Santa Anita Consol., Inc. v. Comm'r of Internal Revenue, Docket No. 3577-65.

• Decision Date: 02 July 1968
• Docket Number: Docket No. 3577-65.
• Citation: 50 T.C. 536
• Parties: SANTA ANITA CONSOLIDATED, INC. (FORMERLY LOS ANGELES TURF CLUB, INC.), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 536

SANTA ANITA CONSOLIDATED, INC. (FORMERLY LOS ANGELES TURF CLUB, INC.), PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3577-65.

Tax Court of the United States.

Filed July 2, 1968.

[50 T.C. 536]

Maynard J. Toll, Bennett W. Priest, and Stanton H. Zarrow, for the petitioner.

Myron A. Weiss and Allan Teplinsky, for the respondent.

In 1957, LATC and CBS organized a corporation (POP) to construct and operate an amusement park, investing $1,800,000 in stock and guaranteeing a line of credit of $8,750,000. In 1959, LATC transferred its POP stock and $4,396,000 to Pacific, an unrelated corporation, and received a release of its liability as guarantor. Held, LATC incurred an ordinary loss in 1959, deductible under sec. 165(a), I.R.C. 1954, of $4,396,000 on payment for its release from the guaranty obligation; held, further, LATC incurred a capital loss of $900,000 on the transfer of its POP stock to Pacific.

FEATHERSTON, Judge:

Respondent determined deficiencies in petitioner's Federal corporate income tax as follows:

+------------------------------+
                ¦TYE Oct. 31— ¦Amount ¦
                +-----------------+------------¦
                ¦1956 ¦$700,575.38 ¦
                +-----------------+------------¦
                ¦1958 ¦207.99 ¦
                +-----------------+------------¦
                ¦1959 ¦1,586,790.02¦
                +------------------------------+
                

Certain issues have been conceded by the parties. The questions remaining for decision are: (1) Whether petitioner is entitled to a deduction for a loss in the year 1959 resulting from its payment of $4,396,000 in connection with the transfer of its interest in Pacific Ocean Park, Inc., to Pacific Seaboard Land Co. and, if so, whether the loss is an ordinary loss or a capital loss; (2) whether petitioner sustained a loss in the year 1959 on the transfer of its stock in Pacific Ocean Park, Inc., to Pacific Seaboard Land Co. in the amount of $900,000, or in any amount.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and exhibits thereto are incorporated herein by this reference.

Petitioner Santa Anita Consolidated, Inc. (formerly known as the Los Angeles Turf Club, Inc. and hereinafter referred to as petitioner or LATC), is a California corporation with its principal place of business at Santa Anita Park, Arcadia, Calif. The tax returns of petitioner for the periods here involved were filed with the district director of internal revenue at Los Angeles, Calif.

For some time prior to 1956, LATC had been interested in developing an entertainment activity in the nature of a family-type amusement park in Southern California. In 1956, LATC assigned two of

[50 T.C. 537]

its employees, Jaynes and O'Dorisio, the task of searching for a location for such an entertainment enterprise.

The result of the investigation by Jaynes and O'Dorisio was a report entitled ‘Proposed Ocean Park Amusement Center (Revised: 12-10-56),‘ which they presented to the officers and board of directors of LATC. The proposed park was to be located on the Santa Monica Beach, at the site of an existing park at the juncture of the cities of Los Angeles and Santa Monica. The report concluded that an amusement center could be constructed for a total of $3 million, and would have an annual attendance of 2,250,000 people. On the basis of this report LATC decided to proceed with such a project.

Jaynes and O'Dorisio discussed the project with Columbia Broadcasting System, Inc. (hereinafter referred to as CBS), which manifested an interest in proceeding with the proposed amusement park.

On January 23, 1957, LATC and CBS entered into a preincorporation subscription agreement providing for the organization of a corporation to be known as Pacific Ocean Park, Inc. (hereinafter referred to as POP), and the purchase by each of 4,000 shares of POP's $100 par value capital stock for $400,000. On the same date, LATC and CBS entered into an agreement concerning POP which stated in part:

At such time or times as Park may desire to borrow funds from any bank or banks or other financing institutions, Club shall guarantee any such loan or loans up to an aggregate amount of $1,125,000 and CBS shall guarantee such loan or loans up to an aggregate amount of $1,075,000; provided that Club shall not be obligated to guarantee any such loan or loans in an aggregate amount exceeding by more than $50,000 the aggregate amount theretofore and/or concurrently therewith guaranteed by CBS; and provided further that CBS shall not be obligated to guarantee any loan or loans unless an aggregate amount at least $50,000 more than the aggregate amount guaranteed by CBS has been and/or is concurrently guaranteed by Club. * * *

On January 26, 1957, POP was incorporated for the purpose of developing and operating a family-type amusement park.

On June 3, 1957, a document entitled ‘Master Plan of Pacific Ocean Park Amusement Center’ was submitted and considered by the board of directors of POP and the management of LATC. The master plan confirmed the estimate that the cost of creating an amusement center would be $3 million. Based on an estimated annual attendance at the park of 2,250,000 people; income of $2,700,000; expenses, excluding depreciation and taxes, of $1,400,000; depreciation for income tax purposes of $500,000; California corporation tax of $32,000; and Federal income tax of $394,000, the master plan projected an estimated average annual net profit of $370,000. The master plan envisioned that the park would open to the public on or about June 30, 1958, and operate on an annual basis.

[50 T.C. 538]

On July 18, 1957, POP and the Bank of America National Trust & Savings Association (hereinafter referred to as Bank of America or bank) entered into an agreement whereby the bank agreed to loan to POP a principal amount up to but not in excess of $2,200,000. This agreement provided that the loan would bear interest at the rate of 4 1/2 percent per annum and be evidenced by promissory notes, and that the bank would be entitled to a commitment fee at the rate of 1/2 of 1 percent. Interest was payable quarterly, and the principal sum was repayable as follows:

+----------------------+
                ¦Oct. 1, 1958 ¦$300,000¦
                +-------------+--------¦
                ¦Oct. 1, 1959 ¦600,000 ¦
                +-------------+--------¦
                ¦Oct. 1, 1960 ¦650,000 ¦
                +-------------+--------¦
                ¦Oct. 1, 1961 ¦Balance ¦
                +----------------------+
                

The aforementioned agreement of July 18, 1957, further provided that POP would furnish to the bank separate continuing guaranties of CBS and LATC, and that it would deliver, or cause to be delivered, balance sheets and profit and loss statements of CBS, LATC, and POP within 90 days of the close of each fiscal year the loan was outstanding.

In accordance with the agreement entered into by LATC and CBS on January 23, 1957, LATC and CBS, on October 3, 1957, entered into a continuing guaranty agreement with Bank of America under which the shareholders severally agreed to be liable as guarantors of POP's indebtedness to Bank of America in an amount not to exceed $2,200.00. Although the continuing guaranty was not signed until October 3, 1957, it was a part of the original loan transaction entered into on July 18, 1957. The continuing guaranty provided that:

Guarantors waive any right to require Bank to (a) proceed against Borrower; (b) proceed against or exhaust any security held from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Guarantors waive any defense arising by reason of any defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower. Until all indebtedness of Borrower to Bank shall have been paid in full, even though such indebtedness is in excess of Guarantors' liability hereunder. Guarantors shall have no right of subrogation, and waive any right to enforce any remedy which Bank now has or may hereafter have against Borrower, and waive any benefit of, and any right to participate in any security now or hereafter held by Bank. Guarantors waive all presentments, demands for performance, notices of non-performance, protests, notice of protest, notice if dishonor, and notices of acceptance of this guaranty and of the existence, creation, or incurring of new or additional indebtedness.

In addition to all liens upon, and rights of setoff against the moneys, securities or other property of Guarantors given to Bank by law, Bank shall have a lien upon and right of setoff against all moneys, securities and other property of Guarantors now or hereafter in the possession of or on deposit with Bank,

[50 T.C. 539]

whether held in a general or special account or deposit, or for safekeeping or otherwise; and every such lien and right of setoff may be exercised without demand upon or notice to Guarantors. * * *

LATC and CBS also agreed to ‘unconditionally guarantee and promise to pay’ to the bank ‘on demand, whether due or not due,‘ any present or future indebtedness of POP. The guarantors also agreed to subordinate any present or future indebtedness of POP to them to the indebtedness of POP to the bank.

During the spring of 1958, it became apparent that the amount estimated in the master plan for the creation of the amusement park was too low. Due to the fact that the project grew considerably in scope, and the fact that the opening had to be postponed more than 1 month, additional funds were needed. Because of the need for additional funds, there was submitted to the board of directors of POP at its meeting held on March 18, 1958, a ‘Request for Additional Funds' which set forth POP's cash requirements to open the park to the public on July 1, 1958. These funds were in addition to the $3 million contemplated by the master plan and an additional $300,000 approved by the parties.¹ This request showed that POP would need an additional $1,293,000, primarily due to the expanded concept of the park, and to the need to replace certain piles, decking, and sections of buildings on the amusement pier prior to opening rather than during the operation of...