Frank v. CIR

• Decision Date: 09 September 1963
• Docket Number: No. 17230.,17230.
• Citation: 321 F.2d 143
• Parties: Sam FRANK, Jr., and Esther Frank, Willie L. McNatt and Helen C. McNatt, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

321 F.2d 143 (1963)

Sam FRANK, Jr., and Esther Frank, Willie L. McNatt and Helen C. McNatt, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17230.

United States Court of Appeals Eighth Circuit.

August 6, 1963.

Rehearing Denied September 9, 1963.

Ronald M. Mankoff, of Durant, Hobby & Mankoff, Dallas, Tex., for petitioners and Wentworth T. Durant, Dallas, Tex., on the brief.

Alec A. Pandaleon, Atty., Dept of Justice, Washington, D. C., for respondent and Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson, Joseph Kovner, Washington, D. C., on the brief.

Before SANBORN and BLACKMUN, Circuit Judges, and STEPHENSON, District Judge.

BLACKMUN, Circuit Judge.

The Commissioner determined deficiencies in the 1956 and 1957 federal income taxes of Sam Frank, Jr. and Willie L. McNatt (and their respective spouses). These deficiencies were attributable to determinations (1) that the taxpayers in acquiring shares of two insurance companies had received compensation and (2) that gains realized on the sale of shares of those corporations and reported as long term capital gains were not entitled to that favorable tax treatment because (a) the taxpayers were dealers in securities and (b) they had not held the shares for more than six months. The taxpayers respectively petitioned the Tax Court for redeterminations and, upon a partially adverse decision there, have now brought the case to this court.

Judge Scott filed a detailed and lengthy opinion not reviewed by the full court and not officially reported. T.C. Memo 1962-99. She ruled in the taxpayers' favor on the compensation question. The Commissioner has taken no appeal on that issue and it is not before us. Helvering v. Pfeiffer, 302 U.S. 247, 250-251, 58 S.Ct. 159, 82 L.Ed. 231 (1937). On the capital asset aspect of the case Judge Scott ruled that the shares sold had not been held by the taxpayers for more than six months as required by § 1222(3) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1222 (3), with respect to long term capital gains. In view of this conclusion the court felt that it was not necessary to pass upon the Commissioner's contention that the shares sold were not capital assets anyway because they fell within the exclusionary language of § 1221(1) by having been held by the taxpayers "primarily for sale to customers in the ordinary course of * * * business".

The facts. The case was submitted on stipulated facts and accompanying documents. So far as those facts are pertinent here, they are:

a. McNatt was registered with the Texas State Securities Board as a general securities dealer from October 1954 until April 1956. Frank was so registered from February 1954 through 1955. The two were the principal partners of a Dallas partnership so registered in 1955. Frank was president and McNatt was vice-president of a corporation similarly registered in November 1955. On February 28, 1956, Frank and McNatt organized an Arkansas joint venture which terminated in January, 1958.

b. Sometime before the end of February 1956 Frank, representing himself and McNatt, met with officers and directors of Bankers Insurance Company, an Arkansas corporation, and advised them on methods of raising additional capital. The plan developed called for the application by Bankers for Arkansas authority to issue and offer 100,000 new shares at $1.50 per share and thereafter to seek authority for 200,000 more shares at $5.

c. Bankers and the taxpayers executed an agreement dated February 28, 1956. This recited that Bankers was "desirous of engaging agents to promote the sale of and sell" 100,000 shares of its stock. Bankers agreed to make that number of shares available to the taxpayers to be sold by them at $1.50 per share exclusively within Arkansas, to pay them 10¢ commission on each share sold, and to permit the taxpayers themselves to purchase 50,000 of the shares on a one-year instalment basis.

d. On March 7 the Arkansas Bank Department authorized Bankers to sell and offer for sale in Arkansas 100,000 shares of its stock at $1.50 per share.

e. On March 22 Frank executed and delivered to Bankers his promissory stock subscription instalment note for $35,000. This recited, among other things, that Frank subscribed for 25,000 shares of Bankers stock at $1.50 less the commission. A certificate for the shares was issued immediately in Frank's name, attached to the note, and held by Bankers. Bankers' ledger disclosed payments made by Frank through February 14, 1957, covering the full amount of that note. On December 17, 1956, and February 14, 1957, Bankers turned over certificates for 10,000 and 15,000 shares, respectively, to Frank. Identical steps were taken by McNatt and on the same dates Bankers turned over to him certificates for 10,000 and 15,000 shares.

f. Also on March 22 McNatt and Frank jointly executed and delivered to Bankers their promissory note for $14,000. On March 28 a certificate for 10,000 shares of Bankers stock was issued in both their names, attached to this note, and held by Bankers. Bankers' ledger disclosed payments made thereafter by Frank and McNatt through July 26, 1956, for the full amount of the note. On that date Bankers turned over 5,000 of those shares to Frank and 5,000 to McNatt.

g. On February 28, 1956, National Security Corp. was organized under Arkansas law. Frank was president and McNatt was vice-president. Each owned 49% of National's stock. From April 7, 1956, through 1957 Frank and McNatt devoted substantially all their time to the management of National. The balance of their time was devoted to the management of their private investments.

h. Also on February 28 Bankers and National executed an agreement whereby Bankers retained National as its exclusive agent to sell the 200,000 additional shares of Bankers by public offering. On April 2 National received an Arkansas permit to deal in and sell securities qualified under Arkansas law.

i. On March 29 Bankers received authority from Arkansas to issue the additional 200,000 shares of its stock and to offer it to the public at $5 per share. This certificate was later twice amended to increase the per share sale price on reduced numbers of shares.

j. Peoples Indemnity Insurance Company of Conway, Arkansas, was organized as an Arkansas corporation in October 1956 by the son of the president of Bankers. It had $50,000 authorized capital consisting of 250,000 no par shares.

k. Essentially the same steps followed with respect to Peoples as had taken place with Bankers. Frank and McNatt met with officers and directors of Peoples and advised them on methods of raising capital. Peoples and the taxpayers executed an agreement on November 2, 1956. By this contract Peoples agreed to make its 250,000 original shares available to the taxpayers to be sold by them at 50¢ a share exclusively within Arkansas, to pay them 10¢ commission on each share sold, and to allow the taxpayers themselves to purchase 100,000 of the shares on a one-year instalment basis. On November 27 Arkansas authorized Peoples to sell and offer for sale in the state its 250,000 shares of capital stock at 50¢ a share. On the same date Frank executed and delivered to Peoples his stock subscription note for $24,750. This recited that he subscribed for 50,000 shares at 50¢ per share. The stock was issued, attached to the note, and held by Peoples. The corporation's ledger showed subsequent payments in full on the note. Between July 29 and November 30, 1957, Peoples turned certificates for these shares over to Frank. McNatt did the same thing and between the same dates he also received certificates for 50,000 shares of Peoples stock.

l. Peoples' Arkansas permit was amended on February 18, 1957, to permit the sale of 350,000 shares at 50¢. On April 4 Peoples was authorized to offer 100,000 shares at $3 each.

m. On March 6, 1957, Peoples and National executed an agreement whereby Peoples retained National as its exclusive agent for five years to sell the 100,000 additional shares of Peoples by public offering.

n. National maintained regular offices, employed over 20 salesmen, and represented itself to the public as a security dealer. McNatt did not have a license to sell securities in Arkansas. The Arkansas Banking Department, however, on March 7, 1956, issued a certificate of authority designating Frank as an agent of Bankers for the sale of its stock. As officers of National, a licensed dealer, Frank and McNatt were authorized to sell securities in that corporation's name in Arkansas.

o. After March 27, 1956, and April 4, 1957, National sold Bankers and Peoples stocks, respectively, at prices in excess of those at which the taxpayers had acquired their stock in these companies.

p. All the Bankers and Peoples shares sold by Frank, McNatt, and their joint venture were sold by National except some stock repossessed and sold through brokers other than National. Subsequent to August 28, 1956, for Bankers, and to May 2, 1957, for Peoples, McNatt, as National's vice-president, allocated purchase orders received between the selling corporation and McNatt, Frank, and others. No allocation of an order to the account of Frank and McNatt was made until after six months from the dates of Frank's and McNatt's respective contracts with Bankers and Peoples.

q. National's federal income tax returns for its fiscal years ended March 31 in 1957 and 1958 showed no compensation paid to officers.

r. In their 1956 and 1957 returns the taxpayers reported the gains realized, individually and through the joint venture, on their sales of Bankers and Peoples stocks. The acquisition date of Bankers shares was specified as either February 28, 1956, the date of the agreement with Bankers, or March 22, 1956, the date of the notes. The acquisition date of Peoples shares was designated as November 2, 1956, the date of the agreement with Peoples. Sales consummated within six months after those dates were treated as short term...