Wachovia Bank and Trust Company v. United States
| Decision Date | 28 March 1961 |
| Docket Number | No. 8232.,8232. |
| Citation | 288 F.2d 750 |
| Parties | WACHOVIA BANK AND TRUST COMPANY and George A. Shuford, Successor Cotrustees of the Evelyn Grove Seely Trust, Appellants, v. UNITED STATES of America, Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Herbert L. Hyde, Asheville, N. C. (Van Winkle, Walton, Buck & Wall, Asheville, N. C., on the brief), for appellants.
Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., and J. M. Baley, Jr., U. S. Atty., Asheville, N. C., on the brief), for appellee.
Before SOBELOFF, Chief Judge, and SOPER and BOREMAN, Circuit Judges.
This is an appeal from the District Court for the Western District of North Carolina which granted defendant's motion for a directed verdict, dismissed the action brought to recover alleged overpayments of federal income taxes, and entered judgment in favor of the United States.1 Upon a review of the whole record, we conclude to affirm.
The Wachovia Bank and Trust Company and George A. Shuford, as taxpayers, are the successor cotrustees of a trust created on October 7, 1949, by one Evelyn Grove Seely. Under the trust conveyance, the original trustees were given certain powers including the power to manage and operate the Battery Park Hotel, a business property situate in Asheville, North Carolina, to organize corporations as they deemed necessary in the administration of the trust estate and to transfer to such corporations any part of the trust estate. In May of 1951, the original trustees organized, under the laws of Florida, a corporation designated as Community Hotels, Inc., hereinafter referred to as Community, which was capitalized at $5,000, all of the stock being owned by the trustees. Community took a ten-year lease, commencing June 1, 1951, on a property located in Daytona Beach, Florida, known as the Seabreeze Manor Hotel. In order to recondition this leased property and make it suitable for commercial operation, the trustees in 1951 initially transferred to Community $23,756.11 of accumulated trust principal and earnings. This transfer was purportedly evidenced by a promissory note bearing four per cent interest, although the note was not introduced as it could not be found. Taxpayers' books reveal that no interest thereon was ever accrued or paid. Subsequently, more than fifty further transfers of trust funds were made to Community which, by 1955, totaled some $98,326.17, none of which was claimed to have been evidenced by note or written instrument, and of the total advances only $3,000 was ever repaid to the trust by Community.
As a result of disagreement as to the management of the trust and the investment in Community,2 a trust beneficiary in 1954 brought an action in a North Carolina Superior Court for a change of trustees and on October 5, 1954, that court appointed one Johnson as conservator of the trust, granting to him all the powers and duties of a receiver as sole manager of the trust to the exclusion of the original trustees. In his first report to the court on December 21, 1954, the conservator noted a total indebtedness of $98,326.17 due the trust from Community but recommended continuation of Community operation until May 1, 1955, in order to determine whether the operation might be profitable and to recover some of the trust advances, if possible. At a July meeting with the trust beneficiaries and their counsel, the conservator stated his conclusion that Community would never have sufficient earnings to repay the trust advances and recommended the amount of such advances be charged off as uncollectible and that Community be liquidated. The conservator additionally reported the receipt of offers to purchase trust properties, including the offer of one Sammons, dated July 9, 1955, to purchase the Battery Park Hotel for $850,000 and the Seabreeze lease and accounts for $50,000, or, alternatively, to purchase only the Battery Park Hotel for $850,000; and an offer submitted by one Puckett, dated July 15, 1955, to purchase the Battery Park Hotel for $900,000. Later, on July 23, Puckett amended his offer to include $5,000 for the stock of Community and $10,000 for the so-called accounts receivable of the trust from Community. On July 25 Sammons increased his bid price to $927,500. On July 30, after having been notified by counsel that the beneficiaries would approve a sale of the trust properties, the conservator recommended to the court that the properties be sold. On August 5, Puckett increased his offer for the so-called accounts receivable charged by the trust to Community from $10,000 to $20,000, and on August 9 the Superior Court authorized acceptance. The accounts receivable were not charged off as worthless prior to their sale to Puckett which was consummated on September 30, but on that same date, for the first time, a loss on the amount of funds advanced to Community by the trust was recorded in the trust books by means of a closing entry in the general ledger. The conservator testified that the sale of the Battery Park Hotel was part of the agreement for the sale of the stock of Community and the so-called accounts receivable.
On October 7, 1955, taxpayers were appointed successor cotrustees of the Seely trust and they subsequently prepared and filed the trust's federal income tax return for the fiscal year ending September 30, 1955, claiming a fully deductible business bad-debt loss of $78,326.17 on the sale of the accounts receivable charged to Community,3 reflected as follows:
Date of Sale September 30, 1955
Cost $98,326.17
Sale Price 20,000.00
Loss 78,326.17
On taxpayers' return they reported a long-term capital gain of $198,447.54 on the sale of the Battery Park Hotel and claimed a fifty per cent deduction for net long-term capital gain in the amount of $99,223.77. The Commissioner treated the advances by the trust as capital assets, contributions to capital of Community, and required the taxpayers to offset the $78,326.17 loss (as a loss from the sale of capital assets) against the total long-term capital gain and allowed the taxpayers only fifty per cent of the difference of $119,456.37, or $59,728.18, as a deduction for net long-term capital gain.4 Taxpayers paid the asserted deficiency and, after denial of their claim for a refund, instituted the present action and demanded a jury trial.
Both taxpayers and Government filed requests for admissions and answers thereto and produced witnesses and documentary evidence at the trial. At the conclusion of the evidence, the District Court directed a verdict for the Government and granted Government's motion to dismiss the taxpayers' complaint. On appeal from the judgment entered thereon, taxpayers contend: That all the transfers of trust funds to Community were, in fact, loans by the trust which imposed upon Community a binding obligation for repayment; that the resulting debts owed by Community to the trust were incurred in the course of and proximately related to the trade or business of the hotel operations of the trust;5 that these debts became partially if not wholly worthless during the taxable year; that evidence introduced in support of these contentions was sufficient to raise a prima facie case, thereby requiring jury determination whether the trust advances qualified for deduction under the business bad-debt sections of the Internal Revenue Code. The Government contends the undisputed facts of record conclusively show the trust advances to Community were not loans but were in substance, if not in form also, contributions to the capital of Community and were, therefore, subject to tax treatment under the capital gains deduction sections of the Code. The Government further contends that, even if the advances, the so-called accounts receivable, were loans or debts, their sale was nevertheless a transaction within the scope of the capital gains and losses provisions and the resulting loss is deductible only to the extent therein provided; that a charge-off of a bad debt under section 166(a) (2) cannot be recognized after a taxpayer has sold the debt, nor may a taxpayer charge off a bad debt where it is not done before a sale and where, as here, the charge-off is not independent of the sale; that any charge-off here was made merely to record the sale; that, even if it had been independent of the sale, there was no showing of a determination, by the conservator or the Superior Court, of worthlessness during the taxable year.
Since the evidence introduced by both parties was in all essential aspects undisputed and uncontroverted, a summary analysis thereof will demonstrate that the advances in question, even though carried as accounts receivable based on loans, were in fact contributions to the capital of Community.
It is certain that if the taxpayers' loss occurred as the result of the sale of what were in substance capital assets, they would not be entitled to the deduction of that loss as a business bad debt. To support the contention that evidence indicated the trust advances could be considered as loans or debts, taxpayers direct attention to the promissory note which purportedly secured the initial $23,756.11 advance; the repayment by Community of $3,000; and the financial records, audit reports and tax returns of both the trust and Community disclosing that the advances were respectively recorded as accounts receivable and accounts payable. Acknowledging the foregoing as established by the evidence, it is equally clear from additional undisputed evidence that: The promissory note said to have secured the first advance of $23,756.11 was never produced and has never been found; none of the over fifty subsequent advances was in any manner evidenced by written...
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