Walker v. Commissioner of Internal Revenue

• Decision Date: 04 December 1944
• Docket Number: No. 9790.,9790.
• Citation: 145 F.2d 602
• Parties: WALKER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

145 F.2d 602 (1944)

WALKER v. COMMISSIONER OF INTERNAL REVENUE.

No. 9790.

Circuit Court of Appeals, Sixth Circuit.

December 4, 1944.

Hilary H. Osborn, of Nashville, Tenn., for petitioner.

Bernard Chertcoff, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, A. F. Prescott, and Irving R. Panzer, all of Washington, D. C., on the brief), for respondent.

Before HICKS, HAMILTON and MARTIN, Circuit Judges.

HICKS, Circuit Judge.

Petition of J. H. Walker to review a decision of the Tax Court, affirming the action of the Commissioner of Internal Revenue in assessing against petitioner deficiencies in income taxes of $411.91 and $260.64 for the years 1938 and 1939, respectively.

The evidence before the Tax Court consisted of stipulated facts and the testimony of the petitioner. Petitioner filed returns for the years involved, on the cash receipts and disbursements basis.

By virtue of his stock ownership in the Monterey Realty Company and the Monterey Hardwood Flooring Company, he was active in the hardwood lumber and hardwood flooring businesses. The Realty Company owned a large acreage of coal and timber lands upon which it operated sawmills in the production of hardwood lumber. The Flooring Company, a separate corporation, manufactured this lumber into flooring. In addition to petitioner's stock interest in these companies, he individually owned and controlled from 3500 to 4000 acres of coal and timber lands adjoining the Realty Company's property. The Monterey Company, a third corporation, was organized in 1921 with 75 or 80 stockholders. Originally it had a capital stock of $10,000 divided into 100 shares of the par value of $100. Petitioner owned two shares of the original issue. The Monterey Company owned a tract of 230.72 acres approximately in the center of the properties owned and controlled by petitioner through his stock ownership in the Realty Company and Flooring Company and his individual ownership of adjacent lands. The Monterey Company was a nonoperating corporation. Upon its property was a lake adapted to various recreational purposes and it was the original plan of the Company to sell its property as a whole or to sell lots around the lake for summer homes. The by-laws provided that any stockholder owning at least two shares could use the lake. The Company exhausted its capital in building a dam and clearing adjacent lands and it became necessary to increase its stock to $20,000 divided into shares of $100 each, which were purchased principally by the original stockholders.

The development failed and on November 4, 1937, the Monterey Company leased its property to petitioner for a term of ten years from January 1, 1938, at an annual rental of $600, payable in advance. Petitioner was required to pay the taxes upon the property and had the right to exclusive swimming, boating, fishing and hunting privileges on the lake, or to sublet these privileges. By the terms of the instrument petitioner was granted the right to purchase the property at any time, within the life of the lease, at a price of $20,000, payable one-fourth in cash and the balance in equal payments due in 1, 2 and 3 years, with interest at 6%.

Petitioner took possession on January 1, 1938, and from time to time acquired additional shares of the stock of the Monterey Company, paying less than par value therefor. At the time of the hearing before the Tax Court he owned 79 shares which he had purchased at low prices and he continued to purchase as opportunity offered. He purchased quite a number of the shares after he leased the property. He testified that he was buying the stock for development; that the tract was in the center of the timbered lands of the companies in which he owned a majority interest; that he had 3500 acres surrounding the property. He further testified that he had no other purpose than to develop it along lines that would make a profit for himself. He testified as follows:

"Q. Did you ever intend developing it for purposes of sale? A. That is my only intention.

"Q. To sell it? A. Yes, sir, and sell the land. The land of the companies I am associated with that own around it.

"Q. That is your intention, to develop it for the purpose of selling it? A. Yes sir.

"Q. Then paragraph 9: `It is understood and agreed one of the lessee's purposes in obtaining this lease is to establish and maintain a pleasure resort upon the leased boundary.' Was that your intention at the time? A. That was my intention at the time, and is yet.

"Q. To maintain a pleasure resort on it? A. I didn't intend to maintain it, no.

"Q. You are going to sell it? A. I will sell it or lease it because I am not in that line of business. * * *"

Again he testified:

"Q. Mr. Walker, you stated to Mr. Thompson that you did not have in mind or it was not your purpose to conduct a pleasure resort on this land? A. No sir.

"Q. Did you have in mind that you might lease it to someone else for that purpose? A. That was my idea, that I would either sell it or lease it to somebody for that kind of purpose.

"Q. Was that one of your original purposes in acquiring this land? A. Yes, sir, and to increase the value of other land and the timber we had surrounding it."

He explained in substance that he paid $600 per annum, or 3% of the stipulated purchase price of $20,000, as rental because this was cheaper than to purchase at $20,000 and pay 6% interest on the notes. He said: "I just arrived at those figures, figuring it would be cheaper for me to do it that way rather than to buy it, due to the fact that I might buy up some of the stock."

In 1938, in connection with the lease, petitioner expended $42.95 for attorney fees, registration fees, and revenue stamps; $293.98 for labor repairing the dam; $4.50 for posting against trespassers; $331.52 for guards against trespassing and fires; and in 1939 he expended $11.51 for revenue stamps, registration fees and blueprints; $157 for labor; and $182.50 for a caretaker. In each year he paid the annual rental of $600. The total expended for 1938 and 1939, respectively, was $1272.95 and $951.01. These items claimed as deductions were disallowed by the Commissioner and his action was sustained by the Tax Court.

We find no reason to disagree with the decision. We must follow the "now familiar rule that an income tax deduction is a matter of legislative grace and that the...