Rassieur v. Commissioner of Internal Revenue

• Decision Date: 03 July 1942
• Docket Number: No. 12193.,12193.
• Citation: 129 F.2d 820
• Parties: RASSIEUR et ux. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

129 F.2d 820 (1942)

RASSIEUR et ux. v. COMMISSIONER OF INTERNAL REVENUE.

No. 12193.

Circuit Court of Appeals, Eighth Circuit.

July 3, 1942.

Abraham Lowenhaupt, of St. Louis, Mo. (George M. Rassieur, Lowenhaupt, Waite & Stolar, and Rassieur & Rassieur, all of St. Louis, Mo., on the brief), for petitioners.

Harry Marselli, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

STONE, Circuit Judge.

This is a petition by Theodore Rassieur and his wife (Carrie M. Rassieur) to review an order of the Board of Tax Appeals denying deductions for a stock loss and for bad debts in their tax year 1933. It is undisputed that the loss occurred and that the debts became bad. The only question is whether these happened in 1933 so as to be proper deductions in that year. The Board sustained the Commissioner in his determination that the loss and bad debts became worthless prior to 1933 and taxpayer seeks review.

Taxpayer (Theodore Rassieur)¹ joined with his son (T. Edward Rassieur) and John P. Sweeney in organizing Rassieur, Sweeney & Co., Inc. He subscribed $50,000 himself and advanced each of them $100,000 to pay for their separate stock subscriptions. Each of these advances was upon a note expressly prohibiting personal liability of the maker but secured by deposit of the stock as collateral. The loss here was through the $50,000 of stock in that company becoming worthless. The bad debts arose from the stock, deposited as collateral to the notes, becoming worthless. For some time before 1933, the company debts exceeded its assets and it would have been unable to sustain itself except for advances made to it by taxpayer for the purpose of keeping it going. Early in 1933, taxpayer determined he could no longer make such advances and, in June, 1933, the corporation was dissolved — at which time its debts exceeded its assets. The Board thought that the time the debts became worthless should be determined as the time the stock became worthless, because there was no personal liability of the makers (the collaterally deposited stock being the only source of payment); because taxpayer was intimately familiar with the affairs of the company; and because he, "as a prudent business man", would have ascertained the stock to be worthless before 1933. It determined the stock to be worthless prior to 1933 because of the business and financial conditions of the company prior to that year.

I. Stock Loss.

There is no dispute as to the evidentiary facts. The question here is whether the evidentiary facts constitute substantial evidence to support the ultimate fact, found by the Board, that this stock became worthless prior to taxpayer's tax year of 1933, which began January 1, 1933. This is a question of fact. Helvering v. Ames, this Court, 71 F.2d 939, 943. The evidence consisted of the testimony of Theodore Rassieur and various exhibits showing the financial condition of the company at different times from its beginning to dissolution. The essential evidentiary facts thus shown are as follows.

Taxpayer Theodore Rassieur was a practicing attorney with outside business interests and investments. His son, T. E. Rassieur, was a young man having several years experience in the brokerage business at St. Louis. John P. Sweeney had considerable experience in the brokerage business at St. Louis, having been in charge of the bond department of a large trust company and, in 1929, was sales manager of a brokerage business. In 1929, taxpayer was induced by his son to put him and Sweeney into business for themselves. The result was organization of Rassieur, Sweeney & Co., Inc., with paid in capital of $250,000, of which taxpayer subscribed $50,000 and each of the others $100,000. Taxpayer advanced the funds to each of the others and took their separate notes (expressly prohibiting personal liability of the makers) therefor secured by pledges of their stock. In May, 1929, the company went into the general brokerage business at St. Louis with an organization of fifteen men made up of an experienced staff of office men, salesmen, stock exchange men, and traders. It had memberships in the St. Louis Stock Exchange and in the Investment Bankers Association. The company also bought and sold securities on its own account. In conducting its margin business, it made advancements for some customers.

After being in business six months, at the end of October, 1929, there was a profit of $71,417.87 on operations, without consideration of increase in value of securities then owned. At that time, the company had $223,976 in customers' accounts receivable, $416,495 of its own investments in stocks and bonds, and owed banks and brokerage houses $406,908.

The panic came the last of October, 1929. That the panic had a drastic and, for several years, a continued depressive effect upon business generally is a matter of such universal knowledge that we may take notice thereof. As to brokerage businesses, two of its reactions were upon the market values of stocks and bonds and upon the volume of dealings therein. The market value of all securities declined and the volume of trading fell off. As shown by this record, general conditions were progressively more unfavorable from the beginning of the panic through 1932 and, as taxpayer testified, "the outlook wasn't any too good in January, 1933." As mirrored in market prices of bonds of the International Telephone & Telegraph Corporation,² the recovery began some time in 1933 and progressively grew to 1938. As other like businesses, this company felt these ill effects. The results were reflected both in the character and volume of business and in the financial condition of the company.

As to character and volume of business. An early change occurred in September, 1931. August 31, 1931, there was $109,700 due from customers, the market value of securities owned had materially declined, and $327,000 was due banks — only $783 to others. Taxpayer concluded the customer accounts should be collected and applied on debts and no further loans to customers for margin trading should be made, as he was apprehensive that he would be unable to help "if I let them go on owing that much money". In September, 1931, customer receivables were collected and reduced from $109,428 to $74,505, some investments (stocks and bonds) were sold and the bank indebtedness reduced from $327,000 to $228,750. By the end of 1931, those receivables had been reduced to $54,705, representing six accounts. With slight variations, this continued until November, 1932, when there were only three accounts (totalling something over $36,000) which were eventually charged off. By March, 1932, the business of the company "had materially dropped," the man who was a trader of unlisted stocks and the one who appeared daily on the Exchange floor were let out.

Late in 1930, T. E. Rassieur had developed a theory of determining the course or trend which the stock market would take. He worked on this during 1931 and finished it early in 1932. This took the form of a booklet — "Trend Interpretation by T. Edward Rassieur." May 26, 1932, the company made a royalty contract, with T. E. Rassieur, to market it by sale to subscribers at a price of $100 per month and authorized the printing of the booklet at its expense. Sales were difficult at $100 and the price was reduced to $25 commencing November, 1932. This service was carried on until January 7, 1933, when the contract was cancelled.

The situation from June, 1932, is concisely stated by the taxpayer as follows:

"During this time, although it was the desire to decrease expenses as much as possible, it was necessary to maintain an office, to have solicitors, telephones and stenographers. The service was carried on in that way from June 1932 until January 7, 1933, when the contract with T. E. Rassieur was cancelled. That was the business that was then being carried on by the Company from June 1932 with the idea and hope that it would make a profit. The Company also rendered other service during that period. It had as late as December 31, 1932, $168,000.00 par value of International Telephone & Telegraph Company bonds and $9,000.00 par value of Valspar Corporation bonds, besides stocks of the market value at that time of $3,941.59. It had to maintain some organization for the purpose of determining what should be done with these assets and when. It also had collateral up on outstanding accounts at that time aggregating $35,000.00 or $36,000.00, and it had to watch the market to determine when collateral should be sold. So there were those three functions that the Company performed, commencing with say June 1932, down to June 24, 1933. It had ceased to do a regular brokerage business, but it was now a holding company, owning these securities, and it had to exercise judgment as to when these securities ought to be sold and when, if ever, we should go back into the brokerage business, after this April. During the year 1932 it had to look after these securities. It sold some of these securities. Others it held. It held the securities because it was the Company's judgment and my judgment that the market had not yet come back sufficiently to justify the sale. We (the Company) sold out collateral during that period and we operated this stock market trend interpretation service. Those were the three functions that the Company was carrying on during the year 1932.

"When I received the December 31, 1932, statement, which was within a couple of days after that date, I explained to Sweeney and my son that it was impossible for me to continue to spend $1,000 a month to carry on a business which during the last six or seven months had not been profitable, and arrangements were then made to release the Company from its obligations under the contract of May 1932 and to release T. Edward Rassieur from...