Lahman v. C.I.R., 111069 FEDTAX, 1971-67
|Opinion Judge:||KERN, Judge:|
|Party Name:||HARRY LAHMAN and ROSE A. LAHMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||William Waller, for the petitioner. Jack D. Yarbrough, for the respondent.|
|Case Date:||November 10, 1969|
|Court:||United States Tax Court|
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $10,210.96 in petitioner's income tax for the year 1963. The only issue for our consideration is whether the gain realized by petitioner Harry Lahman, hereinafter sometimes referred to as ‘ petitioner,’ on the sale on July 9, 1963 of shares of Northwestern National Life Insurance Company common stock is taxable as ordinary income as gain from the sale of ‘ property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,' rather than as long term capital gains as reported by petitioners in their income tax return for the year 1963. The sale was made by a syndicate which had acquired the Northwestern stock in 1962. Petitioner Harry Lahman was a member of a group named ‘ Bradford Associates' which was a participant in this syndicate.
This case was tried on the same calendar with Joseph J. Turner, docket No. 1203-67, and Francis C. Currie and Eleanor B. Currie, Et Al, docket Nos. 3190-67, 3226-67 and 3227-67, involving the same issue and, in the main, the same facts. The trial of this case was confined by the parties to an opening statement by counsel for petitioner and brief testimony by petitioner Harry Lahman. At the request of counsel for respondent his opening statement in the Turner case was incorporated herein by reference. It was stipulated by the parties that the testimony and exhibits which were received in the trial of the Turner case will be considered as having been received in the Currie cases and the instant case to the extent of their relevancy and materiality.
FINDINGS OF FACT
Some of the facts are stipulated. They are found to be as stipulated and the stipulation, together with the exhibits identified therein are incorporated herein by this reference.
Petitioners are husband and wife and reside in Atlanta, Georgia. They filed their joint income tax return for the year 1963 with the district director of internal revenue, Atlanta, Georgia. Petitioner Rose A. Lahman is a party to this proceeding only because she signed that joint return.
Petitioner Harry Lahman is employed as a salesman in the Atlanta office of J. C. Bradford & Co., a partnership (hereinafter described with more particularity) and was so employed at all times here relevant. He is registered as a securities salesman with the commissioner of securities in the State of Georgia. He has never been, in his own right, registered or licensed as a securities dealer and has never inventoried securities for tax purposes.
Petitioner was a member of a group known as ‘ Bradford Associates' which was composed of certain employees of the partnership and which participated in the two syndicates to be described below to the extent of an original participation set out as 37,000 shares of an insurance company to be acquired by the syndicate, as stated in the first syndicate agreement, and set out as 18,500 shares in the second syndicate agreement. petitioner's personal ultimate participation (after an 8 for 1 split of the acquired stock) was 4,000 shares.
J. C. Bradford & Co. (hereinafter sometimes called ‘ Bradford & Co.’ ) is a partnership engaged in the securities business, and is a member of the New York Stock Exchange. Bradford & Co. was a member of the National Association of Securities Dealers (hereinafter sometimes called the NASD) and has been registered with the Securities and Exchange Commission (hereinafter sometimes called the SEC) as a broker-dealer at least since February 4, 1945. James C. Bradford (hereinafter sometimes called ‘ J. C.’ ) is a senior and principal partner of Bradford & Co. J. C. has been in the securities business for 41 years. Bradford & Co. was formed in 1927 and first acquired its seat on the New York Stock Exchange in 1930. J. C. and Bradford & Co. have been very active in life insurance company stock during the years J. C. and Bradford & Co. have been in business. J. C. has advertised Bradford & Co. as ‘ Specialists in Life Insurance Stocks' in a book entitled ‘ Security Dealers of North America’ published semi-annually by Standard and Poor's Corporation which is circulated among securities dealers and in which securities dealers, underwriters and investment bankers place advertisements.
The names of the partners in Bradford & Co. during the years 1961, 1962, and 1963 are listed below.
J.C. Gordon Brooks
Einer Nielsen Gordon Duval
Kenneth H. Wood David Steine
James C. Bradford, Jr. A.S. Hill
Mrs. Eleanor A.
Bradford, Trustee W.M. Robinson
J. C. Bradford & Co., Incorporated (hereinafter sometimes referred to as ‘ Bradford, Inc.’ ) was incorporated under the laws of the State of Tennessee; and its principal office and place of business is located in Nashville, Tennessee. All of the outstanding stock of Bradford, Inc., was owned by Bradford & Co. Bradford, Inc. was a member of the NASD and was registered with the SEC as a broker-dealer in 1961. The corporation Bradford, Inc., was occasionally used as in underwriter of corporate securities. Bradford, Inc., was registered with the State of Tennessee regulatory agency as a broker-dealer. It was not a member of the New York Stock Exchange. During the years 1961, 1962, and 1963 the officers of Bradford, Inc., were as follows:
Vice Presidents Einer Nielsen
Walter M. Robinson
Kenneth H. Wood
|Gordon Duval [*]|
|David Steine [*]|
|Albert S. Hill [*]|
Secretary J.C. Bradford, Jr.
Treasurer Mary Smart
Aragon Corporation (hereinafter sometimes referred to as ‘ aragon’ ) is a Tennessee corporation; and its principal office and place of business is in Nashville, Tennessee. All of the stock of Aragon is owned by the 418 Union Street Corporation, the stock of which, in turn, is owned by Eleanor A. Bradford, the wife of J. C., and by three partners of Bradford & Co. Nationwide Corporation (hereinafter sometimes referred to as ‘ Nationwide’ ) was incorporated under the laws of the State of Ohio. Nationwide conducts a life insurance business. Its principal office was located in Columbus, Ohio. Nationwide owned or controlled several other life insurance companies during the years 1961 to 1963, inclusive. Northwestern National Life Insurance Co. of Minneapolis, Minnesota (hereinafter sometimes referred to as ‘ Northwestern’ ) was organized in 1885 under the laws of the State of Minnesota. Northwestern is a stock and mutual like insurance company and is controlled jointly by its stockholders and its mutual policyholders. Each participating policyholder has one vote for each $1,000 of life insurance carried. As of March 31, 1963, its life insurance in force exceeded $2,700,000,000 and its total assets exceeded $420,000,000. During a period of approximately two months, i.e., in December 1956 and January 1957, Nationwide acquired approximately 51 percent of the outstanding common stock of Northwestern by purchase on the open market. It was acquired from small investors and from owners of large blocks of Northwestern stock. Murray, D. Lincoln, the president of Nationwide, requested that J. C., as an official of Bradford & Co., assist Nationwide in its acquisition of the stock of Northwestern. J. C. was aware that there had been litigation between Nationwide and Northwestern after Nationwide's acquisition of Northwestern's stock, arising from Nationwide's efforts to gain the proxies of Northwestern's participating policyholders. At that time J. C. believed that the dispute between Northwestern and Nationwide depressed the market price of Nationwide's stock. He believed that if Bradford & Co. acquired an option to purchase the Northwestern stock owned by Nationwide and it became known that Nationwide would no longer own stock in Northwestern, the price of Northwestern stock would rise. J. C. was also aware that the 51 percent stock interest, represented by 113, 728 shares of Northwestern common stock, did not provide control of Northwestern because of the votes of the participating policyholders. With these considerations in mind J. C. made an offer in mid-1961 to Mr. Lincoln, the president of Nationwide, to purchase an option to acquire Nationwide's stock interest in Northwestern. After some discussion and negotiation, the Board of Directors of Nationwide authorized the acceptance of J. C.'s offer. The negotiations culminated in an option agreement in the form of a letter dated September 18, 1961 from Nationwide addressed to Bradford & Co. which stated that upon payment of $3.00 per share for the 113,728 shares owned by Nationwide on or before October 12, 1961, Bradford & Co. would have the option to purchase the Northwestern stock for $153 per share on or before October 31, 1962. The payment of $3.00 per share, totaling $341,184, was to be applied to the purchase price on exercise of the option. The market price of Northwestern at the time the option was granted was approximately $123 per share. After J. C. received the option letter from Nationwide, but before it was made effective, J. C. requested a meeting with John S. Pillsbury, the president of Northwestern, with whom he was not yet acquainted. Among the reasons which J. C. had for requesting that meeting was to establish a relationship...
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