Towers v. Comm'r of Internal Revenue

• Decision Date: 18 May 1955
• Docket Number: Docket Nos. 28753,28778,28816.,28754,28779
• Citation: 24 T.C. 199
• Parties: SAMUEL TOWERS, ET AL.,* PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 199

SAMUEL TOWERS, ET AL.,* PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 28753

28754

28778

28779

28816.

Tax Court of the United States.

Filed May 18, 1955.

Albert Averbach, Esq., for the petitioners.

Thomas R. Charshee, Esq., for the respondent.

1. Petitioners engaged in a number of promotional business ventures up to 1939. From 1939 through 1947, petitioners' main activities (other than the practice of law, in which three of them were engaged) were in the capacity of stockholders, officers, directors, and employees, first of Aircraft and Arms Consultants, Inc., then Rumsey Manufacturing Co. (Balch-Morris), and finally Rumsey Products Co. Several of petitioners made loans to Rumsey Products in 1947 by giving the company their personal checks and concurrently receiving in return a check of the corporation in the same amount and similarly dated. Certain loans remained outstanding and became worthless in 1947 when Rumsey Products was adjudged bankrupt. Held, petitioners were not engaged in the business of organizing, promoting, managing, financing, and making loans to such corporation, and are entitled only to deductions for nonbusiness bad debts in accordance with the provisions of section 23(k)(4) of the Internal Revenue Code of 1939.

2. Several of petitioners made advances to a ‘motor pool’ organized by petitioners to finance certain motor purchases of Rumsey Products. These advances constituted loans to Rumsey Products which became worthless in 1947 when Rumsey Products was adjudged bankrupt. Held, petitioners' were of nonbusiness bad debts and are deductible only in accordance with section 23(k) (4).

3. Petitioners purchased finished lawn mowers from Rumsey Products in 1947 for resale to certain customers to whom Rumsey Products could not sell. The lawn mowers were never delivered. Held, losses sustained by petitioners were incurred in a transaction entered into for profit and may be deducted in full under section 23(e)(2).

4. In 1941, four of petitioners were assigned an interest in certain claims owned by John Balch. The interests of three of them were acquired by gift, and that of the fourth by ‘buying into a partnership.’ These claims were later assigned to Rumsey Manufacturing Co. to be used as collateral in conjunction with a bank loan subject to an agreement that the claims, or the proceeds thereof, were to be returned to petitioners when no longer needed by Rumsey Mfg. In 1945 Rumsey Mfg. distributed the monies realized on these claims. Held, (a) that petitioners failed to establish any basis for their respective interests in said claims, and (b) that the proceeds realized are not to be treated as capital gains since they were received in satisfaction of a claim and not as the result of a sale or exchange.

5. In 1945, Rumsey Mfg. made a cash distribution in connection with the retirement of its preferred stock. The company had sufficient earnings from which to have declared a regular dividend and there was no valid business reason for retiring the preferred stock of the company. Held, that the distribution was not made in partial liquidation but was a distribution essentially equivalent to a taxable dividend.

6. In 1945, several of petitioners received an amount from Ramsey Mfg. in satisfaction of certain claims of another against Rumsey Mfg. The claims had previously been purchased by thee petitioners. Held, gain realized by petitioners is taxable as ordinary income since the amount realized was received in satisfaction of a claim and not as the result of a sale or exchange. Amount of gain determined.

7. In 1946, petitioner Albert Towers fulfilled his liability as endorser on two separate notes, one of a partnership called Bonn's, an organization of which petitioner was a partner, and the other of Pierre Cosmetics Company, a corporation in which petitioner was interested. Respondent determined that the items should be treated as nonbusiness bad debts. Held, that petitioner has failed to meet the burden of proving that any more favorable treatment should be accorded.

8. Petitioners incurred certain expenses in 1947 in the course of unsuccessful proceedings to reorganize Rumsey Products. Held, upon the facts, that the items are not to be treated as business losses or business bad debts.

9. Petitioners claimed net operating loss carry-backs from 1947 to 1945 and 1946. Held, petitioners' losses for the years in question were not attributable to the operation of any trade or business regularly carried on by them, and cannot be allowed for carry-back purposes.

10. Petitioner Theordore C. Bonney received a note from Rumsey Mfg. for accrued salary and director's fees. After 6 months petitioner sold the note and reported the amount realized as capital gain. Held, that the proceeds of the sale of such right are to be treated as ordinary income to petitioner.

11. Petitioner Theordore C. Bonney, president of Rumsey Mfg., rented certain premises from that company for $75 per month. The only payment of such rent was by way of set-off allowed in a bankruptcy proceeding. The total rent due for the period of occupancy exceeded the set-off by $185.06. Respondent determined the fair rental value to be $1,200 a year. Held, that the fair rental value of the property was $75 per month; that petitioner Bonney was entitled to credit to the extent of the set-off; but that said petitioner failed to overcome the presumption of correctness of respondent's determination to the extent of the amount of $185.06 above referred to.

12. Petitioner Theodore C. Bonney made certain repairs, which were necessitated by storm damage, to premises rented from Rumsey Mfg. and occupied by Bonney as tenant. Bonney was under no legal obligation to make such repairs. Held, that the amount of damage to the premises were not allowable as a casualty loss to Bonney who failed to produce evidence of basis necessary to meet the requirements of section 113(b).

13. In 1937, petitioner Theodore C. Bonney married Edna Wheaton Stark, herein referred to as Edna. In 1945, petitioner learned that Edna had been previously divorced and forbidden to remarry. Petitioner sought and was granted a decree declaring the marriage a nullity. Petitioner claimed a deduction as a theft loss in 1945 for monies given to Edna for clothing and spending money from 1937 to 1945, during which period they lived together as man and wife. Held, upon the facts, that petitioner is not entitled to a deduction for a theft loss.

14. In conjunction with court proceedings to declare the ceremonial marriage of 1937 void ab initio, Edna filed affidavits containing allegations which impugned Bonney's personal character and professional integrity. She also publicized these matters within the community to the detriment of petitioner Bonney (who was a practicing attorney and corporate executive), and threatened to continue to do so. In order to stop Edna from carrying out her threats, petitioner paid her a substantial amount of money and caused to be conveyed to her his interest in a valuable farm. Petitioner claimed the amount of cash paid and the asserted value of his interest in the farm as a loss from theft or, in the alternative, as a business expense. Held, that while the payment and transfer may have been the result of extortion, the loss was not a theft loss within the meaning of section 23(e)(3). Held, further, that the payment and transfer of an interest in property to an extortioner was not an ordinary and necessary expense either in relation to the practice of law or to petitioner's functions as a corporation executive. Public policy considered.

FISHER, Judge:

The respondent determined deficiencies in the Federal income taxes of petitioners as follows:

+---------------------------------------------------------+
                ¦Petitioner        ¦1944     ¦1945     ¦1946     ¦1947    ¦
                +------------------+---------+---------+---------+--------¦
                ¦Samuel Towers     ¦         ¦$1,297.04¦$1,098.10¦$356.20 ¦
                +------------------+---------+---------+---------+--------¦
                ¦Albert Towers     ¦$3,670.92¦23,590.05¦6,326.52 ¦199.74  ¦
                +------------------+---------+---------+---------+--------¦
                ¦Theodore C. Bonney¦6,608.63 ¦16,129.99¦5,607.44 ¦3,036.44¦
                +------------------+---------+---------+---------+--------¦
                ¦Albert Averbach   ¦1,136.27 ¦13,707.03¦1,104.83 ¦1,652.87¦
                +------------------+---------+---------+---------+--------¦
                ¦David M. Hayman   ¦696.98   ¦15,328.05¦431.39   ¦        ¦
                +---------------------------------------------------------+
                

The issues presented for our consideration are:

(1) Whether certain unpaid loans made by several of petitioners in 1947 to Rumsey Products, Inc., with which they were variously associated as stockholders, employees, officers, and directors were business bad debts arising from a business of promoting, organizing, managing, and financing business enterprises, or were nonbusiness bad debts.

(2) Whether losses sustained by several of the petitioners from advances to a so-called ‘motor pool’ organized to finance motor purchases of Rumsey Products, Inc., were losses incurred in a trade or business, or a transaction entered into for profit, under section 23(e) of the 1939 Code, or were business bad debts under section 23(k)(1) or nonbusiness bad debts under section 23(k)(4).

(3) Whether losses sustained by several of the petitioners, when as a consequence of involuntary bankruptcy proceedings Rumsey Products, Inc., failed to deliver certain finished lawn mowers purchased by these petitioners for resale, were incurred in a trade or business or a transaction entered into for profit under section 23(e)(1) or (2), or were nonbusiness bad debts.

(4) Whether a distribution in 1945 by Rumsey Manufacturing Co., the stock of which was owned by several of petitioners, represented a distribution of profits or the repayment of the proceeds of certain claims, and if the latter, (a) whether petitioners have established a basis for said...