Bennett Paper Corporation v. Commissioner

Bennett Paper Corporation (Bennett) (plaintiff) manufactured corrugated boxes and various paper packaging products. In August 1974, Bennett formed a wholly owned subsidiary called the Commodores International Yacht Club, Inc. (CIYC) to establish a marina and yacht club. In the fall of 1974, CIYC began leasing unimproved waterfront land on which it planned to develop and operate a marina and yacht club. CIYC soon realized, however, that it would be more cost-effective to purchase an existing marina facility. By the end of December 1974, CIYC had not yet acquired a marina or marina facility; it recorded no gross receipts; it had no yacht club members, facilities, boats, or other necessary equipment; it owned no depreciable property; and it had no reciprocal membership privileges with other marinas or yacht clubs. In March 1975, CIYC finally purchased an existing marina and began operations. On its 1974 federal tax return, Bennett claimed a $57,870 deduction for business expenses incurred by CIYC during that year. The commissioner of the Internal Revenue Service (defendant) disallowed the deduction, arguing that because CIYC was not carrying on a trade or business at the time the expenses were incurred, they were nondeductible preopening expenses, which must be capitalized. Bennett petitioned the United States Tax Court for a redetermination.