Hopkins v. Comm'r of Internal Revenue

• Decision Date: 29 August 1950
• Docket Number: Docket No. 9931.
• Citation: 15 T.C. 160
• Parties: JOHN RANDOLPH HOPKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

15 T.C. 160

JOHN RANDOLPH HOPKINS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9931.

Tax Court of the United States.

Promulgated August 29, 1950.

1. Petitioner received certain annual payments from a drug manufacturer by reason of a licensing arrangement between the manufacturer and petitioner's great-grandfather which provided for use by the manufacturer of a medical formula developed by petitioner's ancestor. These payments held royalty income taxable in full to petitioner.

2. Anticipatory assignment by petitioner of a portion of above royalty payments in order to discharge an alimony obligation of petitioner held ineffective to relieve petitioner of taxability on the sums so assigned.

3. Held, petitioner was not entitled to deduct any portion of the loss sustained in sale of a country estate because of incidental raising of fowl on the property.

4. Held, petitioner was not entitled to deduct any portion of the loss sustained on sale of another country estate where he failed to prove that incidental truck farming thereon was part of a commercial enterprise entered into for profit.

5 and 6. On the facts, abandonment loss denied as to petitioner's interest in one parcel of inherited realty, allowed as to another.

7. Foreclosure of tax lien upon inherited unimproved realty held to result in capital loss. Amount of loss determined.

8. Petitioner formed a corporation for the purpose of developing and selling certain Florida real estate in which he held an undivided one-fourth interest. He transferred all this interest to the corporation in exchange for substantially all of its stock. Petitioner's sisters, the co-owners of the property, determined not to come into the corporation as originally planned but instead brought an action for partition. Following the partition sale, the corporation paid over to petitioner the proceeds from the sale of its one-fourth interest. Respondent's determination that the corporate entity should be disregarded and the sale be deemed a sale by petitioner and that the loss thereon is within ban of section 24(b)(1)(A) held error. Petitioner's loss on liquidation of the corporation determined.

9. Petitioner held entitled to deduct back taxes paid to redeem property where under local law the arrearages held a personal liability until redemption or foreclosure of the right to redemption.

10. In 1940 petitioner obtained a loan by the terms of which he received $8,500 in return for his agreement to pay the lender $10,000 over a five-year period. The $1,500 discount held interest and deductible in years payments made. Amount of payments in 1940 and 1941 determined.

11. Petitioner formed a wholly owned corporation to build a pleasure craft of a new design. In the early stages of completion of the initial craft built by the corporation, the facilities for construction were given up and the employees dismissed. The corporation was subsequently dissolved for failure to pay taxes. Petitioner thereafter attempted to sell this craft during the taxable years involved herein. The boat was never used for pleasure purposes. Held, petitioner was not engaged in the business of manufacturing small boats after he gave up the construction facilities and permitted the wholly owned corporation to be dissolved for failure to pay taxes. Held, further, that repairs to the boat during the period in which it was held for sale in the tax years herein are deductible as expenses paid for the maintenance or conservation of property held for the production of income. Section 23(a)(2), I.R.C. Amount of allowable deductions for repairs determined. Benjamin Mahler, Esq., for the petitioner.

Henry C. Clark, Esq., for the respondent.

ARUNDELL, Judge:

The respondent has determined deficiencies against petitioner in the amount of $25,121.39 for the calendar year 1939, $22,275.01 for the calendar year 1940, and $38,737.53 for the calendar year 1941.

The petitioner assigns errors in the respondent's determination:

(1) That certain annual sums received by petitioner from Lambert Pharmacal Co. constituted ordinary income rather than (a) capital gains, or (b) tax-free amortization of a wasting asset.

(2) That assignment by petitioner of $12,000 annually of the payments received from Lambert Pharmacal Co. was ineffective to relieve him of taxability on the sums so assigned.

(3) That petitioner did not sustain a deductible loss of $44,280 in 1940 by reason of a sale of alleged farm property at Stockbridge, Massachusetts.

(4) That petitioner did not sustain a deductible loss of $45,000 in 1941 by reason of a sale of alleged farm property at Cambridge, Maryland.

(5) That petitioner was not entitled to an abandonment loss deduction of $26,191 in 1941 on inherited property located at 1045 Fifth Avenue, New York City.

(6) That petitioner was not entitled to an abandonment loss deduction of $27,600 in 1941 on inherited property located at Irvington, New York.

(7) That petitioner was not entitled to an abandonment loss deduction of $1,987.50 in 1940 on inherited property located at Old Forge, New York.

(8) That petitioner was not entitled to a loss deduction of $12,786.13 either in 1939 or 1940 by reason of the partition sale of inherited property located at Palm Beach, Florida.

(9) That petitioner was not entitled to deduct $9,785.38 back taxes paid by him in 1940 to redeem property located at Stockbridge, Massachusetts.

(10) That petitioner was not entitled to deduct $375 in each of the taxable years 1940 and 1941 by reason of a $1,500 discount on a $10,000 loan obtained by him in 1940.

(11) That petitioner was not entitled to deduct the cost of repairs to the yacht Sea Phantom claimed to have been used by him for commercial purposes and claimed to have been paid as follows:

(a) $1,068.99 paid in 1939 to Daytona Beach Boat Works, Inc.

(b) $19,175.98 paid in 1941 to Daytona Beach Boat Works, Inc.

(c) $1,083.30 paid in 1941 to Clive Merchant Co.

(12) That petitioner was not entitled to deduct the sum of $521.04 in 1941 in respect to taxes upon certain Palm Beach property. This issue was conceded on brief by petitioner.

The proceeding has been submitted upon the pleadings, testimony, and a stipulation of facts with appended exhibits.

Petitioner is an individual with address c/o Mr. Joseph Frank, 11 West 42nd Street, New York 18, New York. His income tax returns for the period involved herein were filed with the collector of internal revenue for the second district of New York. Petitioner is the son of Russell and Vera Lawrence Hopkins and a great-grandson of Dr. J. J. Lawrence.

FACTS AS TO ISSUE 1— TAXABILITY OF ROYALTY INCOME.

On April 20, 1881, one Jordan W. Lambert executed the following instrument in writing:

Know all men by these presents, that for and in consideration of the fact, that Dr. J. J. Lawrence of the City of St. Louis, Mo., has furnished me with the formulae of a medicine called Listerine to be manufactured by me, that I Jordan W. Lambert, also of the City of St. Louis, Mo., hereby agree for myself, my heirs, executors, and assigns, to pay monthly to the said Dr. J. J. Lawrence, his heirs, executors or assigns (sic), the sum of twenty dollars for each and every gross of said Listerine hereafter sold by myself, my heirs, executors or assigns (sic). * * *

On January 2, 1995, J. W. Lambert and J. H. Peacock, president and secretary, respectively, of the Lambert Pharmacal Co., executed the following instrument in writing:

J. J. Lawrence of St. Louis, Missouri, having originated and heretofore sold to J. W. Lambert, the formulae and processes for the manufacture of two medical preparations, known as Listerine and Lithiated Hydrangea, with all the rights and benefits accruing therefrom and has received therein a monthly royalty from J. W. Lambert and J. W. Lambert having sold said formulae of Listerine and Lithiated Hydrangea to the Lambert Pharmacal Company, a corporation organized under the laws of the State of Missouri, and doing business in St. Louis, and furthermore said J. J. Lawrence having sold to said Corporation his sole and exclusive rights to the formulae and processes originated by him for making two preparations called ‘Dugonol‘ and ‘Mentholated Camphor‘ (sic) therefore know all men by these presents that for and in consideration of these facts, the said Lambert Pharmacal Company hereby agrees and contracts for itself and assigns to pay to the said J. J. Lawrence, his heirs, executors and assigns, six dollars on each and every gross of Listerine and Lithiated Hydrangea manufactured or sold by the said Lambert Pharmacal Company or its assigns, and ten per cent (10%) in gross amount of sales of the said Dugonol and Mentholated Camphor, and all other goods which said Lambert Pharmacal Company or its assigns may hereafter manufacture or sell on formulae furnished by said Dr. J. J. Lawrence, account of sales to be rendered and payment of said royalty to be made in the third day of each month. In testimony whereof said Lambert Pharmacal Company has caused these documents to be sealed with its Corporate seal and signed by its President and Secretary this second day of January 1885.

On March 1, 1909, Dr. J. J. Lawrence executed a trust agreement in which he assigned, inter alia:

All my right title and interest in to and concerning the royalties and moneys due and to become due to me by the Lambert Pharmacal Company on sales of Listerine and of other articles and preparations manufactured and sold by it; * * *

The income from this trust was payable to the grantor during his life and upon his death, to his wife and granddaughter, Vera Lawrence Hopkins. The trust terminated upon the death of survivor of the settlor's wife and granddaughter and the principal was then to be distributed to the children of the granddaughter in equal parts. Petitioner, as one of the four surviving children of Vera Lawrence Hopkins, received his share of the above trust, including an undivided...