Nichols, North, Buse Co. v. Commissioner

United States Tax Court · 1971 · Corporations

CorporationsConstructive dividendsEntertainment facilitiesSubstantiation under section 274section 274section 274(d)section 162section 167

Facts

Nicholls, North, Buse Co. purchased a 52-foot yacht, Pea Picker III, with corporate funds in 1964, titled and registered it in the corporation's name, and claimed depreciation, operating expenses, and investment credit. The yacht was used on a shakedown cruise, on several occasions with business-related guests, on at least two admitted personal-use days by James Resenhoeft, and on an unidentified number of additional unrecorded personal occasions with James's nonbusiness friends. The corporation kept a log showing departures, guests, and sometimes the guests' employers, but it almost never recorded specific business discussions or business purpose. Herbert Resenhoeft controlled the corporation, had previously personally owned earlier Pea Picker boats, and allowed his sons to use the yacht freely without direct control over use or documentation.

Issue

Whether the corporation could deduct depreciation, operating expenses, and investment credit for the yacht despite the recordkeeping and mixed use, and whether Herbert Resenhoeft received a constructive dividend from personal use of the corporate-owned yacht by himself and his sons. If there was a constructive dividend, the court also had to decide whether it was measured by the yacht's purchase price or by its fair rental value during the relevant period.

Rule

For an entertainment facility, section 274(d) requires separate substantiation for each occasion of use of the amount, time and place, business purpose, and business relationship of the persons entertained; the business identity of guests alone does not circumstantially establish the business purpose of the occasion. Once personal use of such a facility is shown, the taxpayer must clearly prove the limit of those personal occasions to satisfy the more-than-50-percent business-use requirement. Personal use of corporate-owned property may create a constructive dividend to the shareholder who controls the corporation and permits the use, even when another shareholder is the direct user. When the corporation retains ownership of the facility, the constructive dividend is measured by fair rental value for the period at issue, not by acquisition cost.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeview Produce Brokers, a closely held corporation in Cleveland, bought a 40-foot pleasure boat titled in the corporation's name. Its log for summer outings listed the dates, marina locations, guest names, and each guest's employer, but it said nothing about what business was discussed; the sales manager later testified that he was "sure pricing and credit probably came up" on most trips.

If the corporation claims deductions for the boat's depreciation and operating expenses for those outings, which result is most likely?

Explanation. For an entertainment facility, each occasion of use must be separately substantiated as to amount, time and place, business purpose, and business relationship. Listing guests and their employers may show business relationship, but it does not establish the business purpose of the particular outing. Vague testimony about what probably was discussed is the sort of conjecture section 274 rejects.