Au v. Commissioner

Lawrence, Y. S. Au and Wrona K. H. Au, Petitioners, v. Commissioner of Internal Revenue, Respondent Au v. Commissioner Docket No. 88778 United States Tax Court 40 T.C. 264; 1963 U.S. Tax Ct. LEXIS 129; May 10, 1963, Filed *129 Decision will be entered for the respondent. Basis for depreciation of nonbusiness property converted to business use held to be fair market value at date of conversion, whether or not property was simultaneously contributed to a partnership. Lawrence Y. S. Au, pro se. Aaron S. Resnik, for the respondent. Opper, Judge. OPPER *264 Respondent determined a deficiency of $ 62.06 in petitioners' income tax for the calendar year 1957, only $ 57.60 of which appears to be still in dispute. Petitioners concede that 10 percent of the expenses incurred in operating an automobile in 1957 constitute nondeductible personal expenses as determined in the deficiency notice. The remaining issues are: (1) Whether a 1950 automobile acquired by petitioners in 1951 and converted from nonbusiness to business use in 1957 was a capital contribution by petitioners*130 to a partnership; (2) if so, whether the partnership was entitled to utilize petitioners' original cost of the automobile as the basis for depreciation; and (3) if not, whether the fair market value of the automobile at the time of conversion was greater than $ 650, as determined by respondent. FINDINGS OF FACT Petitioners, husband and wife, are, and were during the year 1957 , residents of Honolulu, Hawaii. They filed a timely joint Federal income tax return for the year 1957 with the district director of internal revenue at Honolulu, Hawaii. Petitioner Wrona had no separate income and is one, of the petitioners solely because a joint return was filed. Hereinafter Lawrence will be referred to as petitioner. During 1957 petitioner was a salaried employee of Leahi Hospital in Honolulu, where he was employed as its chief accountant. During that year he also worked as a public accountant. Petitioner's brother, Alfred Y. K. Au, hereinafter referred to as Alfred, was at all times material hereto a resident of Honolulu, Hawaii. During 1957 Alfred was employed by the City and County of Honolulu as a salaried auditor. He also rendered services to private clients as a certified public*131 accountant. On his 1957 income tax return, petitioner reported salary from his employer and also profits from business. On Schedule C, petitioner *265 listed his principal business activity as a public accountant. He reported gross receipts of $ 1,756.80, business deductions of $ 904.20, and a net profit of $ 852.60. Business deductions claimed were as follows: Depreciation on 1950 automobile $ 500.00 Automobile repair 71.04 Automobile insurance 33.00 Automobile gas 143.78 Taxes on business and business property, and license 31.38 Public relations, dues, and subscriptions 125.00 904.20 Petitioner reported no partnership income on his 1957 income tax return. The automobile on which depreciation was claimed was a 1950 four-door Plymouth sedan which had been purchased by petitioner in the early part of 1951 for $ 2,500. Prior to 1957 petitioner made no business use of the automobile; in 1957 he converted it to business use. The original cost to him of $ 2,500 was used by petitioner as his basis for depreciation. A straight line method of depreciation and a life of 5 years were adopted. In September 1959, petitioner was advised by respondent's examining agents*132 that his 1957 joint income tax return was being audited and that a question was being raised as to the proper basis for depreciation of the 1950 automobile. Shortly thereafter a meeting was held at the office of the district director of internal revenue to discuss this question, at which meeting petitioner was represented by Alfred. An agent's report, a copy of which was forwarded to petitioner under cover of a letter dated January 8, 1960, stated in part as follows: Taxpayer accepted cost of 1950 Plymouth purchased in 1951 as basis to arrive at percentage to be used in allocation of income from accounting business which taxpayer entered into with his brother Alfred Au in beginning of 1957. On May 12, 1960, petitioner and Alfred filed a Form 1065, U.S. Partnership Return of Income, for 1957. The face of that return bore the note, "Income already reported on partners' returns for 1957." Under the depreciation schedule petitioner's automobile was depreciated at $ 500, using the $ 2,500 cost as its basis. Petitioner's partnership share of income was shown as $ 852.60, the same amount of profit which he reported on his 1957 individual income tax return theretofore filed as profit *133 from his own business. On June 8, 1960, petitioner filed what was entitled "Corrected Return" for 1957 on Form 1040, which in all material respects conformed to the earlier return except that the amount of $ 852.60 was shown as income from partnership and no Schedule C was appended thereto. During 1957 petitioner and Alfred each held himself out as an individual accountant servicing clients in his own name. Each used a separate letterhead and rendered separate statements to clients. *266 Each helped out with the other's work. Alfred had a number of clients. During 1957 petitioner had only one account, Kaimuki Bakery, which paid $ 900 for the service. Beginning on January 1, 1957, and continuing for about 5 months, petitioner's car was utilized as a mobile office in which equipment was carried. Petitioner and Alfred each operated from the car in working for private clients. About June 1957, petitioner and Alfred commenced sharing an office at Room 1, 1153 12th Avenue, Honolulu, Hawaii. On June 1, 1957, a bank account was opened in the name of petitioner and Alfred. Payments made to each for accounting services were deposited in this joint account and expenses of maintaining*134 the office were paid by checks drawn on this account. There was no formal or written agreement between petitioner and Alfred in regard to their arrangement and no prior binding agreement regarding distribution of income and expenses reflected in the joint bank account. Income and expenses were allocated at the end of the year, taking into account the assets of each party which had been utilized. Petitioner received about 31 percent of the net proceeds in 1957. This percentage varied in subsequent years. Aside from the Form 1065 filed in 1960 for calendar year 1957, as described above, petitioner and Alfred did not file any partnership returns of income for any year subsequent to 1957, up to and including the year 1961. On the joint tax returns filed by petitioner and his wife for the years 1958 to 1960, no partnership income was reported. In each of those returns a Schedule C was attached reflecting profit from the individual business of the petitioner as a public accountant. Depreciation in the amount of $ 500 for the 1950 Plymouth automobile was claimed in addition to other business deductions. During the years 1956 to 1960, inclusive, Alfred reported on his Federal income *135 tax return filed for each year as an individual the receipts from his business activities as a certified public accountant. No reference was made on any of these returns to the existence of any partnership, and no partnership income was designated thereon. Petitioner and Alfred each had his own separate accounting license to engage in business; each secured such license by virtue of a separate application submitted as an individual and not as a partner in a partnership. Petitioner and Alfred did not register as a partnership under chapter 186, Hawaii Rev. Laws (1955), which laws were in effect throughout the year 1957. No partnership returns of income were filed by Alfred and petitioner with the Department of Taxation of Hawaii. There is no record in the Department of Treasury and Regulation of a partnership doing business as Lawrence Au and Alfred Au. *267 In 1957, when petitioner converted the automobile to business use, it had been operated for about 25,000 miles and was in good condition. In 1957, Plymouth automobiles of the model and type herein involved were being offered for sale in the Honolulu area, and could be purchased in good condition for less than $ 650. The*136 Official Guide used in the Hawaii area representing the average of used car prices reflected the average retail price of 1950 Plymouth automobiles at less than $ 650. The fair market value of the 1950 Plymouth automobile was not in excess of $ 650 when it was converted to business use in 1957. OPINION The evidence appears far from sufficient to sustain petitioner's burden of proof that on January 1, 1957, a partnership was entered into to which the automobile in question could have been contributed. While the existence of a partnership or even a joint venture is a question of the intent of the parties, Nellie Russo Linsenmeyer, 25 T.C. 1126 (1956), external evidence to substantiate or contradict their statements may be relied on. See, e.g., Commissioner v. Culbertson, 337 U.S. 733 (1949). The failure to file any partnership return except as an afterthought or to comply with the requirements of local law, 1 while not decisive if a joint venture actually existed, is some evidence as to whether there ever was any such intention. We cannot lightly assume a violation of law. Harry Sackstein, 14 T.C. 566, 569 (1950).*137 If we were forced to face the issue and conclude that in fact a joint venture was formed, it seems much more likely that it came into being in about June, when the actions upon which petitioner relies took place. It was then that the joint bank account was opened, that petitioner for the first time was collecting fees from a client of his own 2 and that the supposed partners began sharing an office. But, on petitioner's own testimony, by that time the automobile in question had been devoted to business use for over 5 months. Any basis to him would, accordingly, have had to be adjusted long since. Heiner v. Tindle, 276 U.S. 582 (1928), and petitioner's "adjusted basis" with respect to which the partnership contribution would have been made would, *138 even on petitioner's theory, be no more than the fair market value on the date of conversion. What seems more probable, however, is that the payments made to petitioner, either out of the joint bank account or in some other undisclosed way by his brother, were in payment for the "leg work" 3 which, *268 according to the undisputed testimony, he performed with respect to the accounting services which his brother was rendering and as some sort of rental of the car. 4 For reasons which will presently appear, however, we find it unnecessary to decide any of these questions. *139 Even if there were a partnership or joint venture and even if it was created at the time of the contribution to it of petitioner's automobile, the basis upon which the partnership or petitioner could claim depreciation would still be the fair market value on the date of the contribution. "Respondent's computation of depreciation on the basis of fair market value at the time of acquisition [by the partnership] must, we think, be approved, not because the acquisition is significant, but because that happens also to be the time of conversion." Ralph Perkins, 41 B.T.A. 1225, 1227 (1940), affirmed per curiam 125 F. 2d 150 (C.A. 6, 1942). Depreciation is a fact and must be taken into account even where there is no provision for its deduction as in the case of properties devoted to personal use. Helvering v. Owens, 305 U.S. 468 (1939). Petitioner's automobile, which, according to his theory, was used only for personal purposes before its contribution to the putative partnership, had no depreciation basis prior to that time. In Ralph Perkins, supra, where donated property*140 was simultaneously converted to business use, we said: "Even though the conversion took place at the moment of acquisition * * * it was nevertheless a conversion, since the property had no depreciation base before." Ralph Perkins, supra at 1227. See Robert H. Montgomery, 37 B.T.A. 232 (1938). The basis for depreciation, whether of petitioner or of the partnership, is computed upon conversion value, just as it would be if there had been no transfer to the partnership. See Charles J. Thatcher, 24 B.T.A. 1130, 1132 (1931). While the terms of the applicable provision 5 of the 1954 Code vary somewhat from those of its predecessor, 6 it is clear that Congress intended no change in this respect: Contributions to a partnership will have the same effect * * * as under present practice. No gain or loss is to be recognized either to the contributing partner *269 or to the partnership. The property contributed to a partnership is to have the same basis to the partnership for purposes of gain, loss, depreciation, and so forth, as in the hands of the contributor. S. Rept. No. 1622, to accompany*141 H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 94 (1954). It seems to us to follow that respondent was correct in attributing as its basis the fair market value of the automobile at the time of its conversion to business use, whether as a contribution to the partnership or as the continuing individual property*142 of petitioner. We find no adequate evidence of fair market value sufficient to overcome the presumption of correctness of respondent's determination. The only witness on the subject was petitioner's brother, whose qualifications as an expert in the valuation of secondhand automobiles are questionable, to say the least. We have accordingly found as a fact that the fair market value of the automobile on the date of its conversion was the amount determined by respondent. Decision will be entered for the respondent. Footnotes 1. Under the territorial laws of Hawaii a license to engage in the accounting business as a partnership would have been necessary if Alfred and petitioner conducted their business as a partnership. Hawaii Rev. Laws, sec. 117-10 (1955).↩ 2. See the statement in petitioner's reply brief that he "had only one client (Kaimuki Bakery) from whom he grossed $ 900.00 from June to December."↩ 3. Alfred testified that "I helped him out on his account and he did a lot of leg work on my accounts * * *."↩ 4. Alfred testified that the office he had occupied the previous year had been torn down and that petitioner's car "was used as a mobile office in which all of the equipment was packed [and we] went out and worked on our accounts operating from the car * * *."↩ 5. SEC. 723 [I.R.C. 1954]. BASIS OF PROPERTY CONTRIBUTED TO PARTNERSHIP. The basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution.↩ 6. SEC. 113 [I.R.C. 1939]. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (Unadjusted) of Property. -- The basis of property shall be cost of such property; except that -- * * * * (13) Partnership. -- If the property was acquired * * * by a partnership * * * the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer * * *.↩