Motter v. Smyth, 1119.

• Decision Date: 17 April 1935
• Docket Number: No. 1119.,1119.
• Citation: 77 F.2d 77
• Parties: MOTTER, Collector of Internal Revenue, v. SMYTH.
• Court: U.S. Court of Appeals — Tenth Circuit

77 F.2d 77 (1935)

MOTTER, Collector of Internal Revenue, v. SMYTH.

No. 1119.

Circuit Court of Appeals, Tenth Circuit.

April 17, 1935.

F. W. Dewart, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., Sewall Key, John MacC. Hudson, and E. F. McMahon, Sp. Assts. to Atty. Gen., and Summerfield S. Alexander, U. S. Atty., of Topeka, Kan., on the brief), for appellant.

Claude I. Depew, of Wichita, Kan. (W. E. Stanley and William C. Hook, both of Wichita, Kan., and Charles P. Swindler, of Washington, D. C., on the brief), for appellee.

Before LEWIS and PHILLIPS, Circuit Judges, and KENNEDY, District Judge.

KENNEDY, District Judge.

In 1928, Charles H. Smyth made his income tax return for the calendar year upon which the ascertained tax was paid in due course. Thereafter, the Internal Revenue Bureau determined that the taxpayer was liable for an additional tax in the sum of some $29,000. The taxpayer paid the amount under protest to the collector and filed a claim for refund, which claim was determined adversely to the taxpayer. Thereupon he instituted a suit against the collector for the recovery of the alleged erroneous tax. During the pendency of the litigation the taxpayer died, and under an order of revivor his executrix was substituted in his stead. In the court below in a jury-waived trial, the issues were determined in favor of the taxpayer, and from the findings and judgment the collector appeals.

The cause of action involves three items by which the income of the taxpayer would be increased for the taxable year 1928. These items are as follows:

"(a) $33,150.00 commission received on sale of securities of the Kansas City, Mexico & Orient Railroad Company to the Atchison, Topeka & Santa Fé Ry. Co.

"(b) $66,580.82 unreported profit on the sale of stock owned by taxpayer in the Kansas City, Mexico & Orient Railroad Company.

"(c) $28,572.00, representing notes of one Jerome Harrington, which were deducted by taxpayer from his income in 1928 as bad debts and which deduction was disallowed by the Commissioner."

A brief sketch of the facts upon which the controversy rests is as follows: Charles H. Smyth was the owner of 395 shares of the capital stock of the Kansas City, Mexico & Orient Railroad Company. This carrier had been from the beginning of its service in financial difficulties, but in 1927 there developed a prospect that it might be taken over by the Santa Fé Railway System, a solvent and going concern. Charles F. Smyth, the son of Charles H., the taxpayer, in 1927 contacted a high official of the Santa Fé System and induced him to go to the hunting camp of his father, Charles H. Smyth. In the conversation which took place, it developed that negotiations might be opened up looking to the taking over of the Orient by the Santa Fé. Some time in January, 1928, the two Smyths, father and son, got together and decided to attempt to put over a sale to the Santa Fé of the controlling stock in the Orient. It was agreed between father and son that they would jointly attempt this enterprise, and that in the event of its consummation there should be an equal division of the profits arising by commissions from the purchase and sale of the stock of the Orient, the controlling interest of which was held by English stockholders, and likewise an equal division of the profits which would accrue over and above the amount which Smyth had invested in the 395 shares held by him personally. It was further agreed that the father would contact the stockholders and also the officials of the Santa Fé, and that the son would take care of the office, collect and supply data concerning the Orient road in its operations as should be required by the prospective purchasers. On account of the nature of the enterprise, it was necessary to keep the plans and negotiations more or less secret, and the son was to do and did do all of the necessary office work without the aid of a stenographer. The enterprise was fully consummated and the profits therefrom were divided equally between the father and son. In specific amounts, one-half of the profits realized by the sale of the Orient stock secured from the English stockholders was $33,150, and one-half of the profit on the sale of the stock owned by the father, Charles H. Smyth, was $65,580.82. These amounts the father accounted for in his income tax return and the other half of such profits were received by the son. The Revenue Department, in reassessing the tax, charged the father as income of his own with the total commissions and all the profits on the sale of his own stock. The remaining item in controversy, $28,572, is a deduction by Charles H. Smyth from his income in 1928, in the nature of a charge-off for bad debts, represented by notes of one Jerome Harrington, a son-in-law of the taxpayer, which item was disallowed by the Commissioner. Charles H. Smyth in November, 1923, loaned Harrington $15,072, and in January, 1924, $13,500, taking the notes of Harrington. The money realized from the loan was used to buy an interest in the Fourth National Bank of Wichita, with which Harrington was connected; the stock purchased being pledged as collateral for the loan. The bank subsequently was unsuccessful and the debt remained an open and accrued obligation until in September, 1928, when it was charged off by Smyth. After the failure of the bank in September, 1924, Harrington went to E1 Paso, Tex., for his health, and was employed there by one Denton. Through the assistance of Denton and advancement of money by him, Harrington negotiated a compromise settlement with some of his creditors upon the basis of 7 per cent. of their claims. Among the claims so settled were obligations from Harrington to Charles H. Smyth represented by other and older notes than those given for the purchase of the bank stock, and a 93 per cent....