Factor v. CIR

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation281 F.2d 100
Docket NumberNo. 16326.,16326.
PartiesJohn FACTOR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Decision Date27 July 1960





Robert E. Sher, Washington, D. C., for petitioner; Isadore G. Alk, Washington, D. C., Jack B. Rubin, Chicago, Ill., of counsel.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Victor A. Altman, Attys., Dept. of Justice, Washington, D. C., for respondent

Before JERTBERG and MERRILL, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

Before us is a petition filed October 22, 1958, to review1 the decision of the Tax Court entered July 24, 1958, relating to federal income taxes for the taxable years 1935 and 1936.

On August 9, 1946, the Commissioner of Internal Revenue mailed to the taxpayer notice of deficiencies in the amount of $38,315.03 for the year 1935 and $134,912.23 for the year 1936, with an added fraud penalty of fifty per cent for each year.

On November 4, 1946, i. e., within the ninety day period, the taxpayer filed a petition with the Tax Court for a redetermination of the deficiencies.2 The specification of errors relates to five topics which the taxpayer has summed up in this manner:

(a) The Tax Court erred in holding that the corporate entity of Montray should be ignored and thereby imposed an improper burden of proof on taxpayer;

(b) The Tax Court erred in holding that the deposits in the Miss C. Pitts bank account with the Lake Shore Trust and Savings Bank, Chicago, Illinois, constituted income to the taxpayer;

(c) The Tax Court committed plain error in its treatment of the Consolidated Diana transaction;

(d) The Tax Court committed plain error in refusing to consider and in failing to give taxpayer credit for disbursements and advances made by him in connection with the Canadian and English operation; and

(e) The alleged concessions made by the taxpayer in the course of settlement negotiations were not admissible in evidence.

This is not the order in which the assignments are treated in the briefs. We have rearranged them for convenience of treatment and to avoid repetition. Because the transactions are rather involved, it is well at the outset to set forth certain facts stipulated or proved.

I Facts Conceded or Found

An extended stipulation of facts was filed in the case on which many of the findings of fact of the Tax Court are based. From it we cull the following admitted facts:

The Petitioner, John Factor, to be referred to as "the taxpayer", is a resident alien, residing in Beverly Hills, California. His income tax returns for the years 1935 and 1936 were filed with the Collector of Internal Revenue for the Sixth California District.

On August 9, 1946, the Commissioner of Internal Revenue issued a Statutory Notice of Deficiency and Penalties setting forth the following proposed deficiencies in income taxes and penalties:

                  Year         Deficiency        50% Penalty
                  1935        $ 38,315.03         $19,157.52
                  1936         134,912.23          67,456.12

The deficiencies and penalties were determined by the Commissioner by increasing the net income for each of the two taxable years as follows:

                                  Taxable Year Ended December 31, 1935
                                        Adjustments to Net Income
                  Net income as disclosed by return ...........                       None
                  Unallowable deductions and additional income
                      (a) Interest income ..................... $  1,161.05
                      (b) Montray Finance Corporation
                          Ltd. disbursements ..................   68,911.87
                      (c) Other income ........................   44,383.19     114,456.11
                                                                ___________    ___________
                  Total ...................................................... $114,456.11
                  Nontaxable income and additional deductions
                      (d) Taxes ..............................................      257.84
                  Net income adjusted ........................................ $114,198.27
                                  Taxable Year Ended December 31, 1936
                                        Adjustments to Net Income
                  Net loss as disclosed by return ...........................  $ 12,304.87
                  Unallowable deductions and additional income
                      (a) Montray Finance Corporation
                          Ltd. disbursements .................. $263,135.19
                      (b) Capital loss restored ...............   10,304.87     273,440.06
                                                                ___________    ___________
                  Total .....................................................  $261,135.19
                  Nontaxable income and additional deductions
                      (c) Interest paid ....................... $    720.53
                      (d) Taxes ...............................      273.14         993.67
                                                                ___________    ___________
                  Net income adjusted .......................................  $260,141.52

For the year 1935, $68,911.87 of such increase in net income consists of payments made by Montray Finance Corporation, Ltd., of Montreal, Canada, to be referred to as "Montray", determined by the Commissioner to be includible in taxpayer's income for that year.

For the year 1936, $263,135.19 of such increase in net income consists of payments made by Montray and remittances from Harry J. Goulding, determined by the Commissioner to be includible in taxpayer's taxable income for that year.

Montray was organized on July 4, 1935, under the laws of the Province of Quebec, Canada. At or about the time of its organization it agreed to purchase from certain directors of Kirkland Gold Rand, Ltd., to be referred to as "Kirkland", ?€” which had mining property in the Kirkland Lake area of Ontario, Canada, ?€” 300,000 shares of the capital stock of that corporation for $12,535.00. On July 10, 1935, Montray agreed to purchase from Kirkland 100,000 shares of the capital stock of the latter corporation at 25? a share and received an option to purchase an additional 900,000 shares at prices ranging from 40? to 75? a share. On July 6, 1935, Montray granted to C. Rankin Nevens & Company, London, England, to be referred to as "Nevens", an option to purchase shares of Kirkland at a price of 90? a share in Canadian money. Nevens made sales of this stock in England at the price of five shillings a share, which at the then rate of exchange then amounted to approximately $1.25. After Gold Underwriters Canada, Limited, of Montreal, Canada, to be referred to as "Gold Underwriters", succeeded Montray the same option was extended to Nevens.

A number of checks issued by Montray during the period between July 11, 1935, and December 28, 1935, listed by the Commissioner, were determined by him to be income taxable to the taxpayer. Except where specifically admitted, the taxpayer denied that the checks or their proceeds were received by him or paid to him or for his benefit, or that they were taxable income.

In 1936, a corporation known as Diana Gold Mines, Ltd., which had been operating a gold mine in the Province of Manitoba, Canada, was in bankruptcy and its assets were for sale. As a result of negotiations between A. C. Berman, acting for the taxpayer, and one Louis Leipsic of Winnipeg, Canada, it was agreed that $80,000 would be advanced to Leipsic; that Leipsic would acquire the assets of Diana Gold Mines, Ltd. from the trustee in bankruptcy and transfer such assets to a new corporation to be organized by him to be known as Consolidated Diana Gold Mines, Ltd., to be referred to as "Consolidated Diana". Of the amounts paid on the purchase in 1935 and 1936 we are concerned here with the $53,000 presumably paid by Montray in 1935.

Consolidated Diana was organized under the laws of the Province of Manitoba and 1,000,000 shares of its stock were issued in exchange for the assets of the bankrupt corporation; 800,000 of such shares, issued in the name of Canadian Mining & Industrial Securities, Ltd., were placed in escrow in October of 1936. These shares have never been disposed of. Of the remaining 200,000 shares, 174,125 shares were offered for sale and sold in England.

Shortly after Consolidated Diana was organized, an agreement was entered into between it and Carlisle Investment Trust, Ltd., to be referred as "Carlisle", for the acquisition by the latter of the treasury stock of Consolidated Diana at a price of 90? a share. Pursuant to such agreement, a total of 87,690 shares was sold by Carlisle and the sum of $79,163.50 was remitted therefor and deposited in the bank account of Consolidated Diana.

The Commissioner treated certain deposits in the account of Montray in the Bank of Toronto, Montreal, Canada, in the sum of $14,879.35 as advances from taxpayer. The Commissioner subtracted these deposits from the taxpayer's receipts from Montray for 1936, as determined by the Commissioner, in order to arrive at the taxpayer's taxable income from Montray for that year.

Gold Underwriters had been organized under the Company's Act of Canada on August 24, 1933. It had been an inactive company. During the early part of October, 1936, Montray's contracts and options with Kirkland were transferred to Gold Underwriters. The first payment by Gold Underwriters for stock of Kirkland was made on October 7, 1936. The working arrangement between Montray and Nevens was continued with Gold Underwriters. As remittances were received from Nevens, Gold Underwriters deposited them in its bank account. Its affairs do not concern us. We refer to them merely because they are a part of the network of concerns through which the operations, out of which this controversy arose, were carried on.

During the period from December 13, 1934 to August 21, 1935, when the account was closed, the taxpayer had an account in the Lake Shore Trust & Savings...

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