Pessin v. Comm'r of Internal Revenue
| Decision Date | 29 December 1972 |
| Docket Number | Docket No. 3441-69. |
| Citation | 59 T.C. 473 |
| Parties | ARNOLD G. PESSIN AND FRANCES PESSIN, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
F. Selby Hurst, for the petitioners.
Dennis M. Feeley, for the respondent.
Petitioner, a veterinarian, during the taxable years 1965 and 1966 was in the business of breeding horses, trading in property rights in horses, and rendering advice in connection with the promotion of syndications of thoroughbred racehorses. During this period he assisted in three separate syndications for which he received nominations (breeding rights) in the stallions which had been syndicated. Held, (1) that petitioner received the nominations in question on the date of the effective syndications of the stallions involved; fair market value of such stallions determined; and (2) addition to tax for the taxable years 1965 and 1966 due to negligence or intentional disregard of the rules and regulations under sec. 6653(a). I.R.C. 1954, imposed.
Respondent determined deficiencies in petitioners' income tax and additions to tax as follows:
+-----------------------------------------+
¦ ¦ ¦Addition ¦
+--------------+------------+-------------¦
¦ ¦ ¦to tax sec. ¦
+--------------+------------+-------------¦
¦Taxable Year ¦Deficiency ¦6653(a) 1 ¦
+--------------+------------+-------------¦
¦1965 ¦$74,012.30 ¦$3,700.62 ¦
+--------------+------------+-------------¦
¦1966 ¦31,940.57 ¦1,597.03 ¦
+-----------------------------------------+
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.
The issues presented for our consideration are:
(1) Whether the receipt of the nominations by Dr. Pessin constituted taxable income to the extent of the fair market value of the nominations as determined by respondent; and
(2) Whether petitioners are subject to the additions to tax for the taxable years 1965 and 1966 under section 6653(a), I.R.C. 1954.
All stipulated facts are found as stipulated.
Petitioners Arnold G. Pessin and Frances Pessin are husband and wife who at the time the petition was filed resided in Lexington, Ky.
During the taxable years involved, petitioner Arnold G. Pessin was a veterinarian specializing in the treatment and care of horses. Petitioner also during the years in issue was in the business of breeding horses, trading in property rights in horses, and rendering advice in connection with the promotion of syndications of thoroughbred racehorses. During such years Dr. Pessin was a partner in a partnership doing business under the name of Winchester Farms, Lexington, Ky.
Petitioners kept their books and records on the cash basis and filed their joint Federal income tax returns for the taxable years 1965 and 1966 with the district director of internal revenue, Louisville, Ky.
On February 26, 1965, John R. Gaines of Lexington, Ky., purchased from Rex C. Ellsworth of Chino, Calif., an undivided one-half interest in three thoroughbred racehorses named ‘Candy Spots, Prove It, and Olden Times' for the price of $1,800,000.
A syndication agreement was entered into between Ellsworth and Gaines with respect to Candy Spots, Prove It, and Olden Times. The syndication agreement was effected some time early in 1965 but the exact date is not disclosed by the record.
The syndication agreement provided for the division of the ownership of the horses into 30 shares. Each shareholder was entitled to one nomination in each of the aforementioned stallions for each share owned by him for the useful life of the horses. The shares were freely transferable and assignable. The shareholders would share in any profits in the sale of extra breeding rights not used by the shareholders or nomination holders and were required to pay their proportionate shares of expense in maintaining the stallions. The agreement provided that the shares were to be sold for $120,000.
Some time in 1965, Ellsworth conveyed one assignable nomination in the Candy Spots syndicate to Dr. Pessin. On March 1, 1965, Ellsworth wrote a letter (on the letterhead of Dr. Pessin) addressed to petitioner which reads, in part, as follows:
This is to confirm our oral understanding that, in consideration of your agreement to,— so long as you are able to do so,— render such assistance and advice as I may require from time to time in connection with the interests represented by my shares in the three stallions, CANDY SPOTS, OLDEN TIMES and PROVE IT, I hereby assign to you, your heirs and assigns, the use of one (1) nomination to each of them in each breeding season for the respective lives of the stallions, under one of my shares in the CANDY SPOTS, OLDEN TIMES AND PROVE IT SYNDICATE, subject to the terms of the Syndicate Agreement.
On March 30, 1965, Dr. Pessin wrote a letter to Harold Sherman which reads, in part, as follows:
I hereby assign to you for the sum of $50,000 one (1) of the nominations which I have to each of the three stallions CANDY SPOTS, OLDEN TIMES and PROVE IT, in each breeding season for the respective lives of the stallions, subject of course to the terms and conditions of the Syndicate Agreement relating to such nominations.
Shares in the Candy Spots syndicate sere in fact sold for $120,000 each.
The shareholders in the Candy Spots syndicate, according to the syndication agreement, shared expenses and income proportionately from the sale of extra breeding rights as follows:
+---------------------------+
¦Year ¦Expenses ¦Income ¦
+------+-----------+--------¦
¦1967 ¦$37,065.50 ¦$22,500 ¦
+------+-----------+--------¦
¦1968 ¦19,636.00 ¦40,000 ¦
+------+-----------+--------¦
¦1969 ¦21,598.00 ¦50,000 ¦
+------+-----------+--------¦
¦1970 ¦20,409.92 ¦60,000 ¦
+---------------------------+
The net gain by shareholders from the sale of extra breeding rights after deducting their shares of expenses for the years 1967 through 1970 averaged less than $1,000 per share.
On November 2, 1965, Leslie Combs II of Lexington, Ky., syndicated a thoroughbred horse named ‘Fleet Nasrullah.’ The Fleet Nasrullah syndication agreement divided the ownership of the horse into 30 shares and offered them for sale at $35,000 per share. The agreement provided that each nomination holder and each shareholder was to receive one free nomination in the stallion for each share or nomination owned by him for the life of the horse.
The Fleet Nasrullah agreement reads, in part, as follows:
(2) Each of the thirty (30) shares shall be on an equal basis with the others and shall be indivisible, and only a full share shall have any rights hereunder; provided, however, that there is expressly reserved, and the within sale is made subject to free nominations to FLEET NASRULLAH each year during life for each of the following, their heirs and assigns:
Three (3) for Hanes & Combs, Inc.
(3) FLEET NASRULLAH shall stand and shall be kept and maintained at Spendthrift Farm, Iron Works Pike in Fayette County, Kentucky, under the sole personal management and supervision of Leslie Combs II and he shall be entitled to charge and receive the prevailing rates for stallion keep. Leslie Combs II shall have complete charge of advertising the stallion and shall have the authority to select a veterinarian. Owners of shares shall pay all charges, costs and expenses incurred in connection with said stallion in the proportion that their respective shares bear to the whole number of shares.
(4) Each shareholder in each breeding season shall be entitled to one (1) free nomination to said stallion for each share owned by him, subject to the payment of his share of the Syndicate expenses and the provisions of Paragraph 5.
(5) If Leslie Combs II, with the advice and approval of the veterinarian shall determine that FLEET NASRULLAH shall be bred to less than thirty-eight (38) mares in any stud season, then the Shareholders and those persons holding the eight (8) free nominations in each year (as provided in Paragraph 2 herein) who collectively shall be entitled to such reduced number of nominations shall be determined by lot, and any Shareholder or holder of said free nominations who has suffered by reason of the drawing of lots in any season shall not be submitted to the risk of drawing in any subsequent season unless and until all other Shareholders and holders of said free nominations have suffered as the result thereof; and for the purpose of this clause each share and free nomination shall be regarded as if it were the subject of separate ownership and shall be on an equal basis, the one with the other. Notice of the decision to reduce FLEET NASRULLAH'S book to less than thirty-eight (38) nominations and of the time and place of the drawing shall be sent by the Syndicate Manager to each Shareholder and holder of a free nomination by registered mail or by telegram at least five (5) days prior to said drawing.
(6) If the veterinarian attending said stallion and the Syndicate Manager, Leslie Combs II, shall certify that in their opinion FLEET NASRULLAH'S book could be increased without injury to said stallion, additional yearly seasons may be sold by the Syndicate Manager and the yearly proceeds thereof divided equally between the thirty (30) shares.
As indicated in paragraph (2) hereinabove, petitioner received three assignable nominations in the Fleet Nasrullah syndicate in 1965 from Leslie Combs II. Petitioner sold two of these nominations in 1965 for $50,000 each and the remaining nomination was sold in 1968 for $25,000.
The shares in the Fleet Nasrullah syndicate were in fact sold for $35,000 each.
On December 31, 1965, Mrs. H. W. Morrison sold a nomination in Fleet Nasrullah to Tartan Farm for $35,000. Petitioner acted as agent for her on this sale.
The average profit for the shareholders in the Fleet...
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