Arlington Park Jockey Club v. Sauber

• Decision Date: 27 June 1958
• Docket Number: No. 54 C 171,54 C 172.,54 C 171
• Citation: 164 F. Supp. 576
• Parties: ARLINGTON PARK JOCKEY CLUB, Inc., v. Ernest J. SAUBER, District Director of Internal Revenue. WASHINGTON PARK JOCKEY CLUB, a corporation, v. Ernest J. SAUBER, District Director of Internal Revenue.
• Court: U.S. District Court — Northern District of Illinois

164 F. Supp. 576

ARLINGTON PARK JOCKEY CLUB, Inc., v. Ernest J. SAUBER, District Director of Internal Revenue.

WASHINGTON PARK JOCKEY CLUB, a corporation, v. Ernest J. SAUBER, District Director of Internal Revenue.

Nos. 54 C 171, 54 C 172.

United States District Court N. D. Illinois.

June 27, 1958.

Leo J. Schwartz and William J. Friedman, Chicago, Ill., for plaintiffs.

Robert Tieken, U. S. Atty., Donald S. Lowitz, Asst. U. S. Atty., Chicago, Ill., and Charles K. Rice, Asst. Atty. Gen., James P. Garland and William F. Kolbe, Attys., Department of Justice, Washington, D. C., for defendant.

JULIUS J. HOFFMAN, District Judge.

These two cases were consolidated for trial. In Civil Action No. 54 C 171, the plaintiff, Arlington Park Jockey Club, Inc., seeks from the Government the recovery of $102,972.68 of corporate income taxes and interest paid for the fiscal year ended April 30, 1949, and, in addition, interest until repayment is made. In Civil Action No. 54 C 172, the plaintiff, Washington Park Jockey Club, a corporation, seeks from the Government the recovery of $105,110.37 of corporate income taxes and interest paid for the calendar year 1948, and, in addition, interest until repayment is made.

Each of the plaintiff corporations owned $10,000 of the issued $20,000 of the stock of a subsidiary, and the question for decision is whether the plaintiffs may deduct as a bad debt the sum of $227,225.71 which each advanced to the subsidiary within the first fourteen months after its incorporation in a futile effort to insure the success of the subsidiary as a self-sustaining business.

The Commissioner of Internal Revenue disallowed the deduction as a bad debt in the case of each plaintiff and, instead, treated the amounts advanced by the plaintiffs as contributions to capital and therefore deductible only as long term capital losses.

The losses sustained by the plaintiffs were the result of their efforts to make a successful professional football team of the Los Angeles Dons, which operated under a Los Angeles football franchise in the All America Football Conference. Prior to the time that the plaintiffs became financially interested in the Los Angeles Dons the team was owned and operated by Southern California Sports, Inc., which was incorporated under the laws of the State of California on December 20, 1946. Benjamin F. Lindheimer, who was the Executive Director of both plaintiff corporations, was instrumental in organizing the Southern California Sports, Inc., and in securing from the All America Football Conference a franchise for the Los Angeles Dons. Lindheimer was the largest single stockholder in the Southern California Sports, Inc., owning 3,000 shares of its stock having a face value of $30,000, as well as a substantial amount of its debentures. Lindheimer also advanced $270,000 to Southern California Sports, Inc., without receiving therefor any note or other evidence of indebtedness. None of the $270,000 of advances was ever repaid to Lindheimer.

During 1946, the first football season, the Los Angeles Dons were not successful either as a football team or financially. The Southern California Sports, Inc., spent $174,000 hiring and training the Los Angeles Dons for the 1947 season. Prior to the first game of this season, the plaintiffs agreed to and did purchase the Los Angeles Dons from Southern California Sports, Inc., for the price of $10,000. In addition to his position with the plaintiffs, Lindheimer was Chairman of the Executive Committee of the All America Football Conference. Although the Los Angeles Dons had not yet "jelled" as a successful team, Lindheimer was optimistic about the team's future.

Lindheimer testified that if a team could be put together which played good football, and hence would be successful, the franchise would in his judgment be worth between a million and a million and half dollars.

When the plaintiffs agreed to purchase the Los Angeles Dons it was determined that instead of owning the team outright the plaintiffs would cause a new California corporation, to be known as the Los Angeles Dons, Inc., to be formed to take over the team. The sole purpose for organizing a local corporation was to avoid any prejudice which might result from the fact that each of the plaintiffs was an Illinois corporation. Since the Los Angeles Dons was operating under a Los Angeles football franchise it was believed important "to give the club local color and retain the support of Los Angeles area football fans." Don Ameche, who had been president of Southern California Sports, Inc., became president of the new corporation which bore the name Los Angeles Dons, Inc. Similarly, Norman Church and Lloyd Wright became directors of the new corporation in the interests of giving it local color. In his deposition Don Ameche disclaimed any knowledge that the franchize of the Los Angeles Dons had ever been transferred from Southern California Sports, Inc., to the Los Angeles Dons, Inc., describing his role in the whole matter as entirely "passive."

Preceding the completion of the transfer of the Los Angeles Dons, Lindheimer discussed and received permission from Admiral H. Ingram, who was then Commissioner of the All America Football Conference, to make the proposed transfer. Before securing approval from the Conference for the transfer, Lindheimer assured Admiral Ingram that the plaintiffs would pay all the business obligations of the Los Angeles Dons, without regard to the fact that a separate California corporation was to be organized to own the team.

The plaintiff corporations each held a special meeting of its board of directors on August 28, 1947, at which it was agreed that the two corporations would jointly purchase the Los Angeles Dons from the Southern California Sports, Inc., for $10,000 and then transfer the team to a new California corporation, together with $210,000 of cash in return for which each of the plaintiffs would receive 100 shares of stock in the new California corporation together with an unsecured demand note for $100,000 bearing 2½% interest. The reason for the advances made by each plaintiff was explained in the minutes of the meetings of the respective boards of directors as follows:

"It was further reported that if said offer of the Southern California Sports, Inc. to sell the Los Angeles Dons was favorably acted upon by Arlington Park and Washington Park, it would be necessary for each corporation to invest $10,000 as capital and to advance, in order to enable the corporation to function for the current season, an additional $100,000. Whether the 1947 season would result in a financial profit or loss depended to a great part on the success of the football team, and in considering whether such investment should be made the directors should contemplate the possibility of an operating loss in 1947 of anywhere from $50,000 to $150,000. In such event, of course, the advances of $100,000 by each corporation could not be repaid at the end of the current season, but would depend on the future success of the team for ultimate liquidation."

At the time of the transfer the Los Angeles Dons had an annual payroll of $332,586.92 for salaries to coaches, members of the team, and other necessary personnel. In purchasing the Los Angeles Dons the plaintiffs were securing only the franchise, together with contracts which had been entered into with coaches, team members, personnel and for games scheduled for the ensuing season. The Los Angeles Dons, as of August 29, 1947, suffered an aggregate operating loss of $406,113.12.

The proposed transfer was carried out as planned. The Los Angeles Dons, Inc., was organized under the laws of California, and the franchise transferred to it. The Los Angeles Dons continued to lose money through the ensuing fourteen months. In addition to the sum of $20,000 paid by the plaintiffs for stock and the advancement of $200,000 on demand notes on September 2, 1947, the plaintiff Washington Park advanced to the Los Angeles Dons, Inc., the additional sum of $100,000 on March 5, 1948, and the plaintiff Arlington Park advanced the further sum of $100,000 in two installments, one of $50,000 on June 10, 1948, and another of $50,000 on September 8, 1948. These advances of $200,000 were not evidenced by notes and bore no interest. Both the original advancement of $200,000 on September 2, 1947, and the subsequent amount of $200,000 advanced in March, June and September, 1948, were used to meet operating expenses of the Los Angeles Dons.

On October 18, 1848, a partnership formed by Lindheimer and members of his family purchased from the Los Angeles Dons, Inc., for the sum of $39,970.25, the franchise of the Los Angeles Dons, together with all other assets of Los Angeles Dons, Inc., exclusive of cash and certain accounts receivable. As a condition of the sale, the Los Angeles Dons, Inc., agreed to pay and satisfy all current liabilities accrued prior to October 18, 1948. In order to enable the Los Angeles Dons, Inc., to fulfill the latter obligation, the plaintiffs each advanced $25,000 to the Los Angeles Dons, Inc., on October 20, 1948, and each made an additional advance of $2,500 on December 20, 1948. These advances were not evidenced by notes and did not bear interest. As in the case of each of the other advances, the entries on the books of both the lending corporation and the borrowing corporation treated the advances as loans.

With the advances made by the plaintiffs, the Los Angeles Dons, Inc., paid off all its liabilities other than its indebtness to the plaintiffs, and dissolved in December, 1948. On the dissolution, each of the plaintiffs recovered $274.29.

In its income tax return for the calendar year 1948, Washington deducted as a bad debt the loss of $227,225.71 which it sustained in December, 1948, when the Los Angeles Dons, Inc., dissolved with a payment of only $274.29 on the $227,500 which Washington had advanced to that corporation....