Humacid Co. v. Comm'r of Internal Revenue
| Decision Date | 19 August 1964 |
| Docket Number | Docket Nos. 95343,95344. |
| Citation | 42 T.C. 894 |
| Parties | THE HUMACID COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTFRITZ HUNTSINGER AND ESTATE OF MATHILDE HUNTSINGER, DECEASED, FRITZ HUNTSINGER, EXECUTOR, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John H. Hall and Henry C. Diehl, for the petitioners.
J. Earl Gardner, for the respondent.
1. Petitioner Fritz Huntsinger and several of his business associates incorporated the Humacid Co. in 1951 to exploit an idea Huntsinger had concerning a lining for oil drill-holes. Huntsinger had a 25-percent equity interest in Humacid and was its principal creditor. The idea proved unfeasible and Humacid incurred substantial losses. Huntsinger in 1953 and 1954 acquired complete control of Humacid and caused a partnership controlled by him to transfer to Humacid the operating assets of a business which the partnership or its predecessor had successfully conducted for a number of years prior thereto. Held, Humacid is not entitled to carry over the losses previously incurred by it and deduct them from profits generated by the business formerly conducted by the partnership. Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957).
2. In 1958 Huntsinger, for a consideration of $34,000, transferred to a business acquaintance certain unregistered promissory notes issued by Humacid in 1951. Less than 5 weeks after this transfer, the notes were redeemed from the business acquaintance by Humacid, which at the time were controlled by Huntsinger. Held, the business acquaintance was used as a conduit and the notes were, in fact, redeemed from Huntsinger, who realized ordinary income in connection therewith.
3. Huntsinger in 1958 donated certain promissory notes issued by Humacid in 1951 and 1952 to three tax-exempt educational or charitable foundations several weeks prior to their redemption. Held, Huntsinger did not realize income in connection with his donation of the notes to the tax-exempt organizations or the subsequent redemption of the notes by Humacid.
The respondent, pursuant to a statutory notice dated September 18, 1961, determined deficiencies in the income tax of petitioner, the Humacid Co., for its taxable years ended December 31, 1957, 1958, and 1959, in the respective amounts of $23,975.71, $10,192.46, and $728. Pursuant to a statutory notice also dated September 18, 1961, respondent determined deficiencies in the income tax of petitioner Fritz Huntsinger and his wife Mathilde for their taxable years ended January 31, 1959 and 1960, in the respective amounts of $31,388.43 and $1,804.69. In addition to the foregoing amounts, respondent, by way of amended answer, asserted additional deficiencies in the income tax of Fritz and Mathilde Huntsinger for their taxable years ended January 31, 1959 and 1960, in the respective amounts of $38,379.51 and $10,823.88. (The Humacid Co.will hereinafter be referred to as petitioner, and Fritz Huntsinger will hereinafter be referred to as Huntsinger.)
These proceedings have been consolidated.
The principal issue for decision with regard to petitioner is whether certain net operating losses incurred by it during 1952 and 1953 may be carried over and applied as deductions in 1957 and 1958.1
With regard to Huntsinger, two issues are presented for decision. First, we must decide whether Huntsinger realized ordinary income, rather than capital gain, in connection with the redemption in 1958 by petitioner of certain of its unregistered promissory notes which Huntsinger purchased from the original holders in 1953 and 1954 and then transferred to a third party several weeks prior to the redemption of the notes in 1958. In the second issue, which respondent raised by amended answer, we must decide whether Huntsinger realized ordinary income by virtue of the redemption by petitioner of certain promissory notes 3 weeks after Huntsinger had donated such notes to certain charitable and educational institutions.
All other issues raised in the pleadings have been settled pursuant to agreement between the parties or have been conceded or abandoned by respondent.
Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Fritz and Mathilde Huntsinger, during the years before us, were husband and wife. They filed joint income tax returns for their fiscal years ended January 31, 1959 and 1960, with the district director of internal revenue at Los Angeles, Calif.2
Petitioner was incorporated under California law on January 31, 1951. It filed its corporation income tax returns for the calendar years 1957, 1958, and 1959, prepared on an accrual method of accounting, with the district director of internal revenue at Los Angeles, Calif.
Petitioner evolved from a joint venture formed by Huntsinger and several of his friends and business associates to exploit an idea which Huntsinger had concerning the use of humic acid as a lining material in connection with the drilling of oil wells. The total cash investment by these persons in the joint venture was as follows:
+------------------------------+
¦Fritz Huntsigner ¦1 $8,325¦
+-------------------+----------¦
¦Morris H. Barnard ¦6,425 ¦
+-------------------+----------¦
¦William H. Bluhm ¦2,500 ¦
+-------------------+----------¦
¦H. F. Rey ¦3,000 ¦
+-------------------+----------¦
¦William H. Hopkins ¦3,000 ¦
+-------------------+----------¦
¦B. B. Smith ¦3,000 ¦
+-------------------+----------¦
¦ ¦ ¦
+------------------------------+
On or about June 21, 1951, petitioner acquired the business and assets of the joint venture. In exchange therefor, petitioner issued 10,000 shares of common stock, constituting all of its outstanding stock, as follows:
+------------------------------------------------------------------------+
¦ ¦Shares ¦
+---------------------------------------------------------------+--------¦
¦Fritz Huntsinger ¦2,501 ¦
+---------------------------------------------------------------+--------¦
¦Morris H. Barnard ¦1,931 ¦
+---------------------------------------------------------------+--------¦
¦Robert F. Hopkins ¦1,116 ¦
+---------------------------------------------------------------+--------¦
¦B. B. Smith ¦901 ¦
+---------------------------------------------------------------+--------¦
¦William H. Hopkins ¦901 ¦
+---------------------------------------------------------------+--------¦
¦Marianne Rey, executrix of the last will of H. F. Rey, deceased¦901 ¦
+---------------------------------------------------------------+--------¦
¦William H. Bluhm ¦749 ¦
+---------------------------------------------------------------+--------¦
¦Raymond L. Drew ¦1 600 ¦
+---------------------------------------------------------------+--------¦
¦Albert D. Barnes ¦400 ¦
+---------------------------------------------------------------+--------¦
¦ ¦ ¦
+------------------------------------------------------------------------+
1 All funds invested by Huntsinger in petitioner constituted community property owned jointly by Huntsinger and his wife. Therefore, all interest which Huntsinger had in petitioner, represented by stock or promissory notes, etc., constituted community property. For purposes of convenience, however, such interests shall hereinafter be referred to as belonging solely to Huntsinger.
1 The record does not indicate when Drew and Barnes joined the joint venture.
Huntsinger has been, at all times relevant hereto since petitioner's incorporation, the principal executive officer and a director of that corporation. In fact, he has been the dominant figure in its operation. From the very outset of petitioner's existence, it had been contemplated by all the shareholders that petitioner's principal source of financing would be loans from Huntsinger and Morris H. Barnard. As matters ultimately developed, Huntsinger was the principal source of petitioner's financing. From its inception until October 3, 1952, petitioner borrowed from its stockholders a total of $174,500 represented by promissory notes. Of this amount, $91,000 was advanced by Huntsinger. Huntsinger advanced these funds to petitioner, as follows:
+-----------------------------------------------+
¦Date of promissory note¦Original term¦Principal¦
+-----------------------+-------------+---------¦
¦ ¦ ¦amount ¦
+-----------------------+-------------+---------¦
¦ ¦ ¦ ¦
+-----------------------+-------------+---------¦
¦ ¦ ¦ ¦
+-----------------------+-------------+---------¦
¦July 6, 1951 ¦4 years ¦$15,000 ¦
+-----------------------+-------------+---------¦
¦Aug. 13, 1951 ¦----do ¦15,000 ¦
+-----------------------+-------------+---------¦
¦Oct. 19, 1951 ¦2 years ¦10,000 ¦
+-----------------------+-------------+---------¦
¦Dec. 1, 1951 ¦----do ¦12,500 ¦
+-----------------------+-------------+---------¦
¦Jan. 17, 1952 ¦----do ¦10,000 ¦
+-----------------------+-------------+---------¦
¦May 2, 1952 ¦----do ¦5,000 ¦
+-----------------------+-------------+---------¦
¦May 24, 1952...To continue reading
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