In re Ward

• Decision Date: 04 May 1955
• Docket Number: 13969.,13949,No. 13941,13941
• Citation: 131 F. Supp. 387
• Parties: In the Matter of Fred A. WARD, Bankrupt. In the Matter of FRED WARD, Inc., Bankrupt.
• Court: U.S. District Court — District of Colorado

131 F. Supp. 387

In the Matter of Fred A. WARD, Bankrupt In the Matter of FRED WARD, Inc., Bankrupt.

Nos. 13941, 13949, 13969.

United States District Court D. Colorado.

May 4, 1955.

HILLIARD, Referee.

These matters are before the Referee in Bankruptcy on tax claims filed in each proceeding by the United States, the objections thereto interposed by the Trustee, and on the petition of the Trustee for judgment against the United States for tax refunds claimed by him to be due the bankrupt corporation.

The questions presented may be summarized as follows:

1. Did the Commissioner of Internal Revenue erroneously disallow certain deductions claimed by the corporation as business expenses?

2. Is the Trustee entitled to judgment against the United States because of tax refunds sought by him, arising out of worthless securities and bad debt deductions asserted by the Trustee in amended returns and in claims for refunds which have been rejected by the Commissioner?

3. Were certain amounts received by the individual bankrupt capital gains and dividends, as contended by the Commissioner, or loans as contended by the Trustee?

4. Did the Commissioner erroneously determine that farm losses claimed by the individual bankrupt were not allowable?

Some background material gathered from the facts appearing in the record and adduced at the hearing will contribute to a better understanding of the problems involved. It appears that each of the bankrupts was adjudged such on September 6, 1951, in involuntary proceedings. For some weeks prior to the adjudications the affairs of the corporation had been in the hands of a non-bankruptcy Receiver appointed by the District Court of the City and County of Denver, and that Receiver became Trustee in Bankruptcy of the estate of each of the bankrupts.

The State court proceedings and the subsequent bankruptcies marked the end of a spectacular business career commenced by Ward in Denver in 1941, highlighted by the creation, expansion and collapse of what the Trustee's counsel describe as an automobile empire. First, for some years, Ward was an automobile salesman and a used car dealer, then he became the distributor of Hudson automobiles in Denver and Northern Colorado, and subsequently the distributor for all of Colorado and New Mexico and a part of Nebraska. He erected a pyramid of principal, subsidiary and affiliated corporations. Except for a short period in his early connection with Hudson he was the controlling and principal stockholder of the bankrupt corporation, and completely dominated its policies and activities from then until the end. Study of the entanglements of the affairs of these related corporations with one another and with Ward's personal concerns, the intercompany transactions and transactions between Ward, other officers and employees, the companies, the exchange of checks, and the reconciliation of the resulting accounts, occupied the attention of accountants for many months. The fruits of their labors are among the exhibits offered at the hearing and the chief among them was one of the witnesses produced by the Trustee.

The testimony is that the key to the growth of Ward's business was advertising in nearly every form of that interesting device. His methods partook of the glamorous. He bought a ranch near Broomfield, not far from Denver, with a luxurious and showy residence and landscaped grounds. There, and in his office and show rooms and nearly everywhere else, he entertained customers and prospective customers, dealers and prospective dealers, Hudson officials and representatives; he gave parties at which literally hundreds were present, the guests invited with an eye to their business or their influence in promoting business; he flew customers to the factory to drive their new cars home; he exhibited prize horses duly identified with Hudson and Ward; he bought prize live stock at the National Western Stock show, so that Ward and Hudson would be in the eye of the rancher and stock men and the public generally and in their minds when the purchase of automobiles was to be considered; he took active and very public parts in charitable drives and enterprises. He moved his business into enlarged and elaborate quarters, and over the bar in a room next to his private office, he testified, went many of the thousands of dollars worth of liquor the cost of which the Commissioner has declined to allow as deductions on the corporation's returns. More of this liquor was served to the guests at his ranch parties and quantities of it were distributed as gifts to employees, customers, dealers and company officials. This lavish dispensing of liquor, the publicity-attracting devices, the entertainment, the gifts and the parties, were the cause, he testified, for the truly enormous sales of Hudson cars made by him. For whereas, in 1941, Hudson sold 265 cars in this area, at the peak of Ward's enterprise there were months when 500 were sold. His gross sales went from $1,364,050.26 in 1947 to $8,966,371.38 in 1949 and the 1950 sales were almost as great. Whereas nationally Hudson was in twelfth place, in terms of units sold, in Ward's territory it was third, exceeded only by Chevrolet and Ford. Other Hudson dealers were entreated by Hudson headquarters to study his methods. Why then did he fail? Because, he testified, his expansion and the momentum of his advertising techniques were arrested and made useless by the impact of Regulation W, the terms of which effectively stifled the sale of automobiles on the installment plan. With the promulgation of this regulation sales fell off, the weaker elements in the corporate pyramid disintegrated, and finally, after intricate manipulations and straw-graspings not necessary to delineate, the whole structure fell, leaving in its ruins the many creditors here represented by the Trustee, the tax claims asserted by the United States and the limitless imponderables which situations of this kind invariably generate.

Questioned by counsel for the United States Ward testified he had been convicted in 1939 in the Colorado courts of forgery, false pretenses, confidence game and conspiracy to commit confidence game; and in 1953 in the Federal courts of mail fraud and conspiracy to commit mail fraud. This evidence was adduced as going to the credibility of Ward, and properly so. The Referee, therefore, gave the closest attention to his testimony, and to his appearance and demeanor on the stand; and has given much thought and study to these things since the hearing. As a result the Referee has come to the conclusion that, whatever Ward may have been or done at other times, his testimony at the hearing now under discussion was entirely credible, clear and convincing, and it has been given weight accordingly. From like observation and study the Referee has concluded that similar weight should be given to the testimony of Iva R. Ward, the bankrupt's wife, although it should be understood as to both of these witnesses that these observations are not blanket endorsements of the conclusions they may have expressed. But they do constitute recognition, so far as their evidence was competent, relevant and material, of its truthfulness and persuasiveness.

The Commissioner, in determining deficiencies of income and excess profits taxes against the corporation for the years 1946 through 1950, disallowed amounts claimed as deductions for expense. They relate largely to expenses claimed for the purchase of liquor and that point only will be discussed in this opinion, although it is to be understood the same conclusions as to deductibility have been reached with respect to the other disputed items. In proof of the tax liability asserted the government offered a duly certified copy of the Commissioner's assessment and rested its case. This raised a presumption of law that the tax was legally due and owing and shifted the burden to the Trustee. A. & A. Tool & Supply Co. v. Commissioner, 10 Cir., 182 F.2d 300. The Trustee sought to sustain this burden by offering the testimony of a certified public accountant, and by the testimony of the bankrupt and his wife, and the Referee has accorded the testimony of the two latter the weight above mentioned. Counsel for the government criticise Ward's testimony with respect to the claimed liquor expense on the ground he did not name the persons who drank the liquor and when and where, but the company's books recorded the purchases and charged them to expense, and Ward outlined in satisfactory detail the classes of persons who consumed it and the purposes for which it was given them. He was definite in asserting the liquor was purchased and used to promote the sale of automobiles and the amounts claimed as deductions bear a reasonable relation to the sales, for as between liquor expense and sales we find these proportions: 1947, $2514.76, $1,364,050.26; 1948, $2310.16, $1,682,216.19; 1949, $4043.37, $8,966,371.38; 1950, $3780.35, $8,405,601.13. He testified it was the custom of the trade to give liquor to and buy drinks for customers, prospective customers, subordinate dealers and employees, and factory representatives, and that its use in those ways constituted an ordinary and necessary expense of doing business. There is nothing in the record to dispute him in this or in any other regard. It follows, therefore, that the Referee is obliged to find and he does find that the expense deductions for liquor were ordinary and necessary expenses within the meaning of Section 23(a) (1) of the Internal Revenue Code, 26 U.S.C.A., and that the deficiencies asserted on account of the disallowance of these deductions were erroneous. Wilson v. Eisner, 2 Cir., 282 F. 38; A. & A. Tool & Supply Co. v. Commissioner, supra.

After the appointment of the Trustee and examination of the books and records of the company, the Trustee filed amended returns for the company and included deductions not theretofor claimed on account of...