Huff v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 24594
| Decision Date | 07 August 1930 |
| Docket Number | Docket No. 24594,24595. |
| Citation | 20 BTA 516 |
| Parties | R. E. HUFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MRS. E. B. HUFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harry C. Weeks, Esq., for the petitioners.
J. Arthur Adams, Esq., for the respondent.
These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income tax, asserted by the respondent for the year 1920 in the amount of $3,857.88 against R. E. Huff, and in the amount of $2,577.48 against Mrs. E. B. Huff. They arise from the disallowance of a deduction for a loss which petitioners claimed occurred in 1920.
FINDINGS OF FACT.
The petitioners were husband and wife, residing in Wichita Falls, Tex., during 1920. The law of community property prevailed in that State in 1920. Each petitioner had a separate estate, and in addition they had community property and income. The transaction and loss here involved were in relation to such community property. Mrs. Huff died before the hearing and R. E. Huff and William E. Huff, as executors of her estate, were substituted as petitioners.
R. E. Huff was a lawyer and banker. In June, 1918, he entered into an agreement with W. M. McGregor and John S. Mabry for the organization of a reciprocal fire insurance association to be known as Wichita Great Western Underwriters, hereinafter called the association. The agreement further provided:
The purpose of this association is to solicit and secure fire insurance contracts;
The parties to this contract are to be known as managers and attorneys of this association, and their respective duties are to be as follows, to-wit:
(a) The said W. M. McGregor to be Secretary and Treasurer of said partnership;
(b) The said R. E. Huff and W. M. McGregor are together to handle all the funds of and manage all the finances connected with the association, and are to employ such office help as they see fit, look after the printing of stationery and other matters incident to the conduct of the office of the association;
(c) The said John S. Mabry is to be manager of the sales department and is to canvass this state and any other state where business is sought to be secured, solicit fire insurance contracts, and have charge of and employ all men in the sales department;
That the only party to this contract who is to draw a salary is the said John S. Mabry, who is to receive the sum of Fifty Dollars per week and expenses, said salary and expenses to be paid by the said W. M. McGregor and R. E. Huff until the finances of the association are in condition to allow of such being paid out of the funds of the association; and that salary shall remain fifty dollars per week until said Mabry secures one hundred underwriters or men who will guarantee the policies, and then for each one hundred underwriters that said Mabry shall secure up to one thousand his salary is to be increased fifty dollars per month, traveling expenses still being allowed. The said McGregor and Huff are to advance the initial expenses for securing business in consideration of the ability of the said Mabry to make the association a going enterprise, and out of the first earnings that accrue from the operation of the business the amount that they have previously advanced will be deducted before a division of profits will be allowed.
The moneys collected by the said John S. Mabry are to be remitted direct to the said W. M. McGregor and the same are to be held in trust for the people who pay it.
The expense ratio allowed for the organization is forty per cent of the gross premium income, and out of this forty per cent is to be paid the current expenses of the association, including the salary of the said John S. Mabry and his traveling expenses, and also any expenses incurred in employing agents at different towns. After all these current expenses are paid, the remainder is to be divided share and share alike, one-third each to each of the parties to this contract.
The current expenses incident to the carrying on of the business are to be deducted from the first profits accruing from the operation of the business.
In case either party to this contract desires to withdraw from this partnership, he will give to the other parties hereto the privilege of buying his interest in the partnership as it may appear.
From any amount of money paid by underwriters at the time they become underwriters ten per cent is to be deducted by the attorneys and managers hereof, which is to be for organization purposes, said ten per cent to be equally divided between the parties hereto.
The grand distribution of the earnings is to be made between the parties at such times as shall be hereafter agreed upon by them.
Before the association began business, McGregor withdrew. Huff and Mabry continued with the project. The original agreement was further changed by reducing the amount of gross premium income to be used for expenses and profits from 40 to 25 per cent, and increasing the amount for the reserve fund from 60 to 75 per cent.
Under the plan of organization any person wishing to participate might become an underwriter by subscribing such amount as he might desire to invest, paying one-fourth such amount in cash. Ten per cent of the cash payment was allowed to the managing attorneys, Huff and Mabry, and the balance was to constitute a reserve or trust fund which was to remain the property of the subscribers. This fund was to be used only for the payment of fire losses in excess of the amount in the association's reserve fund. An advisory board was created for protecting and safeguarding the interests of such subscribers, but this board took no active supervision until about the close of 1920. The board looked to Huff to see that the association was properly conducted.
Huff was not very active in the business. At first he had monthly statements made to him, and checked them up, but soon busied himself with other matters. The management of the association was left almost entirely to Mabry, with no supervision at all during 1919 and the greater part of 1920.
Early in 1920 Mabry represented to Huff that there was needed $25,000 for working capital. Thereupon Huff agreed to advance that amount and the following agreement was executed:
THIS AGREEMENT entered into this 11th day of March, A. D. 1920, by and between Huff and Mabry, attorneys-in-fact for the Wichita Great Western Underwriters, the said Huff and Mabry being a partnership composed of R. E. Huff and John S. Mabry, herein styled parties of the first part, and R. E. Huff, of Wichita Falls, Texas, hereinafter styled party of the second part.
WITNESSETH:
That, whereas, parties of the first part in their business of operating the Wichita Great Western Underwriters need working capital to the extent of approximately TWENTY FIVE THOUSAND DOLLARS ($25,000.00).
And, Whereas, party of the second part has agreed to advance to parties of the first part said sum, or as much thereof as in the opinion...
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