Nichols, North, Buse Co. v. Commissioner

United States Tax Court · 1971 · Corporations

56 T.C. 1225 (1971)

Updated July 31, 2026

corporationsconstructive dividendsentertainment facilitiessection 274 substantiationdepreciationinvestment creditsec. 274entertainment facility

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 later occasions involving guests connected with companies doing business with Nicholls, and on admitted personal outings by James Resenhoeft, the president's son; additional unrecorded personal dockside uses also occurred. The corporate log recorded dates, guests, and operational details, but usually did not record specific business discussions or business purpose. Herbert Resenhoeft controlled the corporation, allowed his sons to use the yacht freely, and the corporation charged only 25 percent of the yacht's yearly depreciation and operating expenses to his drawing account as personal expense.

Issue

Whether Nicholls could deduct depreciation and operating expenses and claim investment credit for the yacht despite section 274, and whether Herbert Resenhoeft received a constructive dividend from personal use of the yacht by himself and his sons. If there was a constructive dividend, the further issue was whether it should be measured by the yacht's acquisition cost 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 mere business identity of guests does not circumstantially prove the business purpose of the occasion. Once some personal use of a facility likely to serve personal purposes is shown and records are inadequate, the taxpayer must clearly prove the extent of personal use and that qualifying business use exceeded 50 percent of total days of use. A shareholder in control of the corporation may receive a constructive dividend from personal use of a corporate-owned facility by himself or by persons whose use he permits, and when the corporation retains ownership, the dividend is measured by fair rental value of the use rather than acquisition cost.

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

Prairie Gate Produce, a closely held corporation in Des Moines, bought a 40-foot cabin cruiser to entertain suppliers on the Mississippi River. Its log lists each outing's date, marina, guest names, and their employers, but says nothing about what business was discussed or why the outing occurred.

If Prairie Gate claims depreciation and operating-expense deductions for the cruiser, which is the strongest basis for disallowance under the governing rule?

Explanation. For an entertainment facility, each occasion of use must be separately substantiated as to amount, time and place, business purpose, and business relationship. A list of guests and their business affiliations may help show business relationship, but it does not by itself prove the business purpose of the occasion. That is the defect here.