Hogue v. CIR

• Decision Date: 04 May 1972
• Docket Number: No. 71-1569.,71-1569.
• Citation: 459 F.2d 932
• Parties: Ross D. HOGUE and Mildred M. Hogue, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

459 F.2d 932 (1972)

Ross D. HOGUE and Mildred M. Hogue, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 71-1569.

United States Court of Appeals, Tenth Circuit.

May 4, 1972.

George Voss, Dodge City, Kan., for appellants.

Leonard J. Henzke, Jr., Atty., Tax Div., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., and Meyer Rothwacks, Thomas L. Stapleton and Gary R. Allen, Attys., Tax Div., Dept. of Justice, Washington, D. C., with him on the brief), for appellee.

Before SETH and McWILLIAMS, Circuit Judges, and CHRISTENSEN, Senior District Judge.^*

CHRISTENSEN, Senior District Judge.

Appellants¹ brought this action in the United States Tax Court for a redetermination of a 1964 income tax deficiency determined by the Commissioner of Internal Revenue. The item in dispute was the tax assessed on $19,345.83 claimed in the return to be deductible as a business bad debt arising from appellant's guaranty of certain obligations of a furniture business in alleged advancement of his accounting practice. Consistently with the ruling of the Commissioner, the Tax Court concluded that payments by appellant of the guaranteed loans did not create business debts within the contemplation of the Internal Revenue Code of 1954 as amended, 26 U.S.C. § 166(a) (1) (1970),² and the implementing Treasury Regulations, 26 C.F.R. § 1.166-5(b) (2) (1971).³ As the basis for appeal to this court, within the jurisdiction conferred by 26 U.S.C. § 7482, appellant contends that the Tax Court's decision is not supported by the record.

There is little dispute in the record as to most of the significant facts. The controversy centers mainly around inferences to be drawn therefrom and an evaluation of appellant's testimony with reference to his motivation in incurring the debts in question. He did not expressly or directly relate these debts to his accounting practice. But he did include them in the broad sweep of his corporate experiences over a long period of time which in general were within the scope of the type of inquiry directed by the Supreme Court in Whipple v. Commission, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 228 (1963),⁴ and of a nature comparable to those which led the Tax Court to approve business deductions in Frank A. Garlove, 24 TMC 1049 (1965),⁵ upon which appellant strongly relies. Indeed, there is rather convincing evidence that some of appellant's previous corporate activities were carried on primarily to promote his accounting practice. An appraisal of appellant's case in view of these favorable aspects, and an understanding of the Tax Court's conclusion that these aspects nonetheless did not warrant a finding that the particular debts in question were proximately related to appellant's accounting business will be aided by a review of activities leading up to the loans in question.

Mr. Hogue and his wife were residents of Dodge City, Kansas, at the time their joint 1964 income tax return was filed. Appellant became a certified public accountant in 1942 and practiced continually in Dodge City, Kansas, since that time. In 1946 he formed Ross D. Hogue & Company which was the only active CPA firm in the Dodge City area.

On July 29, 1946, appellant, in furtherance of a community project supported by the local Chamber of Commerce, formed Dodge City Industries, Inc., inducing local businessmen to invest $500 in order that the corporation could promote Dodge City for introduction of new industries. Appellant became secretary of the corporation and his accounting firm furnished all of the accounting services and office space. In May of 1950, the purpose of the corporation was changed to promotion solely of the milo and cereal grain industry and, as a result, the company's name was changed to Grain Products, Inc. With $700,000 in contributed capital and over 400 stockholders, the company became one of appellant's largest clients in total accounting fees. Payments made to Hogue, Beebe & Trindle (the successor of Ross D. Hogue & Company) for the period of 1952 through 1968 totaled $71,982.71. In addition, appellant received an annual salary as an officer of Grain Products, Inc., and participated in profit sharing and pension plans. Of 400 stockholders, 35 were appellant's clients at the time of Grain Products' formation and 73 additional shareholders became clients after its formation. Appellant organized Grain Products Terminal Elevator, Inc., in 1955 to operate a public grain elevator. He was president and later became secretary-treasurer. His accounting firm performed all of its accounting services for the period 1955 through 1967, receiving approximately $33,413.34 in fees. Appellant had only a small stockholder's interest in Grain Products, Inc., and Grain Elevator. Appellant also helped to incorporate The Journal, Inc., in 1947, which published a weekly farm paper. This corporation after several reorganizations and name changes was finally liquidated in 1959 and reincorporated as High Plains Publishers. During various periods of time appellant had been a stockholder, director, and officer of this journal but from it his accounting firm received in fees only $3,730.84 between 1947 and 1960.

In 1958, appellant conceived and organized Greek Builders, Inc. This corporation had about 60 preferred stockholders owning 2,101 shares of A and B stock of a par value of $100 per share. Of this amount appellant and his wife owned some 160 shares. Appellant also owned 9,440 shares out of a total of 10,000 shares of the common stock, having a par value of $1.00 per share. The majority of the class B preferred stock was owned by Mullin Furniture (600 out of 881 shares). It also owned more than one-fourth of the class A preferred stock (318 out of 1,220 shares). During all material times appellant was president and treasurer of Greek Builders, his wife was secretary, and his son vice-president. Greek Builders finished the construction of a fraternity house in Lawrence, Kansas, but its chief financial backer, a Mr. Chalmers, died, and no new construction was thereafter undertaken. Hogue, Beebe & Trindle furnished office facilities and some accounting services for Greek Builders but received only nominal fees consisting mostly of reimbursement of expenses.

A substantial client of appellant's accounting firm was Mullin Furniture, Inc. The operations of the corporation, conducted by brothers J. D. Mullin and M. E. Mullin, consisted of five stores located in different Kansas cities and producing an annual volume of over $1,000,000. During 1946 to 1952 appellant's accounting firm received varying fees from Mullin Furniture, including a $15,000 special fee for revising its accounting system; during 1952 through 1958 over $19,000 in accounting fees was realized. In addition, Hogue, Beebe & Trindle performed services and received fees from related Mullin Furniture interests such as J. D. Mullin, Mullin Investment, and Mullin Furniture Employees Profit Sharing Trust. Appellant's only stock interest in Mullin Furniture was one share of non-voting stock acquired in 1961.

Sometime prior to 1958 J. D. Mullin, who had been in charge of handling the financial affairs of Mullin Furniture, died, leaving the management of the firm to the surviving brother, M. E. Mullin. The latter was unfamiliar with the financial side of the business and experienced difficulties with reference to financing and in his relations with trustees who had succeeded to the interest of his late brother. In 1958, M. E. Mullin began consulting with appellant for the purpose of devising a plan which would allow him to withdraw from the furniture business. None of the various plans initially worked out by appellant proved acceptable.

Finally, in 1961, appellant formulated a plan agreeable to M. E. Mullin, involving the purchase at $100 per share by Greek Builders of the 3,259 shares of voting stock jointly held by M. E. Mullin, the J. D. Mullin Trust, and Mullin Investment, Inc. To finance this transaction Greek Builders agreed to purchase the accounts receivable from Mullin Furniture, Inc., for $334,933, which it paid by $9,033 cash, issuing 918 shares of Greek Builders to Mullin Furniture, and transferring 2,341 shares of Mullin Furniture voting stock (which thereupon became treasury stock) to Mullin Furniture. Greek Builders subsequently sold the receivables to Bankers Investment Company for $375,869.90. Thereafter, Greek Builders had voting control of Mullin Furniture, with the 918 shares it had retained from the original purchase of all voting stock. At this time appellant traded his one share of Mullin Furniture non-voting stock for one share having voting privileges, and contemporaneously assumed the management and presidency of Mullin Furniture.

Following the acquisition of control of Mullin Furniture by Greek Builders the furniture stores operated successfully for a time, after which they began losing money. Appellant then established a line of credit with a bank in an attempt to pay for an oversupply of furniture inventory obtained by an overly enthusiastic new manager. But the financial situation worsened until it became necessary to dispose of all of the stores except the one located in Dodge City. The operations of this last store at length became so unsatisfactory that in 1964 appellant sought additional financial backing from the First National and Fidelity State banks for the purposes of a complete liquidation⁶ apprehending that otherwise anxious creditors might complicate the liquidation. It was anticipated by appellant at this time that with such interim financing there would be enough funds to pay creditors and perhaps later to start up at a new location; neither hope was realized.

The banks were willing to extend the liquidation backing to the business only on condition that appellant would guarantee payment of the loans. Accordingly, two loans for $13,000 and $6,000, respectively, were made to Mullin Furniture, Inc.,...