Teitelbaum v. CIR

• Decision Date: 03 October 1961
• Docket Number: No. 13150.,13150.
• Citation: 294 F.2d 541
• Parties: Abraham TEITELBAUM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

294 F.2d 541 (1961)

Abraham TEITELBAUM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13150.

United States Court of Appeals Seventh Circuit.

August 24, 1961.

Rehearing Denied October 3, 1961.

Abraham Teitelbaum, Beverly Hills, Cal., for petitioner.

Louis F. Oberdorfer, Asst. Atty. Gen., Tax Division, Michael F. Smith, Lee A. Jackson, I. Henry Kutz, Norman H. Wolfe, Attorneys, Department of Justice, Washington, D.C., for respondent.

Before HASTINGS, Chief Judge, and MAJOR and KNOCH, Circuit Judges.

KNOCH, Circuit Judge.

Petitioner, Abraham Teitelbaum, seeks review of decision by the Tax Court which reversed in part and affirmed in part determinations made by the Commissioner of Internal Revenue, respondent herein.

On behalf of himself and his partner, (his first wife, Esther Melnick Teitelbaum) the petitioner paid a jeopardy assessment in excess of $340,000 including taxes, interest, penalties and costs, for the years 1944 through 1948. In 1955, there was another jeopardy assessment against petitioner for the years 1949 through 1951. Mr. Teitelbaum's petitions for re-determination of both assessments were consolidated for trial.

Mr. Teitelbaum lists the contested issues as follows:

1. The trial Court Judge Russell E. Train should have in good conscience informed Petitioner at the start of the hearings of the consolidated petitions for tax redetermination, that he was the minority member of the King Congressional Committee in 1951 investigation of Income Tax Irregularities in which proceeding Petitioner was a main witness, who thought it was his civic duty to give testimony in which he was an intended victim of a $500,000 extortion plot.

Had Judge Train, at the start of the proceedings, made a statement as to his being a member of the minority group of the King Congressional Committee, or an attorney on the Staff of the Joint Committee on Internal Revenue taxation, then his statement having been made, it would have been up to Petitioner either to exercise his Constitutional prerogative to ask or not to ask for a change of venue. Tr. pp. 1387, 1430.

On pages 192-193 of the Tr., Petitioner called to the Court's attention his participation as a witness before the King Congressional Committee. This remark was made in Petitioner's opening statement to the trial Judge. Tr. p. 148.

2. The majority of the rulings of the trial Judge were erroneous in law and not based on the evidence.

3. The rulings of the trial Judge in favor of Petitioner did not result in the return of any money paid under protest, because of his ruling in the second tax case.

4. The burden of proof of fraud, being on Respondent, the same was not discharged.

5. The trial Judge failed to honor the stipulations of facts filed in the cases. Tr. pp. 127 to 145 Incl.

From the record it appears that Judge Russell E. Train, who heard this case in the Tax Court, was an attorney on the staff of the Joint Committee on Internal Revenue Taxation and never a member of the staff of the King Subcommittee. Judge Train was a mere spectator to Mr. Teitelbaum's testimony as a witness before the King Subcommittee, and took no position adverse to Mr. Teitelbaum. Mr. Teitelbaum, himself, stated in the Tax Court hearing:

"I am perfectly satisfied with your Honor. I certainly wouldn\'t have asked for a change of venue * * *." Tr. 1398

The record affords no support for any finding of disqualifying personal bias or prejudice. Tucker v. Kerner, 7 Cir., 1950, 186 F.2d 79, 23 A.L.R.2d 1027.

While Mr. Teitelbaum was counsel for the Chicago Restaurant Association, he received certain sums which he characterized as Christmas bonus gifts and which he did not report as taxable income. Whether these sums were gifts exempt from tax or were taxable compensation presents a question of fact. If the payments proceeded primarily from the constraint of a moral or legal duty, they were not gifts. Bogardus v. Commissioner, 1937, 302 U.S. 34, 41, 58 S.Ct. 61, 82 L.Ed. 32. The minutes of the Chicago Restaurant Association disclose the motive for these payments. The minutes indicate:

"* * * at this time of the year we usually consider the matter of a Christmas Gift to Mr. Teitelbaum to cover additional expenses which he incurs." Exh. QQ.

In a letter from the Executive Vice-President of the Association, Mr. Teitelbaum was advised:

"In the past years, * * * you received sums of money at or about Christmas each year, * * * While the latter was in the nature of a gift, it was intended to augment your expense account * * You have always advised us that the expenses we gave you, in addition to the basic retainer, was not sufficient." Exh. 38

The Tax Court's finding that the Christmas bonus gifts were compensation is not clearly erroneous and must stand. Federal Rules of Civil Procedure, Rule 52(a), 28 U.S.C.A.

It was stipulated between the parties that (Second Supplemental Stipulation of Facts):

"23. The partnership return of Teitelbaum and Simon for the year 1950 claimed a deduction for the conversion of electricity in the Fine Arts Building from D.C. to A.C. This conversion was done pursuant to an ordinance of the City of Chicago."

Mr. Teitelbaum deducted the cost of this conversion (almost $80,000) as an ordinary and necessary expense paid or incurred during the taxable year in which it occurred. It was Mr. Teitelbaum's contention that the conversion added nothing to the value of the building, although his architect, on cross-examination, did state that he would advise a buyer who contemplated the purchase of a building in which such conversion was required by ordinance and had not yet been made, to take the cost of such conversion into consideration in arriving at a purchase price.

The Tax Court held that the electric conversion was a capital expenditure which must be amortized out of the income from the years of its useful life. Mr. Teitelbaum argues that the Tax Court thus ignored the stipulation quoted above. We find no contradiction between the stipulated facts and the Tax Court's finding. The mere fact that the conversion was involuntary and made only to comply with a city ordinance does not render it an ordinary expense. Involuntary modifications made to comply with orders of municipalities or regulatory bodies have been held to be capital items and not deductible expenses. Even though they may not improve the property by increasing its attractive appearance or efficiency, or prolonging its life, such modifications do render the property more valuable for the taxpayer's use by bringing the property into compliance with applicable regulation. Parkersburg Iron & Steel Co. v. Burnet, 4 Cir., 1931, 48 F.2d 163, 164, 165; R. K.O. Theatres, Inc. v. United States, Ct. Cl., 1958, 163 F.Supp. 598, 602; Woolrich Woolen Mills v. United States, 3 Cir., 1961, 289 F.2d 444.

In 1948, Mr. Teitelbaum and his first wife acquired property near Indio, California, which included a date ranch and residential facilities. The Tax Court found that out of a total consideration of $127,372.09, at least $88,872.09 was allocable to the residence and related improvements, which included a main house with a high-ceilinged, two-fireplace living room of 45 × 60 feet, a guest house, swimming pool, pool house and servants' house. About $21,000 was allocated to the land and $17,500 to the trees and related improvements. There were also a caretaker's house, a house for the farm laborers, 300 date trees covering about six to seven acres, and about two and one-half acres of grapefruit. Mr. Teitelbaum asserts that the date ranch was never intended to be a recreational hobby but was conducted as a separate business enterprise which, in the hands of his predecessor, had earned a profit of as high as $45,000 in one year. However, that predecessor had informed Mr. Teitelbaum that during the years following World War II, the price of dates declined, and that an overall loss had resulted for the most recent year, which would be claimed by the predecessor as a business loss for tax purposes. Mr. Teitelbaum had also sought information from the Date Growers' Association in California. In 1947, domestic date prices were declining, partly because of newly begun importation of dates from abroad.

The absence of a profit motive is significant in determining whether an enterprise is conducted as a business. White v. Commissioner, 6 Cir., 1955, 227 F.2d 779, certiorari denied 351 U.S. 939, 76 S.Ct. 836, 100 L.Ed. 1466. Where a taxpayer derives substantial income from other occupations, the size and character of his regular business, of the farm, its operation and records, his time and effort expended, and the nature of the residential facilities, are all elements in determining whether the taxpayer is conducting a business venture for profit or cultivating a farm as an adjunct to a country residence. Morton v. Commissioner, 2 Cir., 1949, 174 F.2d 302, certiorari denied 338 U.S. 828, 70 S.Ct. 77, 94 L.Ed. 503; Coffey v. Commissioner, 5 Cir., 1944, 141 F.2d 204.

Mr. Teitelbaum was allowed to deduct his losses from this operation in 1948, and he contends that no change in operation occurred for succeeding years. The first Mrs. Teitelbaum used the big house and its related buildings as her major residence from the time of its acquisition and continuously after her separation from Mr. Teitelbaum in 1949.

The Tax Court found that no adequate records were maintained for the date ranch, the substantial residential expenses being commingled with those of the farming operation. The Tax Court characterized Mr. Teitelbaum's evidence in this regard as "a mass of unsorted cancelled bills." No effort had been made to segregate them. The evidence supports the Tax Court's conclusion that no attempt had been made to put the ranch on a paying basis, that Mr. Teitelbaum devoted little time to the operation and exercised no managerial responsibility after separating from his wife in 1949. In Field v. Commissioner, 26...