Belser v. Comm'r of Internal Revenue, Docket No. 97873.

• Citation: 10 T.C. 1031
• Decision Date: 07 June 1948
• Docket Number: Docket No. 97873.
• Parties: IRVINE F. BELSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

10 T.C. 1031

IRVINE F. BELSER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 97873.

Tax Court of the United States.

Promulgated June 7, 1948.

1. The taxpayer purchased all the shares of a corporation which acquired two farms and he thereafter made loans and advances to the corporation. Prior to 1932 the corporation had divested itself of the farms, retaining no assets, and mortgages on the farms, securing the taxpayer's loans, had been extinguished. The cost of the shares and the amount of the loans, held, not deductible in 1932 because shares and loans became worthless in prior years.

2. The taxpayer, a lawyer, was appointed special counsel for a state railroad commission at an annual salary. He continued his private law practice and, in handling cases assigned him by the state, exercised independent judgment. Held, the taxpayer was an independent contractor, not an officer or employee of the state, and his compensation for services as special counsel was not exempt from Federal income tax under the interpretation of the law prevailing in 1932.

3. Expenses claimed by the taxpayer as incurred and paid in connection with his practice of law, held, deductible as to some proved paid in 1932 and nondeductible as to others not so proved.

4. The taxpayer prepared his 1932 income tax return a few days after expiration of the period for filing, as extended, and prepared a check in the amount shown due and a statement explanatory of the delay. He left these papers with his secretary for mailing. The collector has no record of receiving them, and the check was never returned cashed. Held, that petitioner has failed to prove the filling of an income tax return for 1932, and imposition of the 25 per cent penalty for failure to file is approved. Sec. 291, Revenue Act of 1932. Clint T. Graydon, Esq., for the petitioner.

F. L. Van Haaften, Esq., for the respondent.

The Commissioner determined a deficiency of $3,974.08 in petitioner's income tax for 1932 and a penalty of $993.52 for failure to file a return. Petitioner charges that the Commissioner erred (1) in failing to deduct $24,000 from gross income on account of the alleged worthlessness of petitioner's shares in and loans to a corporation of which he was sole shareholder; (2) by including in taxable income compensation for services rendered as special attorney to the Railroad Commission of South Carolina; (3) by failing to deduct estimated business expenses; and (4) by asserting the 25 per cent delinquency penalty. Petitioner alleges that he mailed his 1932 tax return and adequately explained a delay in filing it. The Commissioner denies receipt.

FINDINGS OF FACT.

Petitioner, a resident of Columbia, South Carolina, normally files his income tax returns with the collector of internal revenue for the district of South Carolina. He reports income on the cash basis. He has been engaged in the practice of law at Columbia since 1915, and in 1932 received fees aggregating about $40,000. He was married in 1914 to May H. Belser, who died in 1942.

1. In August 1919 petitioner contracted to purchase 331 acres of farm land from W. W. DePriest for $20,000, and 424.05 acres from John W. Stewart for $21,202.50. In making these contracts he acted for R. B. Herbert, W. M. Manning, John T. Sloan, and himself, who had agreed to and did organize the Fairview Farming Co. (hereinafter called the company) as a South Carolina corporation on December 11, 1919, to take title to these lands. The purpose of the company, as stated in its charter, was ‘to do a general farming business with power to sell, buy and mortgage real estate.‘ Each of the 4 incorporators subscribed for 50 shares of stock of a par value of $100 a share, and each paid to the company $3,600 cash and gave his note for $1,400.

On January 6, 1920, DePriest conveyed the 331-acre tract to the company, which paid him $6,666.67 cash and gave him a mortgage on the property to secure payment of the remaining $13,333.33. On March 12, 1920, Stewart conveyed the 424-acre tract to the company, which paid him the $21,202.50 in cash. The funds needed beyond the company's capital were supplied by a loan of $10,000 from a Winnsboro, South Carolina, bank, secured by a mortgage on the Stewart tract, and by petitioner, who borrowed $12,000 from the Homestead Building & Loan Co., securing repayment by a mortgage on his home. Of the authorized capital of $25,000 represented by 250 shares, the company issued a certificate for 50 shares to each of the four incorporators on March 25, 1920, and on the same day Herbert and Sloan assigned their shares to petitioner, and Manning assigned his to petitioner's wife, but petitioner was beneficial owner. Each transferee received from petitioner $3,600 in cash and petitioner's note for $1,500 as consideration for the assignment, but because of petitioner's subsequent financial difficulties payment of the notes was forgiven by the creditors. The two tracts of land were the only assets that the company ever owned.

In 1921 the company borrowed $1,000 from petitioner, giving him a second mortgage on the DePriest tract, and petitioner borrowed $5,000 from his brother-in-law, which loan was secured by a third mortgage on the DePriest tract. The money procured was applied by the company to partial payment of the first mortgage note held by DePriest. When a further installment of the purchase price became due in 1922, petitioner and his wife, as sole directors and stockholders of the company, by resolution approved a sale of the tract to petitioner for $4 ‘for the purpose of facilitating a loan to take up the purchase money mortgage‘ and in view of the company's indebtedness to petitioner. The company conveyed the tract to petitioner by deed dated July 27, 1922, and on July 31, 1922, he conveyed it by mortgage deed to the First Carolinas Joint Stock Land Bank, to secure a loan of $7,200, which was used to pay off the purchase price.

When the $10,000 note due the Winnsboro bank matured, the company paid off the debt by a $10,000 loan from the Fidelity Mutual Life Insurance Co., conveying the Stewart tract to the latter by a mortgage deed of December 4, 1920, to secure payment. On December 15, 1920, the company gave petitioner a second mortgage deed to this property to secure a $5,000 loan from him, and January 27, 1923, gave petitioner a third mortgage deed to this property to secure $3,500 loan from him.

While the company was borrowing money secured by mortgages on the two tracts, petitioner was using its shares as collateral for loans to him, individually. On November 30, 1921, he gave to the National Loan & Exchange Bank his notes for $14,350, $5,000, $1,661.04, and $150, respectively, all payable in one year and secured by 100 shares of the company, 125 shares of Clarendon Farms, Inc., the $5,000 note, due him, covered by a second mortgage on the Stewart tract, and certain share-cropping agreements. While the 100 shares of the corporation were thus pledged as collateral, petitioner on March 14, 1922, had its authorized capital reduced to $5,000, but he neither notified the bank of this act nor canceled any certificates. He defaulted on payment of all the notes, the bank sued, and on June 27, 1923, the court gave judgment against him for principal of $21,161.04, interest of $963.48, attorney's fees of $250, and costs of $7.40, or a total of $22,381.92, and ordered that if the judgment were unsatisfied within 90 days the collateral be sold. On January 15, 1924, the company deeded to the bank the Stewart tract, subject to the $10,000 first mortgage, the $5,000 second mortgage, which latter the bank held as collateral, and the $3,500 third mortgage.

On December 22, 1926, the corporation's charter was canceled by the Secretary of State of South Carolina for nonpayment of the capital stock tax.

On July 6, 1929, petitioner paid the bank $1,000 on the judgment and the bank agreed that if he should pay $500 more by November 1, 1929, it would convey the Stewart tract to any person or corporation designated by him for the grantee's note of $18,500, secured by a first mortgage on the tract. The agreement contemplated removal of other mortgage liens; referred to the total payments involved ($1,000, $500, and $18,500), or $20,000, as ‘the purchase price‘ of the tract, and provided further that if petitioner should pay the bank $5,000 (inclusive of the $1,000 and $500 referred to) by November 1, 1933, the bank, at petitioner's election, would either satisfy its judgment or assign the judgment to any person or corporation designated by petitioner. In order that the bank could secure a first mortgage on the tract, the parties agreed that petitioner either cancel or postpone the lien of the third mortgage, securing payment of the note for $3,500, and that the bank cancel and satisfy the first mortgage securing the $10,000 loan of the Fidelity Mutual Life Insurance Co., ‘as well as the mortgage of Fairview Farming Company to Irvine F. Belser, dated December 15, 1920,‘ which secured petitioner's $5,000 loan to the company and which had been assigned to the bank. Petitioner formally declared the indebtedness of $3,500 satisfied and the third mortgage discharged by instrument dated February 28, 1930.

Petitioner made the payments required by this agreement, and on February 28, 1930, organized the Fairview Co. (hereinafter called Fairview), as a South Carolina corporation to take title to the Stewart tract. He acquired all of its 100 shares of stock, having an aggregate par value of $1,000. On February 28, 1930, the bank conveyed to Fairview the Stewart tract, and on March 15, 1930, petitioner conveyed to Fairview the DePriest tract. Fairview's charter was canceled on December 10, 1930, for nonpayment of the capital stock tax.

In 1932 petitioner paid off the note secured by the Stewart tract; the bank released its mortgage, and on January 20, 1932, the bank assigned its judgment against p...