City Builders Finance Co. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 34492.

• Decision Date: 18 December 1930
• Docket Number: Docket No. 34492.
• Parties: CITY BUILDERS FINANCE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

21 B.T.A. 800 (1930)

CITY BUILDERS FINANCE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 34492.

Board of Tax Appeals.

Promulgated December 18, 1930.

Frank C. Olive, Esq., and George S. Olive, C. P. A., for the petitioner.

O. J. Tall, Esq., for the respondent.

This proceeding is for the redetermination of deficiencies in income tax as follows:

                    For the fiscal year 1923 ________________________  $1,302.62
                    For the fiscal year 1924 ________________________     266.06
                    For the fiscal year 1925 ________________________   5,061.29
                

There were two assignments of error. The first assignment relative to the inclusion by the Commissioner in gross income of $4,461.88, was conceded by the respondent at the hearing. The second assignment of error is as follows:

The respondent erred in that he failed to allow as a deduction from the petitioner's gross income for the fiscal year ended June 30, 1925, a loss of $12,500 sustained by it on the disposal of 32½ shares of stock of a corporation other than the petitioner.

FINDINGS OF FACT.

Petitioner is an Indiana corporation with its principal office in Indianapolis.

In 1920 Richard Croker and his wife, Bula Croker, of New York, owned about two miles of ocean frontage at Palm Beach, Fla. In 1920 Croker and his wife entered into a contract with J. B. McDonald, by the terms of which Croker and his wife constituted and appointed said McDonald their agent to sell said lands in lots for a term of five years, with right of renewal under certain specified conditions for another five years, and with stipulations that in the sale of said lots, there should be paid to the Crokers $150 per front foot, net to them, and that all amounts obtained by McDonald in excess of said $150 per front foot should belong to McDonald. The contract also contained option provisions, by which McDonald had the option at any time, during the ten-year period, to purchase said land, or such part thereof as then remained unsold, at $150 per front foot. Thereafter, in October, 1920, McDonald entered into a contract with Ewing Graham, E. D. Anthony, and A. P. Anthony, by the terms of which contract McDonald, in consideration of certain advancements made by Graham and the Anthonys, conveyed to each of them a one-fourth interest in said contract rights, McDonald as a real estate broker retaining the exclusive sales agency. The contract also provided that a corporation should at once be organized to take over the said lands, under the terms and conditions contained in the Croker contract, as well as the contract between themselves.

Thereupon Palm Beach Estates, Inc., a Florida corporation, was organized, and the said lands and contract rights and obligations were assigned to it. Soon after the organization of the above-named corporation, and the assignment to it of the said lands under those contracts, Croker died, and the whole situation became involved in litigation in a three-cornered contest in the courts. Children of Croker by a former marriage challenged his right to make the original contract. Mrs. Croker contended that the contract between herself and Mr. Croker on the one part, and McDonald on the other part, was a personal contract, and was not assignable to a corporation. The suit filed by the Croker children was decided against their contentions. The suit filed by Mrs. Croker was decided by the lower court in favor of the Palm Beach Estates, Inc., but is now pending in the Supreme Court of Florida.

Petitioner, the City Builders Finance Co., and another corporation, known as the City Builders Realty Co., are Indiana corporations with personnel of stockholders practically identical. Both of said corporations operated in Florida and became acquainted with the Croker-McDonald contract as well as its several mutations. McDonald succeeded in getting the City Builders Finance Co. and the City Builders Realty Co. interested in the Palm Beach Estates, Inc., project, and as a result they purchased a one-fourth interest in the Palm Beach Estates, Inc., for $50,000, one-half of which purchase price was paid in cash by petitioner, for a one-eighth interest. The total number of shares of stock of the Palm Beach Estates, Inc., at that time, was 260, and petitioner became the owner and received 32½ shares, paying $25,000 therefor on May 26, 1923.

On October 9, 1924, the litigation hereinbefore referred to reached a point where it became necessary to raise and deposit in court $529,000 in cash. None of the stockholders of the Palm Beach Estates, Inc., was prepared to furnish that money and McDonald and his associates opened negotiations with a Phipps Co., known as the Palm Beach Co., to obtain a loan of the necessary amount of money. As a result of such negotiations, the Phipps Co. and the Palm Beach Estates, Inc., entered into a contract, with the result that the Phipps Co. furnished the cash, $529,000, which was deposited in court to await final decision and orders of the court in the suit brought by Mrs. Croker.

The Phipps Co. furnished that money as a loan under the contractual terms and conditions that the money should be deposited in court and remain so deposited until final decree be obtained, and in the event Mrs. Croker finally won the case, in effect canceling the assignment to the corporation, that said money should be returned to the Phipps Co. and the Phipps Co. contract of...