McNatt v. Commissioner
| Decision Date | 26 April 1962 |
| Docket Number | 88552.,Docket No. 88376 |
| Parties | Willie L. McNatt and Helen C. McNatt v. Commissioner. Sam Frank, Jr., and Esther Frank v. Commissioner. |
| Court | U.S. Tax Court |
Ronald M. Mankoff, Esq., for the petitioners. Harold D. Rogers, Esq., for the respondent.
Respondent determined deficiencies in petitioners' income tax for the years 1956 and 1957 in the following amounts:
The issues for decision are:
(1) Whether petitioners Willie L. McNatt and Sam Frank, Jr., received income as compensation for services upon receipts of stock of Bankers Insurance Company and Peoples Indemnity Insurance Company which they were permitted to purchase at a fixed price pursuant to agreements between them and the two companies with respect to the promotion and sale of stock of the companies.
(2) Whether the stock of Bankers Insurance Company and Peoples Indemnity Insurance Company sold by petitioners Willie L. McNatt and Sam Frank, Jr., and their joint venture in 1956 and 1957 had been held for less than 6 months so that the gain upon the sale of the stock constituted a short-term capital gain.
(3) In the alternative, whether the stock of Bankers Insurance Company and Peoples Indemnity Insurance Company sold by petitioners Willie L. McNatt and Sam Frank, Jr., and their joint venture in 1956 and 1957 was property held primarily for sale to customers in the ordinary course of their trade or business.
All of the facts have been stipulated and are found accordingly.
Petitioners Willie L. McNatt (hereinafter referred to as McNatt) and Helen C. McNatt are husband and wife residing at Dallas, Texas. They filed joint income tax returns for the calendar years 1956 and 1957 with the district director of internal revenue at Little Rock, Arkansas.
Petitioners Sam Frank, Jr. (hereinafter referred to as Frank) and Esther Frank are husband and wife, residing in Los Angeles, California. They filed joint income tax returns for the calendar years 1956 and 1957 with the district director of internal revenue at Little Rock, Arkansas.
Frank and McNatt each were on the cash basis of reporting income and expenses during the calendar years 1956 and 1957. McNatt was registered with the State Securities Board, State of Texas, as an individual general securities dealer from October 11, 1954 until April 26, 1956. Frank was registered with the State Securities Board, State of Texas, as an individual general securities dealer from February 4, 1954, until December 31, 1955.
Republic Trust Securities Company of Dallas, Texas, was until terminated on November 30, 1955, a partnership, the principal partners of which were McNatt and Frank. On November 17, 1955, this partnership became registered as a general securities dealer in the State of Texas.
On November 30, 1955, National Republic Trust, Inc., Dallas, Texas, a corporation of which Frank was president and McNatt was vice president, became registered as a corporate securities dealer in the State of Texas.
On February 28, 1956, Frank and McNatt organized a joint venture in which each had a 50 percent interest. This joint venture (hereinafter referred to as the joint venture) filed Federal partnership returns of income for the years 1956 and 1957 showing its address as Little Rock, Arkansas. The joint venture was terminated as of January 1958.
Prior to February 28, 1956, Frank, representing himself and McNatt, met with the officers and directors of Bankers Insurance Company (hereinafter referred to as Bankers) of Conway, Arkansas, and consulted with and advised them on methods for raising additional capital. Bankers had been founded by its president, E. R. Keller, with an initial authorized capital of 100,000 shares at 50 cents par value per share. The plan developed by Frank and Bankers called for the application by Bankers to the Arkansas Banking Commission for authority to change to no-par stock, to issue and offer 100,000 additional shares of its stock at $1.50 per share, and thereafter to apply for authority to issue and offer 200,000 additional shares of its stock at $5 per share. The additional issue of 100,000 shares was to be offered to McNatt, Frank, and Bankers' insurance agents. Of this additional issue, the insurance agents of Bankers purchased 40,000 shares at $1.50 per share, and 60,000 shares were offered to Frank and McNatt. Also, an additional 40,000 shares were sold to Bankers' president, E. R. Keller, and its secretary, H. C. Berryman, at $1.25 per share.
On February 28, 1956, Bankers as first party and Frank and McNatt as second party entered into a contract whereby Bankers agreed to make available to Frank and McNatt 100,000 shares of Bankers' stock to be sold exclusively within the State of Arkansas for $1.50 per share and as compensation for the services of Frank and McNatt to pay them 10 cents per share on each share of stock sold. This contract further provided:
On March 7, 1956, Bankers was authorized by the State of Arkansas to issue 100,000 additional shares of stock and to offer these shares at $1.50 per share.
On February 28, 1956, National Securities Corporation (hereinafter referred to as National) was incorporated under the laws of the State of Arkansas. Frank was president, and McNatt, Vice President of this corporation, and each owned 49 percent of its stock. By contract entered into on February 28, 1956, between Bankers and National, Bankers retained National as its exclusive agent to sell for it by public offer 200,000 shares of its capital stock, the public offering price to be yet determined and the sale to be subject to the approval and regulation of the State Insurance Commission and the State Bank Department of the State of Arkansas. National agreed to become qualified under the laws of the State of Arkansas to act as a dealer in stocks and when so qualified to promote and sell the contemplated issue of the capital stock of Bankers. Bankers agreed to pay National a commission of 20 percent on each share of stock sold. On March 29, 1956, Bankers was given authority to issue an additional 200,000 shares of stock and to offer it to the public at $5 per share. This permit was amended as of September 14, 1956, to permit the sale of a certain number of shares at $6.25 and was further amended on December 4, 1956, to permit the sale of a certain number of shares at $7.25 per share. On April 2, 1956, National was licensed under the laws of the State of Arkansas to deal in and sell insurance company securities.
On March 10, 1956, Frank and McNatt executed and delivered their joint promissory note in the amount of $70,000 to Bankers providing for payment of the sum one year after date for value received with interest upon maturity at the rate of 6 percent per annum. On March 22, 1956, Frank delivered $350 in cash to Bankers and executed and delivered an installment stock subscription note dated March 10, 1956, which provided as follows:
I, the undersigned hereby subscribe to 25,000 shares of no par value common stock of Bankers Insurance Company at $1.50 per share (less 10¢ per share as company's agent) and for value received promise to pay to the order of Bankers Insurance Company, the sum of $35,000.00 as follows: $350.00 paid herewith, and $350.00 on or before the 1st day of each and every succeeding month for ELEVEN (11) consecutive months, the balance due and payable twelve (12) months from date hereof, said sum to bear interest at the rate of six per cent (6%) per annum from...
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