Giblin v. Commissioner of Internal Revenue

• Decision Date: 23 November 1955
• Docket Number: No. 15587.,15587.
• Citation: 227 F.2d 692
• Parties: Vincent C. GIBLIN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

227 F.2d 692 (1955)

Vincent C. GIBLIN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15587.

United States Court of Appeals Fifth Circuit.

November 23, 1955.

Hilton R Carr, Jr., Herbert A. Warren, Jr., Vincent C. Giblin, Miami, Fla., for petitioner.

John Potts Barnes, Chief Counsel, Internal Revenue Service, Chicago, Ill., Rollin H. Transue, Sp. Atty., Internal Revenue Service, Washington, D. C., H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Karl Schmeidler, Attys., Department of Justice, Washington, D. C., for respondent.

Before RIVES, TUTTLE and JONES, Circuit Judges.

TUTTLE, Circuit Judge.

This is a petition for review of a decision of the Tax Court involving income taxes for 1945. The questions presented for our consideration are two. First, whether loans made by taxpayer to a corporation, of which he was an officer, director, large stockholder and principal actor, are deductible in full as a business bad debt under Section 23(k) (1) of the Internal Revenue Code of 1939, 26 U.S. C.A., or whether these loans are deductible only under Section 23(k) (4) as a non-business bad debt not incurred in taxpayer's trade or business, and are thus to be taken into account as a short term capital loss. Second, whether taxpayer's cancellation in 1945 of $31,668.23 of a total indebtedness owing him of $51,668.23 from the corporation at a time when it was insolvent both before and after the cancellation, such cancellation being made coincident with a refinancing and reorganization of the corporation's affairs to provide it with capable management and enable it to obtain additional funds, constitutes a bad debt loss or amounts to a contribution to the corporation's capital.¹

The relevant facts are not in dispute. During 1945 taxpayer was a resident of Miami, Florida, and was engaged that year in the practice of law, from which he received a substantial income during the tax year in question. Beginning in 1925 he commenced a course of activities not directly related to the practice of law.

In the early part of 1925 he engaged in the formation of a land owners association in Okeechobee County, Florida. The purpose of this association was to attempt to take control of the Everglades Drainage District from the trustees of the Internal Improvement Fund of the State of Florida and place control in the land owners themselves. He devoted three months to this venture before moving to Fort Lauderdale, Florida to resume the practice of law.

He then entered into a business venture in connection with a real estate subdivision in Broward County known as Chateau Park. This venture consisted of efforts by the petitioner on behalf of property owners in the subdivision to obtain releases from mortgages on a portion of their property. The petitioner was successful in persuading the mortgage holders to release a portion of the property and for his efforts received some forty lots in the subdivision.

The petitioner then attempted to go into the real estate business with a friend named Kelly and purchased some acreage north of Fort Lauderdale for this purpose. This venture collapsed as a result of the failure of the real estate market to revive after the Florida land boom crash.

From 1927 to 1929 the petitioner served as a circuit judge of Broward County, Florida. The petitioner then moved to Miami and formed a law partnership.

His next business venture came a few weeks after the formation of the law partnership in Miami. The petitioner leased a race track in Pompano, Florida for the purpose of operating horse racing under a system which he had devised and which he believed would be considered legal by the Courts even though wagering on horse racing was, at that time, illegal in the state. He put $3,000 or $4,000 into the venture, operated and managed the track himself with great difficulty in an effort to keep the track operating until a court test of the legality could be had. The system devised by the petitioner was intended to be used in the large horse racing tracks and dog tracks after its legality was tested at Pompano. However, the other tracks adopted another system of operation and the petitioner's venture failed. The petitioner devoted the major portion of his time for a period of four or five months to this venture.

In 1932 the petitioner and Jack August formed a corporation known as the Biscayne Bonding Co. This corporation wrote surety bonds as agents for a principal and was capitalized by $2,500 of the petitioner's money and $2,500 from Jack August. This venture failed when the principal became bankrupt. The petitioner devoted a substantial part of his time to this venture. It was estimated by Jack August that the petitioner devoted approximately 50% of his time to the business.

His next business venture was in 1934 in connection with the Pensauken Kennel Club. This venture consisted of operating a dog track in New Jersey just outside of Philadelphia. The New Jersey legislature was about to pass a bill authorizing greyhound racing in arenas "now" owned by municipalities. Through the efforts of the petitioner an agreement was reached with the town of Pensauken, land was acquired, and an arena was erected overnight. The law was passed and a permit for dog racing was obtained. The petitioner invested all of his own money that he could raise in the venture. After being in operation for only 49 days the venture collapsed as a result of a court ruling. But in that 49 day period the venture was so successful that all loans were repaid with 6% interest, a 20% stock dividend was paid and the share of the profits received by the petitioner was $25,000. If the track had operated another 30 days the petitioner would have made $150,000 and would have been able to get out of the practice of law. He devoted 8 months of his time to this venture and was gone from Miami during this entire period of time.

In 1935 and 1936 the petitioner and an associate devoted their efforts to procuring a lease from the City of Miami for the operation of a restaurant in Biscayne Bay Front Park in Miami. They were successful in their efforts and each received a 1/3 interest in the corporate venture. The petitioner sold his stock to his associate.

In 1939 the petitioner organized the Economy-Profit Sharing Association, a cooperative corporation, the purpose of which was to provide laundry and dry cleaning services to the members of the cooperative at a price much less than the price then fixed by the State Laundry and Dry Cleaning Board. The petitioner acted as president and general manager and devoted no less than 70% of his time for approximately two years to this venture. The gross receipts of the corporation were $400,000 or $500,000 a year. The venture operated approximately two years until the legislature finally repealed the act which had established the State Laundry and Dry Cleaning Board.

The petitioner engaged to a slight extent in the grain market until he found out he knew little or nothing about that activity. He did make a $10,000 profit in one year.

He invested some money in the B-G Realty Co. in 1936, but does not recall the purpose of the corporation.

He invested in Saunders and Storm, Inc., but does not recall the purpose of that corporation.

On January 22, 1945 a corporation was formed by the petitioner and Jerry Donovan under the name of Stag Bar, Inc. with an authorized capital of $500 consisting of ten shares of stock with a value of $50 per share. Donovan had no funds and it was agreed that petitioner would put up the initial capital of $500. Five shares of capital stock were issued to petitioner and five shares to Donovan. It was further agreed that the petitioner would advance the corporation up to $10,000 with the understanding that all advances by the petitioner should be repaid before any dividends were declared and paid. The petitioner later became dissatisfied with Donovan's operation of the business and his stock was transferred to the petitioner. On May 8, 1945 the petitioner arranged with Dinty Dennis to take over the management of the corporation and transferred to Dennis 3 1/3 of his shares of the initial stock. By that date the petitioner had advanced $17,000 to the corporation and a resolution was adopted authorizing the issuance to petitioner of 65 promissory notes aggregating $17,000. Only one note for $200 was paid. After Dennis took over management the operations of the bar were enlarged to include a restaurant and lounge necessitating additional expenditures. Between May 8, 1945 and December 12, 1945 the petitioner made further advances to the corporation in an amount in excess of $34,000. The petitioner became dissatisfied with the operation of the business under Dennis and on December 8, 1945 Dennis resigned and petitioner acquired from Dennis the 3 1/3 shares issued to him on May 8, 1945.

On December 12, 1945 the petitioner and his brother, Creston A. Giblin, entered into a written agreement. After reciting that the corporation was indebted to the petitioner on account of advances and loans in the sum of $51,668.23 as of December 8, 1945, and to better the corporation's financial status and provide it with capable management, it was agreed, in substance, that the petitioner would assign to Creston A. Giblin five shares or 50% of the capital stock of the corporation and accept from the corporation a partial payment of the sum of $20,000 in cancellation of its indebtedness to him. Creston A. Giblin agreed that in consideration of the foregoing he would accept and assume the presidency, general managership, and directorship in the corporation, and that he would lend the company not less than $15,000 which was not to become due or repayable in whole or in part until December 31, 1946, but which was to be repaid with interest at 5% per annum.

At a special meeting of the directors of the corporation held on December 12, 1945, a resolution was adopted approving the...