Weber v. Kavanagh, 3626.

Decision Date09 November 1943
Docket NumberNo. 3626.,3626.
Citation52 F. Supp. 619
PartiesWEBER v. KAVANAGH, Collector of Internal Revenue.
CourtU.S. District Court — Western District of Michigan

Race, Haass, Allen & Brewer and Hugh W. Allin, all of Detroit, Mich., for plaintiff.

John C. Lehr and Arnold W. Lungerhausen, both of Detroit, Mich., and George J. Laikin, of Washington, D.C. (Samuel O. Clark, Jr., and Andrew D. Sharpe, both

of Washington, D.C., on the brief), for the Government.

LEDERLE, District Judge.

Findings of Fact.

1. This is a suit for recovery of income taxes paid by plaintiff, William C. Weber, a resident of Detroit, Michigan, to the defendant, Giles Kavanagh, Collector of Internal Revenue for this District, upon an allegedly erroneous deficiency assessed by the Commissioner of Internal Revenue on plaintiff's 1929 income tax return.

2. On March 13, 1930, plaintiff filed with defendant Collector his income tax return for the calendar year 1929, on Form 1040, wherein plaintiff claimed and took as a deduction, his net loss for 1927 as shown by his 1927 tax return, in the sum of $73,305.02, and his net loss for 1928 as shown by 1928 tax return, in the sum of $54,036.33. Plaintiff's 1929 tax return thereby showed a net loss of $50,077.88.

3. On August 25, 1931, the Internal Revenue Agent in charge at Detroit proposed to disallow the deductions taken in the 1929 tax return for the net losses shown by the 1927 and 1928 return as aforesaid. On January 5, 1932, the Commissioner of Internal Revenue, by registered mail, notified plaintiff of an additional tax of $9,657.93 assessed against him by reason of the aforesaid disallowance. This sum, together with accrued interest, was paid as follows:

                     October 10, 1939              $3,035.00
                     October 23, 1939               5,000.00
                     March 30, 1940                    50.00
                     June 22, 1940                     25.00
                     February 11, 1941              4,305.43
                     April 25, 1941                 4,578.13
                   making a total of $16,993.56

4. On October 9, 1941, plaintiff filed his claim for refund of taxes and interest paid as aforesaid by reason of said disallowance of deductions and subsequent assessment. This claim for refund was disallowed on April 15, 1942, and this suit was instituted on December 29, 1942.

5. The net loss carryover deductions were disallowed and the additional tax assessed on the ground that the plaintiff was not engaged during 1927 and 1928 in the operation of a trade or business regularly carried on within the meaning of Section 117 of the Revenue Act of 1928, 26 U.S.C. A. Int.Rev.Acts, page 388.

6. Plaintiff taxpayer, William C. Weber, was born in Detroit in 1856, and became self-supporting about 1876. For a period of approximately five years he worked at various jobs on salary, and finally took a position as clerk for C. L. Ortman, of Saginaw, Michigan, who was engaged in the occupation of buying and selling timber lands. Mr. Weber remained with Mr. Ortman and his successors until about 1884, at which time he acquired the business then being carried on by them. Mr. Weber was precipitated into the business world while in high school because of his father's financial reverses during the panic of 1873, his earliest financial dealing on his own account being the borrowing of $1500 from his employer, Mr. Ortman, to pay an obligation of his father's. Taxpayer has never inherited any money or property.

Prior to 1884, Mr. Weber bought on his own account certain lands for the purpose of resale, and from 1884 to the present time has been engaged in buying and selling lands and interests therein, principally in the State of Michigan and the Province of Ontario, Canada, including particularly the selling of the right to cut timber therefrom.

Up to the present time Mr. Weber has purchased in excess of 215,000 acres of land, the bulk of which he has resold. Of these 215,000 acres, about 150,000 acres were purchased prior to 1900. From 1900 to 1915 various sections, being 640 acres each, were purchased. The largest single purchase during the 1920's was 2000 acres, the balance of purchases during this period being smaller blocks and parcels for "grouping-up" purposes. At present taxpayer still retains title to some 15,000 acres of timber lands and an additional 15,000 acres of cutover lands.

From 1920 to 1929 taxpayer's gross receipts from rentals of land and sales of standing timber, mineral rights and fee title to land reached an aggregate of $798,561.63. Approximately two-thirds of these receipts were payments made by various parties for the right to cut and remove timber from lands owned by plaintiff. Since 1900 plaintiff's basic sales were as follows:

In 1903, a large tract including mineral rights, surface and timber rights;

In 1905, surface and timber rights only in a tract, the right to mineral deposits being reserved;

In 1907, surface and timber rights only in a tract, the right to mineral deposits being reserved In 1911, surface and timber rights only in a tract, the right to mineral deposits being reserved;

In 1920, only the right to cut timber in a tract, surface and mineral rights being reserved;

In 1929, a full fee title to a large tract in Canada;

In 1938, surface and timber rights only in a tract, the right to mineral deposits being reserved;

In 1939, surface and timber rights only in a tract, the right to mineral deposits being reserved.

7. Mr.Weber's sole means of livelihood from 1884 to the present time has been the income realized from his transactions in lands. His initial purchase of land, many subsequent purchases, and many endeavors connected with his lands have been financed with money borrowed by him. An example of the extent of this method of financing his land activities appears from interest payments reported in his three income tax returns in question, namely, 1927 — $9222.31; 1928 — $17,702.18; 1929 — $21,694.89. That is, for each of the three years in question, he paid an average of $16,206.00 interest on loans to finance his land activities.

8. Mr. Weber's main method of operation has been, by a series of purchases, some large and some small, to acquire substantial contiguous holdings in various localities, and then find purchasers therefor and negotiate sales thereof. In disposing of his properties, it has been his custom, when possible, to first sell cutting rights to persons engaged in the business of logging timber lands. Such cutting rights might be the subject of one, two, three or four sales. Mr. Weber also has made exhaustive investigations of mineral possibilities in his various holdings, and, in addition to doing some development work himself, has made leases to mining companies, who generally paid him in royalties. The field of customers interested in, and able to handle, the necessarily large enterprises involved in lumbering and mining operations is very limited. When lands on which he has been able to sell only timber rights are no longer valuable for this purpose, Mr. Weber has subdivided them, and then sold them, by land contract or otherwise, in tracts of forty to one hundred sixty acres, for farming purposes, often reserving mineral rights for future sale.

9. Mr. Weber has always maintained an office in a separate room of his home for the transaction of his land business, in which he kept his equipment, files, maps, books, etc., having value in respect to these activities. Since 1908, Mr. Weber has been assisted in his land activities by his son, Harry Weber, who, in addition to making land transactions in his own right, has assisted his father in the various activities connected with his lands and kept his father's voluminous records. Mr. Weber's records consist of an original land book covering the period from 1877 to 1910, containing separate sheets for each purchase, showing the source of title, a description of the land, the payment of taxes during the years owned, sales of cutting and other rights and the ultimate disposition of the land. Since 1910, this single record has been broken down into three volumes, one of which is a complete record of taxes owing and paid, and the other two are large bound books containing pages approximately eleven by sixteen inches, showing the nature and source of title, a description of the property, transactions with respect to the property, such as offers and sales of cutting rights and other interests therein, actions taken to perfect and clear title, and the ultimate disposal of the property.

10. During the period from 1884 to this time, Mr. Weber personally, and since 1908 with the assistance of his son, has been regularly and continuously engaged in negotiating purchases and sales of his property, and in this regard has carried on a voluminous correspondence, both for the purpose of acquiring information and for the purpose of conducting negotiations. Mr. Weber's correspondence approximates one thousand letters per year written by him.

11. In acquiring information with respect to his lands, Mr. Weber from time to time employed the services of expert timber estimators, commonly called "timber cruisers". As an instance of the volume of this work, during the years 1910 to 1929, Mr. Weber had 2904 parcels of land cruised. In his 1928 tax return two expense deductions were: "Paid for services rendered in 1928, $4070.48; Paid for supplies to estimating crew in 1928, $529.03." In addition to acquiring the expert advice of timber cruisers, who are also a source of information to Mr. Weber as to prospective purchasers, he made frequent trips to the areas in which he owned lands for the purpose of inspecting his holdings and ascertaining who his neighboring owners and, consequently, prospective customers, were, and entering into negotiations with them.

12. Another ramification of taxpayer's activities in connection with his various properties, necessitated by the nature and extent thereof, has been inspections of the land, by taxpayer, his son, and his timber cruisers, to keep...

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2 cases
  • Longyear Realty Corporation v. Kavanagh
    • United States
    • U.S. District Court — Western District of Michigan
    • 8 Mayo 1945
    ...§ 41(5). 2. The finding of the Commissioner is prima facie correct, and the burden is on a contestant to disprove it. Weber v. Kavanagh, D.C.1943, 52 F.Supp. 619. 3. Where a taxpayer has failed to prove that a tax payment in a later year arose out of the same transaction as a tax payment in......
  • Lawrence Print Works v. Lynch
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    • U.S. District Court — District of Massachusetts
    • 10 Noviembre 1943

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