Keene v. Commissioner

MEMORANDUM FINDINGS OF FACT*160 AND OPINION

FEATHERSTON, Judge: Respondent determined deficiencies in Federal income taxes for the year or period ended December 31, 1978, as follows:

Respondent concedes on brief that there is no deficiency in the income tax (or addition to tax) of Keene & Associates, Inc., P.S., (hereinafter Associates) for the taxable period ended December 31, 1978 (docket No. 4589-81), and that Robert B. Keene, Jr., (petitioner) is not liable as transferee of the assets of the corporation for that period (docket No. 4590-81). ² The issues remaining for decision are whether petitioner (docket No. 4358-81) is entitled to an investment credit for 1978 on assets he received pursuant to the plan of complete liquidation of Associates, and whether petitioner is liable for an addition to tax pursuant to section 6653(a). ³

*161 FINDINGS OF FACT

When he filed his petition, petitioner was a legal resident of Richland, Washington. He timely filed an individual income tax return for 1978.

Petitioner was a certified public accountant engaged in conducting a public accounting practice in Richland, Washington. On April 1, 1976, petitioner incorporated his accounting practice by transferring his business assets to Associates, a newly formed corporation, in exchange for its stock. Petitioner, the president of Associates, owned all of its stock from its incorporation until its liquidation on December 31, 1978. The liquidation was accomplished, pursuant to section 331, by the transfer of all of Associates' assets and liabilities to petitioner in exchange for all of his stock.

Among the assets petitioner received on liquidation was certain depreciable property (mostly office equipment) which had been acquired by Associates either during its fiscal year ended March 31, 1978, or during its short year from March 31, 1978 to the liquidation on December 31, 1978. Following the liquidation, petitioner used all of the property transferred to him in the continuation of his accounting work through a sole proprietorship.

*162 On his individual Federal income tax return, petitioner claimed an investment credit of $3,137, for the acquisition of qualified property in the amount of $31,365. Respondent determined that an investment credit is not allowable with respect to property, valued at $23,859, received on the liquidation of Associates.

OPINION

The issue of whether petitioner is entitled to the disputed investment credit turns on the precise language of several Code sections which are tied together by cross references. Section 48(b) and (c)⁴ classifies "section 38 property" (i.e., property qualifying for an investment credit; section 38, section 48(a)), as being either "new" or "used." Because the "original use" of the property here in question commenced with Associates, and not with petitioner, it does not qualify as "new" property. Our question thus narrows to whether the property meets the definition of "used section 38 property" as set forth in section 48(c). If it does not meet that defintion, the property will not support an investment credit.

*163 To qualify as "used section 38 property" under the section 48(c) definition, the property must meet certain requirements; in particular, it (1) must be "acquired by purchase," as defined by section 179(d)(2); and (2) must not "after its acquisition by the taxpayer, * * * [be] used by a person who used such property before such acquisition (or by a person who bears a relationship described in section 179(d)(2)(A) or (B) to a person who used such property before such acquisition)." Section 48(c)(1) and (3); ⁵section 1.48-3(a)(2)(i), Income Tax Regs.

Contending that petitioner fails to meet the purchase and no-related-user requirements of section 48(c), respondent refers us to section 179(d)(2)(A) ⁶ which defines the term "purchase." That section excludes from the definition of "purchase" any property acquired by certain related persons as described (with modifications irrelevant here) in section 267. Section 267(b)(2) classifies as related "[a]n individual and a corporation more than 50 percent*164 in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual."

Because petitioner owned 100 percent of the stock of Associates, the prior user, he clearly falls within the section 267 definition of proscribed relationships and hence the section 179(d)(2)(A) description. Therefore, petitioner's acquisition of the property from Associates does not qualify as a "purchase" within the meaning of the section 48(c)(3) definition of "used section 38 property". Furthr, because petitioner personally used the property*165 after acquiring it from his wholly owned corporation, the property runs afoul of the parenthetical no-related-user qualification of section 48(c)(1). We hold that respondent correctly denied the investment tax credit for petitioner in 1978.

Petitioner does not appear to argue otherwise on the merits. ⁷ His arguments on brief, some of which seem quite unrelated to the "questions" they supposedly address, center mainly on the conceded issues. In the "questions presented" portion of his brief, he puts in issue the addition to tax for negligence under section 6653(a)⁸ in the amount of $31; the addition in this amount relates to the denial of the investment credit which we have just upheld. Petitioner makes, however, only a vague constitutional argument which appears to apply just to the addition to tax on the new jobs credit, an issue respondent has conceded. This constitutional argument is without merit in any event. ⁹

*166 Petitioner has presented no evidence explaining why he, a practicing accountant, was not negligent in taking a tax credit which the Code definitely (though via a rather roundabout method) does not permit. As petitioner has failed to carry his burden of proof, Welch v. Helvering,290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure, we sustain respondent on this issue.

Due to respondent's concessions,

Decision will be entered for respondent in docket No. 4358-81.

Decisions will be entered for petitioners in docket Nos. 4589-81 and 4590-81.