Arkansas Bank and Trust Company v. United States

• Decision Date: 05 December 1963
• Docket Number: No. 896.,896.
• Citation: 224 F. Supp. 171
• Parties: ARKANSAS BANK AND TRUST COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Arkansas

224 F. Supp. 171

ARKANSAS BANK AND TRUST COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

No. 896.

United States District Court W. D. Arkansas, Hot Springs Division.

December 5, 1963.

Smith, Williams, Friday & Bowen, Little Rock, Ark., Wood, Chesnutt & Smith, Hot Springs, Ark., for plaintiff.

Robert L. Waters, Dept. of Justice, Stanley F. Krysa, Dept. of Justice, Fort Worth, Tex., for defendant.

JOHN E. MILLER, Chief Judge.

This is an action by plaintiff-taxpayer, Arkansas Bank and Trust Company, to recover $960.66 paid under protest to the United States on January 4, 1962. In the plaintiff-taxpayer's 1959 corporate tax return it showed a net operating loss and applied for a tentative carry-back adjustment to the year 1956. The agents of the Commissioner of Internal Revenue examined the 1959 income tax return and application based upon the net operating loss deduction there reflected, and reduced the net operating loss reduction by disallowing $5,000 "rental expense" claimed by the taxpayer for the year 1959. This adjustment was accompanied by the increase in the allowed interest expense of $1,342.78 and a reduction of interest income of $455.03. The net adjustment had the effect of decreasing the 1959 loss by $3,202.19, which then caused a deficiency of $960.66 for the year 1956, to which the 1959 operating loss had been carried. The taxpayer paid the deficiency and timely filed its claim for refund which was denied.

The pertinent allegations in the plaintiff's complaint are set forth in paragraphs 3 through 7, as follows:

"3. In the corporate income tax return filed for 1959, plaintiff reflected as a deduction rental payments totaling Five Thousand Dollars ($5,000.00) paid pursuant to the terms of a lease under which it rented the building it occupied at Malvern Avenue and Broadway, Hot Springs, Arkansas. A net operating loss was reflected on the return. Pursuant to appropriate provisions of the Internal Revenue Code, this net operating loss was carried back to the year 1956 and a refund of taxes paid in that year was applied for. Agents of the defendant examined the 1959 income tax return and application, as aforesaid, based upon the net operating loss deduction there reflected and, among other changes, reduced the net operating loss deduction by disallowance of the aforesaid rental expense claimed by plaintiff.

"4. Agents of the defendant assessed additional income tax for the year 1956 in the amount of Nine Hundred Sixty and 66/100 Dollars ($960.66), which amount together with interest of Two Hundred Seventy-Six Dollars ($276.00) was paid to the District Director of Internal Revenue on January 2, 1962.

"5. On May 3, 1962, a claim for refund on Treasury Form 843 for the additional taxes assessed and paid, as aforesaid, was duly filed with agents of the defendant by the plaintiff. True copy of the said claim for refund is annexed hereto and incorporated herein by this reference.

"6. Over six (6) months have expired since the aforesaid claim for refund was filed with the defendant and no part of the additional taxes paid for 1956 has been refunded.

"7. The defendant illegally and erroneously determined and assessed the additional income tax liability asserted for 1956 against the plaintiff; illegally and erroneously collected the Nine Hundred Sixty and 66/100 Dollars ($960.66) together with interest thereon paid January 2, 1962, by the plaintiff for that year and illegally and erroneously disallowed the Five Thousand Dollars ($5,000.00) rental payment as provided by the lease agreement of the plaintiff, as aforesaid."

The defendant, United States, in its answer denied the Commissioner's determinations were erroneous, but otherwise admitted the allegations contained in plaintiff's complaint.

On October 23, 1963, the case was tried to the court at which time both parties introduced oral and documentary evidence. At the conclusion of the trial the case was submitted and taken under advisement by the court, subject to the submission of briefs by the parties in support of their contentions, which briefs have been received, and the cause is ready for disposition.

The pertinent facts as developed by the testimony at the trial and as admitted in the pleadings are not in dispute. The inferences to be drawn from them pose the major difficulty in the determination of the parties' contentions.

The President of the Arkansas Bank and Trust Company and principal stockholder is Cecil W. Cupp, formerly of Arkadelphia, Arkansas. In May 1959 Mr. Cupp acquired the stock of Mr. David Burgauer, who was President of Arkansas Trust Company. Mr. Cupp was President of the Citizens National Bank of Arkadelphia at the time he purchased the stock of Arkansas Trust Company. The Arkansas Trust Company in May 1959 had a capital structure of $400,000 and was located on Central Avenue in Hot Springs, Arkansas. The plaintiff, Arkansas Bank and Trust Company, is the successor of the Arkansas Trust Company. Its principal place of business is in Hot Springs, Arkansas, at the intersection of Malvern Avenue and Benton Street.

This property, owned in 1956 by Mrs. Afton Wootton and her son, Richard Wootton, is a tract of land containing 29,835 square feet, bounded by Malvern Avenue, Benton Street and Broadway. In March 1956 James W. Dowds, Sidney Nutt, and Q. Byron Hurst purchased the property from the Woottons for $125,000. At the time of the sale from the Woottons to Dowds, et al., Ray Smith, Sr., appraised the property for the Woottons at a value of $40,000 for the land and $85,000 for the improvements.

Dowds, et al., operated the property as a partnership under the name of "Broadway Square Building." On the partnership's 1956 tax return, the cost of the property was listed as $25,000 for the land and $100,000 for the improvements.

The improvements on the property at the time of the sale from the Woottons to Dowds, et al., consisted of the following:

(a) The Frederick Hotel building, which fronted the intersection of Malvern Avenue and Broadway Street, a two-story brick structure, with a full basement.

(b) A one-story brick garage and service station facing Broadway, which contained a partial basement.

(c) A one-story brick furniture store with a full basement, facing Malvern Avenue.

(d) A one-story brick building with a full basement facing Malvern Avenue, which contained the Salvation Army, The Sail Bar, a barber shop, and a cab stand.

After the purchase of the property by Dowds, et al., certain capital improvements and repairs were made. In 1957 a capital improvement of $10,000 was made in the Frederick Hotel to construct office space on the second floor. In 1956 repairs were made costing $1,331.62; in 1957 additional repairs were made costing $1,448.22; and in 1958 repairs were made costing $1,634.99. The "Broadway Square Building" partnership of Dowds, Nutt and Hurst received the following rents:

                           Gross           Net
                1956     $9,755.00     ( $2,058.87)
                1957     11,225.73     (  4,554.63)
                1958     13,371.36     (  2,729.15)
                1959     14,493.61     (    750.98)
                

On the 1959 partnership tax return of "Broadway Square Building" amounts received under the "lease" were reported as rent.

In May 1959 Dowds, on behalf of the partnership, offered to sell this property to Cecil W. Cupp, President of the Arkansas Bank and Trust Company for $150,000. Cupp advised Dowds that the bank could not purchase the property because of state and federal bank regulations, but that the bank might lease the property if approval of the federal banking authorities and the Comptroller of the Currency could be obtained. The property was in a submarginal area outside the established trade avenues of the City of Hot Springs. One block east of the property was the Rock Island depot and west and south of the property the Missouri Pacific depot.

Mr. Cupp, as President of the Arkansas Bank and Trust Company, had a difficult time obtaining authority from the Board of Directors to negotiate with Dowds for a lease of the property.

The "Agreement of Lease," which was negotiated at arms length, was executed by "Broadway Square Building" and "Arkansas Trust Company" on September 15, 1959. It contained the following major provisions:

"The Lessors Dowds, Hurst, and their wives have this day leased to the Lessee Arkansas Trust Company the following described lands located in the City of Hot Springs, Garland County, Arkansas, to-wit:

description omitted

for a term of Fifteen (15) years, beginning on the 15th day of September, 1959, and ending on the 14th day of September, 1974. The Lessee agrees to pay, and the Lessors agree to accept as rent for said premises during said term the sum of One Thousand Two Hundred Fifty ($1,250.00) Dollars per month, payable in advance on the 15th day of each month through and including the 15th day of August, 1962, and the sum of Nine Hundred ($900.00) Dollars per month, payable in advance on the 15th day of each month beginning the 15th day of September, 1962, through and including the 15th day of August, 1974.

"The Lessoe further agrees that, during the terms of this lease, it will pay all property and ad valorem taxes and special assessments levied against the leased premises and on any building the Lessee may elect to construct on said leased premises, and that it will pay all insurance on the buildings on said leased premises or any replacement thereof, and all costs of operation, maintenance and repair of the buildings or any replacement thereof, and all utility charges, including, but not limited to, water, gas, lights, sewer service, telephone and garbage disposal.

"COVENANTS OF THE LESSEE:

"(1) The Lessee does hereby covenant and agree with the Lessors that it will:

"(A) Pay said rent at the times and place and in manner aforesaid:

"(B) Use and occupy said premises in a careful and proper manner.

"(C) Not use or occupy said premises for any unlawful purposes; and will conform to and obey all present

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