Lincoln v. Comm'r of Internal Revenue, Docket Nos. 38869

• Decision Date: 18 July 1955
• Docket Number: 39159,38876,39055,Docket Nos. 38869,39160.
• Citation: 24 T.C. 669
• Parties: JOSEPH C. LINCOLN AND LESGHINKA LINCOLN, et AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 669

JOSEPH C. LINCOLN AND LESGHINKA LINCOLN, et AL.,1 PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 38869

38876

39055

39159

39160.

Tax Court of the United States.

Filed July 18, 1955.

1. A hotel corporation operated at a loss for several years. In 1949 the stockholders adopted a plan whereby all of the preferred stock was surrendered to the corporation and canceled and all of the common stock was sold for $1 a share. An individual, the son of one of the Lincoln family stockholders, who was not a stockholder before adoption of the plan, paid $100,000 new capital to the corporation for which he received 1,000 shares of new preferred stock; and a certificate for 487 1/2 shares of common stock, out of 750 shares, was issued to him. A certificate for 262 1/2 shares of common stock was issued to the new hotel manager. Upon the facts, held, that the old preferred and common stock did not become worthless at any time in 1949; held, further, that loss deductions by the Lincoln petitioners from their sales of common stock are not precluded by sec. 24(b)(1)(A), 1939 Code.

2. On July 14, 1949, Macklin, a partner in Macklin Company, died. His death terminated the partnership which was engaged in selling securities. The surviving partner, Lincoln, through procedures allowed under Ohio law, elected in the Probate Court to purchase the deceased partner's interest in the partnership assets at their appraised value. Distribution of all partnership assets was made to Lincoln by court order. Lincoln applied the assets to pay partnership debts to creditors including himself. Also, Lincoln received $10,000 from insurance on Macklin's life pursuant to an agreement executed when the partnership was formed but which expired before Macklin's death. Upon the facts, held, that Lincoln purchased, as surviving partner, the deceased partner's interest. Since the application of securities (assets) in payment of debts was effected by Lincoln as the purchaser of the deceased partner's interest in liquidation of the partnership, and since stock in the hotel corporation, supra, owned by the partnership was not worthless before July 14, 1949, the partnership did not sustain net loss in its last taxable period but realized a gain.

[24 T.C. 670]

Charles D. Leist, Esq., William H. Fleming, Esq., and Glen O. Smith, Esq., for the petitioners.

James A. Scott, Esq., for the respondent.

The Commissioner determined deficiencies for 1949 in the income tax liability of Joseph C. and Lesghinka Lincoln, Lillian C. Lincoln, and John C. and Helen C. Lincoln, in the amounts set forth below. The Commissioner determined a deficiency in the income tax liability of Gordon S. Macklin, deceased, for the taxable period January 1, 1949, to July 14, 1949, the date of his death. Gordon S. Macklin, deceased, was a member of a partnership. In his income tax return for 1947, Gordon S. Macklin claimed a net operating loss carry-back from 1949, representing his share of an alleged net operating loss for the partnership for the year 1949. The Commissioner has determined that the partnership did not have a net operating loss for the year 1949, and, therefore, he disallowed the deduction of a net operating loss carry-back which was taken in the income tax return for 1947 of Gordon S. Macklin, deceased. The deficiencies in income tax determined by the Commissioner are as follows:

+-------------------------------------------------+
                ¦Docket No.¦Taxpayer ¦Year¦Deficiency¦
                +----------+----------------------+----+----------¦
                ¦ ¦ ¦ ¦ ¦
                +----------+----------------------+----+----------¦
                ¦38869 ¦J. and L. Lincoln ¦1949¦$6,753.13 ¦
                +----------+----------------------+----+----------¦
                ¦38876 ¦Lillian Lincoln ¦1949¦6,753.12 ¦
                +----------+----------------------+----+----------¦
                ¦39055 ¦John and Helen Lincoln¦1949¦35,783.07 ¦
                +----------+----------------------+----+----------¦
                ¦39159 ¦G. S. Macklin Estate ¦1947¦8,965.55 ¦
                +----------+----------------------+----+----------¦
                ¦39160 ¦G. S. Macklin Estate ¦1949¦9,991.17 ¦
                +----------+----------------------+----+----------¦
                ¦ ¦ ¦ ¦ ¦
                +-------------------------------------------------+
                

In Docket Nos. 38869 and 38876, the petitioners claim that there is overpayment of income tax for 1949 in the amounts of $971.51 and $1,637.74, respectively.

In Docket No. 39055, petitioners have abandoned issues relating to a bad debt loss and a farm loss. In Docket Nos. 38869, 38876, and 39055, respondent has conceded the issue relating to distributions of Wade Park Manor Corporation to petitioners. The parties have agreed that the issue relating to a net operating loss carry-back, in Docket No. 39159, and the issue relating to deduction for medical expense, in Docket No. 39160, will be disposed of under a Rule 50 recomputation. Effect will be given under Rule 50 to stipulations of the parties. Some of respondent's determinations are not contested.

One of the issues relates to a corporation, Flamingo Hotel Company. John, Helen, Joseph, and Lillian Lincoln, Gordon S. Macklin, deceased, and Gordon Macklin & Company owned stock of Flamingo Hotel Company. One question to be decided is whether the preferred

[24 T.C. 671]

and common stock of Flamingo Hotel Company became worthless in 1949. As of September 15, 1949, there was a transaction which involved all of the common stock of Flamingo Hotel Company, and John, Helen, Joseph, and Lillian Lincoln sold their common stock. If it is held that Flamingo Hotel Company stock did not become worthless in 1949, it is necessary to decide whether long-term capital loss deductions claimed by the Lincoln petitioners are not allowable because of the provisions of section 24(b)(1)(A) of the 1939 Code.

Another issue relates to the partnership, Gordon Macklin & Company. John C. Lincoln and Gordon S. Macklin, deceased, were the only members of the partnership. The death of Macklin on July 14, 1949, terminated the partnership. The questions to be decided are whether John C. Lincoln, the surviving partner, sold his interest in the partnership and sustained a long-term capital loss, or whether Lincoln purchased the interest of his deceased partner in the partnership.

FINDINGS OF FACT.

The stipulated facts are found accordingly. The stipulations, together with the attached exhibits, are incorporated herein by this reference.

Joseph C. and Lesghinka Lincoln filed a joint return. John C. and Helen Lincoln filed a joint return. Lillian C. Lincoln filed an individual return. All are residents of Arizona, but they have a mailing address, in care of their attorneys, in Cleveland, Ohio, and they filed their returns for 1949 with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

Gordon S. Macklin died on July 14, 1949, a resident of Cleveland, Ohio. He was survived by his wife, Evelyn B. Macklin. Glen O. Smith and Evelyn B. Macklin are the duly appointed executors of the Estate of Gordon S. Macklin, Deceased. Gordon S. and Evelyn B. Macklin filed a joint return for 1947. An amended return for 1947 was filed after Macklin's death. An individual return was filed for Macklin for the taxable period beginning on January 1, 1949, and ending on July 14, 1949. All of the returns were filed with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

John C. and Helen Lincoln are the parents of Joseph C. Lincoln, Lillian C. Lincoln, and David C. Lincoln. David Lincoln was 24 years of age in 1949. Although John and Helen Lincoln have lived in Arizona for about 20 years, they have substantial investments and property interests in the vicinity of Cleveland, Ohio, as do their children, also.

Gordon S. Macklin, deceased, and Evelyn Macklin had three children, Gordon, Jr., John, and Virginia. The children, as well as Evelyn Macklin, survived Gordon S. Macklin.

[24 T.C. 672]

Macklin Operated, Inc., was an Ohio corporation of which Gordon Macklin was president and the majority stockholder. Among the directors of Macklin Operated, Inc., were John C. Lincoln and William H. Bemis, an attorney and a partner in the law firm, Baker, Hostetler & Patterson, of Cleveland. C. B. Whitcomb was an officer of Macklin Operated; he became president after Macklin's death. The firm of Baker, Hostetler & Patterson rendered services in the organization of Macklin Operated in 1944. The corporation was dissolved in 1951. The business of Macklin Operated consisted chiefly of services in the supervision of various properties in which the Lincoln family had controlling interests. Among the properties in Cleveland which Macklin Operated administered and supervised were Wade Park Manor Hotel, Deshler Hotel, Sovereign Hotel, Auditorium Hotel, LeVeque-Lincoln Tower Building, and Bulkley Building.

John C. Lincoln was the founder of the Lincoln Electric Company in Cleveland. He has had various business interests, in addition, among which are investments in hotel properties. For many years the Lincoln family has had very substantial interests in hotel properties. John Lincoln built the Camelback Inn in Phoenix, Arizona, in the 1930's. He has lived in Phoenix, Arizona, since then.

William H. Bemis has represented members of the Lincoln family since the early 1940's, and he became their personal counsel on about July 15, 1949. He was a director of several corporations which operated hotel properties in which the Lincoln family owned interests. Bemis, in his practice, represents individuals who have interests in a substantial amount of property in Cleveland.

Gordon S. Macklin, for a great many years, was an associate of John Lincoln, and he represented the Lincoln family in investment matters.

In 1940, Gordon Macklin and John Lincoln formed a partnership, Gordon S. Macklin & Company, in Cleveland, in which they were the only partners. The business of Macklin & Company was purchasing, selling, and dealing in securities both for its own account and for the accounts of customers.

Alice M. Bemis is the wife of...