Webbe v. Commissioner
| Decision Date | 26 August 1987 |
| Docket Number | Docket No. 42331-85. |
| Parties | Peter J. Webbe and Patricia Webbe, v. Commissioner. |
| Court | U.S. Tax Court |
James F. Nangle, Jr., 314 N. Broadway, St. Louis, Mo., for the petitioners. Robert J. Burbank, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in and additions to petitioners' Federal income tax for the tax year ended December 31, 1981, as follows:
Additions to Tax
Deficiency Sec. 6653(a)(1)1 Sec. 6653(a)(2)
$240,919 $12,045 *
* 50 percent of the interest due on the determined deficiency
After concessions, the issues remaining for decision are: (1) Whether petitioner2 is entitled to a $209,501 deduction for legal fees allegedly paid in 1981; (2) whether petitioner is entitled to a $113,700 deduction for office operations and salary expenses allegedly paid in 1981; (3) whether petitioner is entitled to miscellaneous business deductions of $2,844 for expenses incurred in 1981; (4) whether petitioner may increase the basis in his Aladdin Hotel Corporation stock by the amount of legal fees paid for services rendered in negotiating and closing the 1981 sale of the stock; (5) whether petitioner is allowed in 1981 an offset to the gain from the sale of his Aladdin Hotel Corporation stock by the amount of his basis in the stock as a result of alleged contingencies in 1981; (6) whether petitioner is entitled to a deduction of $238,587 for interest expenses incurred in 1981; (7) whether petitioner is entitled to a $37,338 investment tax credit composed of rehabilitation expenditures and of expenditures for new and used furniture placed in service in the Gateway Hotel in 1981; and (8) whether petitioner is liable for additions to tax pursuant to section 6653(a)(1) and section 6653(a)(2) for the 1981 taxable year.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioners, Peter J. Webbe (hereinafter "petitioner") and Patricia Webbe, husband and wife, resided in St. Louis, Missouri, at the time they filed their petition herein. Petitioners filed a joint Federal individual income tax return using the cash method of accounting for the taxable year ended December 31, 1981.3
In the late fall of 1971, petitioner acquired a 15 percent interest in the Aladdin Hotel Corporation (hereinafter the "Aladdin") for approximately $150,000. At that time, the Aladdin owned and operated the Aladdin Hotel and Casino (hereinafter the "Aladdin Hotel") in Las Vegas, Nevada. The Aladdin Hotel had approximately 310 rooms at the time petitioner acquired his interest. During the 1970's the hotel was expanded to more than 1,200 rooms. By 1975, petitioner's ownership interest in the Aladdin had increased to 45.11278 percent. In September of 1980, the stockholders of the Aladdin and their respective stock ownership percentages were as follows:
Ownership Percent
Peter Webbe.........................45.11278
Richard L. Daly...................... 15.03760
Sam Diamond........................ 6.01504
MoeE. George....................... 30.07518
John J. Jenkins....................... 3.00752
George Morse........................ 0.75188
Sorkis J. Webbe, Sr. ("Sorkis"), petitioner's brother, was the general counsel of the Aladdin and was instrumental in petitioner's investing in the Aladdin. Sorkis died on May 29, 1985.
The Aladdin began to experience considerable legal problems during 1976. A Grand Jury investigation of the Aladdin began in that year and continued through 1979. On September 4, 1979, an indictment was handed down naming the following defendants: the Aladdin, Lee Linton, Sorkis J. Webbe, Fred L. Kennedy, Robert C. Tindell, Dennis Piotrowski, Del E. Webb Corporation, and James R. Comer.4 The indictment contained 43 counts. Count 1 was a conspiracy count pursuant to, inter alia, 18 U.S.C. sec. 371 (1982). Counts 2 through 13 were charges of using the United States mails in furtherance of a scheme to defraud, in violation of 18 U.S.C. secs. 1341 and 1342 (1982). Counts 14 through 28 were charges of using interstate wire facilities in furtherance of a scheme to defraud in violation of 18 U.S.C. secs. 1342 and 1343 (1982). Counts 29 through 37 were charges of transporting in interstate commerce money or property taken by fraud in violation of 18 U.S.C. secs. 2312 and 2314 (1982). Counts 38 and 39 were charges of interfering with commerce or the movement of articles and goods in commerce by extortion in violation of 18 U.S.C. sec. 1951 (1982). Count 40 was a substantive count of violating the Racketeer Influenced and Corrupt Organization ("RICO") Statute, 18 U.S.C. secs. 1961-1968 (1982). Counts 41-43 were charges of income tax evasion against Lee Linton. Aladdin was not only named as a defendant in the Linton case, but it was also designated as the "enterprise"—one of the essential elements in a RICO case.
The trial of the Linton case began in May of 1981 and continued through the late fall of 1981. The causes of action involved in the Linton case arose prior to the sale of the Aladdin and while petitioner was an executive officer and employee of the Aladdin. On November 30, 1981, a jury verdict of not guilty was returned as to count 1 in the Linton case. Immediately thereafter, all of the other counts with the exception of the three counts of income tax evasion against Lee Linton, were dropped.
During 1981, a checking account entitled "Sorkis J. Webbe, agent for stockholders," (hereinafter the "Agent Account") was maintained at the Missouri State Bank and Trust Company. The Agent Account was set up for the purpose of paying the attorneys involved in the Linton case. Checks drawn on the Agent Account during the year 1981 were paid to various attorneys, law firms, and others as set out below:
Payee Amount Received
Albert J. Krieger............ $145,000.00
James M. Shellow ........... 103,585.955
Charles A. McNelis.......... 27,500.00
James A. Twitty ............ 75,000.00
Burke & Smith.............. 6,503.70
Others .................... 5,946.18
Don Carpenter.............. 9,025.00
JaySchulman .............. 4,002.00
Court Reporters............. 6,453.24
Total ................... $383,106.07
Charles A. McNelis represented the Aladdin in the Linton litigation. Albert Krieger represented Sorkis in the Linton case. James Shellow represented the Aladdin in an interlocutory appeal taken in the Linton case. James A. Twitty represented Dennis Piotrowski in the Linton case.6
Sharlo Leonard maintained the office records of the Agent Account form which the attorneys in the Linton case were paid. During 1981, Ms. Leonard was responsible for coordinating attorney work schedules, paying bills, making deposits, typing, filing, and for the temporary group law office that was located in Las Vegas, Nevada. The house had four bedrooms, files, a copy machine, a computer, secretarial equipment, offices, and a kitchen.
The total amount of deposits made to the Agent Account during 1981 that were available to be used to pay the legal fees in the Linton case was $530,950. The total amount of checks actually written on and clearing the Agent Account for the year 1981 (other than checks which merely constituted a wash or loan) was $543,466.91.
Valley Bank of Nevada Account Number XXXXXXXXX (the "Office Account") was used to pay costs involved in the Linton case, including investigators, court reporters, a copying machine, a telephone, housekeeping, utilities, rent, groceries, dry cleaning, catering meals, hotel rooms for attorneys, airline tickets, polling for jury selection, and Sharlo Leonard's salary. The Office Account was funded by the Agent Account. The total amount transferred from the Agent Account to the Office Account during 1981 was $113,700.7
One of the sources of funds for both the Agent Account and the Office Account was a $1.6 million joint loan8 in the names of petitioner and Richard Daly. During 1981, $328,000 of the proceeds of the loan were transferred into the Agent Account.9
On August 20, 1980, petitioner and the other shareholders of the Aladdin entered into an agreement to sell their Aladdin stock to N&T Associates, Inc., ("N&T") a Nevada corporation owned by Carson Wayne Newton and a trust for the benefit of the children of Edward Ray Torres. The sales transaction was closed on September 30, 1980. Petitioner's total share of the sales proceeds was $20,241,164, consisting of a downpayment at the closing in the amount of $1,293,797 and a receivable in the amount of $18,947,637.
Petitioner elected to report the gain from the sale using the installment method pursuant to section 453. A separate promissory note with regard to each of the deferred principal payments due was received by petitioner. The promissory notes were each secured by a pledge of all of the stock of the Aladdin. The Valley Bank of Nevada retained possession of the promissory notes and acted as collecting agent for the parties to the sales transaction. The $1.6 million loan, discussed above, was secured by certain of the promissory notes. The promissory notes held as security for the loan had a total face value of $2,003,776.72.
Section 10.13 of the sales agreement provides that:
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