Campbell v. Commissioner
| Decision Date | 08 June 1961 |
| Docket Number | Docket No. 56121. |
| Citation | 20 TCM (CCH) 825,1961 TC Memo 166 |
| Parties | S. J. Campbell and Ileen B. Campbell v. Commissioner. |
| Court | U.S. Tax Court |
COPYRIGHT MATERIAL OMITTED
B. W. Flinn, C. P. A., City Hall Bldg., Rockford, Ill., and Karl C. Williams, Esq., for the petitioners. Walter T. Hart, Esq., for the respondent.
The Commissioner determined income tax deficiencies for 1949 and 1950 in the amounts of $4,588.82 and $9,602.81, respectively. The first question is whether amounts paid by a corporation to cover expenses incurred by one of the petitioners represented income to petitioners rather than ordinary and necessary business expenses of the corporation. The second question is whether gains from sales of horses were capital gains.
The petitioners filed joint returns for the taxable years with the collector of internal revenue for the first district of Illinois. The issues relate to S. J. Campbell. Therefore, he is referred to hereinafter as the petitioner.
Campbell was the president, a director, and a stockholder of Kable News Company, an Illinois corporation, in 1949 and 1950 and during the 15 preceding years.
Kable News is engaged in the business of buying magazines and periodicals on consignment from publishers and selling them on consignment to wholesalers throughout the United States. The publishers are located in the United States and in Toronto, Canada. The business of Kable News is highly competitive. It competes with about 12 other concerns engaged in the same business. In the taxable years, Kable News dealt with about 30 publishers and 850 wholesale dealers, and it handled over 150 magazines and periodicals, and also, pocketbooks. The wholesalers to whom Kable News sells publications make sales to operators of newsstands located in drugstores, hotel lobbies, on streets, and other places patronized by the general public. Some of the magazines are devoted to special kinds of material such as detective stories, comics, crossword puzzles, popular science subjects, and articles dealing with astrology.
Kable News maintains an office in New York City where 50 individuals were employed in 1949 and 1950. It also maintains an office in Chicago where there are 2 employees. It has an office in Mount Morris, Illinois, 120 miles from Chicago, where there are about 75 employees, all of its accounting work is done, all of the magazines and books (printed by others) are received from the publishers, and from which they are reshipped to the customers of Kable News. Kable News also employs salesmen who travel and local representatives. The solicitation and promotion of business, purchases and sales, and general business contacts are handled in the New York and Chicago offices. A large percentage of the corporation's business is taken care of by the New York office. Warren Angel was a director and the manager in charge of the New York office until his death in January 1949. George B. Davis became the manager of the New York office in June 1949. Campbell was in charge of the Chicago office prior to and during the taxable years.
The corporation's gross receipts were over $11,835,600 in 1949, and $9,993,271 in 1950. It had a net profit for 1949 of about $50,348, and a loss for 1950 of about $212,000. The corporation paid dividends in the amount of $15,000 in 1949, and $13,600 in 1950.
The outstanding stock of Kable News in 1949 and 1950 consisted of 20,000 shares of common stock, of which the Campbells owned 13,600 shares, and Warren Angel and the estate of Angel's deceased wife owned 6,400 shares. Of the stock owned by the Campbells, 10,100 shares were held in their names, jointly, and 3,500 shares were held in the name of Ileen Campbell. The Campbells, owning the majority stock, controlled Kable News. On January 9, 1950, Kable News agreed to purchase the 6,400 shares formerly owned by Angel and his deceased wife's estate, with the intention of holding those shares as treasury stock. Those shares were held in escrow pending the purchase of all of them by Kable News. It acquired those shares by December 15, 1950. Thereafter, there were outstanding only the 13,600 shares owned by the Campbells.
The directors of Kable News during 1949 and 1950 were Campbell, his wife, and Charles E. Stuart. Ileen Campbell was neither an officer nor an employee of Kable News.
The Campbells maintain their home in Mount Carroll, Illinois, which is 128 miles west of Chicago and 30 miles from Mount Morris. They occupied, however, an apartment in Chicago, leased by Kable News, during a substantial period during 1949 and 1950. They kept personal belongings and clothing in the apartment at all times.
The Campbells own and operate farms in Carroll County comprising 2,500 acres. The farms are located near and close to their home in Mount Carroll. At his farms, Campbell kept a few riding horses and hackney horses. He is interested in horses.
Campbell's duties during the taxable years as the president and chief executive of Kable News included negotiating and executing contracts for the corporation, holding conferences with the executives and representatives of wholesalers and publishers, promoting the business of the corporation, and attending meetings and conventions of publishers, wholesalers, and distributors. He visited the New York office of Kable News occasionally.
During the taxable years, Kable News paid bills and invoices for expenses incurred by or for Campbell. Such charges were billed directly to the corporation. They were for railroad and pullman tickets, hotel bills, the rent of the Chicago apartment and other apartment expenses, purchases of merchandise, restaurant charges, tickets to shows, and an all-expense trip to Europe in 1950 for Campbell and his wife. In addition, the corporation paid Campbell a cash expense allowance. The total amounts disbursed by the corporation for all of such items was $12,436.05 in 1949, and $15,984.67 in 1950, all of which were included in the corporation's deductions in its returns for 1949 and 1950 for traveling, entertainment, and other business expenses.
Upon the audit of the income tax returns of Kable News for its fiscal years ending on September 30, 1949 and 1950, the Commissioner determined that of the above amounts, only $4,470.35 was deductible by the corporation for 1949, as business expense, and only $3,229.66 was deductible for 1950; and he disallowed deductions of $7,965.70, for 1949, and $12,755.01, for 1950. The Commissioner included in petitioners' taxable income $7,965.70, for 1949, and $12,755.01 for 1950 on the ground that they had received income from Kable News in cash and through payments for their personal benefit. He gave the following explanation:
It is determined that you received from Kable News Company, in the form of cash and payments for your personal benefit, the amount of $7,965.70 during * * * 1949 and the amount of $12,755.01 during * * * 1950, which amounts constitute taxable income to you * * * under sections 22(a) and 115 of the Internal Revenue Code.
The total amounts of bills paid by Kable News for expenses of Campbell and the cash received by Campbell from the corporation in 1949 and 1950, the portions of each item for which the corporation was allowed business expense deductions, and the portions which the respondent determined constituted income of Campbell (which are in dispute) are set forth in the following schedule:
-----------------------------------------------------------------------------------------
Deductions Amounts
Expenses Paid Allowed Added to Campbell's
Dates by Kable News Co. Total Paid Kable News Income
-----------------------------------------------------------------------------------------
1949
1949 Rent Chicago Apt.............. $ 4,771.14 $ 2,385.57 $ 2,385.57
1949 Cash to Campbell.............. 3,562.84 1,187.61 2,375.23
1/18 Stop & Shop Store............. 351.34 -0- 351.34
1/31 Ritz Carlton, N. Y. .......... 642.84 321.42 321.42
1/31 R. R. Tickets, N. Y. ......... 97.92 -0- 97.92
4/12 R. R. Tickets, N. Y. ......... 382.95 191.48 191.47
4/12 Ritz Carlton, N. Y. .......... 338.55 169.27 169.28
5/4 Decorating Apt. .............. 430.00 215.00 215.00
10/5 International Livestock Show.. 270.00 -0- 270.00
10/10 National Horse Show........... 378.00 -0- 378.00
10/28 Royal Winter Horse Show....... 75.00 -0- 75.00
11/23 Ritz Carlton, N. Y. .......... 775.65 -0- 775.64
12/19 Saddle & Sirloin Club......... 359.83 -0- 359.83
__________ __________ __________
$12,436.05 $ 4,470.35 $ 7,965.70
1950
1950 Rent Chicago Apt. ............ $ 4,686.00 $ 2,343.00 $ 2,343.00
1950 Cash to Campbell.............. 1,976.69 658.89 1,317.80
4/14 R. R. Tickets, N. Y. ......... 243.69 121.85 121.84
5/18 R. R. Tickets, N. Y. ......... 211.84 105.92 105.92
8/31 R. R. Tickets, Chicago ....... 142.54 -0- 142.54
9/27 International Livestock Show.. 270.00 -0- 270.00
9/28 Party, Chicago Apt. .......... 162.75 -0- 162.75
__________ __________ __________
Sub-total .................. $ 7,693.51 $ 3,229.66 $ 4,463.85
1950 European Trip ................
...To continue reading
Request your trial