 212 includes not merely income of the taxable year but also income which the taxpayer * * * may realize in subsequent taxable years; and is not confined to recurring income but applies as well to gains from the disposition of property.
[Section 1.212-1(b), Income Tax Regs.↩ ]6.
Section 1.212-1(d), Income Tax Regs. , provides:(d) Expenses, to be deductible under
section 212↩ , must be "ordinary and necessary". Thus, such expenses must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income.4. Tax Reform act of 1976, Pub. L. No. 94-455, sec. 301(c)(1)(B), 90 Stat. 1550. The amendment, passed October 4, 1976, was made applicable to all items of tax preference for taxable years beginning after December 31, 1975.
Id.,↩ sec. 301(g)(1), 90 Stat. 1553.