Jacobson v. Comm'r of Internal Revenue

• Decision Date: 10 May 1946
• Docket Number: Docket No. 4189.
• Citation: 6 T.C. 1048
• Parties: LEWIS F. JACOBSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

6 T.C. 1048

LEWIS F. JACOBSON, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4189.

Tax Court of the United States.

Promulgated May 10, 1946.

1. Petitioner is the owner in Chicago, Illinois, of a leasehold and buildings thereon. In 1925 petitioner borrowed $90,000 on the property and executed his negotiable bonds therefor. Some of the bonds have been paid off and retired from time to time and the interest has at all times been paid. On January 1, 1938, $51,750 of such bonds was still outstanding. In the years 1938, 1939, and 1940 petitioner acquired some of these bonds at less than their face value. Some of them were acquired by petitioner directly from the bondholders themselves after negotiations with them. Some were acquired by purchases through the secretary of a bondholders' committee and through security houses. Held that, as to the bonds acquired by petitioner through direct negotiations with the bondholders, he is not taxable on the gain therefrom under the doctrine of Helvering v. American Dental Co., 318 U.S. 322; held, further, that petitioner is taxable on the gain realized in the purchases from bondholders through the secretary of the bondholders' committee and the security dealers, under the doctrine of the Supreme Court in United States v. Kirby Lumber Co., 284 U.S. 1, he being at all times solvent.

2. On the evidence, held, petitioner is entitled to a deduction in each of the taxable years 1939 and 1940 for $750 expended in entertaining clients in the course of his law business and paying for meals for employees for which he was not reimbursed by his law firm.

3. On the evidence, held, the expenses of operating petitioner's automobile in 1939 and 1940 were incurred one-half for petitioner's personal use and the use of his family, which expenses are not deductible, and one-half in its use for business purposes, which expenses are deductible. Sidney C. Nierman, Esq., for the petitioner.

David F. Long, Esq., for the respondent.

The Commissioner has determined deficiencies in petitioner's income tax for the years 1938, 1939, and 1940, respectively, of $842.99, $708.19, and $2,416.79. The petitioner contests parts of these deficiencies by the following assignments of error:

(a) The Commissioner erred in failing to allow automobile and entertainment expenses in connection with his practice of law, aggregating $597.97 for 1938, $793.34 for 1939 and $750.55 for 1940.

(b) The Commissioner erred in holding that the acquisition by the petitioner of his mortgage obligations, at a price lower than the face value thereof during each of the years in question, represented taxable income to the petitioner during any of said years.

(c) The Commissioner erred in failing to hold that the holders of the bonds, being creditors of the petitioner, gratuitously and because of debtor's straitened circumstances, diminishing security and other facts, accepted from petitioner an amount less than the face value thereof.

(d) The Commissioner erred in failing to hold that the payment for said bonds at an amount less than the face value thereof did not create any taxable income to the petitioner.

At the hearing petitioner abandoned his assignment of error as to the $597.97 automobile and entertainment expenses disallowed by the Commissioner for the year 1938. He continues to press his assignment of error as to the disallowance by the Commissioner of such expenses of $793.34 for 1939 and $750.55 for 1940. Several adjustments made by the Commissioner in his deficiency notice were not contested in the petition.

FINDINGS OF FACT.

The petitioner is an individual who resides in Chicago, Illinois. He filed his income tax returns with the collector of internal revenue for the first district of Illinois.

In June 1922 petitioner purchased a half interest in the building located at the northwest corner of 47th Street and Drexel Boulevard, Chicago, Illinois, and leasehold running for 99 years from May 1, 1914, and in March 1923, he purchased the remaining half interest therein. In December 1925 a substantial addition was made to the building. The total cost to the petitioner of the leasehold and improvements and the addition was $116,580.56. When the petitioner became the owner of all the interest in the above leasehold and building, he allocated, for the purpose of depreciation, $76,580.56 to the building and $40,000 to the leasehold.

On or about May 1, 1925, petitioner borrowed the sum of $90,000 from the South Side Trust & Savings Bank, and petitioner and his wife executed 200 bonds secured by a mortgage trust deed on the leasehold and building to evidence and secure the payment of the loan. The proceeds of the loan were used to pay off the existing encumbrance on the property, to pay for an addition to the building which cost $16,250, and to pay the necessary brokerage commission and expenses in connection with the loan, leaving a small surplus over and above the several items above enumerated, which was paid to the petitioner.

The bonds were payable at the rate of $2,500 semiannually to and including November 1, 1931, and the balance of $57,500 on May 1, 1932, with interest at 6 1/2 percent per annum. All of the bonds which became due up to and including November 1, 1931, were paid at or about their respective maturity dates.

On June 8, 1931, the South Side Trust & Savings Bank failed to open its doors.

A bondholders' committee was formed for the bondholders who had purchased bonds on petitioner's building. On May 1, 1932, petitioner applied to the bondholders' committee and the bondholders themselves for an extension of the time of payment of this loan. He communicated with the individual bondholders, as well as the committee, and procured an extension to May 1, 1937, for the payment of the principal of the bonds. At no time did petitioner default in the payment of interest on the bonds.

During this extended period checks for interest were issued by petitioner directly to the holders of the bonds and were delivered to them by R. W. Gerding, secretary of the committee. Bondholders frequently visited the petitioner at his office in connection with the collection of their interest and to find out the status of the property. Petitioner kept a list of the bondholders, the dates of payment of their interest, the numbers of their bonds, and their addresses, and he was fully informed as to who his creditors on this bond issue were and where they were, and they were kept informed, from time to time, as to petitioner's general financial condition.

In 1937 petitioner again procured an extension of time for the payment of the bonds to 1942, and in that connection he paid 10 percent on account of the principal of the bonds, leaving an unpaid balance of $51,750 as of January 1, 1938.

On April 9, 1938, petitioner purchased $450 of bonds from Beatrice Johnson and Margaret Finn, owners thereof, and paid therefor $202.50. The checks of Sidney C. Nierman (a partner of the petitioner, whose office was the same as petitioner's) were issued to the owners of the bonds with an endorsement that they were in full payment of the purchase price of said bonds. Petitioner reimbursed Sidney C. Nierman for this payment, as Nierman was acting for petitioner in the transaction and the owners of the bonds knew that he was.

On June 9, 1938, petitioner purchased $3,600 of bonds from Beatrice Johnson and Margaret Finn, owners thereof, under the same circumstances as shown in the foregoing paragraph, and paid $1,620 therefor.

On August 17, 1938, petitioner purchased $900 of bonds from Beatrice Johnson, owner thereof, under the same circumstances as shown in the foregoing paragraphs and paid $405 therefor.

Summarizing the transactions in 1938, the total unpaid principal amount of the bonds purchased by petitioner during 1938 was the sum of $4,950 and the amount paid therefor was $2,227.50, or a difference of $2,722.50.

In 1938 petitioner purchased bonds from Dr. Kemp in the unpaid principal sum of $900 for $957. The Commissioner (by evident mistake) included the sum of $43 as income in connection with this Kemp purchase on the assumption that the unpaid amount of the bonds was $1,000 instead of $900, and on that assumption included in income for the year 1938 the sum of $2,767.50, instead of $2,722.50 shown above.

On February 15, 1939, petitioner purchased $1,800 of bonds owned by H. N. Samuels through McGraw & Co., who were representing Samuels in the transaction, and paid $900 therefor.

On June 16, 1939, petitioner purchased $450 of bonds directly from Dolly Stoecker, the owner thereof, and paid $225 therefor.

On October 23, 1939, petitioner purchased $180 of bonds of which Ernest Zentner was the owner, at the price of $86.50. The purchase was made through the brokerage firm of Anderson, Plotz & Co. Petitioner paid the firm a fee of $10 for making the purchase.

Summarizing the transactions of 1939, the total unpaid principal amount of bonds purchased by the petitioner was the sum of $2,430 and the amount paid therefor was the sum of $1,211.50, or a difference of $1,218.50.

On April 4, 1940, petitioner purchased through R. W. Gerding, secretary of the bondholders' committee, $270 of bonds of which Jens Hendrickson was the owner, and paid therefor the sum of $130. A fee of $7.50 was paid by petitioner to Gerding for making the purchase.

On May 21, 1940, petitioner purchased $450 of bonds of which Garnet Grayson was the owner and paid the sum of $210. The transaction was handled by R. W. Gerding, secretary of the bondholders' committee and a service charge of $7.50 was paid to Gerding for his services.

On May 23, 1940, petitioner purchased $2,700 of bonds of which Edna Mary Griffin was the owner and paid the sum of $1,080. The transaction was handled by R. W. Gerding, secretary of the bondholders' committee and a service charge of $27 was paid to Gerding for his services.

On June 19, 1940, petitioner purchased $1,800 of...