Tompkins v. Commissioner of Internal Revenue
| Decision Date | 06 June 1938 |
| Docket Number | No. 4313,4314.,4313 |
| Citation | 97 F.2d 396 |
| Parties | TOMPKINS v. COMMISSIONER OF INTERNAL REVENUE (two cases). |
| Court | U.S. Court of Appeals — Fourth Circuit |
George D. Brabson, of Washington, D. C. (D. H. Blair and Blair & Korner, all of Washington, D. C., on the brief), for petitioners.
Arthur A. Armstrong, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key and A. F. Prescott, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before PARKER and SOPER, Circuit Judges, and WAY, District Judge.
The above entitled cases are appeals from two decisions of the Board of Tax Appeals. The two cases were consolidated before the Board and heard together there and here. The facts have been stipulated by the parties and are, in substance, as follows:
Charles H. Tompkins and Lida R. Tompkins, his wife, of Washington, D. C., during the calendar year 1932, and both prior and subsequent thereto, were the members of a partnership known as Charles H. Tompkins. Each partner owned a fifty per cent interest in the partnership whose business was buying, selling and holding real estate and securities for investment purposes.
In 1928, said Charles H. Tompkins partnership and a corporation known as McPherson Square Corporation, acquired together at a total cost of $145,000 property in the city of Washington, consisting of land and an office building thereon. There was a first deed of trust in the principal amount of $79,000 on the entire property, given in 1926 by a former owner to two trustees to secure first trust notes in that amount held by the Penn Mutual Life Insurance Company. Payment of the indebtedness secured by the deed of trust was assumed by the Tompkins partnership as a part of the purchase price.
Neither the Tompkins partnership nor any of its members had any financial interest or stock in McPherson Square Corporation. Under the arrangement the Partnership acquired a three-fifths interest and the Corporation a two-fifths interest in the ownership of the property. This transaction was the only venture on which the said Partnership and the Corporation ever embarked together so far as the record discloses or suggests.
The original cost of the partnership's three-fifths interest, was:
Cost of Property .................. $145,000
Less first Trust .................. 79,000
Total Cost of interest above first
trust ............................ 66,000
3/5 interest of Charles H. Tompkins
Partnership ...................... 39,600
In 1932 McPherson Square Corporation became financially involved and could not pay its share of the taxes and the interest on the notes secured by the deed of trust and the Tompkins partnership was unwilling to pay the Corporation's share of the taxes and interest. The situation then existing made it impractical for the Tompkins partnership to secure a voluntary conveyance to it of the corporation's 2/5 equity in the property, for the reason that McPherson Square Corporation was owned by a brokerage company then in receivership, which had assigned all of the stock in the McPherson Corporation to E. E. Pierce Company as collateral, prior to such receivership. The Pierce Company was, therefore, beneficially entitled to the value, if any, exising in the 2/5 equity in the real estate.
On September 23, 1932, after default in the payment of the interest on the deed of trust notes, the surviving trustee in the deed of trust pursuant to the provisions of the trust and to the demand of the Penn Mutual Life Insurance Company, the creditor secured, foreclosed the deed of trust and sold the property through auctioneers at public auction after proper advertisement of the sale in a Washington newspaper.
Subsequent to 1928 and prior to 1932 the first trust notes totalling $79,000 were curtailed by the Partnership and the Corporation in the amount of $6,000, so that in 1932 the notes had been reduced to $73,000 principal. Three-fifths of the curtailment, $3,600, was paid by the Tompkins partnership, thereby increasing the cost of the interest of the partnership in the property from $39,600 to $43,200.
In view of the fact that the Partnership assumed the payment of the indebtedness secured by the deed of trust and would have been liable to the holder of the notes for any deficiency in case the amount bid at public sale and paid for the property was less than the debt plus the unpaid taxes and cost of sale, the Tompkins partnership bid upon the property at the public sale and became the successful bidder at $79,000. The deed to the property bore date September 23, 1932, the day the trustee's sale occurred, and was made by the surviving trustee named in the deed of trust, to Mr. and Mrs. Tompkins, the members of said partnership.
The advertisement of the sale under the deed of trust stated that the trustee would place a new loan of $73,000 upon the property to a responsible borrower. The purchase price was paid by the Tompkins, by $6,000 cash and the giving of a new deed of trust from the Tompkins upon the entire property for $73,000. The excess of $6,000 of the highest bid over the principal debt of $73,000 was expended in satisfying unpaid taxes, interest and the costs of the sale, including the trustee's compensation for making the sale.
The Tompkins partnership acted in good faith in the matter for the purpose of preventing an even greater loss and not with the view of avoiding taxes. In its income tax return for 1932, the Partnership claimed a deductible loss in the amount of $43,200 on account of the transaction aforesaid. The Commissioner on final audit of the return disallowed that loss, thereby increasing the distributive shares of the partners, petitioners herein, which caused the deficiencies in issue in these proceedings.
Thereafter the Tompkins filed petitions with the Board of Tax Appeals praying a redetermination of the deficiencies and a reversal of the ruling of the Commissioner in disallowing the alleged loss of $43,200. The Board denied the petitions and held, in substance, that the Tompkins partnership neither sold nor otherwise disposed of the 3/5 interest in the real estate, but in fact merely acquired the remaining 2/5 interest and thereby became the sole owner of the entire property. The Board in its opinion said:
Petitioners urge that the Board erred in failing to hold that the transaction between the partnership and the corporation was a single joint venture upon the termination of which in 1932 petitioners suffered a deductible loss and in holding that petitioners had a continuous 3/5 interest in the property, that foreclosure and sale under the deed of trust merely operated to vest the other 2/5 interest in petitioners, and that their gain or loss on the 3/5 interest cannot be ascertained until petitioners finally dispose of that interest.
1. We think the circumstances disclosed by the evidence show that this was a joint venture between the Partnership and the Corporation for the purpose of profit. The nature and purpose of the business in which petitioners, the partnership, were engaged generally; the absence of any interest by the partnership or any of its members in the corporation and of any showing or suggestion that the corporation or any of its officers or stockholders were interested in the partnership; the well known object of a real estate corporation such as McPherson Square Corporation, all of the stock in which was owned by a brokerage company; the fact that this was the only transaction ever entered into between the partnership and the corporation and the nature of the transaction itself, in the absence of affirmative proof to the contrary, justify the conclusion that the object of the purchase and holding of the property by the partnership and the corporation constituted a single special joint adventure the purpose of which was profit. In Dexter & Carpenter v. Houston, 4 Cir., 1927, 20 F.2d 647, at pages 651, 652, it was said:
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