22 T.C. 1057 (1954), 35990, Bradford v. C.I.R.

Docket Nº:35990, 36895.
Citation:22 T.C. 1057
Opinion Judge:BRUCE, Judge:
Party Name:J. C. BRADFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ELEANOR A. BRADFORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:William Waller, Esq., and Lawrence Dortch, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
Case Date:August 18, 1954
Court:United States Tax Court
 
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Page 1057

22 T.C. 1057 (1954)

J. C. BRADFORD, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ELEANOR A. BRADFORD, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Nos. 35990, 36895.

United States Tax Court.

August 18, 1954

1. A dealer in securities realized a gain upon the sale of certain stocks to its customers in the ordinary course of its dealer business. Held, the gain constituted ordinary income rather than a capital gain.

2. Petitioner was released from his liability as endorser of a note upon part payment of the amount due. The creditor retained the note upon which there was an unpaid balance. Held, petitioner did not become subrogated to the rights of the creditor under Tennessee law, and the payment was not deductible as a worthless bad debt. The payment was deductible, however, as loss within the purview of section 23(e), Internal Revenue Code of 1939.

3. Petitioner's wife acquired certain rights in redemption of preferred shares given to her by petitioner. Included among the rights received were the right to purchase and sell FHA mortgage loans covering 383 houses and the benefits of a contract having no ascertainable fair market value entitling her to 20 per cent of the net income on power sold to the houses. Held, the gain realized on the rights constituted income to petitioner's wife rather than to petitioner. Petitioner's wife realized capital gains upon the sale of right to purchase and sell the FHA mortgages and upon the receipt of payments under the power contract.

4. In 1938 petitioner's wife gratuitously assumed $205,000 of petitioner's indebtedness to the bank. In 1946 $100,000 of the indebtedness was discharged for $50,000. Held, the indebtedness was that of petitioner's wife and not petitioner. The discharge of the $100,000 indebtedness for $50,000 did not represent a gift to petitioner's wife of $50,000 within the purview of section 22(b)(3), Internal Revenue Code of 1939, and she realized ordinary income in the amount of $50,000.

Page 1058

William Waller, Esq., and Lawrence Dortch, Esq., for the petitioners.

Homer F. Benson, Esq., for the respondent.

The respondent determined deficiencies in income tax of the petitioners as follows:

Year Deficiency

James C. Bradford 1943 $48,538.00

1944 658.49

1945 21,520.99

1946 103,461.29

Eleanor A. Bradford 1945 718.98

1946 69,942.79

James C. Brandford did not petition for a redetermination of the deficiency against him for the year 1944. Eleanor A. Bradford did not petition for a redetermination of the deficiency against her for the year 1945. The proceedings were consolidated. The issues for decision are:

1. Whether the Commissioner erred in determining that James C. Bradford's distributive share of the gain realized by a partnership in 1943 on the sale of certain stocks was ordinary income rather than capital gains. 2. Whether the Commissioner erred in failing to allow as a deduction the amount paid by James C. Bradford in 1943 to secure his release as an endorser on a note. 3. Whether the Commissioner erred in determining that the gains realized on certain rights received upon the redemption of preferred shares given to Eleanor A. Bradford by James C. Bradford were taxable to him rather than to her, and that the gains represented ordinary income rather than long-term capital gains.

Page 1059

4. Whether the Commissioner erred in determining that the discharge of a $100,000 note signed by Eleanor A. Bradford for $50,000 was not a gift but constituted ordinary income in the amount of $50,000, and that the income was taxable to James C. Bradford rather than Eleanor A. Bradford.

FINDINGS OF FACT. Issue I . Petitioners, James C. Bradford (hereinafter referred to as petitioner) and Eleanor A. Bradford (hereinafter referred to as Eleanor), are husband and wife, residing in Davidson County, Tennessee. They filed their returns for the calendar years involved with the collector of internal revenue for the district of Tennessee. Petitioner was, during the years in question, a member of J. C. Bradford and Co., a partnership engaged in the investment banking and securities business in Nashville, Tennessee. J. C. Bradford and Co. was a member of the New York Stock Exchange and the scope of its business included underwriting and dealing in securities, buying various forms of obligations, and general financing apart from commercial banking. Throughout 1943 J. C. Bradford and Co. actively bought and sold, in the ordinary course of its dealer business, stocks of two local insurance companies, National Life and Accident Insurance Company and Life and Casualty Insurance Company. At some time prior to April 17, 1943, it became obvious to the members of J. C. Bradford and Co. that both of the named companies would pay large stock dividends later in the year 1943 which would enhance the price of the stock. It seemed to the members of the firm an opportunity to realize a capital gain rather than ordinary income on the resale of the stock. On March 25, 1943, J. C. Bradford and Co. and purchased for resale to customers 1,375 shares of National Life and Accident Insurance Company voting trust certificates at $32.25 per share. The purchase was entered in the ‘ trading account’ on the firm's books, and the shares were available for resale by the firm's trading department. Of the shares purchased 1,000 were sold on March 31, 1943; and on April 17, 1943, the remaining 375 shares were transferred to the ‘ stock and bond account’ ledger at $32.25 per share. Shares listed in the ‘ stock and bond account’ were not available for resale by the trading department. The trading department continued to purchase and sell National Life and Accident Insurance Company shares. On October 16, 1943, at a time when the balance in the ‘ trading account’ was zero, the Page 1060 trading department sold 100 shares to a customer at $43.50 per share. On October 18, 1943, the 375 shares in the ‘ stock and bond account’ were transferred to ‘ trading account.’ One hundred of the shares returned to the ‘ trading account’ were used to cover the purchase of October 16, 1943, and the remaining 275 shares were sold in the ordinary course of business on October 18, 1943, to two customers at $44 per share. Any member of J. C. Bradford and Co. could order stock transferred from the ‘ trading account’ to the ‘ stock and bond account’ and vice versa. A balance remaining in a ‘ stock and bond account’ at the end of the calendar year was transferred temporarily to inventory. Throughout 1943 J. C. Bradford and Co. actively traded in two classes of Life and Casualty Insurance Company stock, ‘ B’ stock and ‘ actual stock.’ On March 15, 1943, the balance in the ‘ B’ stock ‘ trading account’ was 58 shares. On April 17, 1943, 25 of the 58 shares were transferred on the books of the firm to the ‘ stock and bond account’ at $10.50 per share, which was the lowest price paid for these shares after November 4, 1942. On April 5, 1943, the balance in the ‘ actual’ stock ‘ trading account’ was 986 shares. On April 17, 1943, 975 of the 986 shares were transferred on the books of the firm to the ‘ stock and bond account.’ Three hundred and fifty-three shares were transferred at $16.125 per share, 3 shares at $11.50 per share, 130 shares at $11.875 per share, and 489 shares at $12 per share. The prices ascribed to the shares represented an attempt by the bookkeeper to equate the shares transferred with the prices paid for various shares purchased on or after February 11, 1943. The following is a summary of the ledger entries which were made in Life and Casualty Insurance Company ‘ stock and bond accounts':

Life and Casualty ‘ B’ -stock and bond account

1943 Shares Cost and/or market value per share Shares on hand

Increase Decrease

Apr. 17 [1]25 $10.50 25

Aug. 27 [1]1,500 18.375 1,525

[2]1,200 325

Oct. 6 [3]200 20.00 125

Oct. 14 [3]100 21.00 25

Oct. 18 [3]25 21.00 0

Life and Casualty ‘ Actual’ -stock and bond account

1943 Shares Cost and/or market value per share Shares on hand

Increase Decrease

Apr. 17 1353 $11.125 353

Apr. 17 13 11.50 356

Apr. 17 1130 11.875 486

Apr. 17 1489 12.00 975

Aug. 27 1500 18.375 1,475

Aug. 27 [2]1,200 2,675

Oct. 6 3200 20.00 2,475

Oct. 14 3500 21.00 1,975

Oct. 14 3200 21.00 1,775

Oct. 18 3775 21.00 1,000

Oct. 19 3200 22.50 800

Oct. 25 3300 22.75 500

Oct. 25 315 23.00 485

Oct. 28 337 22.00 448

Nov. 3 3100 22.25 348

Nov. 3 3200 22.00 148

Nov. 3 382 23.00 66

Nov. 3 318 22.50 48

Nov. 4 325 22.00 23

Nov. 6 323 22.375 0

FN1 Transferred from trading account. FN3 Transferred to trading account. Page 1061 Entries on the books of J. C. Bradford and Co. reflecting the transfer from the stock and bond accounts to the trading accounts and the sale of shares of Life and Casualty Insurance Company stock are contained in the following excerpts from the ledger accounts:

Life and Casualty ‘ B’ -trading account

1943 Shares Cost
...

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