Turner v. C.I.R., 111069 FEDTAX, 1203-67

Docket Nº:1203-67.
Opinion Judge:KERN, Judge:
Party Name:JOSEPH J. TURNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Edward S. Smith, Albert S. Barr, III and William Waller, for the petitioner. Jack D. Yarbrough, for the respondent.
Case Date:November 10, 1969
Court:United States Tax Court
 
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28 T.C.M. (CCH) 1252 (1969)

T.C. Memo. 1969-240

JOSEPH J. TURNER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 1203-67.

United States Tax Court.

November 10, 1969

Edward S. Smith, Albert S. Barr, III and William Waller, for the petitioner.

Jack D. Yarbrough, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

Respondent determined a deficiency of $4,541.16 in petitioner's income tax for the year 1963. The only issue for our consideration is whether the gain realized by petitioner on the sale on July 9, 1963 of shares of Northwestern National Life Insurance Company common stock is taxable as ordinary income as gain from the sale of ‘ property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,'[1] rather than as long term capital gains as reported by petitioner in his income tax return for the year 1963. The sale was made by or on behalf of a group or organization, hereinafter sometimes referred to as the ‘ second syndicate,‘ which included as a member Alex. Brown & Sons, a partnership engaged in the securities business, of which petitioner was a general partner. The deficiency at issue resulted from respondent's determination that petitioner's distributive share of the gain realized by the Alex. Brown & Sons partnership from the second syndicate's sale of some of the Northwestern National Life Insurance Company common stock constituted ordinary income rather than capital gain.

This case was tried on the same calendar with Francis C. Currie and Eleanor B. Currie, Et Al, docket Nos. 3190-67, 3226-67 and 3227-67, and Harry Lahman and Rose A. Lahman, docket No. 1971-67, involving the same issue and, in the main, the same facts. Most of the testimony and several of the exhibits which were made a part of the record of the above-named cases were received during the trial of the instant case. It is stipulated by the parties that the testimony and exhibits which were received during the trial in the instant case would be considered as evidence in the Currie and Lahman cases subject to objections on the grounds of relevancy and materiality.

FINDINGS OF FACT

Some of the facts are stipulated. They are found to be as stipulated and the stipulation, together with the exhibits identified therein are incorporated herein by this reference.

Petitioner Joseph J. Turner is an unmarried individual who resides in Baltimore, Maryland. Petitioner timely filed his federal income tax return for the calendar year 1963 with the district director of internal revenue, Baltimore, Maryland.

At all times here relevant, petitioner was a general partner of Alex. Brown & Sons. Alex. Brown & Sons was and is a partnership engaged in the securities business. It is a member of the New York Stock Exchange and it is registered with the Securities and Exchange Commission as a broker-dealer. Alex. Brown & Sons became a ‘ Class B’ participant in the second syndicate.

J. C. Bradford & Co. (hereinafter sometimes called ‘ Bradford & Co.’ ) is a partnership engaged in the securities business, and is a member of the New York Stock Exchange. Bradford & Co. was a member of the National Association of Securities Dealers (hereinafter sometimes called the NASD) and has been registered with the Securities and Exchange Commissioner (hereinafter sometimes called the SEC) as a broker-dealer at least since February 4, 1945. James C. Bradford (hereinafter sometimes called ‘ J. C.’ ) is a senior and principal partner of Bradford & Co. J. C. has been in the securities business for 41 years. Bradford & Co. was formed in 1927 and first acquired its seat on the New York Stock Exchange in 1930. J. C. and Bradford & Co. have been very active in life insurance company stocks during the years J. C. and Bradford & Co. have been in business. J. C. has advertised Bradford & Co. as ‘ Specialists in Life Insurance Stocks' in a book entitled ‘ Security Dealers of North America’ published semi-annually by Standard and Poor's Corporation which is circulated among securities dealers and in which securities dealers, underwriters and investment bankers place advertisements.

The names of the partners in Bradford & Co. during the years 1961, 1962, and 1963 are listed below.

J.C. Gordon Brooks

Einer Nielsen Gordon Duval

Kenneth H. Wood David Steine

James C.

Bradford, Jr. A.S. Hill

Mrs. Eleanor A.

Bradford, Trustee. W.M.Robinson

J. C. Bradford & Co., Incorporated (hereinafter sometimes referred to as ‘ Bradford, Inc.’ ) was incorporated under the laws of the State of Tennessee; and its principal office and place of business is located in Nashville, Tennessee. All of the outstanding stock of Bradford, Inc., was owned by Bradford & Co. Bradford, Inc. was a member of the NASD and was registered with the SEC as a broker-dealer in 1961. The corporation Bradford, Inc., was occasionally used as an underwriter of corporate securities. Bradford, Inc., was registered with the State of Tennessee regulatory agency as a broker-dealer. It was not a member of the New York Stock Exchange. During the years 1961, 1962, and 1963 the officers of Bradford, Inc., were as follows:

Office Name

President J.C.

Vice Presidents Einer Nielsen

Walter M. Robinson

Kenneth H. Wood

Gordon Brooks

Gordon Duval [*]

David Steine [*]

Albert S. Hill [*]

Secretary J.C. Bradford, Jr.

Treasurer Mary Smart

Aragon Corporation (hereinafter sometimes referred to as ‘ Aragon’ ) is a Tennessee corporation; and its principal office and place of business is in Nashville, Tennessee. All of the stock of Aragon is owned by the 418 Union Street Corporation, the stock of which, in turn, was owned by Eleanor A. Bradford, the wife of J. C., and by three partners of Bradford & Co. Nationwide Corporation (hereinafter sometimes referred to as ‘ Nationwide’ ) was incorporated under the laws of the State of Ohio. Nationwide conducts a life insurance business. Its principal office was located in Columbus, Ohio. Nationwide owned or controlled several other life insurance companies during the years 1961 to 1963, inclusive. Northwestern National Life Insurance Company of Minneapolis, Minnesota (hereinafter sometimes referred to as ‘ Northwestern’ ) was organized in 1885 under the laws of the State of Minnesota. Northwestern is a stock and mutual life insurance company and is controlled jointly by its stockholders and its mutual policyholders. Each participating policyholder has one vote for each $1,000 of life insurance carried. As of March 31, 1963, its life insurance in force exceeded $2,700,000,000 and its total assets exceeded $420,000,000. During a period of approximately two months, i.e., in December 1956 and January 1957, Nationwide acquired approximately 51 percent of the outstanding common stock of Northwestern by purchase on the open market. It was acquired from small investors and from owners of large blocks of Northwestern stock. Murray D. Lincoln, the president of Nationwide, requested that J. C., as an official of Bradford & Co., assist Nationwide in its acquisitions of the stock of Northwestern. J. C. was aware that there had been litigation between Nationwide and Northwestern after Nationwide's acquisition of Northwestern's stock, arising from Nationwide's efforts to gain the proxies of Northwestern's participating policyholders. At that time J. C. believed that the dispute between Northwestern and Nationwide depressed the market price of Nationwide's stock. He believed that if Bradford & Co. acquired an option to purchase the Northwestern stock owned by Nationwide and it became known that Nationwide would no longer own stock in Northwestern, the price of Northwestern stock would rise. J. C. was also aware that the 51 percent stock interest, represented by 113,728 shares of Northwestern common stock, did not provide control of Northwestern because of the votes of the participating policyholders. With these considerations in mind J. C. made an offer in mid-1961 to Mr. Lincoln, the president of Nationwide, to purchase an option to acquire Nationwide's stock interest in Northwestern. After some discussion and negotiation, the Board of Directors of Nationwide authorized the acceptance of J. C.‘ s offer. The negotiations culminated in an option agreement in the form of a letter dated September 18, 1961 from Nationwide addressed to Bradford & Co. which stated that upon payment of $3.00 per share for the 113,728 shares owned by Nationwide on or before October 12, 1961, Bradford & Co. would have the option to purchase the Northwestern stock for $153 per share on or before October 31, 1962. The payment of $3.00 per share, totaling $341,184, was to be applied to the purchase price on exercise of the option. The market price of Northwestern at the time the option was granted was approximately $123 per share. After J. C. received the option letter from Nationwide, but before it was made effective, J. C. requested a meeting with John S. Pillsbury, the president of Northwestern, with whom he was not yet acquainted. Among the reasons which J. C. had for requesting that meeting was to establish a relationship between the management of Northwestern and the first syndicate which would be more friendly than the relationship between Northwestern and Nationwide, which had been distinctly unfriendly. After this meeting and until the 1963 sale of the Northwestern stock here at issue, J. C. and Pillsbury met and corresponded frequently. On or about October 9, 1961, J. C. organized a syndicate (hereinafter sometimes referred to as ‘...

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