Millsap v. Comm'r of Internal Revenue, Docket No. 1556-64.
| Decision Date | 27 September 1966 |
| Docket Number | Docket No. 1556-64. |
| Citation | 46 T.C. 751 |
| Parties | I. HAL MILLSAP, JR., AND FRANCES MILLSAP, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William C. Myers, Jr., and Max H. Myers, for the petitioners.
James H. Martin, for the respondent.
Held: 1. Advances by petitioner to a controlled corporation were nonbusiness debts.
(a) Petitioner was not in the trade or business of promoting corporations for a fee or commission.
(b) Petitioner was not in the trade or business of promoting corporations for a profit on their sale.
(c) Petitioner was not in the trade or business of lending money.
(d) The advances were not proximately related to any separate trade or business of the petitioner distinct from that of the corporation.
2. Petitioner is not entitled to a casualty loss deduction in excess of insurance proceeds as the result of the destruction of his home and its contents by fire. Petitioner's evidence was insufficient to establish his basis in the house, his basis in its contents, or the fair market value of its contents immediately before the fire.
3. Insurance proceeds paid to reimburse petitioner for additional living expenses occasioned by the fire are income to him.
4. As to claimed bad debt deduction of $1,000, there was sufficient evidence to find that a loan was made, that the debt had value when created, and that the debt became worthless in 1959.
5. As to claimed business expense deduction of $1,000, testimony that a loan was made is no support, and having failed to move to conform pleadings to proof, petitioner is not entitled to a bad debt deduction. Even if petitioner had so moved, there was no proof that the debt became worthless in the year the deduction was claimed.
The respondent determined deficiencies in the income tax of the petitioners as follows:
+-----------------+
¦Year ¦Amount ¦
+------+----------¦
¦1957 ¦$2,487.47 ¦
+------+----------¦
¦1958 ¦20,187.37 ¦
+------+----------¦
¦1959 ¦3,280.14 ¦
+------+----------¦
¦1960 ¦1,569.65 ¦
+-----------------+
Respondent determined that petitioners are entitled to a net operating loss carryback deduction in 1958 from 1961 in the amount of $7,197.33. In determining the amount of such carryback deduction respondent disallowed deductions of $177.26 for interest and $379.95 for contributions which were claimed in petitioners' return for 1961. Petitioners alleged error in their petition on these issues, but they offered no evidence on them. We have therefore treated their contentions as abandoned. There remain for our decision the following questions:
(1) Was the amount of $83,857.871 outstanding on loans made by petitioner I. Hal. Millsap, Jr., to Millsap Oil and Gas Co. which became worthless in 1960 a business or nonbusiness bad debt?
(2) Did petitioners sustain a loss by reason of the destruction of their house and the contents thereof by fire in 1959 in excess of the amounts they were compensated for by fire insurance?
(3) Did petitioners realize income in 1959 upon the receipt of $2,500 of insurance proceeds for additional living expenses incurred as the result of the destruction of their home?
(4) Are the petitioners entitled to a nonbusiness bad debt deduction in 1959 in the amount of $1,000 for a loan made to George Billingsley?
(5) Are the petitioners entitled to a deduction of $1,000 in 1959 for a claimed promotional expense?
Separate findings of fact and opinions are hereafter set forth with respect to each of these issues. All facts that have been stipulated are so found. Those portions of the stipulation of facts which pertain to a particular issue are incorporated by this reference in the findings of fact for the issue to which they relate.
The petitioners are husband and wife residing in Siloam Springs, Ark. Their joint Federal income tax returns for the years in question were filed with the district director of internal revenue, Little Rock, Ark. Petitioner Frances Millsap is a party herein only by reason of having filed joint returns with her husband, I. Hal Millsap, Jr., and he will hereafter be referred to as the petitioner.
From 1946 to the time of trial petitioner was associated with his father in a retail grocery business known as Hal Millsap foodliner, which was operated as a partnership during the years in issue. During the period 1946 to 1953 this was petitioner's only business activity of consequence. In 1953, however, he began to take an interest in a variety of other ventures. Between 1953 and the time of trial he caused seven corporations to be formed. They were Razorback Oil & Gas Co., Kan-A-Tex-O-Oil & Gas, Inc., Millsap Oil & Gas Co. (hereafter MOG), Ram Oil Co., Mo-Ark Oil Co., Non-Censored News, Inc., and P.D.Q. Food Marts, Inc. The oil and gas companies were in the business of buying leases, drilling wells, and selling working interests. Non-Censored News published a quarterly journal on legislative developments and a local newspaper in Siloam Springs. P.D.Q. Food Marts operated a grocery store.
Petitioner owned stock in all these companies. Ram Oil and Mo-Ark Oil were both two-man corporations. Petitioner served in an advisory capacity to the newspaper company. Whether he performed services for P.D.Q. Food Marts does not appear from the records. Petitioner, his father, and his wife controlled Razorback. Petitioner and his father owned all of the stock of Kan-A-Tex-O, except qualifying shares owned by petitioner's wife. MOG was formed in 1955 to consolidate under petitioner's control those interests in oil and mineral properties which were owned by him, Razorback, and Kan-A-Tex-O. Petitioner was president and a director of MOG and received the following amounts as salary:
+-----------------+
¦Year ¦Amount ¦
+------+----------¦
¦1957 ¦0 ¦
+------+----------¦
¦1958 ¦$4,999.92 ¦
+------+----------¦
¦1959 ¦4,583.26 ¦
+------+----------¦
¦1960 ¦0 ¦
+-----------------+
At the time MOG was formed in 1955 the company issued over 1 million shares of stock in favor of petitioner or his nominees in consideration of the assignment by petitioner, Kan-A-Tex-O, and Razorback of oil and mineral properties owned by him and the two companies. By the end of 1958, petitioner owned 42,135 share of MOG stock, about 1.75 percent. Kan-A-Tex-O owned 798,600 shares, about 33.3 percent. No other shareholder owned more than about 3.1 percent.
During 1958 petitioner sold an undisclosed number of his shares in MOG for a gross sales price of $89,320. Petitioner reported his gain thereon, $79,377.71, as long-term capital gain. In 1959 petitioner again sold an undisclosed amount of his MOG stock, this time for a gross sales price of $10,250. Petitioner reported his gain thereon, $8,831, as long-term capital gain.
Petitioner's income from the Foodliner partnership for the years in question was as follows:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1957 ¦$17,776.23 ¦
+------+-----------¦
¦1958 ¦17,456.04 ¦
+------+-----------¦
¦1959 ¦14,070.98 ¦
+------+-----------¦
¦1960 ¦15,662.44 ¦
+------------------+
His only other significant sources of reported income during those years were his MOG salary and gain from the sale of MOG stock. He reported no other income from salaries and no dividend income.
During the period from 1953 to the time of trial petitioner was also involved individually in real estate development in the Rio Grande Valley, the export-import business in Mexico, and the sale of fishing tackle.
Petitioner acquired a reputation as a potential investor in and advisor to new businesses. He traveled 75,000 to 100,000 miles annually to investigate about 100 proposed ventures, or ‘deals.‘ He ultimately participated in a very small percentage of them.
Petitioner made loans to Ram Oil ($3,500 and $11,000), Mo-Ark Oil ($25,000), and P.D.Q. Food Marts ($5,000). He loaned Kan-A-Tex-O an undisclosed amount to cover legal fees incident to its incorporation. He loaned $10,000 to the A & P Mining Co., which was involved in gold and copper mining in South America. MOG owned one-quarter of the stock of A & P Mining Co.
Petitioner also made loans to employees of MOG and Kan-A-Tex-O. Sometimes they were made in order to promote projects of the companies and were in effect loans not related to company business. Petitioner also made three loans to coventurers, each in the amount of $600.
Between March 8, 1955, and August 11, 1960, petitioner advanced to MOG sums totaling $249,155.76. During the same period MOG made repayments in the amount of $165,297.89. On August 11, 1960, the date of the last advance, MOG was indebted to petitioner in the amount of $83,857.87. No repayments were made after that date. MOG ceased to do business in 1960 and went into receivership. Petitioner deducted as a business bad debt the amount of $83,857.87 on his return for 1960.
Petitioner claimed net operating loss carryback deductions from 1960 in 1957 and 1958 based upon a net operating loss in 1960 that resulted from the claimed business bad debt deduction. These carryback deductions were tentatively allowed. Respondent subsequently determined, however, that petitioner was not entitled to the claimed business bad debt deduction in 1960. He thereupon assessed the deficiencies for 1957, 1958, and 19602 that are here in issue.
OPINIONRespondent does not contest the characterization of the amounts advanced by petitioner to MOG as loans (rather than contributions to capital); nor does he contest that the debts due petitioner from MOG became worthless in 1960. The question that remains is whether these debts were business or nonbusiness, within the meaning of section 166(d)(2) of the 1954 Code.3
Petitioner asserts that his activities since 1953 show that he is in the business of ‘promoting, financing and developing corporations.’ He argues that his loans to MOG were proximately related to that...
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