Monteleone v. Comm'r of Internal Revenue

• Citation: 34 T.C. 688
• Decision Date: 13 July 1960
• Docket Number: Docket No. 72859.
• Parties: MICHELE MONTELEONE AND FRANCES MONTELEONE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

34 T.C. 688

MICHELE MONTELEONE AND FRANCES MONTELEONE, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 72859.

Tax Court of the United States.

Filed July 13, 1960.

William A. Cruikshank, Jr., Esq., for the petitioners.

Eugene F. Reardon, Esq., for the respondent.

Held, on the facts petitioner sustained a theft loss during the taxable year 1954.

TIETJENS, Judge:

This proceeding involves an income tax deficiency for the taxable year 1954 in the amount of $13,301.

The issue for decision is whether petitioner suffered a theft loss deductible under the provisions of section 165(c)(3) of the 1954 Code.

FINDINGS OF FACT.

Some of the facts were stipulated, are so found, and are incorporated herein by this reference.

During the taxable year 1954, Michele and Frances Monteleone were husband and wife. They filed a joint Federal income tax return for that year with the district director of internal revenue at Los Angeles. Michele is a party to this proceeding solely by virtue of having signed the return. Hereafter, Frances will be referred to as the petitioner.

In January 1954, petitioner received an interlocutory decree of divorce from her husband. Incident to a property settlement between them, she received at that time a substantial amount of cash from Michele. Publicity was given the divorce and accompanying cash settlement in the local newspapers.

In February of 1954, petitioner met Frank Coleman through a mutual acquaintance. On March 3, 1954, Coleman introduced petitioner to Herman Prujansky, a business associate of his. For many years, Prujansky had been engaged in promoting and managing night clubs, restaurants, and cocktail lounges. His primary role in these activities was to attract the clientele. In the Detroit area he had gained the title of ‘Night Major of Detroit’ by virtue of his endeavors in this field. At the time petitioner met Prujansky, both he and Coleman were engaged in the operation of a cocktail lounge in the Hollywood area known as Club 22. In January 1954, Prujansky had ‘taken over’ operations of the club at the insistence of its owner who had been unable to make a financial success of the business.

Prior to meeting Prujansky, petitioner was told by Coleman that Prujansky intended to acquire the club, and that he was presently in need of money to meet current bills. On the evening of their first meeting, petitioner advanced Prujansky $500. Subsequently, she made other advances of money to him: $5,000 on March 4, 1954; $1,100 on March 8, 1954; and $12,000 on March 16, 1954. With respect to the March 16 advance, the following agreement was executed between petitioner, Coleman, and Prujansky, also known as Herman Prujan:

This agreement between Francis (sic) Monteleone, hereinafter to be known as the lendor, and Frank Coleman and Herman Prujan, hereinafter known as the Lendees, is drawn for the purpose of the Lendor to loan to the Lendees the sum of $12,000.00. Said sum to be repaid in the following manner: $500.00 or more per month plus 10% per annum interest on the unpaid balance until paid in full. First payment to commence on May 1, 1954.

It is further agreed between the Lendor and the Lendees that the Lendees will form a Corporation, and at that time this loan will be transferred as an obligation of this Corporation and that said Corporation will execute to the Lendor a note and Chattel Mortgage of all the fixtures and equipment of that certain place known as the 22 Club, located at 8522 Sunset Blvd., Los Angeles, California.

Each of the various advances was made by petitioner on the strength of of Prujansky's representation that the money was to be used in the acquisition and operation of the Club 22, the profits from which were to be applied against the indebtedness. In addition, petitioner was led to believe she was to become a partner in the venture. Prujansky never acquired ownership of the club.

On April 2, 1954, petitioner advanced Prujansky $6,000; on April 26, 1954, $1,500; and on April 28, 1954, $2,500. The first of these advances was made on the strength of Prujansky's representation that he held a 49 per cent interest in a partnership engaged in the development and sale of a specialty item of children's furniture; that the amount would be repaid in full; and the petitioner was to share in one-half the profits derived from Prujansky's interest in the partnership. The other advances related to a proposed business enterprise of Prujansky's known as the Seacomber's Restaurant, Prujansky representing to petitioner that he needed the funds for the acquisition and operation of this business.

With respect to the $6,000 advance, petitioner and Prujansky entered into an agreement on April 2, 1954, extracts of which are set forth below:

WHEREAS, on March 25, 1954, HERMAN PRUJAN entered into a partnership agreement with one MARY de MARIA for the carrying on of the business of selling the ‘14 in 1 SNUGGLE BABE’, an all purpose feeding and play table for infants and children, under the partnership name of ‘D and M ENTERPRISES', and

WHEREAS, HERMAN PRUJAN is entitled to 49% of the net profits of said business, and

WHEREAS, FRANCES MONTELEONE is desirous of sharing in the profits of HERMAN PRUJAN from the business conducted under the name of ‘D and M ENTERPRISES' and has read the partnership agreement dated March 25, 1954 between MARY de MARIA and HERMAN PRUJAN,

NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:

Thereafter followed language providing for the agreement referred to above.

Through the period wherein petitioner made these various advances to Prujansky, he returned $600 to her.

At some undisclosed time after Prujansky commenced operation of the Club 22 and the Seacomber Restaurant, Prujansky was required to return to Detroit for a period of some 62 days. Shortly thereafter, both business ventures failed.

On February 23, 1955, petitioner instituted a civil action in the Superior Court of the State of California, for the County of Los Angeles, against Coleman and Prujansky to recover moneys advanced them. In her complaint in that proceeding she alleged:

On May 15, 1954, at Los Angeles, California, defendants were indebted to plaintiff in the sum of $28,000.00, for money before that time had and received by the defendants to and for the use and benefit of the plaintiff, and for money lent by the plaintiff to the defendants at their request, which debt the defendants fraudulently contracted by falsely, fraudulently and deceitfully representing to the plaintiff that they would pay over said sum money to an escrow of said sum of $28,000.00 for the benefit of the plaintiff and for the purpose of a certain business enterprise in the City of Los Angeles, County of Los Angeles, State of California, by means of which false representations they induced the plaintiff to pay over to the defendants the said sum of money, whereas the defendants when the said debt was contracted did thus obtain said sums of money with the intent of cheating and defrauding the plaintiff out of the same.

At some undisclosed time thereafter, petitioner, Prujansky, and petitioner's attorney met in the latter's office where a written stipulation was prepared in connection with the civil action filed by petitioner. Pursuant thereto, Prujansky stipulated: That all the allegations set forth in plaintiff's complaint were true; that he was indebted to petitioner in the sum of $28,000; and that judgment in that amount might be entered in her favor against him. Petitioner agreed to stay execution of judgment on the condition that Prujansky make restitution, the first payment to be made on or about February 21, 1955. In accord therewith, Prujansky made, during 1955, 3 payments to petitioner totaling $1,200. This stipulation was filed with the County Clerk of the Superior Court on June 11, 1956.

On May 15, 1956, a criminal complaint was filed by petitioner charging Prujansky and Coleman with four counts of grand theft relating to these advances. An information filed on the basis of that complaint was, on October 11, 1956, dismissed as to both parties by the Superior Court on defendants' motion under section 995 of the California Penal Code.

On March 6, 1957, the Los Angeles grand jury returned an indictment against Prujansky and Coleman charging them with six counts of grand theft relating to these advances, and a seventh count alleging violation of the Corporate Securities Act of California concerning the purported sale of a partnership interest. On June 19, 1957, this indictment was dismissed by the Superior Court as to both defendants pursuant to their motion under section 995 of the California Penal Code, relating to the conclusion of the court that the defendants had been indicted without ‘reasonable or probable cause.’

On the joint return filed by the petitioner with her husband for the calendar year 1954 a deduction was claimed in the amount of $28,000 for ‘Theft by Herman Prejan aka Turk Prejan and Frank...