Opinion ID: 357068
Heading Depth: 1
Heading Rank: 3

Heading: the deductibility of corporate expenses:

Text: 132 An income tax concomitant of the land clearing operation beyond the constructive dividend issue already discussed entails the propriety of the Corporation's deduction of expenses incurred thereon as ordinary and necessary business expenses under 26 U.S.C. § 162. The district court decided that the expenses incurred by the Corporation prior to the transfer of the property to the partnership were wholly non-deductible because they represented permanent improvements to land, or capital expenditures. 59 See, 26 U.S.C. § 263; Rev.Rul. 59-42; 1959-1 Cum.Bull. 47. 60 As to the expenses incurred subsequent to the transfer of title the majority of the expense deductions at issue the district court permitted deductions only for that amount of those expenses which did not exceed the payments made by the partnership in the year in which the expenses were incurred. 133 We affirm the pre-transfer finding and vacate and remand as to the post-transfer finding.
134 The deductibility of the pre-transfer expenses hinges on a determination of which entity was the true owner in interest of the property at the time the expenses were incurred. 61 If the Corporation was the owner, the expenses were capital in nature and incorrectly deducted as ordinary and necessary business expenses. 135 It is undisputed that the Corporation actually purchased the land. The partnership could not obtain the funds necessary to close the deal within the time constraints imposed by the vendor. Because it could not obtain the necessary financing in time, it looked to the Corporation to make the initial purchase. Indeed, according to Loftin, the partnership was not even in existence at the time of the initial purchase. 62 However, the taxpayers assert that the Corporation was, in truth, only a purchasing agent that is, that the partnership was the true owner in interest at the April 17 purchase date. 136 The district court's finding to the contrary is supported by the record. First, the Corporation adopted a resolution prior to its purchase of the land on behalf of the partnership. That resolution explicitly indicated that the Corporation was purchasing the land in order to sell it to the partnership at such time as the partnership could arrange the necessary financing. Thus, the intention of the Corporation was to sell, not merely to make a nominal transfer. In fact, on November 1, 1963 the date the land was sold to the partnership the Corporation received consideration equal to that which it had paid to the original vendor in April. 137 It simply is not enough that the taxpayers intended to purchase the land from the Corporation at the earliest possible date. In this regard, there was a five month delay between the corporate purchase and the ultimate transfer, despite the fact that the partnership had the capacity to repurchase this property at an earlier time. Although the failure to arrange for the transfer was explained by Woodard as being due to carelessness, 63 the district court was entitled to assign little weight to the Corporation's purported intention to immediately transfer the land to the partnership. Moreover, even had the trial court accepted this explanation, the assertion of an intent to transfer is insufficient here to support a finding of beneficial ownership. See, McBride v. Commissioner, 23 T.C. 901 (1955). 138 Second, in making the initial purchase, the Corporation committed its coffers to full potential liability for repayment. In addition, the Corporation listed the property as an asset on its fiscal 1963 tax return. Yet, once the land was sold to the partnership, the asset no longer appeared on the subsequent corporate tax returns. 139 In short, the district court did not commit clear error in concluding that these transactions were tantamount to a purchase by the Corporation with an eventual resale to the partnership. 140 As we have noted above, we do not believe in exalting form over substance. However, in this instance, we cannot permit this adage to be utilized as the last grasp toward extrication. To quote from our learned Brother Goldberg: 141 We can indulge in no presumption to penalize even an errant taxpayer, but we do not believe that this tutelage interdicts us to forego ineluctable inferences and common sense. 142 Webb v. Commissioner of Internal Revenue, 394 F.2d 366, 380 (5th Cir. 1968). 143 In essence, while taxpayers seek to pierce the paper armor of . . . (their) characterization of a particular transaction, Cornelius v. Commissioner of Internal Revenue, 494 F.2d 465, 471 (5th Cir. 1974), they offer no explanation which could support a decision to do so.
144 The issue of post-transfer expenses presents a more difficult problem. As was noted above, the district court did not deny deductibility as to the full amount of these expenses. Instead, the Corporation was permitted to deduct that portion which did not exceed the payments made to it in each respective year. 145 The predicate for this denial was the district court's resolution of the constructive dividend issue. Because expenses incurred in conferring a dividend, constructive or otherwise, are not deductible and because the district court determined that expenses incurred in excess of payments received by the Corporation represented constructive dividends to the shareholders, the excess was deemed to be non-deductible by the Corporation. See, United States v. Smith, 418 F.2d 589, 596 (5th Cir. 1969). 146 We note, at the outset, that our decision to vacate as to the constructive dividend issue necessarily mandates that we vacate and remand as to the deduction of post-transfer expenses because the former is an essential predicate of the latter. However, in addition to this overriding problem, we are troubled with a further aspect of the district court's treatment of the post-transfer expenses which we discuss now in an effort to avoid further delays in the resolution of this matter. 147 The district court chose to measure the deductions on a fiscal year basis. That is, the court arrived at a determination of the non-deductible excess of costs over payments by matching costs and payments in each of the Corporation's fiscal years. At first glance, this is appealing given that the Corporation, which was the entity seeking the deductions, had selected a fiscal tax year for reporting its income. However, the choice of a fiscal year period is less convincing when one considers that the district court chose to link the issue of the deductibility of costs with the issue of the constructive dividend. The constructive dividend was measured on a calendar year and if the deductibility of a portion of the expenses was denied because those expenses represented a constructive dividend, as determined on a calendar year basis, it would appear to be inconsistent to measure the excess portion within a different time frame for purposes of resolving the deduction issue. 148 Thus, if the district court, on remand, decides that a constructive dividend was conferred on the basis of the land clearing operation, it must measure the portion of non-deductible expenses related thereto in a manner consistent with its measurement of the constructive dividend should they remain inextricably related, as they are under the present approach of the district court.