Champion v. CIR, 18937.

• Decision Date: 11 June 1962
• Docket Number: No. 18937.,18937.
• Parties: Flora L. CHAMPION, Individually and as Independent Executrix of the Estate of Frank Champion, deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

303 F.2d 887 (1962)

Flora L. CHAMPION, Individually and as Independent Executrix of the Estate of Frank Champion, deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18937.

United States Court of Appeals Fifth Circuit.

June 11, 1962.

Dougal C. Pope, Charles Crady, III, Houston, Tex., for petitioner.

R. P. Hertzog, Acting Chief Counsel, I. R. S., Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Carolyn R. Just, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before TUTTLE, Chief Judge, and HUTCHESON and JONES, Circuit Judges.

JONES, Circuit Judge.

The Commissioner of Internal Revenue determined income tax deficiencies of Frank Champion and Flora L. Champion for the year 1951 in the amount of $3,358.94, and for the year 1952 in the amount of $177,096.56. The Tax Court agreed with the Commissioner's determination, and its decision and order is before us for review. The transactions from which the asserted tax deficiency arose were those of Frank Champion, who was a party in the proceeding in the Tax Court which is before us for review. He has died and Flora L. Champion, his widow, has qualified as Independent Executrix of his estate. In her representative capacity, she has been substituted for her husband as a petitioner in these proceedings. She is a petitioner in her individual capacity because of the filing of a joint income tax return.

Texas-Ohio Gas Company was a Delaware corporation organized in May, 1951, with an authorized capital stock of 600,000 shares of the par value of 50 cents a share. It was promoted by Clyde Austin. As an incident to its qualification to do business in Texas, Austin made a deposit for the account of the corporation in a Houston bank of a check drawn by Austin upon a bank in which the drawer's balance was less than the amount of the check. The check was credited as full payment for all of the authorized capital stock. The corporation was promptly qualified, and Austin promptly transferred the corporate bank account to his own. The capital stock was issued to "Clyde Austin, Trustee," in two certificates, No. 1 for 380,000 shares and No. 2 for 220,000 shares. Whether a trust was intended is not apparent from the record. The corporation was organized for the purpose of building a gas pipe line and transporting gas from Mexico to Ohio. Apparently some contracts, whether tentative or final is uncertain, were made with owners of gas properties and others, but these seem unimportant for the purposes of the reaching of a solution to the problems presented.

On July 17, 1951, Champion and Texas-Ohio entered into a contract which was in the form of a letter from the company to him. The agreement provided that Champion should "receive for services rendered and to be rendered as manager of the company fifteen per cent. (15%) of the capital stock of Texas-Ohio Gas Corporation and the right to purchase an additional ten per cent. (10%) at the opening price when placed upon the market by the Investment Bankers, simultaneously to when issuance of all the stock represented by the various interests will be issued and made of record." The agreement also provided that an Executive Committee would be appointed and "all stock involved in this transaction will be placed in a voting trust under which the Executive Committee will have the authority to operate." No voting trust was ever set up. It was recited that a detailed agreement would be drafted in the near future. No such agreement was ever prepared.

On July 27, 1951, a meeting of the Board of Directors of Texas-Ohio was held. At the meeting Austin reported that Certificate No. 1 for 380,000 shares should be reissued to Clyde Austin and Frank Champion, Trustees, "to be held by them for future developments, to their own benefit and the benefit of others who contributed to the organizational development of the company as their several interests might appear, such being the agreement with Mr. Champion." On the day of the meeting Certificate No. 1 was cancelled and reissued as Certificate No. 3 to "Clyde Austin and Frank Champion, Trustees." At the meeting Austin stated that 59,999 shares out of Certificate No. 2 should be issued to J. Leslie Witt and Earl E. Beyer, Trustees, and the balance of that Certificate in the amount of 160,001 shares should be held subject to the future order of Champion and Austin. The Board approved Mr. Austin's action in the matter. Certificate No. 2 was surrendered to the company.

An investment banking firm negotiated for and purchased 50,000 shares of Texas-Ohio stock from Austin and Champion at 50¢ per share and 50,000 shares from the company at $2.00 per share, with an option to buy 100,000 additional shares at $2.00 per share. The option was exercised. The 50,000 shares were issued out of Certificate No. 3, and Certificate No. 10 for 330,000 shares was reissued to Austin and Champion, Trustees. Champion received $11,225 from this deal. At the direction of Austin and Champion the 160,001 shares were to be used to meet the commitment to the bankers and for such other purposes as the Board of Directors might determine upon. The investment bankers held 200,000 shares at a cost of $325,000. In April of 1952, Champion bought 5,000 shares of Texas-Ohio stock from the company for 50¢ per share which was delivered to him out of the shares supposedly represented by the 220,000-share Certificate turned in by Austin. A few days later Champion sold this 5,000 shares to Harold F. Wood for $6.50 per share resulting in a profit to him of $30,000. Austin made a similar sale. Of the proceeds of the sale made by Champion the sum of $27,500 was placed in a separate bank account "for the welfare of the company." In May of 1952, Champion received $15,000 from Austin for which Champion was to deliver 3,000 shares of Texas-Ohio stock to a purchaser, then undisclosed, at such time as the company should receive a permit from the Federal Power Commission. No permit was received.

Soon after, probably in June of 1952, the discovery was made that when Austin went through the motions of making payment of $300,000 for the 600,000 shares of the capital stock of the company he had used a worthless check. The investment bankers, finding they had bought into a hollow shell, made demands upon the company and upon Champion. On June 18, 1952, Champion was required by the bankers to place the $27,500 in the company's regular bank account. Champion was required to agree that no action would be taken to recognize claims with respect to the 330,000 shares which had previously been held by Champion and Austin "for future development to their own benefit and the benefit of others." It was required that the 330,000 shares be put in the names of others. The minutes of a meeting of the Board of Directors of Texas-Ohio held on August 5, 1952, recite that Champion called attention to the "agreement under which he was to receive 90,000 shares of the stock of the company," and stated that "it had become necessary to make a readjustment of provisions for distribution of the stock under circumstances which developed after he had given upward of a year of full time service to the company." A motion was then adopted "that 50,000 shares of the original stock of the company be confirmed in Mr. Champion as of the date of his original agreement with the company, that is to say July/7 sic, 1951, upon condition that Mr. Champion make no further claim to stock based upon said agreement, and that said issue of 50,000 shares of stock to him be in full consideration for one year of his service to the company, said year to be considered as having been completed on the first day of July, 1952; it being further provided that Mr. Champion, at his own option, might consider the sale of certain stock of the company to Harold F. Wood, from the proceeds of which sale Mr. Champion has held in abeyance to the credit of the company the sum of $27,500, as a sale from said allocation of 50,000 shares of stock to him, and upon that condition might withdraw from the company said sum of $27,500; it also being provided that this allocation of stock be not in prejudice of any option which may at any time be extended to Mr. Champion for the further purchase of stock of the company." Champion received the $27,500. Two days later a certificate for 65,000 shares was issued to Champion, of which 20,000 was earmarked for others. On September 15, 1952, pursuant to an option, Champion purchased 10,000 shares from the company at $1.00 per share.

In the Federal income tax return of Frank Champion and Flora L. Champion, his wife, for 1951, a profit of $11,225 on the sale of Texas-Ohio stock was reported as a short-term capital gain. In their 1952 return, long-term capital gains were reported of 10,000 shares of Texas-Ohio acquired "7-1951," at a cost of $2,500 and sold "4-52" for $32,500, showing a gain of $30,000, and of 3,000 shares of Texas-Ohio acquired "7-1951," at a cost of $15,000 and sold "5-52" for $30,000, showing a gain of $15,000. The return showed no tax payable. The Commissioner asserted a tax deficiency for 1951 of $3,358.94, which for the most part, resulted from the inclusion of $11,225 as compensation from Texas-Ohio taxable as ordinary income, and the disallowance of $6,237.46 which had been claimed as a deduction for travel and entertainment. For 1952 the Commissioner's proposed deficiency included an item of $251,750 as compensation from Texas-Ohio and a travel and entertainment deduction of $9,817.64, was disallowed. The Commissioner concluded that the $11,225 received by Champion from the sale reputedly made by Austin and himself in 1951 was compensation for services and as such was taxable as ordinary income. The Commissioner held that the $30,000 profit on the stock sold to Wood and the $15,000 received from Austin on the unconsummated sale of 3,000 shares were also compensation for services and...