Scott, Judge:
Respondent determined deficiencies in petitioner’s income tax for the taxable years 1970,1971,1972, and 1973 in the amounts of $4,643, $29,247, $32,852, and $4,284, respectively-
The issues for decision are:
(1) Whether under section 482, I.R.C. 1954,1 respondent properly allocated to petitioner for each of the years 1971,1972, and 1973 additional rental income from a motel facility owned by petitioner and rented by him to a corporation the stock of which was owned 76 percent by him and 24 percent by his two sons.
(2) Whether respondent properly disallowed investment credits claimed by petitioner for each of the years 1971, 1972, and 1973 with respect to certain personal property included in the furnishings and fixtures of the motel facility rented by petitioner to the corporation during the years 1971, 1972, and 1973.
The year 1970 is involved in this case only because of the elimination of a tentative allowance of a loss carryback from the year 1973 and an investment credit carryback from 1973. The correctness of these adjustments is dependent upon the determination of the other issues presented in this case.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner, an individual who resided in Junction City, Kans., at the time of the filing of the petition in this case, filed a joint Federal income tax return for each of the years 1970 and 1971 with his wife, Patricia Fegan, who died January 10, 1971. For the calendar years 1972 and 1973, petitioner filed an individual Federal income tax return as a single taxpayer. Petitioner’s returns for each of these years was filed with the Internal Revenue Service Center at Austin, Tex. These returns were prepared on the cash receipts and disbursements method of accounting.
Fegan Enterprises, Inc. (Enterprises), is a Kansas corporation which was incorporated on January 2, 1970. Approximately 76 percent of Enterprises’ stock was owned during the years here in issue by petitioner and the balance of the stock was owned equally by petitioner’s two sons, T. Michael Fegan (Michael) and Robert R. Fegan (Robert). During the years here in issue, petitioner was the president of Enterprises. He received no compensation for his services as president during any of the years here in issue. During these years petitioner was also vice president of the Junction City Telephone Co. and was compensated for his services in this capacity. Petitioner’s son Michael was vice president of Enterprises and his son Robert was secretary. Both Michael and Robert received compensation for their services to Enterprises during the years here in issue— Michael receiving $4,500, $3,600, and $4,800 for the fiscal years of Enterprises ending November 30 of 1971, 1972, and 1973, respectively, and Robert receiving $2,400, $3,600, and $400 for these respective fiscal years of Enterprises.
At the time Enterprises was incorporated, petitioner transferred to the corporation between 18 and 20 properties previously owned by him individually which at the time of transfer had a total value of approximately $350,000. During the years 1970 through 1973, petitioner made interest-free loans to Enterprises without security or formal evidence of the indebtedness. As of November 30, 1971, 1972, and 1973, the balance of the outstanding loans from petitioner to Enterprises amounted to $93,064.66, $80,621.01, and $83,774.38, respectively.
In 1961, petitioner and several other persons formed a corporation which built a motel in Junction City. The motel, known as the Continental Host, was owned and operated by the corporation. Sometime after its formation, the corporation became a subchapter S corporation. Petitioner became interested in the actual operation of the Continental Host Motel sometime after the commencement of its operation and for the period from late 1968 until sometime in 1969 took an active interest in the operation of the motel.
The motel business was sold by the subchapter S corporation in 1969.
Petitioner had for a number of years prior to the years here in issue owned various types of interests in real estate. During his active business career he had acquired around 50 properties, some of which he had sold after their acquisition. In 1966, petitioner commenced operation of a cocktail lounge through a corporation — the Lantern Club, d.b.a. the Torchlight Lounge. Initially this cocktail lounge was operated in the Continental Host Motel.
In 1969, petitioner became interested in the possibility of construction of a motel in Junction City, Kans., with the idea of obtaining a national franchise under which the motel would be operated. In furtherance of his plan, petitioner engaged a firm of certified public accountants to make a study on market demands and economic feasibility for a proposed motor inn in Junction City, Kans. This firm furnished petitioner with a report dated September 1969 which stated that after considering the economic conditions existing in Junction City, it was concluded that the area could support a 100-room motor inn facility to be located in the place petitioner was considering building a motel if the motel was operated with a national affiliation and referral service. This report pointed out the dependence of Junction City on activities at the nearby army post, Fort Riley, and on tourist business available from tourists visiting the historic attractions at Fort Riley and the Eisenhower Center at nearby Abilene, Kans. The report also pointed out that at times motel rooms were in demand by persons attending athletic events at Kansas State University, Manhattan, Kans., approximately 19 miles from Junction City.
The report analyzed the rooms presently available in Junction City and the surrounding area, as well as the restaurant facilities available in Junction City. With respect to the analysis of operation of restaurant facilities, the report stated the opinion that: “a first-class distinctive atmosphere restaurant offering quality food, excellent service, and moderate prices would receive strong support from both local residents and transient guests.”
With respect to room occupancy, the report estimated the share of the market that could realistically be obtained by a 100-room facility, located where petitioner proposed to locate the motel, to be between 23,000 and 26,000 room nights annually or an occupancy level between 65 percent and 70 percent. The report stated that this occupancy would be between 42 and 47 percent of the total room demand in Junction City and surrounding areas, but in the opinion of the writer the favorable location of the motel, coupled with a national affiliation and referral service, would enable the motel to capture an above average share of the market.
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Scott, Judge:
Respondent determined deficiencies in petitioner’s income tax for the taxable years 1970,1971,1972, and 1973 in the amounts of $4,643, $29,247, $32,852, and $4,284, respectively-
The issues for decision are:
(1) Whether under section 482, I.R.C. 1954,1 respondent properly allocated to petitioner for each of the years 1971,1972, and 1973 additional rental income from a motel facility owned by petitioner and rented by him to a corporation the stock of which was owned 76 percent by him and 24 percent by his two sons.
(2) Whether respondent properly disallowed investment credits claimed by petitioner for each of the years 1971, 1972, and 1973 with respect to certain personal property included in the furnishings and fixtures of the motel facility rented by petitioner to the corporation during the years 1971, 1972, and 1973.
The year 1970 is involved in this case only because of the elimination of a tentative allowance of a loss carryback from the year 1973 and an investment credit carryback from 1973. The correctness of these adjustments is dependent upon the determination of the other issues presented in this case.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner, an individual who resided in Junction City, Kans., at the time of the filing of the petition in this case, filed a joint Federal income tax return for each of the years 1970 and 1971 with his wife, Patricia Fegan, who died January 10, 1971. For the calendar years 1972 and 1973, petitioner filed an individual Federal income tax return as a single taxpayer. Petitioner’s returns for each of these years was filed with the Internal Revenue Service Center at Austin, Tex. These returns were prepared on the cash receipts and disbursements method of accounting.
Fegan Enterprises, Inc. (Enterprises), is a Kansas corporation which was incorporated on January 2, 1970. Approximately 76 percent of Enterprises’ stock was owned during the years here in issue by petitioner and the balance of the stock was owned equally by petitioner’s two sons, T. Michael Fegan (Michael) and Robert R. Fegan (Robert). During the years here in issue, petitioner was the president of Enterprises. He received no compensation for his services as president during any of the years here in issue. During these years petitioner was also vice president of the Junction City Telephone Co. and was compensated for his services in this capacity. Petitioner’s son Michael was vice president of Enterprises and his son Robert was secretary. Both Michael and Robert received compensation for their services to Enterprises during the years here in issue— Michael receiving $4,500, $3,600, and $4,800 for the fiscal years of Enterprises ending November 30 of 1971, 1972, and 1973, respectively, and Robert receiving $2,400, $3,600, and $400 for these respective fiscal years of Enterprises.
At the time Enterprises was incorporated, petitioner transferred to the corporation between 18 and 20 properties previously owned by him individually which at the time of transfer had a total value of approximately $350,000. During the years 1970 through 1973, petitioner made interest-free loans to Enterprises without security or formal evidence of the indebtedness. As of November 30, 1971, 1972, and 1973, the balance of the outstanding loans from petitioner to Enterprises amounted to $93,064.66, $80,621.01, and $83,774.38, respectively.
In 1961, petitioner and several other persons formed a corporation which built a motel in Junction City. The motel, known as the Continental Host, was owned and operated by the corporation. Sometime after its formation, the corporation became a subchapter S corporation. Petitioner became interested in the actual operation of the Continental Host Motel sometime after the commencement of its operation and for the period from late 1968 until sometime in 1969 took an active interest in the operation of the motel.
The motel business was sold by the subchapter S corporation in 1969.
Petitioner had for a number of years prior to the years here in issue owned various types of interests in real estate. During his active business career he had acquired around 50 properties, some of which he had sold after their acquisition. In 1966, petitioner commenced operation of a cocktail lounge through a corporation — the Lantern Club, d.b.a. the Torchlight Lounge. Initially this cocktail lounge was operated in the Continental Host Motel.
In 1969, petitioner became interested in the possibility of construction of a motel in Junction City, Kans., with the idea of obtaining a national franchise under which the motel would be operated. In furtherance of his plan, petitioner engaged a firm of certified public accountants to make a study on market demands and economic feasibility for a proposed motor inn in Junction City, Kans. This firm furnished petitioner with a report dated September 1969 which stated that after considering the economic conditions existing in Junction City, it was concluded that the area could support a 100-room motor inn facility to be located in the place petitioner was considering building a motel if the motel was operated with a national affiliation and referral service. This report pointed out the dependence of Junction City on activities at the nearby army post, Fort Riley, and on tourist business available from tourists visiting the historic attractions at Fort Riley and the Eisenhower Center at nearby Abilene, Kans. The report also pointed out that at times motel rooms were in demand by persons attending athletic events at Kansas State University, Manhattan, Kans., approximately 19 miles from Junction City.
The report analyzed the rooms presently available in Junction City and the surrounding area, as well as the restaurant facilities available in Junction City. With respect to the analysis of operation of restaurant facilities, the report stated the opinion that: “a first-class distinctive atmosphere restaurant offering quality food, excellent service, and moderate prices would receive strong support from both local residents and transient guests.”
With respect to room occupancy, the report estimated the share of the market that could realistically be obtained by a 100-room facility, located where petitioner proposed to locate the motel, to be between 23,000 and 26,000 room nights annually or an occupancy level between 65 percent and 70 percent. The report stated that this occupancy would be between 42 and 47 percent of the total room demand in Junction City and surrounding areas, but in the opinion of the writer the favorable location of the motel, coupled with a national affiliation and referral service, would enable the motel to capture an above average share of the market.
The report recommended a rate structure of $10 to $12 for single rooms and $13 to $15 for double rooms, scaled to attain an average rate of between $10.50 and $11.50 per day per room. The report pointed out that it was customary in the area to allow a discount of $1 to certain commercial customers and to charge $1 per room more during the summer months when the tourist trade was more available than in the winter months. The report recommended building the motel in such a manner that 30 of the 100 rooms could be closed off during the winter months when demand for rooms was low, thereby saving utility and related costs with respect to vacant rooms.
Attached to the report was a statement of estimated income and expenses for a proposed 100-room motor inn with 36,500 rooms available annually. This report showed the income expectations on the basis of various percentages of occupancy. (See table on p. 795.)
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The report concluded that a profit before depreciation, rent, interest, amortization, and income taxes, but including $85,000 profits from lease of stores including a private club cocktail lounge, of $115,000, $139,000, and $166,000, could be anticipated based on 65-percent occupancy, 70-percent occupancy, and 75-percent occupancy, respectively.
After receiving this report, petitioner proceeded with the construction of the motel facility. One reason petitioner had the study made was that he was attempting to obtain a franchise from the Downtowner Corp. to operate the motel as a Downtowner Motor Inn. In late 1969 or early 1970, prior to the completion of construction of the motel, petitioner did receive this franchise in his personal name.
When petitioner commenced construction of the motel he planned to operate it through Enterprises. However, after the death of his wife in early January 1971, petitioner began investigating the possibility of leasing the motel properties to an unrelated motel operation with a national affiliation. He discussed the proposition with the representatives of several national chains, but the only offer he actually received was from Royal Inns. The offer from Royal Inns was for rental only of the rooms and lobby area, excluding the dining room and kitchen facilities, since Royal Inns was not interested in operating the dining facilities. The offer of Royal Inns was to pay a rental of 27 percent of gross room receipts to petitioner. Petitioner concluded that the Royal Inns did not have the financial stability which he wanted in a lessee.
Petitioner obtained a loan in the amount of $350,000 from Capital Federal Savings & Loan, Topeka, Kans., to partially finance the construction of the motel facility. In late 1970, petitioner had obtained a commitment for a loan up to $450,000, but did not draw any amount on the commitment until about July of 1971 and did not draw the final portion of the $350,000 until August or early September of 1971. He drew in total only $350,000 of the committed amount. Petitioner and Enterprises had agreed to the terms of a lease agreement for the motel properties prior to the time petitioner drew the final amount of the $350,000 loan. The loan agreement wdth Capital Federal Savings & Loan provided for monthly payments of principal and interest in the total amount of $3,800 to be paid over the 14-year life of the financing agreement. Petitioner made the first $3,800 payment on October 1,1971.
On June 25, 1971, prior to the opening of the motel in early August 1971, petitioner leased a “clubroom” in the motel approximately 27 feet by 54 feet to his cocktail lounge, the Lantern Club, d.b.a. the Torchlight Lounge, in order to move the operation from the Continental Host over to the new motel. The rental provided for in the lease agreement was $400 monthly. On June 15,1971, petitioner leased the north one-half of the annex building of the motel property to his son, Michael, for $125 monthly, the premises to be used for operating a retail liquor store. In this lease, petitioner agreed to pay all utilities, except telephone, with respect to the premises.
During 1971, petitioner leased a portion of the motel facilities to Enterprises for use as a motel and restaurant for a term of 10 years. Operation of the motel began in early August 1971 and the ceremonies of the opening of the motel were held on September 16, 1971. From the time of commencement of operation of the motel in August 1971, the operation was carried on by Enterprises.
Petitioner and Enterprises had agreed to terms for the leasing by Enterprises of the motel properties owned by petitioner, and petitioner’s attorney had prepared for petitioner a document entitled “Lease and Operation Agreement” providing for the leasing by Enterprises of the motel properties in accordance with the agreement between petitioner and Enterprises several months prior to December 1, 1971. The terms of the document incorporated petitioner’s understanding of the agreement between himself and Enterprises, and the document as initially drafted by the attorney was subsequently executed by petitioner personally and petitioner as president of Enterprises, except that the space left blank for the date the lease was entered into was filled in with handwriting in ink. The first paragraph of the executed lease states that the agreement is “made and entered into” by the parties “this 1st day of Dec. 1971.” The handwritten notation “1st” and “Dec. 1971” were inserted by petitioner in the typewritten agreement previously prepared for him by his lawyer. The lease and operation agreement provided for lease of the premises and use by Enterprises of the franchise which petitioner held in his own name from the Downtowner Motor Inn. The agreement, which contained 21 pages of detailed provisions, insofar as here pertinent, stated:
LEASE AND OPERATION AGREEMENT
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That Lessor, * * * does * * * lease * * * unto Lessee the land and premises being a Downtowner Motor Inn located in Geary County, Junction City, Kansas, and described as:
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said premises being leased, with certain exceptions set forth in the leases attached as Exhibit “I” and Exhibit “II” which are made a part hereof, together with all rights, privileges, easements and appurtenances thereunto belonging, including fixtures, equipment and furniture located on said premises,* * *
To Have And To Hold the leased premises as a Downtowner Motor Inn for a term beginning on_and ending_upon and subject to the terms, conditions, provisions and restrictions which the parties hereto mutually agree to observe, keep and perform, as follows, to-wit:
Article I
That Lessor, further grants to Lessee the exclusive right to operate, manage and administer the subject matter of this agreement only as a Downtowner Motor Inn. It is agreed that this grant is a part of this agreement and is subject to the terms, conditions, provisions and restrictions as herein set forth.
Article II
As rent for the leased premises, Lessor reserves and Lessee covenants and agrees to pay to Lessor, at the office of Lessor in Junction City, Kansas, or at such other place as Lessor may designate in writing from time to time, rent for and during the full term hereof, without notice or demand, as set forth on Exhibit “HI”.
Article YII,
Lessor shall keep and maintain the roof, exterior walls, foundations, gutters and downspouts of the building containing the leased premises in good condition and repair and shall make all repairs to said building required because of structural defects.
Subject to the duties and obligations of Lessor stated in the preceding paragraph of this article and elsewhere in this lease, Lessee shall keep and maintain the interior of the leased premises and the windows thereto in good condition and repair, damage by fire or other casualty and normal wear and tear and obsolescence excepted.
* * * * * * *
* * * * * * *
Article X
Lessee shall pay for the light, heat, power, water and all other utilities and utility services used on or about the leased premises and shall contract for the same in Lessee’s own name.
* * * * * * *
Article XIII
Lessee covenants and agrees to maintain at all times during the life of this lease public liability insurance under which Lessor shall be named as an insured, properly protecting and indemnifying Lessor, * * *
Article XIV
Lessee covenants and agrees to pay, before the same become delinquent and before interest begins to accrue thereon, all taxes and assessments, general and special, which have heretofore been or are during the life of this lease levied and assessed against the leased premises and the building containing same or appurtenances thereof, and parking and other areas serving same; * * *
Lessee further covenants and agrees to keep and maintain at all times during the life of this lease, fire and extended coverage insurance on the building containing (exclusive of foundations) the leased premises in an amount not less than ninety percent (90%) of their full insurable value. * * *
Article XXIV
Lessor hereby grants unto Lessee the sole, exclusive and continuing right and option, exercisable as herein provided, to extend the term of this lease for a period of ten (10) years from the end of the primary term and from the end of any two (2) successive ten (10) year extensions thereof, upon the same terms and conditions specified herein as to rent and otherwise.
Although in the formally signed lease agreement the term of the lease was left blank, in fact, the term was 10 years.
The exceptions to the leased premises attached as Exhibits I and II were the leases to Michael and to the Lantern Club. The third attachment to the lease with respect to rental provided for a minimum rental in the sum of $45,600 per year payable in advance in equal monthly installments of $3,800 due the first day of the month. In addition, there was a provision for percentage rental of a further sum. This provision stated:
(b) Percentage rent: The further sum each rent period of the lease term equal to twenty-five percent (25%) of Gross Room Rental above Two Hundred Fifty Thousand Dollars, ($250,000)