Walet v. Comm'r of Internal Revenue, Docket Nos. 63479

• Decision Date: 28 November 1958
• Docket Number: 63480.,Docket Nos. 63479
• Citation: 31 T.C. 461
• Parties: EUGENE H. WALET, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CELIA R. WALET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

31 T.C. 461

EUGENE H. WALET, JR., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CELIA R. WALET, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 63479

63480.

Tax Court of the United States.

Filed November 28, 1958.

Eugene H. Walet, Jr., Esq., pro se.

Towner S. Leeper, Esq., for the respondent.

1. Where petitioner, president of a corporation, realized long-term capital gain from sale of the corporation's stock in 1950 and was subsequently adjudicated liable to restore a portion of his profits under section 16(b) of the Securities Exchange Act of 1934, held, payment of the judgment in 1954 does not entitle petitioner to reopen the taxable year 1950 so as to claim a capital loss carryover from 1950 to 1951.

2. Petitioner sporadically devoted a small percentage of his time to seeking out, investigating, and negotiating for personal profitable ‘deals' in oil and other natural resources. Held, travel and entertainment expenses allegedly incurred in connection therewith are not deductible on this record under section 23(a)(1)(A), I.R.C. 1939. A possible issue as to deductibility under section 23(a)(2) has not been raised and is therefore not adjudicated.

3. Petitioner in 1944 purchased a house with the intention of renting it to his former spouse and their son, and actually received such rent until 1946, but thereafter chose not to receive rent and had no expectation of ever receiving rent from them again. Held, deductions for depreciation and repairs in 1951, 1952, and 1953 were not allowable under section 23(1)(2) or section 23(a), I.R.C. 1939.

Respondent determined deficiencies in each of petitioners' income taxes for the taxable years ended December 31, 1951, December 31, 1952, and December 31, 1953, in the following amounts:

+-----------------+
                ¦Year  ¦Amount    ¦
                +------+----------¦
                ¦1951  ¦$3,655.88 ¦
                +------+----------¦
                ¦1952  ¦5,243.64  ¦
                +------+----------¦
                ¦1953  ¦5,362.23  ¦
                +-----------------+
                

Petitioners each filed timely claims for refund of taxes for 1951 in the amount of $3,402.83.

The questions for decision are:

1. Whether petitioners may amend their 1951 returns to reflect an amount which they paid in 1954 pursuant to a judgment rendered against Eugene H. Walet, Jr., under section 16(b) of the Securities Exchange Act of 1934.

2. Whether petitioners are entitled to a deduction for certain expenses allegedly incurred by Eugene H. Walet, Jr., in connection with ‘personal business ventures.’

3. Whether petitioners are entitled to deductions for depreciation and maintenance expenses attributable to a house occupied by Eugene H. Walet, Jr.‘s former spouse and son.

FINDINGS OF FACT.

Certain facts have been stipulated and are so found. Petitioners, husband and wife, are residents of New Orleans, Louisiana, and filed individual returns with the district director of internal revenue in New Orleans on a cash receipts and disbursements basis. Since Celia R. Walet is concerned herein only by virtue of her one-half interest in the marital community under Louisiana law, Eugene H. Walet, Jr., will hereinafter be referred to as the petitioner.

Since 1946, and at all times relevant to this proceeding, petitioner was president and a director of the Jefferson Lake Sulphur Company (hereinafter sometimes referred to as Jefferson Lake), a New Jersey corporation with headquarters in New Orleans. From 1936 to 1945 petitioner, a licensed attorney, served as general counsel to the company, a position which he relinquished upon assuming the presidency. As president, however, petitioner continued to do such legal work for the company as might be connected with his activities. Prior to 1936 petitioner was engaged in the general practice of law in New Orleans.

The common stock of Jefferson Lake is an equity security as defined in section 3 of the Securities Exchange Act of 1934 and the company had been registered on the New York Curb Exchange (as it was then known), a national securities exchange duly registered with the Securities and Exchange Commission pursuant to section 6 of the same Act.

Between August 16, 1950, and November 24, 1950, petitioner sold 3,600 shares of Jefferson Lake common stock for which he received the amount of $74,581.79. Of these shares, 2,400 had been acquired prior to November 1, 1949, at a cost of $19,086.30; 1,200 were acquired in April 1950 at a cost of $9,299.50. Petitioner reported long-term capital gain of $46,195.99 from these transactions in his 1950 return. He also reported other gains and losses, both short-term and long-term, which are not at issue here.

Between April 20, 1950, and November 29, 1950, petitioner acquired, in addition to the purchases noted above, 2,700 shares of Jefferson Lake common. These shares were not sold during 1950 nor at any subsequent time relevant to this case. Of the 2,700 shares, 1,200 were purchased at a cost of $9,404.50; the remaining 1,500 were acquired at a cost of $13.76 per share through the exercise of a stock option granted petitioner by corporate resolution on October 16, 1950. The option entitled petitioner to purchase up to 1,500 shares of Jefferson Lake treasury common stock at 86 per cent of its market price at the time of the accrual of the option. The motivation for the option was the recognition of petitioner's unusual and extraordinary services to Jefferson Lake over a period of approximately 8 years; it was granted to take advantage of section 130(a) of the Internal Revenue Code of 1939. Petitioner exercised the option on November 29, 1950. The grant of the option was subsequently approved by the Jefferson Lake stockholders at their annual meeting held on March 8, 1951.

Each of the foregoing stock transactions by petitioner was consummated in good faith, resulted from no inside information, and no damage was sustained by Jefferson Lake or any of its stockholders. Petitioner used $20,000 of the proceeds received in 1950 to pay a personal indebtedness to Jefferson Lake and otherwise indicated that he regarded himself in rightful possession and control of said proceeds.

Petitioner duly reported his 1950 stock dealings to the Securities and Exchange Commission in accordance with the requirements of section 16(a) of the Securities Exchange Act of 1934 whereupon, in early 1951, the Commission advised both Jefferson Lake and petitioner of petitioner's possible liability for insider's profits under section 16(b).

On June 29, 1951, Jefferson Lake filed a complaint pursuant to section 16(b) against petitioner seeking recovery of $39,365 in profits realized by petitioner from his ‘short-swing’ sales of 3,600 shares of company stock in 1950. Petitioner entered an answer on September 7, 1951, admitting the transactions alleged in the complaint and raising certain defenses to the applicability of 16(b) in the particular circumstances. Judgment was entered for Jefferson Lake on stipulated facts on April 2, 1952, pursuant to cross-motions for summary judgment. Jefferson Lake Sulphur Co. v. Walet, 104 F.Supp. 20 (E.D. La. 1952).

The method employed in computing petitioner's liability to Jefferson Lake was to match the costs of certain of petitioner's purchases in 1950 with the amounts realized from certain of his 1950 sales so as to arrive at an amount representing the maximum profit to petitioner. The costs used in this computation were as follows:

+-----------------------------------------------------------------------------+
                ¦1,200 shares of option stock (out of 1,500) at $13.76 per share   ¦$16,512.00¦
                +------------------------------------------------------------------+----------¦
                ¦1,200 shares purchased and sold in 1950 and reported on           ¦          ¦
                +------------------------------------------------------------------+----------¦
                ¦petitioner's 1950 income tax return                               ¦9,299.50  ¦
                +------------------------------------------------------------------+----------¦
                ¦1,200 shares purchased but not sold in 1950, therefore not        ¦          ¦
                ¦reported                                                          ¦          ¦
                +------------------------------------------------------------------+----------¦
                ¦on petitioner's 1950 return                                       ¦9,404.50  ¦
                +------------------------------------------------------------------+----------¦
                ¦Total                                                             ¦35,216.00 ¦
                +-----------------------------------------------------------------------------+
                

The total cost thus computed was subtracted from $74,581.79, the amount reported as realized from sales of company stock on petitioner's 1950 income tax return, thus yielding a profit of $39,365. For section 16(b) purposes the actual certificates used in the cost computation were not the same as those used in the computation of amounts realized against which said costs were matched.

In June 1952 the parties filed a stipulation decreasing petitioner's liability from $39,365.79 to $36,677.79 for the reason that insofar as the 1,200 shares of option stock was concerned, the applicable rule of law limited recovery to the profit represented by the difference between the market value of the stock on the date of the grant of the option and the sale price of said stock, rather than a profit based on the actual cost to petitioner of the option shares. The actual cost of $16,512 was accordingly stepped up to $19,200 (cost was 86 per cent of market) and the profit was reduced by a similar amount.

The decision of the District Court was affirmed on March 11, 1953, 202 F.2d 433 (C.A. 5), and certiorari was denied by the Supreme Court, also in 1953, 346 U.S. 820. Petitioner satisfied the judgment in the following manner: He paid Jefferson Lake $11,427.79 by check on July 23, 1954, and deposited 400 shares of Chrysler Corporation common stock as security for the remainder; he paid $25,250 in cash on December 28, 1954, and received back the Chrysler stock.

Petitioner filed...