Back to Main Page28 T.C. 1100, 1957 WL 1139 (Tax Ct.) (Cite as: 28 T.C. 1100)
Tax Court of the United States.
AMERICAN PROPERTIES, INC., ET AL.,[FN1] PETITIONERS (SAYRES),
versus
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket Nos. 57748-57751. Filed August 30, 1957
Tracy Griffin, Esq., and Kenneth P.
Short, Esq., for the petitioners.
Gordon N. Cromwell; Esq., for the
respondent.
Held, that the activities of the corporate petitioner in
constructing, maintaining, and operating racing
boats did not constitute the carrying on of a trade or business,
but were incident to the personal hobby of
its
sole stockholder, and the corporation is not entitled to deduct amounts
expended by it as ordinary and
necessary business expenses, or to take deductions for depreciation
on the boats.
Held, further, that the amounts expended by the corporation
are properly taxable to the individual
petitioners, since such expenditures were solely for the personal
benefit of the individual petitioner who
was
the sole stockholder.
Held, further, that the individual petitioners omitted
certain salary income from their returns, and that the
respondent properly determined additions to tax on account thereof,
pursuant to section 293(a), I.R.C. 1939.
ATKINS, Judge:
From this point you’ll see highlights from the
court document pointing out Ted Jones as the Designer
and building supervisor of Sayres’ Slo-Mo-Shun
hydroplanes, as well as Sayres’ contracting of Jones
effectively preventing Jones from designing boats for competitors,
and Sayres dismissal of
legitimate offers by established and reputable racing teams for
boats based on the Ted Jones
designed Slo-Mo-Shuns. And In the end,
it can be seen that without Ted Jones there would have
been no Slo-Mo-Shun IV , and that
once Ted left the Sayres operation in 1951, Jensen Motorboats
built no more new hydroplanes. Anchor Jensen was a builder,
not a designer, and without Jones’
designs, Jensen Motorboats was out of the raceboat
business except as a repair facility
From the Court document:
In the design, construction, operation, and maintenance of Slo-Mo-Shun III, the petitioner (Sayres)
retained technical assistance of experts who were recognized as
outstanding in their fields. Since Ted
Jones, the boat designer, was employed on a full-time basis
as an engineer with an airplane company,
his work for the petitioner was done at nights, on weekends,
and on holidays. Anchor
Jensen, of the local boat-building firm, Jensen Motor Boat
Company, was the builder.
Here is early Sayres testimony noting Ted hired as the
designer, Jensen as builder.
From the Court document:
The petitioner, Jones, and Jensen watched the 1948, Gold
Cup races in
their experience with the first Slo-Mo-Shun
and Slo-Mo-Shun II and III they recognized the
tremendous
room for improvement in the designing of racing boats. At that time they
also recognized the possibility
of
profit to be made in the designing, construction, and sale of racing boats.
They considered the possibility
that the Navy might become interested in the basic design of these fast
boats and might become an
important customer.
Jones proceeded to design Slo-Mo-Shun IV which would be revolutionary in the field of unlimited
hydroplane boats. He used the identical design which he had used for years in building and racing
limited class boats. By August 1949, Jones and the petitioner
concluded that Slo-Mo-Shun IV,
which was then in the process of construction, would prove to be
far superior to boats currently
being used.
Here, Sayres testimony points to a conclusion reached
following a scouting trip to the Gold Cup race in
1948 that Ted Jones’ design (as presented in Slo-Mo-Shun III) had great potential, both in racing and
possible commercial application. And that Jones designed the
revolutionary Slo-Mo-Shun IV by adding
improvments to his established designs.
From the Court document:
On June 26, 1950, Slo-Mo-Shun IV,
driven by the petitioner on
world straightaway speed record of 160 m.p.h., breaking the
11-year-old record of 141 m.p.h.
Recognizing the capabilities of this boat and the
possibility of still further improvements of design
in a model to be built, the petitioner sought a contractual
arrangement which would include Ted
Jones, the designer, and Anchor Jensen, the builder.
However, because of disagreement as to
technical engineering principles Jones refused to sign an agreement
which would include Jensen as
a party.
On July 17, 1950, an agreement was executed 'by and between
AMERICAN PROPERTIES, INC.,
(and/or S. S. Sayres) party of the First Part, and TED O.
JONES, Party of the Second Part,' which
provided that whereas the first party (Sayres) had financed
construction of Slo-Mo-Shun III and
Slo-Mo-Shun IV and whereas second party (Jones) designed both
of those boats and assisted in
development, construction, and testing the parties agreed as follows:
The second party (Jones) agreed to work exclusively for the
first party (Sayres) in the design and
development of 'GOLD 'CUP' and 'UNLIMITED' classes of racing boats
during the existence of
the contract and a period of 1 year thereafter; second party
(Jones) agreed not to disclose to
others any basic or essential features of design, construction, or
development; first party (Sayres)
agreed that when constructing racing boats, only second party
(Jones) would be employed to
design such boats and to supervise construction, and that upon all boats sold by first party (Sayres), in
whom title should always rest, second party (Jones) would receive a fee of
$5,000 or 10 per cent of sale
price, whichever was greater, this being in addition to time and
material charges such as had been paid in
the
past; first party (Sayres) agreed that if Slo-Mo-Shun
IV should be sold for an amount greater than
cost, first party (Sayres) would pay second party (Jones) 10 per cent of
actual netprofit after taxes, or a
flat sum of $5,000 whichever was greater, in which case second party (Jones)
would, in consideration
thereof, design a new unlimited class racing boat for first party
(Sayres) at no additional fee; both parties
agreed that in event of any sale of plans and designs of Gold Cup
and unlimited boats, first party
(Sayres) would pay second party (Jones) a fee of $2,500
together with traveling expenses and a fee of
$25 per day actually spent in supervising construction. It was provided that the agreement should
continue until terminated by written notice of either party, giving
180 days' notice. It was signed
by S. S. Sayres as president of American Properties, Inc., and
in his individual capacity, and by
Jones.
Here, the court notes Sayres contracted Jones to be
designer of his boats and superintendent of their
construction, and it outlines the agreement both signed. Note that
the contract did not include or extend
to Anchor Jensen, and was, at Jones insistence, split from agreements
dealing with boat construction.
From the Court document:
On July 22, 1950, Slo-Mo-Shun IV,
driven by Ted Jones, won the Gold Cup race. Following
that, Jones
was approached by others seeking boats of the design of Slo-Mo-Shun IV. Horace Dodge sought to
have two boats built, offering $50,000 per boat. Jones sought
approval of the petitioner which was
refused.
The court notes how successful racing team owner Horace
Dodge sought out designer Jones in hopes of
having two boats of the Slo-Mo-Shun
design built, how Jones reported Dodge’s offer to Sayres, and how
Sayres refused the offer. Note that only Jones and Sayres
were involved, not Jensen.
From the Court document:
In February 1951 construction of Slo-mo-Shun
V was commenced for the purpose of entering the 1951
Gold Cup races. The petitioner prevailed upon Jones and Jensen to work
together in the construction of
the
boat. The boat was constructed at the
premises of the Jensen Motor Boat Company under the
supervision of Jones and with the aid of some of Jensen's boat
builders. The boat was completed
by the end of July 1951. Jones received $5,000 for designing Slo-Mo-Shun V in addition to compensation
received on an hourly basis for its construction.
Again, the court notes Sayres testimony that Ted Jones
was designer, and was paid per the contract.
From the Court document:
About November 1, 1951, Ted Jones left
another concern. He thus ceased to operate under the agreement of
1950. No formal notice of
termination of the contract was ever given by either party. Because he
felt restrained by the contract
of 1950, Jones did not, for a number of years, build any boats
for others of the design of the
Slo-Mo-Shun boats, although he had many
opportunities to do so. However,
commencing in
January 1954, he did design a number of boats for various
individuals throughout the country,
employing the design of the Slo-Mo-Shun
boats. At the time of the hearing in this case in 1956,
there were about 20 boats eligible for competition in the
unlimited class, of which all but 4 were of
the basic Slo-Mo-Shun design.
The Court notes Ted Jones departure from the Sayres team
in 1951 to work for Mercury Marine, and
Jones’ adherance to the
non-disclosure portion of the contract because he felt it an obligation. It
also
notes that by the time Jones did resume designing and building
in 1954 with the Rebel Suh (later named
Maverick) and Miss Thriftway, some 16 Slo-Mo-Shun
copy-variants had been constructed by others.
Noting the $50,000 price Horace Dodge offered and the
$30,000 price (not noted in the document) that
Ted Jones charged for boats such as Shanty I and Miss
Wahoo, it can be seen that by adhering to felt
obligations, Jones, missed an opportunity to earn a sum of roughly
$500,000 to $800,000, a huge
amount of money at that time. Meanwhile, Jensen, who’s
family claims was the Slo-Mo-Shun designer,
and who likely would have relished such income, offered no
such designs or any new boat construction
following the building of Ted Jones’ Slo-Mo-Shun
V despite an open opportunity to do so.
From the Court document:
The members of the crew of these boats included highly
skilled technicians who worked on the various
Slo-Mo-Shun boats in their spare time since
they were full-time employees of other organizations. None
of
them was employed by either American Properties, Inc., or American Automobile
Company. Jones
was compensated for designing the boats and Jensen was paid for
his work in building them.
Once again, the court notes Sayres testimony regarding
who was designer and who was builder.
.
From the Court document:
Despite the fact that Slo-mo-Shun
IV did establish a new world speed record in June 1950 and did win
the
Gold Cup in July of that year, the
corporation, which had no boat-building facilities and had no
continuing contract with Jensen for building, did not proceed to
provide boat-building facilities or take
the
ordinary steps which might be expected of a business organization looking
toward making a profit,
such as advertising or making other selling attempts. On the contrary, when Slo-Mo-Shun
IV won the
Gold Cup race, Jones, the designer and driver, was
approached by others seeking boats of this design
and one person offered large prices for two boats, but when
Jones relayed these offers to the petitioner
the latter told him (T)HAT we wouldn’t be building for
anyone.
The tax court, through testimony of Sayres, notes Jensen
as builder and Jones the designer. And once
again It’s noted that though Sayres claimed he planned
to build and sell boats based on the Slo-Mo-Shun
design, and had Ted Jones under contract to design and
supervise construction of such boats, he declined
a
bonafide customer offer to pay $100,000 for two
boats. When Jones understood that Sayres wouldn’t
be building more boats, and left for Mercury, the door was open with
some 16 opportunities for Anchor
Jensen and his Motorboat Company to design and build the
very sort of boats that the Jensen family
claims Anchor had invented, and built for Sayres, yet Jensen
never took that opportunity to design or
build a single one.
From the Court document:
About November 1, 1951, Jones left
the
east. In January 1954, he commenced building boats of the Slo-Mo-Shun
design for various
individuals. The petitioner
(Sayres) testified that Jones’s departure was the reason that the
originally conceived idea of producing racing boats did not ultimately
materialize on a commercial
basis. No reason is given
for his departure and we think it is indicative that he was convinced that
there
would be no commercialization of the boats.
This is the clincher. Sayres has told the court that the
reason he did not go into the race boat building
business was that Ted Jones had stepped out of the picture. Without Ted Jones, Sayres had no boat
designer. He did have the Jensen Motorboat Company and Anchor
Jensen as a builder, but it’s clear from
Sayres’ testimony that he placed
his faith in Ted Jones design talents, and not in Anchor Jensen.
