Love v. United States

• Decision Date: 01 May 1951
• Docket Number: No. 48946.,48946.
• Parties: LOVE et al. v. UNITED STATES.
• Court: U.S. Claims Court

96 F. Supp. 919

LOVE et al. v. UNITED STATES.

No. 48946.

United States Court of Claims.

May 1, 1951.

Robert C. Cotten, Jr., Washington, D. C., for plaintiffs. Moyle & Wanlass, Washington, D. C., were on the briefs.

John A. Rees, Washington, D. C., with whom was Asst. Atty. Gen. Theron Lamar Caudle, for defendant. Andrew D. Sharpe and Ellis N. Slack, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

JONES, Chief Judge, delivered the opinion of the court:

The plaintiffs, a family group, sue for a refund of a portion of the income taxes paid for the calendar years 1940 and 1941.

It has been stipulated that if plaintiffs are entitled to recover the aggregate amounts should be $5,170.62 for 1940 and $4,128.87 for 1941.

The plaintiffs are members of a partnership or joint venture known as the Love Group Joint Venture. Each of them had an equal interest in the joint venture. The partnership filed income tax returns for the years indicated reporting income from certain real property as partnership income and setting out each individual's share therein. However, the legal title to the properties that produced the revenue involved here was held by the Leado Investment Company, a corporation owned by the plaintiffs. The corporation's returns bore the statement "Non Operative" and reported no gross income, no deductions, and no tax due. The facts are set out in detail in the findings.

After the plaintiffs had filed their returns and paid their income taxes for the two years deficiency assessments were proposed on the ground that some of the revenue which had been reported was derived from the property of the Leado Investment Company, a corporation; that taxes should have been paid by the corporation on this income and that the individuals should have reported this portion of their income as dividends.

The plaintiffs filed a formal protest against the proposed changes. After considerable discussion and a sequence of changes and adjustments an amount was agreed upon which was more than the individual taxes that had been reported, but less than the amount that would have been assessed if that portion of the income which flowed from properties standing in the name of the corporation had been taxed as corporate income and treated as dividends to the individual owners. No binding agreement was signed, but payment was made on the compromise basis with the understanding that a claim for refund might be filed and pressed.

The question is whether the Leado Investment Company should have been treated as a separate entity for Federal income tax purposes.

It is the contention of plaintiffs that the Leado Investment Company was a dummy or phantom corporation, used merely as a convenience to hold record title to certain properties, and that it was never in active operation. Defendant, on the other hand, contends that Leado's business activities were sufficient to require its being recognized as a separate and taxable entity.

The corporation was formed in 1916 with an authorized capital stock of $2,000 consisting of 20 shares of $100 par value each. In 1917 Edward K. Love and his wife acquired some real estate upon which they planned to erect a residence. The title to this property was placed in the name of the Leado Investment Company, and until 1927 not much, if any, other use was made of the corporation. Its stock had originally been issued to several employees of the Edward K. Love Realty Company but was later transferred to members of the Love Group. None of its capital stock was ever paid in and it never had a bank account in its name. No books of account were kept and its minute books recorded only the election of directors and officers from time to time as they were changed, and its dissolution in June 1944. The minute books, stock certificate book, seal, and other such records as were pertinent to the corporation were kept in the office of the Edward K. Love Realty Company. At all times the stock of the Leado Investment Company was beneficially owned by one or more of the five plaintiffs.

The Edward K. Love Realty Company was engaged in the business of arranging loans secured by deeds of trust upon real properties for its clients on a commission basis. One of the clients was the Love Group Joint Venture, which was formed to enable the five members of the Love family to pool their resources for the purpose of engaging in the business of lending money at interest, such loans being secured by deeds of trust upon real estate.

Commencing in 1927 there were defaults in payment of some of the Love Group's loans and after 1929 the number of loans in default increased rapidly. To protect its investments the Love Group Joint Venture foreclosed certain deeds of trust securing the defaulted notes and had the property sold at public auction. Frequently a representative of the Love Group made the highest bid; in such cases the trustee was directed to make his deed to the Leado Investment Company. Record title was placed in Leado to facilitate the subsequent sale and conveyance of the property so transferred. After the title was recorded subsequent transfers of the property were made by deed signed by Leado's officers.

After legal title to these properties was transferred to Leado, that company executed promissory notes accompanied by deeds of trust in amounts equal to the unpaid balance due at the time of foreclosure. These notes and deeds of trust were made in the name of and given to a nominee of the Love Group Joint Venture; these payees endorsed the notes without recourse and delivered them with accompanying papers to the Edward K. Love Realty Company. The properties standing in Leado's name were rented to tenants, usually...