Brown v. Commissioner
| Decision Date | 16 January 1979 |
| Docket Number | Docket No. 8581-77. |
| Parties | Milton O. Brown v. Commissioner. |
| Court | U.S. Tax Court |
Hugh L. Dick, for the petitioner. Jan R. Pierce, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency for the taxable year 1973 in the amount of $5,690. The issue remaining for decision is whether petitioner suffered an ordinary loss on section 12441 stock in the amount of $20,600 in 1973 within section 1244 of the Internal Revenue Code or whether he is entitled to a capital loss on worthless securities under section 165(g).
Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
At the time the petition was filed, Milton O. Brown, petitioner, resided in Portland, Oregon. His Federal income tax return for the calendar year 1973 was prepared and filed on the cash receipts and disbursements method with the Internal Revenue Center in Ogden, Utah.
Petitioner is an attorney, who during 1973 was also involved in numerous other business activities. Sometime during the summer of 1973, petitioner and three other individuals each pooled $25 and answered an advertisement by John A. Reppert for a claimed "blackjack strategy." The letter suggested to petitioner that Reppert had an even better deal than the blackjack strategy, i.e., a system for betting on the horses. This horse race betting system is hereinafter referred to as the "system."
In response to Reppert's letter, petitioner contacted Reppert and expressed an interest in the system. Reppert then visited petitioner in Portland, Oregon, in early October 1973. He convinced petitioner that the system was sound at the time of the aforesaid meeting, and petitioner tentatively agreed to risk a certain amount wagering on the horses.
After petitioner decided to risk his money using the system, he formed a corporation, Gold Pot, Inc., (hereinafter referred to as the "corporation"). Petitioner signed the Articles of Incorporation as an incorporator on October 16, 1973, and filed them with the Oregon State Corporation Commissioner on October 22, 1973. The stated purpose of the corporation was to "engage in every legal activity in the State of Oregon and including gambling where legalized and speculating in various enterprises."
At the organizational meeting and first meeting of the board of directors, the corporation ostensibly adopted a plan to issue section 1244 stock, consisting of 100 shares of common stock for a consideration of $20,600. On October 22, 1973, petitioner subscribed to buy all 100 shares of stock of Gold Pot, Inc., for $20,600. On October 23, 1973, the corporation offered to sell to the petitioner those 100 shares of stock and on October 26, 1973, petitioner deposited $21,000 into the checking account of the corporation at the Portland Metropolitan Branch of the United States National Bank.
On October 26, 1973, the aforesaid bank issued four cashier's checks (numbers 65460, 65461, 65462 and 65464) for $5,000 each, or a total of $20,000 to petitioner drawn on Gold Pot, Inc.'s, account.
On or about October 27, 1973, petitioner flew to Florida to meet Reppert. On October 28, 1973, Reppert and the corporation entered into an agreement (hereinafter referred to as the "agreement") wherein petitioner paid $20,000 in the form of the four cashier's checks to Reppert.
The agreement provided that Reppert was to place bets using the system at various horse race tracks over a three-year period or until such time as the system ceased to return a profit. Reppert was to use funds totaling not less than $50,000 in making the wagers and the petitioner was to receive 25 percent of the net profit at the end of every two-week period. The net profit was defined as gross winnings minus total wagers lost. The agreement also provided that if petitioner had not received at least $20,000 from Reppert on or before April 28, 1974, Reppert would pay petitioner whatever sum was necessary to guarantee petitioner the total sum of $20,000, and such sum was due even if the system was not successful in making a net profit.
On October 29, 1973, petitioner and Reppert entered into a Supplemental Agreement which made provision for testing the systems and provisions for setting up additional "banks."
On December 20, 1973, Reppert informed petitioner by letter that he had lost the $50,000 bank plus $6,000 more and he asked for another $10,000 from petitioner. In a special meeting of the board of directors of the corporation held December 26, 1973, the corporation was dissolved. The petitioner made no serious effort to collect any money from Reppert.
OpinionPetitioner Milton O. Brown became interested in John A. Reppert's system for betting on the horses. He formed Gold Pot, Inc., and adopted a plan to issue section 1244 stock. Petitioner deposited $21,000 into the checking account of Gold Pot, Inc., and had four cashier's checks for $5,000 each totaling $20,000, drawn on that account issued to himself. Then petitioner through the corporation entered into a written agreement with Reppert. He gave Reppert $20,000 (the four cashier's checks) which Reppert was to use to wager on the horses.
Some two months later, Reppert informed petitioner that the $20,000 had been lost gambling on the horses. As a result, the corporation was dissolved.
In his income tax return for the taxable year 1973, petitioner claimed the $20,600 to be an ordinary loss under section 1244 of the Internal Revenue Code. The additional $600 was for petitioner's travel and lodging expenses incurred when he flew to Florida to sign the agreement with Reppert. In his amended pleadings, petitioner has taken the alternative position that if the Court finds that he did not suffer an ordinary loss under section 1244, then he suffered a capital loss under section 165(g).
Respondent takes the position that the stock in the corporation did not qualify as section 1244 stock because the corporation was not "largely an operating company" within the meaning of the regulations. Respondent also...
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