Masoni v. Commissioner, Docket No. 3021-65 — 3023-65.
| Citation | 1968 TC Memo 129,27 TCM (CCH) 619 |
| Decision Date | 26 June 1968 |
| Docket Number | Docket No. 3021-65 — 3023-65. |
| Parties | John G. Masoni and Helen Masoni v. Commissioner. Joseph C. Lombardo and Mary Lombardo v. Commissioner. Estate of W. Frank Hobbs, deceased, Sara Keller Hobbs, Executrix and Sara K. Hobbs v. Commissioner. |
| Court | U.S. Tax Court |
Richard Katcher, 1100 Keith Bldg., Cleveland, Ohio, for the petitioners. George J. Tomlinson, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined deficiencies in income tax against the petitioners John G. Masoni and Helen Masoni for the taxable years 1960 and 1961 in the respective amounts of $23,659.11 and $21,901.00, against the petitioners W. Frank Hobbs and Sara K. Hobbs for the taxable years 1960 and 1961 in the respective amounts of $30,389.51 and $22,242.96, and against the petitioners Joseph C. Lombardo and Mary Lombardo for the taxable years 1960 and 1961 in the respective amounts of $18,443.22 and $23,067.87. Hereinafter John G. Masoni, W. Frank Hobbs, and Joseph C. Lombardo will be referred to collectively as the petitioners.
The issue presented is whether it should be considered that a partnership, Jeff Downs Company, operated Jefferson Downs Race Track during the taxable years 1960 and 1961, with the result that the petitioners, as partners thereof, are entitled to deduct their shares of the operating losses sustained in the operation of the track.
Some of the facts have been stipulated and the stipulations are incorporated herein by this reference.
At the time of filing the petitions Lombardo resided in Parkview, Ohio, Hobbs resided in Tampa, Florida, and Masoni resided in Fort Lauderdale, Florida. Masoni and Lombardo each filed joint income tax returns with their wives for the calendar years 1960 and 1961 with the district director of internal revenue at Cleveland, Ohio. Hobbs filed a joint income tax return for the calendar years 1960 and 1961 with the district director at Tampa, Florida. All three petitioners employed the cash receipts and disbursements method of accounting.
Prior to 1959 a corporation known as Magnolia Park, Inc., had unsuccessfully operated a horse race track in Jefferson Parish, Louisiana (such course having been known as Magnolia Park Race Course and later as Jefferson Downs Thoroughbred Race Track) upon land leased to it by Malcolm Woldenberg and Stephen Goldring. Magnolia Park, Inc., was, at all times herein material, in reorganization pursuant to Chapter X of the Bankruptcy Act, the trustee being Richard B. Montgomery, Jr. In August 1958, the trustee obtained from the Louisiana State Racing Commission a license to conduct a race meeting at the track for the spring season of 1959. On November 1, 1958, Woldenberg and Goldring leased the property to the trustee, under an agreement entitled "Net Ground Lease," for a term of 30 years and 2 months, the lease being recorded in the records of Jefferson Parish. It provided for an annual rental of $50,000 for the first year, $55,000 for the second year, and $60,000 for each year thereafter, plus a percentage of the gross pari-mutuel receipts and a percentage of certain other revenues. It was provided that any existing or subsequent improvements should be the property of the lessee. Therein it was recognized that it was the intention of the trustee to enter into a sublease with a corporation to be known as Jefferson Downs, Inc.
On November 3, 1958, Jefferson Downs, Inc., hereinafter referred to as the corporation, was organized under the laws of Louisiana. The trustee of Magnolia Park, Inc., entered into an "Operating Agreement and Lease" with the corporation whereby he subleased the above property to the corporation, it being specifically provided that the improvements were not leased to the corporation. The sublease was for a term of 2 years and 2 months, commencing November 1, 1958, with an option to the lessee to renew the lease for an additional term of 28 years. The corporation agreed to conduct horse racing on the premises for at least 60 days (apparently each year). The rental was stated as a percentage of the pari-mutuel receipts of the track (with a $60,000 minimum), plus 15 percent of any receipts from the use of the premises other than as a race track. It was provided that any improvements should belong to the trustee. This lease was recorded in the records of Jefferson Parish. In November 1958 the racing commission, at the request of the trustee, approved the corporation's application to be the operator of the track under the above license which had been granted to the trustee for the 1959 spring racing season.
Prior to the opening of the 1959 spring racing season the track was renovated by the corporation, which erected several new barns, made additions to the clubhouse and grandstand, erected a paddock in front of the clubhouse, and installed new lighting.
The 1959 spring racing season began on March 2 and ended on May 2. The meeting was hampered by stormy, damp, and cool weather. Due in part to the bad weather, the corporation incurred a loss of $320,304.41 for the 8 months ended July 31, 1959. The balance sheet as of July 31, 1959, showed an excess of liabilities over assets of $124,220.13.
In the summer of 1959, Masoni inspected the race track facilities and also the financial reports of the corporation and of Magnolia Park, Inc., to determine the advisability of purchasing on behalf of himself and others a controlling stock interest in the corporation. His examination of the financial records disclosed the loss sustained at the spring meeting. His examination of the race track facilities led him to believe it would be necessary to make substantial improvement to make the track usable.
Sometime in August 1959 Masoni, acting on behalf of himself, New Orleans Sportservice, Inc. (hereinafter referred to as Sportservice), Lombardo, and Hobbs (all four parties being referred to hereinafter collectively as the Masoni group),1 purchased from the then stockholders of the corporation slightly over 80 percent of the 17,331 outstanding shares of the corporation's stock, all of the corporation's outstanding debentures (face value of $139,950) and all of the loans payable to stockholders (face value of $170,370.36). The purchase price of the stock was $8.01 per share, and that of the debentures and loans was face value.
After the purchase the shares of stock of the corporation were owned as follows:
No. of Shares
Masoni .................... 3,480
Hobbs ..................... 3,480
Lombardo .................. 3,480
Sportservice .............. 3,480
C. Ray Edmonds ............ 1,554
Others .................... 1,857
Thereafter the following persons were elected as officers and directors of the corporation:
Edmonds ..... President and Director
Hobbs ....... Vice-president and Director
N. Ford Reese Secretary and Director
Masoni ...... Treasurer
The members of the Masoni group were experienced operators of race tracks. In spite of the losses which had been sustained by the corporation during the 1959 spring race meeting, the Masoni group believed that they could provide better management than the corporation had theretofore had and that they could operate the track at a profit, if further improvements were made to the physical facilities. Their belief was based, in part, upon the fact that in June 1959 the state law had been amended to reduce the percentage of pari-mutuel wagering pools which the operator of a race meeting was required to pay as license fees.
It was the intention of the Masoni group to continue operating the track through the corporation. On August 13, 1959, the corporation applied to the state racing commission for a license to conduct race meetings in the fall of 1959 and the spring of 1960, such meetings to be for the periods September 24, 1959 through November 21, 1959, and March 11, 1960, through April 23, 1960, respectively. The license was granted in August 1959.
In preparation for the 1959 fall race meeting, the corporation, under management of the Masoni group, improved the race track facilities, at a cost of about $50,000, by installing heating equipment in the clubhouse and grandstand, paving the parking area, resurfacing the race course, installing underground drainage facilities, and building additional barn facilities.
In the fall of 1959 the members of the Masoni group made loans to the corporation in amounts and on dates as follows:
Masoni ........... $ 17,654.49 10/ 1/59
Lombardo ......... 17,654.49 10/ 1/59
Hobbs ............ 17,654.49 10/ 1/59
Sportservice ..... 300,000.00 9/30/59
17,654.49 10/ 1/59
15,000.00 11/30/59
The other shareholders of the corporation did not make any loans to it. L & M Properties Company, an Ohio corporation, loaned $45,000 to the corporation on November 30, 1959.2
Operation of the 1959 fall race meeting resulted in a loss of $263,091.33 to the corporation, which was attributable in part to unusually inclement weather. The balance sheet of the corporation as of November 30, 1959, showed an excess of liabilities over assets of $410,085.74.
As a result of the losses totaling over $500,000 which the corporation had suffered in operating the track during the 1959 spring and fall race meetings, the Masoni group gave consideration, in early 1960, to the question whether the operation of the track should be continued. Sportservice indicated to Masoni that it believed its loan to the corporation, which was in excess of $300,000, was in jeopardy and that it was considering demanding payment, and inquired what the other stockholders intended to do about the situation. The Masoni group was not willing to loan more money to the corporation since the minority stockholders had not loaned...
To continue reading
Request your trial