## Facts

- Nicholls, North, Buse Co. was a Wisconsin corporation engaged in brokerage services and lending to small canning companies.
- Herbert A. Resenhoeft was president and a director; he and his wife Charlotte owned all voting common stock, and their sons held nonvoting stock.
- The corporation bought a boat with corporate funds pursuant to unanimous board approval.
- The boat was used for both business entertainment and personal recreation; Herbert’s sons used it freely for personal purposes, and Herbert did not operate it.
- The corporation claimed depreciation, operating expenses, and an investment tax credit relating to the boat.
- The IRS disallowed the corporation’s depreciation, operating expenses, and investment credit for the boat.
- The IRS also asserted a constructive dividend to Herbert; the asserted measure shifted from the boat’s purchase price (plus expenses) to the fair rental value of the boat’s use.
- The only issue for 1963 was resolved by stipulation; the remaining issues were tried for 1964, with the final computations to be entered under the Tax Court’s Rule 50 procedure.

## Issues

1. Whether the corporation could deduct depreciation and operating expenses and claim an investment tax credit for the boat under the substantiation requirements applicable to entertainment facilities.
2. Whether personal use of the corporate boat by the controlling shareholder’s family produced a constructive dividend to the controlling shareholder.
3. If a constructive dividend occurred, whether it should be measured by the boat’s acquisition cost (and related expenses) or by the fair rental value of the personal use.

## Decision

- The Tax Court sustained the IRS’s disallowance of the corporation’s depreciation, operating expenses, and investment tax credit for the boat because the corporation failed to meet the substantiation requirements of I.R.C. § 274.
- The court held that Herbert received a constructive dividend from his sons’ personal use of the corporate boat, notwithstanding a son’s minority ownership interest, because Herbert controlled the corporation and the facility.
- The court held that the constructive dividend was measured by the fair rental value of the boat for the relevant period, not by the boat’s total acquisition cost.
- The final deficiency amounts were left for computation under Rule 50.

## Legal Principles

- Deductions and credits relating to an “entertainment facility” are subject to strict substantiation under I.R.C. § 274(d); inadequate records can result in denial of the claimed depreciation, operating expenses, and related credits.
- Once personal use of an entertainment facility is shown, the taxpayer must prove with specific evidence the limited extent of business use; the business identity of guests is insufficient, by itself, to substantiate business purpose.
- A constructive dividend may arise when a closely held corporation confers personal benefits through corporate property; personal use by a shareholder’s family can be treated as a distribution to a controlling shareholder.
- When the corporation owns the facility and allows personal use, the constructive dividend is generally measured by the fair rental value of the use during the period in question, rather than the cost to acquire the asset.

## Conclusion

The Tax Court denied all yacht-related depreciation, expense deductions, and investment credit for failure to substantiate business use under § 274, and it taxed the controlling shareholder on a constructive dividend equal to the fair rental value of the family’s personal use of the corporate boat.


Nicholls, North, Buse Co. v. Comm’r, 56 T.C. 1225 (1971)