Constantin v. Commissioner

• Decision Date: 31 January 1966
• Docket Number: Docket No. 95445.
• Citation: 25 TCM (CCH) 166,1966 TC Memo 27
• Parties: E. Constantin, Jr. and Ruth F. Constantin v. Commissioner.
• Court: U.S. Tax Court

25 T.C.M. (CCH) 166 (1966)

T.C. Memo. 1966-27.

E. Constantin, Jr. and Ruth F. Constantin v. Commissioner.

Docket No. 95445.

United States Tax Court.

Filed January 31, 1966.

Jack Gray Johnson, 1700 Mercantile Bank Bldg., Dallas, Tex., and Robert L. Blumenthal, for the petitioners. James F. Hart, for the respondent.

Memorandum Findings of Fact and Opinion

HOYT, Judge:

Respondent determined a deficiency in the income tax of petitioners for the taxable year 1958 in the amount of $62,551.77. The only issue presented is whether petitioners are entitled to a business bad debt deduction in the amount of $117,184.47 for the taxable year 1958, or in the alternative, to a nonbusiness bad debt deduction for that year.

Findings of Fact

Some of the facts have been stipulated and the Stipulation of Facts, together with the exhibits attached thereto, are incorporated and made a part of our Findings by this reference.

Petitioners, E. Constantin, Jr., and Ruth F. Constantin, are husband and wife residing in Dallas, Texas. They filed a joint Federal income tax return for the calendar year 1958 on the cash basis with the district director of internal revenue at Jackson, Mississippi.

Ruth F. Constantin is a petitioner herein only because petitioners filed a joint return for 1958, and hereinafter E. Constantin, Jr., will be referred to as the petitioner.

Since 1942, petitioner has been engaged in the oil and gas business as an independent oil producer and oil refiner. He has conducted these businesses in corporate, partnership, and individual forms in New Mexico, Texas, Arkansas, and Mississippi.

Petitioner employed between 300 and 400 employees, including his brother, Jules Constantin. As manager of production for petitioner, Jules' duties consisted of overseeing the drilling, equipping, completion and operation of oil and gas wells. Jules had management authority over many of petitioner's employees.

Jules died on January 2, 1953, and was survived by his wife, Sally, and two sons by a prior marriage, James A. and Harry L. Constantin.

Jules Constantin and W. H. Rogers, Jr., jointly purchased oil and gas properties in which they each owned a 50 percent interest. Said venture was carried on the books of petitioner as the "Constantin and Rogers" account.

The petitioner, Jules, W. H. Rogers, Jr., and Charles Else jointly purchased oil and gas properties in which Jules owned a 2/9th interest and the petitioners owned a 3/9th interest. Said venture was carried on the books of petitioner as the "CCE&R" account.

Jules, the petitioner, A. A. Spencer, and W. H. Rogers, Jr., jointly purchased oil and gas properties in which Jules owned an interest. Said venture was carried on the books of petitioner as the "CCS&R" account.

The properties on which most of the advances here involved were made were those owned jointly by Jules and W. H. Rogers, Jr. Approximately 25 wells were drilled on these properties. All of the properties were operated by petitioner, acting for the respective joint co-owners.

With the exception of stock in the Paluxy Asphalt Company, all of the property owned by Jules at his death, including all of the oil and gas properties involved herein, constituted community assets of Jules and his wife, Sally.

The petitioner maintained books and records for the period 1943 to 1958, inclusive, on which were recorded various charges and credits pertaining to advances made by petitioner on behalf of Jules and other joint owners for acquiring, developing, equipping, or operating the oil and gas leases.

A summary of 17 different ledger accounts which pertain to advances made by petitioner on behalf of Jules and the Estate of Jules Constantin, Deceased, during said periods shows the following:

(a) the name of the account to which it pertains,

(b) the total charges and total credits, by calendar year, which were recorded in such account, and

(c) the net debit or credit balance reflected by such account at the end of each calendar year of its existence through September 30, 1958.

Included among the charges to the Jules Constantin Account (J. Constantin Estate Account after the death of Jules Constantin), as reflected in said summary, are the following charges for expenditures made by petitioner on behalf of Jules during the period 1943 through 1952, but not made for acquiring, developing, equipping or operating oil and gas leases:

                  (a) Various telephone and telegraph
                       expenses ......................  $  460.50
                  (b) Various automobile expenses
                       of Jules Constantin ...........     126.25
                  (c) Various automobile expenses
                       of Harry Constantin, son of
                       Jules Constantin ..............     568.11
                  (d) March 15, 1943 — Check No
                       6704 ..........................     500.00
                  (e) June 22, 1943 — Draft ..........     488.02
                  (f) Nov. 15, 1950 — Check No. 8586     1,000.00
                  (g) Dec. 11, 1950 — Check No. 8741     1,000.00
                                                        _________
                                                        $4,142.88
                                                        =========
                

Except for the aforesaid amount of $4,142.88 expended for personal items and described hereinabove, all of the charges in all of the accounts reflected in the 17 summaries of petitioner's books and records represent expenditures made by petitioner on behalf of various parties (including Jules and the Estate of Jules Constantin) for acquiring, developing, equipping or operating various oil and gas leases.

The following listing sets forth, as to each of the 17 accounts summarized, that portion of the balance in such account at January 3, 1953, and at September 30, 1958, which represented unrecovered and unreimbursed expenditures which were made by petitioner on behalf of Jules and the Estate of Jules Constantin, Deceased (except that the credit balance in the last account, Schedule 17, represents to the extent of such balance a recovery in excess of expenditures in such account):

                ----------------------------------------------------------------------------------------------
                    Schedule
                       No.                       Account                           1/3/53      9/30/58
                ----------------------------------------------------------------------------------------------
                        1    J. Constantin & W. H. Rogers, Jr. ................ $ 28,438.88  $  29,534.27
                        2    Constantin & Rogers — Archer County ..............       24.88         24.88
                        3    J. Constantin & W. H. Rogers — Eastland County ...      874.41        874.41
                        4    J. Constantin & W. H. Rogers — Cora Roberts A
                               Cora Roberts B. ................................   12,821.37     12,821.95
                        5    Constantin & Rogers — Throckmorton County ........        9.20          9.20
                        6    J. Constantin & W. H. Rogers — Oklahoma Operations    1,220.83      1,220.83
                        7    J. Constantin & W. H. Rogers Whit Lease —
                               Falls Co. ......................................    1,132.18      1,133.05
                        8    J. Constantin — Padgett & Wilkinson ..............   13,756.58     10,788.00
                        9    C. C. E. & R. ....................................   16,982.91        -0-
                       10    C. C. E. & R. Equipment ..........................   13,276.64        -0-
                       11    J. Constantin Estate — C. C. E. & R...............      -0-        29,567.51
                       12    Jules Constantin Account (J. Constantin — Estate
                               Account after death of Jules Constantin) .......   22,360.55     20,290.19
                       13    E. Constantin III & J. Constantin ................      -0-           -0-
                       14    Constantin, Constantin, Spencer & Rogers .........   12,577.74        -0-
                       15    J. Constantin — C. C. S. & R. ....................      -0-        12,577.74
                       16    J. Constantin Swabbing ...........................      403.36        403.36
                       17    Jules Constantin Carey-Thompson ..................   (2,329.80)    (2,329.80)
                                                                                ___________   ___________
                       Net Total .............................................. $121,549.73   $116,915.59
                                                                                ===========   ===========
                    Note (1): The Jules Constantin portion of the Schedule 9 and Schedule 10 accounts
                              was transferred to the Schedule 11 account during 1955
                    Note (2): The Jules Constantin portion of the Schedule 13 account was transferred
                              to the Schedule 12 account during 1951
                    Note (3): The Jules Constantin portion of the Schedule 14 account was transferred
                              to the Schedule 15 account during 1955
                    Note (4): All of the above balances at September 30, 1958, represent expenditures
                              made prior to September 30, 1956, except for the following amounts in the
                              J. Constantin & W. H. Rogers, Jr. Account, Schedule 1
                                               1956 (after Sept. 30th) $  346.57
                                               1957 ..................  1,489.14
                                               1958 ..................  1,141.27
                                                                       _________
                                                   Total ............. $2,976.98
                                                                       =========
                ----------------------------------------------------------------------------------------------
                

The amounts listed hereinabove under the 9/30/58 column, totaling $116,915.59, were charged off by petitioner on his books and records on September 30, 1958. together with an additional amount of $268.88 not there listed.

Jules did not sign any notes or execute any written instruments pertaining to the advances made to him or on his behalf by petitioner. Also, there was no understanding or arrangement for the time of repayment or the payment of interest with respect to said advances.

Petitioner employed a younger brother, Charles, at a lower level than Jules in petitioner's organization, and peti...