Diamond v. Comm'r of Internal Revenue
| Decision Date | 21 June 1971 |
| Docket Number | Docket Nos. 3260-65,2989-66. |
| Citation | 56 T.C. 530 |
| Parties | SOL DIAMOND AND MURIEL DIAMOND, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard Weinberger, for the petitioners.
Lewis M. Porter, Jr., for the respondent.
1. In 1961 petitioner, as a mortgage broker, received $145,186.37 in commissions or fees from borrowers for obtaining loans on their behalf from Marshall Savings & Loan, which was controlled by the Moravec family. During the same year petitioner made secret payments totaling $39,398.50 to the Moravecs. Held, the commissions are fully includable in petitioner's 1961 gross income. Sec. 61, I.R.C. 1954. Held, further, petitioner's payments to the Moravecs are not deductible as ordinary and necessary business expenses. Sec. 162, I.R.C. 1954.
2. Petitioner performed services for Kargman in obtaining a mortgage loan for property which Kargman was purchasing. The loan was in the full amount of the purchase price. As compensation for his services Kargman gave petitioner an interest in the venture whereby for 24 years petitioner would be entitled to 60 percent of the earnings from the property and would be chargeable with losses in the same proportion. Less than 3 weeks after acquiring that interest, petitioner sold it for $40,000. Held, the interest had a fair market value of $40,000 when petitioner received it and that amount represents ordinary income to him. Sec. 61(a)(1), I.R.C. 1954. Sec. 721, as interpreted by regs. sec. 1.721-1(b)(1), relied upon by petitioners, is inapplicable here to remove such income from the otherwise operative provisions of sec. 61(a)(1). Held, further, petitioners have failed to establish that they are entitled to a deduction for petitioner's share of a partnership loss stemming from the termination of the venture with Kargman. Secs. 708 and 752, I.R.C. 1954.
The Commissioner determined deficiencies of $36,657.57 and $16,507.27 in petitioners' income tax for the calendar years 1961 and 1962 respectively. After concessions, the following issues remain for decision: (1) Whether certain commissions received by petitioner Sol Diamond in 1961 must be included in petitioners' gross income for that year under section 61, I.R.C. 1954, and if so, whether purported ‘consultants fees' paid by him in respect of such commissions during that year are deductible as ordinary and necessary business expenses under section 162, I.R.C. 1954; and (2) whether petitioner Sol Diamond received ordinary income in the amount of $40,000 in 1962 as compensation for services rendered, and if so, whether petitioners are entitled to a deduction in that year for petitioner's share of an alleged $40,000 loss on termination of a partnership.
The parties have stipulated certain facts which are incorporated herein by this reference.
Petitioners Sol and Muriel Diamond are husband and wife. They filed joint Federal income tax returns for the calendar years 1961 and 1962, prepared on the cash receipts and disbursements method of accounting, with the district director of internal revenue at Chicago, Ill. They resided in Chicago, Ill., at the time the petition in this case was filed.
During 1961 and 1962 Sol Diamond (petitioner) was a builder and a mortgage broker. His building activities included the purchase of land, construction of buildings and homes on the land, and ultimately sale of the improved properties. In his capacity as a builder, petitioner served as president of First Federal Townhouses, Inc. From time to time petitioner arranged for loans to be made to that corporation on the basis of real estate mortgages. He arranged for the loans through a mortgage broker, and the corporation paid the broker a percentage commission for each loan.
While engaged in the building business, petitioner became acquainted with Henry Moravec, Sr. (Henry, Sr.), and his son, Henry Moravec, Jr. (Henry, Jr.), who were officers of Marshall Savings & Loan Association (Marshall) of Riverside, Ill., licensed and operated under the laws of the State of Illinois. At all times relevant herein, its deposits were insured by the Federal Savings & Loan Insurance Corporation. During 1961 Marshall was a ‘mutual association of depositors,‘ and had at least 20,000 depositors. The Moravecs obtained and voted a majority of the depositors' proxies at the association's annual meetings, and as a result, they were able to name and elect a slate of directors at the meetings. Marshall's officers included Henry J. Moravec, Sr., as president, Henry J. Moravec, Jr., as executive vice president and secretary, and Jerome Moravec (Henry, Sr.‘s brother) as vice president and treasurer.
During 1960 or 1961, Henry, Jr., suggested that petitioner become a mortgage broker. He told petitioner that Marshall needed responsible and successful builders as borrowers and that, as the result of his contacts in the building industry, petitioner could make more money by bringing borrowers to Marshall than he could by building homes. Petitioner accepted the offer and began work as a mortgage broker.
Both Henry, Sr., and Henry, Jr., instructed petitioner in his duties. As a mortgage broker, petitioner's functions included calling on builders, persuading them that he could provide them with better service than could the brokers with whom they were currently doing business, and assisting them in obtaining ‘payouts' on loans that he might arrange on their behalf.
Before approving a loan to any of petitioner's clients, Henry, Jr., visited and examined the property to be mortgaged. On occasion he told petitioner how much to charge as a broker's commission for arranging a loan from Marshall. Howe Marshall. However, Henry, Jr., did not determine whether petitioner in fact received such commissions.
For about 6 months petitioner was unable to produce any business for Marshall. But during 1961 business improved, and petitioner was able to produce a number of builders in need of mortgage loans.
During 1961 petitioner received the following payments as commissions from borrowers with respect to loans which he had placed with Marshall:
+--------------------------------------------------+
¦Borrower ¦Date ¦Amount ¦
+---------------------------+--------+-------------¦
¦ ¦ ¦ ¦
+---------------------------+--------+-------------¦
¦Gleich Construction ¦1/13/61 ¦$7,333.37 ¦
+---------------------------+--------+-------------¦
¦Krilich Builders ¦1/24/61 ¦1,650.00 ¦
+---------------------------+--------+-------------¦
¦Jack Netchin ¦3/14/61 ¦* 18,610.75¦
+---------------------------+--------+-------------¦
¦Gleich Construction ¦5/ 4/61 ¦1,000.00 ¦
+---------------------------+--------+-------------¦
¦Jack Netchin ¦5/ 4/61 ¦* 30,000.00¦
+---------------------------+--------+-------------¦
¦Gleich Construction ¦5/20/61 ¦650.00 ¦
+---------------------------+--------+-------------¦
¦Jack Netchin ¦5/26/61 ¦* 7,539.50 ¦
+---------------------------+--------+-------------¦
¦Krilich Builders ¦6/ 1/61 ¦3,952.00 ¦
+---------------------------+--------+-------------¦
¦Melvin Ruder ¦6/ 9/61 ¦1,300.00 ¦
+---------------------------+--------+-------------¦
¦First National Construction¦6/ 9/61 ¦1,000.00 ¦
+---------------------------+--------+-------------¦
¦Do ¦6/15/61 ¦1,000.00 ¦
+---------------------------+--------+-------------¦
¦Richard Gremley ¦7/17/61 ¦7,488.00 ¦
+---------------------------+--------+-------------¦
¦Do ¦7/17/61 ¦5,000.00 ¦
+---------------------------+--------+-------------¦
¦Krilich Builders ¦7/28/61 ¦18,246.00 ¦
+---------------------------+--------+-------------¦
¦First National Construction¦7/31/61 ¦15,630.00 ¦
+---------------------------+--------+-------------¦
¦Greenwood Estates ¦8/ 2/61 ¦342.00 ¦
+---------------------------+--------+-------------¦
¦Jack Netchin ¦8/30/61 ¦233.00 ¦
+---------------------------+--------+-------------¦
¦Krilich Builders ¦9/20/61 ¦* 2,687.00 ¦
+---------------------------+--------+-------------¦
¦Do ¦9/29/61 ¦2,000.00 ¦
+---------------------------+--------+-------------¦
¦Do ¦11/21/61¦3,344.00 ¦
+---------------------------+--------+-------------¦
¦Jack Netchin ¦12/11/61¦127.00 ¦
+---------------------------+--------+-------------¦
¦Do ¦12/11/61¦243.75 ¦
+---------------------------+--------+-------------¦
¦Krilich Builders ¦12/11/61¦990.00 ¦
+---------------------------+--------+-------------¦
¦Richard Gremley ¦12/ /61 ¦14,820.00 ¦
+---------------------------+--------+-------------¦
¦ ¦ ¦ ¦
+------------------------------------+-------------¦
¦Total ¦145,186.37 ¦
+------------------------------------+-------------¦
¦ ¦ ¦ ¦
+--------------------------------------------------+
67 These payments are described in greater detail below.The borrowers listed above were successful builders and were consequently considered to be desirable customers for Marshall to have.
At about the time that petitioner received each of the four foregoing commissions identified by an asterisk, he made a payment or payments by check for the benefit of the Moravecs which was equal to approximately 50 percent of the amount of the commission payment. Such payments were made as follows:
(1) Petitioner received a commission from Jack Netchin in the amount of $18,610.75 on March 14, 1961, and deposited that amount in his checking account at peoples National Bank of Chicago. On the same date petitioner also...
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