Campbell v. Comm'r of Internal Revenue (In re Estate B. Campbell)
| Decision Date | 06 April 1971 |
| Docket Number | Docket Nos. 2540-68,2831-68. |
| Citation | 56 T.C. 1 |
| Parties | ESTATE OF RALPH B. CAMPBELL, DECEASED (MABEL W. CAMPBELL, ADMINISTRATRIX), AND MABEL W. CAMPBELL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles R. Hembree, Dan E. Fowler, and Philip E. Wilson, for the petitioners.
Juandell D. Glass, for the respondent.
1. Certain ‘service stock’ was unrestricted when first acquired by promoter; it was later placed in escrow and subjected to certain restrictions. Held, gain thereafter realized by promoter upon subsequent sales of his rights in such escrowed stock was capital gain rather than ordinary income.
2. Held, petitioners failed to carry burden of proving error in Commissioner's determination that an item of $8,217.91 represented unreported income.
3. Held, in the light of a history of filing joint returns over a period of years and of the wife's reliance upon her husband in their financial affairs, that a return purporting to be the joint return of both spouses for 1964 was in fact intended to be a joint return notwithstanding that the wife's signature was not in her handwriting.
4. Addition to tax for negligence determined by Commissioner under sec. 6653(a), I.R.C. 1954, approved in the absence of evidence showing that the Commissioner erred.
The Commissioner made the following determinations of deficiencies and addition to tax in the petitioners' income tax:
+------------------------------------+
¦ ¦ ¦Addition to tax sec.¦
+----+----------+--------------------¦
¦Year¦Deficiency¦6653 (a), I.R.C. ¦
+----+----------+--------------------¦
¦ ¦ ¦1954 ¦
+----+----------+--------------------¦
¦1963¦$4,150.77 ¦$207.54 ¦
+----+----------+--------------------¦
¦1964¦8,299.09 ¦ ¦
+------------------------------------+
Four issues remain for decision:1 (1) Whether Ralph B. Campbell realized ordinary income or capital gain from the sale of his rights in certain shares of stock in The Oaks, Inc., in 1963 and 1964; (2) whether h received unreported compensation in the amount of $8,217.91 in 1963 from The Oaks, Inc.; (3) whether petitioner Mabel W. Campbell filed a joint income tax return with her husband, Ralph B. Campbell, for 1964; and (4) whether petitioners are liable for the section 6653(a) addition to tax for 1963.
The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.
Petitioner Mabel W. Campbell (hereinafter sometimes referred to as Mabel, or Mrs. Campbell, or petitioner) and her husband, Ralph B. Campbell (hereinafter sometimes referred to as Ralph, Campbell, or Mr. Campbell), resided at 316 Mariemont Drive, Lexington, Ky., during the taxable years 1963 and 1964. Ralph died on July 20, 1967, and Mabel was appointed administratrix of his estate. She has continued to reside at the foregoing address at least up to the time of the filing of the petitions herein.
Mr. and Mrs. Campbell filed a joint Federal income tax return for 1963 with the district director of internal revenue at Louisville, Ky. They had previously filed joint returns at least for the years 1960, 1961, and 1962, and they continued to file joint returns for the years 1965 and 1965; A 1964 Federal income tax return— in the name of ‘Ralph B. and Mabel W. Campbell’—was also filed with the district director of internal revenue at Louisville. That return was signed ‘Ralph B. & Mabel W. Campbell’; no part of that signature was in Mabel's handwriting. the 1964 return purported to be a joint return. A check (‘X’) was placed in the box beside ‘Married filing joint return (even if only one had income).’ Exemptions were taken for both spouses and one child. Mrs. Campbell had no separate income in 1964; however, the return claimed itemized deductions in the aggregate of $5,667.02 and the record fails to establish that no portion thereof was allocable to her. During the audit of the 1964 return Mrs. Campbell did not raise the issue with the examining agent that she had not signed the return. Mr. Campbell handled all of the couple's financial affairs. Accordingly, Mrs. Campbell did not participate in preparing any of the returns filed for the years 1960-66. Although she knew what she was doing when she signed the joint returns for each of the years 1960, 1961, 1962, 1963, 1965, and 1966, she did not examine any of them before signing and she knew nothing about the income tax returns. She accepted her husband's preparation of all the returns, and at least tacitly approved or acquiesced in the filing of a joint return for 1964. She intended to file a joint return with her husband for that year.
At some undisclosed time prior to the fall of 1961, Mr. Campbell, who had a background in the restaurant and motel business, conceived the idea of establishing a luxury or resort-type hotel in a suburban area near Lexington, Ky. With that end in view he obtained an option in October 1961 to purchase a tract of some 20 acres of land that was thought to be suitable for that purpose. Two persons named Grissom and Pessin were associated with him in the project. With the assistance of Frank Gilliam, a Lexington lawyer, a Kentucky corporation named ‘The Oaks, Inc.’ (hereinafter sometimes referred to as The Oaks) was formed, and articles of incorporation therefor were filed by Campbell, Grissom, and Pessin as incorporators with the secretary of state of Kentucky on or about November 8, 1961. Although the articles of incorporation provided for 10,000 shares of authorized stock, no certificates evidencing shares of stock were formally issued at that time or at any other time prior to August 1, 1962, as hereinafter set forth.
Grissom and Pessin's interest in the venture was terminated in May or June 1962, when they transferred all their rights therein to Campbell. Meanwhile a group of other persons began to render services in connection with the project, particularly in respect to obtaining financing therefor, and Campbell reached an understanding with them as to an ‘apportionment of rights' in the corporation to reflect the interest of each of these persons in the corporation for services rendered. Thereafter, on August 1, 1962, Campbell, as the ‘sole stockholder,‘ held ‘The first meeting of the sole stockholder’ of The Oaks at Gilliam's office, and he passed a resolution providing for the issuance of 1,250 shares. Such shares were to be issued to himself and the various members of the foregoing group as follows:
+---------------------------------------+
¦ ¦Number of shares ¦
+--------------------+------------------¦
¦Ralph B. Campbell ¦615 ¦
+--------------------+------------------¦
¦W. Russell Campbell ¦125 ¦
+--------------------+------------------¦
¦James A. Clark ¦100 ¦
+--------------------+------------------¦
¦Rick Wolfinbarger ¦125 ¦
+--------------------+------------------¦
¦G. Frank Vaughan, Jr¦100 ¦
+--------------------+------------------¦
¦Frank G. Gilliam ¦125 ¦
+--------------------+------------------¦
¦Delio Vega ¦60 ¦
+---------------------------------------+
These shares represented ‘service’ stock and were allotted for services rendered. Certificates for such shares were actually issued at that time on blank forms that had not been specially printed for The Oaks; the name of the corporation and other pertinent data were ‘type(d) in,‘ and the forms were signed by Campbell and Gilliam as president and secretary, respectively. The 615 service shares received by Campbell were not reported as ordinary income in any of the returns filed for 1962, 1963, or 1964. He regarded them as being ‘of nominal if any value’ at the time of receipt.
Various attempts to obtain private financing for the venture had proved unsuccessful prior to August 1, 1962, and consideration was being given to the possibility of obtaining financing through a public issuance of stock. It was to that end that Campbell ‘determined’ at the foregoing ‘first meeting of the sole stockholder’ that the number of authorized shares should be increased to 1 million, of which 400,000 would be offered to the public at $5 per share less a commission of $1 a share to two persons named Leroy Eckley and Gary Rose, with whom Campbell had been conducting negotiations in this connection.
It was also determined at the foregoing August 1, 1962, meeting that when the number of authorized shares was increased, the number of shares to be issued to the person named above would be increased proportionately (with an exception hereinafter noted) as follows:
+---------------------------------------+
¦ ¦Number of shares ¦
+--------------------+------------------¦
¦Ralph B. Campbell ¦61,250 ¦
+--------------------+------------------¦
¦W. Russell Campbell ¦12,500 ¦
+--------------------+------------------¦
¦James A. Clark ¦10,000 ¦
+--------------------+------------------¦
¦Rick Wolfinbarger ¦12,500 ¦
+--------------------+------------------¦
¦G. Frank Vaughan, Jr¦10,000 ¦
+--------------------+------------------¦
¦Frank G. Gilliam ¦12,500 ¦
+--------------------+------------------¦
¦Delio Vega ¦6,000 ¦
+--------------------+------------------¦
¦William S. Black ¦250 ¦
+---------------------------------------+
The exception related to the 250 shares allocated to William S. Black, which were to be ‘issued out of’ Campbell's portion. Black was associated in the practice of law with Gilliam, and at that meeting, Campbell, Black, and Gilliam were ‘elected’ as directors.
It was understood that the certificates for the original 1,250 shares would be endorsed back by the shareholders and they were to receive in return at some time later...
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