Opinion
Docket Nos. 72451-72453, 79734-79737.
Filed July 29, 1960.
1. In 1941 petitioners owned stock in CC Corporation which owned oil and gas properties. Petitioners sold their stock for cash and overriding royalty interests in the oil and gas properties. At the time of the sale, the overriding royalty interests had a fair market value. Held, payments from the overriding royalty interests received by petitioners during the years in issue, 1954, 1955, and 1956, are taxable as ordinary income subject to depletion and not as long-term capital gain. Warren v. United States, 171 F. Supp. 846, certiorari denied 361 U.S. 916, followed.
2. Bad debt losses sustained by certain petitioners held deductible under section 166(a), I.R.C. 1954, as business bad debts.
3. In 1935 and 1936, one petitioner negotiated contracts for the sale of residue gas from S Company to manufacturers of carbon black. S Company was compensated by receiving 30 per cent of the carbon black manufactured, which the manufacturers agreed to sell for S Company. Petitioner was to receive a 2 per cent commission on the cash proceeds received by S Company. In 1947, S Company and petitioner compromised differences over the amount due petitioner when S Company agreed to pay petitioner $110,000 in equal monthly installments over an 11-year period. In 1956, petitioner assigned the right to receive the last 2 years' installments totaling $20,000 for $18,500. Held, the proceeds of the assignment are taxable as ordinary income and not as long-term capital gain.
Glenn E. Alexander, pro se.
Leland E. Fiske, Esq., and Cecil L. Smith, Esq., for the petitioners.
Carswell H. Cobb, Esq., for the respondent.
Respondent has determined deficiencies in petitioners' income tax for the years 1954, 1955, and 1956, as follows:
Docket Petitioners Year Deficiency No. 72451 Glenn E. Alexander and Margaret Y. Alexander ................................. 1954 $4,519.25 72452 Creston H. Alexander and Marian M. Alexander ................................. 1954 4,535.10 72453 Charles E. Dimit and Helen Mae Dimit ........ 1954 2,734.72 79734 Estate of Euna M. Alexander, Deceased, Creston H. Alexander, Independent Executor, and Clyde H. Alexander, Individually ...... 1956 9,849.22 { 1955 2,227.98 79735 Charles E. Dimit and Helen Mae Dimit ........ { { 1956 217.27 79736 Creston H. Alexander and Marian M. Alexander ................................. 1955 7,114.31 79737 Glenn E. Alexander and Margaret Y. Alexander ................................. 1955 6,253.86 Three issues are presented for our consideration:1. Whether payments to petitioners in the taxable years on overriding royalty interests in certain oil and gas properties received upon the sale of stock in the Corpus Christi Corporation constitute ordinary income subject to depletion, or long-term capital gain. (This issue is common to all dockets.)
2. Whether certain petitioners sustained deductible bad debt losses during the taxable years attributable to the operation of a business regularly carried on by them. (This issue is common to all docket numbers, except No. 79734.)
3. Whether petitioners in Docket No. 79734 realized ordinary income or long-term capital gain in 1956 upon the assignment of a contract with the Shamrock Oil Gas Corporation.
FINDINGS OF FACT.
Many of the facts have been stipulated and those not incorporated in our findings of fact below are incorporated herein by this reference.
The petitioners, Creston H. Alexander and Marian M. Alexander, his wife, Glenn E. Alexander and Margaret Y. Alexander, his wife, Charles E. Dimit and Helen Mae Dimit, his wife, and Clyde H. Alexander and Euna M. Alexander, his wife, maintained offices in Dallas, Texas, and filed joint income tax returns for the years in issue with the district director of internal revenue, Dallas. Euna M. Alexander died November 30, 1959, and upon motion, Creston H. Alexander, independent executor, was substituted upon the record as personal representative of her estate.
Issue 1. Royalty Payments as Ordinary Income or Long-Term Capital Gain.
The Corpus Christi Corporation, hereinafter referred to as Corpus Christi, was organized in 1938 under the laws of the State of Texas. On May 5, 1941, 1,250 shares of its stock were owned by the Chicago Corporation, hereinafter referred to as Chicago, and the remaining 3,750 shares were owned by various other owners, including the petitioners. On that date all the petitioners had held their stock for more than 2 years.
Corpus Christi acquired and operated oil and gas properties covering approximately 8,782 acres in Jim Wells, Kleberg, and Neuces Counties, Texas. By May 5, 1941, 18 producing wells had been brought in on these properties, thereby developing approximately 2,200 acres. The remaining acreage was undeveloped. A high pressure recycling plant had been constructed on the properties at a cost in excess of $2 million which, by May 5, 1941, had been in operation for approximately 2 years.
In early 1941, petitioners and the other individual stockholders determined to sell their interests in Corpus Christi because of its mounting needs for financing. After unsuccessfully approaching several oil companies, petitioners and the other individual shareholders consummated a sale of their stock to Chicago at a price of $163.63 per share, an additional $54.55 dependent upon whether Chicago could effect a tax-free liquidation of Corpus Christi, and an overriding royalty interest on all oil, gas, and other minerals produced and saved, and all products extracted, separated, and saved from gas produced from the properties of Corpus Christi. Chicago agreed to develop the properties for production of oil and gas, and either to sell the petitioners' shares of the product and give an accounting therefor, or to divide the product in kind providing 60 days' storage thereof, as petitioners elected.
Petitioners, and other stockholders in consummation of the agreement with Chicago, delivered pro rata sufficient shares to Chicago to give it 80 per cent of the stock in Corpus Christi, receiving therefore $163.63 per share. Chicago then caused Corpus Christi to be liquidated and the remaining shares of petitioners' and the other stockholders were redeemed by Corpus Christi in return for the overriding royalty interests provided for in the agreement with Chicago. Chicago took all the remaining assets of Corpus Christi.
Petitioners' Federal income tax returns for 1941 were subjected to review as to the proper treatment of the proceeds from sale of their stock in Corpus Christi. The review was administratively closed when petitioners accepted a valuation of $1,035,000 for the overriding royalty interests owned by the stockholders of Corpus Christi made by an engineer revenue agent.
For the taxable years involved (1954, 1955, and 1956) petitioners received payments under and by virtue of the May 5, 1941, contracts in the following amounts:
Year 1954
Petitioner Amount received
Creston Alexander and wife .................. $23,141.36 Glenn Alexander and wife .................... 23,141.40 Charles Dimit and wife ...................... 23,141.34
Year 1955
Creston Alexander and wife .................. 28,615.01 Glenn Alexander and wife .................... 22,758.34 Charles Dimit and wife ...................... 28,615.00
Year 1956
Clyde Alexander and wife .................... 115,712.51 Charles Dimit and wife ...................... 27,708.72
Petitioners reported these payments on their returns as ordinary income subject to depletion. They now claim that such payments should be treated as payments made on the purchase price of their stock and treated as long-term capital gain instead of ordinary income.
Issue 2. Deductibility of Bad Debt Losses.
Creston, Glenn, and Charles are members of a group known as the Alexander group. This group has and is engaged in organizing, financing, and operating business ventures. In some cases these activities were carried on by the group members alone; in other cases they were carried on with other business associates. The members of the Alexander group are also the partners in Alexander Investment Company.
Most of the operations of the Alexander group have been directed by Creston, Glenn, and Charles. Since 1945 Creston has devoted most of his time to the activities of the group. Since 1946 Glenn has devoted most of his time to the same activities. Charles began devoting most of his time to these activities in 1947.
During the years 1941 to 1958, inclusive, the Alexander group, or one or more of its members, was at some time interested in the organization, financing, or operation of 28 business ventures, engaged in 17 separate types of business. Of the 28 ventures, 27 were corporations and one a partnership. Most of these business ventures were successful but not all of them.
At all times during this period the Alexander group controlled Creslenn Oil Company. When the Alexander group decided to organize a new business venture, the members met and decided whether the new venture would be owned by the members individually or be owned by Creslenn Oil Company. Loans to and guaranties of the notes of the various ventures were a part of the activities of the Alexander group.
During the years 1941 to 1958, inclusive, Creston, as a member of the Alexander group, participated in the organization of 23 of the business ventures and in the refinancing of 2 others. He was active, as an officer, director, or partner in the management of 18 of the companies. During the same period Glenn, as a member of the Alexander group, participated in the organization of 24 of the companies and in the refinancing of 2 others. He was active as an officer, director, or partner in the management of 15 of the companies. Charles, during the same period, as a member of the Alexander group, participated in the organization of 23 of the companies and in the refinancing of 2 others. He was active as an officer, director, or partner in the management of 12 of the companies.
Creston, Glenn, and Charles acted as managers with respect to stocks owned in the various companies by or for their respective wives and children.
During the years 1941 to 1958, inclusive, Creston acquired direct ownership of stock or capital of 16 companies. He also acquired indirect ownership or control of the stock or capital of certain companies, by reason of his management of stocks owned as guardian for his children or by his children's trusts, his ownership in Alexander Investment Company, and his ownership and that of his family in the stocks of Creslenn Oil Company and Creslenn Ranch Company. During the years 1948 to 1958, inclusive, 7 companies were liquidated and 3 companies were sold. Stock of 2 others was exchanged for other stocks in connection with mergers. At December 31, 1958, Creston owned directly stock or capital in 8 companies.
During the years 1941 to 1958, inclusive, Glenn acquired direct ownership of stock or capital of 17 companies. He also acquired indirect ownership or control of certain companies by reason of his management of stocks owned as guardian for his children or by his children's trusts, his ownership in Alexander Investment Company, and his ownership and that of his family in the stocks of Creslenn Oil Company and Creslenn Ranch Company. After the liquidation of the 7 companies, the sale of 3 others, and the exchange of stock by merger of 2 more, Glenn owned, at December 31, 1958, stock or capital directly in 8 companies.
During the years 1941 to 1958, inclusive, Charles acquired direct ownership of stock or capital of 16 companies. He also acquired indirect ownership or control of certain companies by reason of his management of stocks owned as guardian for his children or by his children's trusts, his ownership in Alexander Investment Company, and his ownership and that of his family in the stocks of Creslenn Oil Company and Creslenn Ranch Company. After the liquidation of 7 companies, the sale of 3, and the merger of 2, Charles owned at December 31, 1958, stock or capital directly in 7 companies.
During the years 1941 to 1958, Creston made direct investments in the stock or capital of 16 companies in a total amount of $223,058.05. He made indirect investments, through his children's guardianship, children's trusts, Alexander Investment Company, Creslenn Oil Company, and Creslenn Ranch Company of $237,140.39. His combined direct and indirect investment in the stock or capital of 26 companies was $460,198.44. During the years 1949 to 1958, the liquidation of 7 companies, the sale of 3 companies, and the merger of 2 companies reduced this investment by the amount of $208,656.67, leaving a direct investment at December 31, 1958, in 8 companies of $177,874.96.
During the years 1941 to 1958, Glenn made direct investments in the stock or capital of 17 companies in a total amount of $229,486.47. He made indirect investments, through his children's guardianship, children's trusts, Alexander Investment Company, Creslenn Oil Company, and Creslenn Ranch Company of $230,710.43. His combined direct and indirect investment in the stock or capital of 27 companies was $460,196.90. During the years 1949 to 1958, the liquidation of 7 companies, the sale of 3 companies, and the merger of 2 companies reduced this investment by the amount of $211,912.06, leaving a direct investment in 8 companies of $175,949.96.
During the years 1941 to 1958, Charles made direct investments in the stock or capital of 16 companies in a total amount of $189,883.32. He made indirect investments, through his children's guardianship, children's trusts, Alexander Investment Company, Creslenn Oil Company, and Creslenn Ranch Company of $176,530.40. His combined direct and indirect investment in the stock or capital of 25 companies was $366,413.72. During the years 1949 to 1958, the liquidation of 7 companies, the sale of 3 companies, and the merger of 2 companies reduced this investment by the amount of $164,613.88, leaving a direct investment in 7 companies of $138,303.30.
During the years 1943 to 1958, Creston made direct loans to 11 companies in the total amount of $161,733.78. Of this amount, $130,503.78 was repaid during the period and $7,480 was transferred to cost of stock, leaving a balance outstanding at December 31, 1958, of $23,750. The average annual balance outstanding during the 16-year period was $39,382.73.
During the years 1943 to 1958, Glenn made direct loans to 12 companies in the total amount of $343,637.96. Of this amount, $287,357.96 was repaid during the period, $16,550 was charged off as a loss, and $7,480 was transferred to cost of stock, leaving a balance outstanding at December 31, 1958, of $32,250. The average annual balance outstanding during the 16-year period was $40,222.99.
During the years 1944 to 1958, Charles made direct loans to 11 companies in the total amount of $143,337.93. Of this amount, $107,222.37 was repaid during the period, $385.56 was charged off as a loss, and $7,480 was transferred to cost of stock, leaving a balance outstanding at December 31, 1958, of $28,250. The average annual balance outstanding during the 15-year period was $35,609.05.
During the years 1952 to 1958, Creston directly guaranteed the notes of 2 companies in the total amount of $78,125. Of this amount, $50,000 was repaid by the borrower and $28,125 was paid by Creston and charged off as a bad debt, leaving no balance at December 31, 1958. During the years 1947 to 1958, Glenn guaranteed the notes of 4 companies in the total amount of $504,085.24. Of this amount, $448,102.71 was repaid by the borrower and $35,482.53 was paid by Glenn and charged off as a bad debt, leaving a balance outstanding at December 31, 1958, of $20,500. During the years 1952 to 1958, Charles directly guaranteed the notes of 2 companies in the total amount of $32,242.65. All of this amount was paid by Charles and charged off as a bad debt, leaving no balance at December 31, 1958.
In June 1952, Creston, Glenn, and Charles, in their activities of the Alexander group, organized Oil Field Haulers, Ltd., a Canadian corporation, to engage in the business of oil field hauling in Canada. Risk capital of $120,400 was supplied to the corporation by the organizers which, at that time, they thought would be sufficient to meet the needs of the business. It was expected that the operations of the business would be profitable. In due course of the business a total of $262,000 was borrowed by the corporation from the Royal Bank of Canada on its note. The note was guaranteed by the Mercantile National Bank of Dallas, Texas, and Creston, Glenn, and Charles guaranteed the note to the Mercantile National Bank. The operations of Oil Field Haulers, Ltd., proved unsuccessful and resulted in large losses. At June 30, 1954, the corporation discontinued business, was liquidated, and the assets applied against its debts. There were not enough assets to pay the note due the Royal Bank of Canada, hence that bank made a demand on the Mercantile National Bank of Dallas for payment on its guaranty and that bank, in turn, made demand on Creston, Glenn, and Charles to make good their guaranty to the Mercantile National Bank. As a result of this demand, petitioners Creston, Glenn, and Charles each paid the sums of $14,000 in 1954 and $14,125 in 1955 to the Mercantile National Bank of Dallas by reason of their obligation to the bank as guarantors of the note. Creston, Glenn, and Charles each claimed deductions on their returns for 1954 and 1955, as bad debt losses, the respective amounts of $14,000 for 1954 and $14,125 for 1955. The Commissioner in his determination of the deficiencies did not question that petitioners had losses on their guaranties as they claimed. He determined, however, that these losses were nonbusiness bad debt losses and allowable only as short-term capital losses under the applicable provisions of the Internal Revenue Code of 1954.
In 1954, Cimota Exploration, Inc., was organized by Charles and his associates of the Alexander group to engage in uranium mining. Charles made loans to the corporation and also endorsed the corporation's note. The corporation was unsuccessful and was liquidated in 1956. Charles sustained a loss of $4,503.31 by reason of his loans to the corporation and his endorsement of the corporation's note. He claimed this deduction on his 1956 return as a bad debt which became worthless in that year. The Commissioner in his determination of the deficiency disallowed the deduction as a business bad debt and allowed it as a nonbusiness bad debt allowable only as a short-term capital loss under the applicable provisions of the 1954 Code. The foregoing are the only deductions involved in Issue 2.
During the years 1954, 1955, and 1956, Creston, Glenn, and Charles were in the business of organizing, financing, and operating corporations and business ventures. These bad debt losses described in the foregoing paragraphs were sustained in this business and are deductible as business bad debts under section 166(a), 1954 Code.
Issue 3. Proceeds of Assignment of Settlement Contract As Ordinary Income or Capital Gain.
During the years 1935 and 1936, Clyde aided in negotiating three contracts on behalf of the Shamrock Oil Gas Corporation (hereinafter referred to as Shamrock) to effectuate sale of residue gas to manufacturers of carbon black. Contracts were negotiated in 1935 between Shamrock and Western Carbon Company, and Shamrock and Reliance Carbon Company; in 1936 a contract was negotiated between Shamrock, Witco Carbon Company, and Continental Oil Company.
The contract between Shamrock and Western Carbon Company read, in part, as follows:
WITNESSETH:
1. Seller is the owner of a plant for the extraction and manufacture of gasoline from natural gas, situate in Moore County, Texas, known as the "McKee Plant"; the natural gas used in and passed through said plant being received by said Seller from lands and leases owned by it in said county, more particularly described in Exhibit A hereto attached and made part hereof, and under the terms of said purchase agreements from lands and leases in said county. There is then left a large surplus of so-called tail, stripped or residue gas at the exhaust of said plant.
2. Buyer is a manufacturer of carbon black and proposes to erect a plant at some place in Moore County, Texas, in the general vicinity of said McKee Plant; and Buyer has agreed, and does hereby agree, that it will, upon commencement of construction of a railroad from the site of said carbon black plant of Buyer to either the Atchison, Topeka Santa Fe or Rock Island Pacific Railroad, commence the construction of a carbon black plant upon a site to be agreed upon between the parties hereto, and that it will prosecute the construction and erection of said plant with reasonable diligence to completion, the said plant when completed to be of a capacity sufficient to handle a minimum of 30,000,000 cubic feet of gas per day of twenty-four (24) hours. In the event that Seller shall so elect, said carbon black plant shall be constructed at or near the railroad of either the Atchison, Topeka Santa Fe or Rock Island Pacific Railroad, and Seller shall construct at its own expense the necessary gas pipe line to said location.
3. In consideration of the premises, Seller has agreed and does hereby agree, to sell to Buyer, and Buyer has agreed, and does hereby agree, to buy from Seller, certain quantities of natural gas upon the terms and conditions hereinafter set forth.
* * * * * * *
14. The price to be paid to Seller for gas delivered to Buyer shall be 30% of the carbon black production of Buyer's plant, hereinafter referred to as royalty, which shall, at Buyer's expense, be placed in Buyer's warehouse in paper bags, uncompressed. Seller's share of said production shall be stored in Buyer's warehouse, without cost to Seller, but shall be held subject to Seller's risk.
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16. It is understood and agreed that Buyer, either through its own efforts or that of its sales agent or agents, shall make sale of Seller's royalty black and shall do so in at least the proportion that Buyer moves its own stock. Buyer shall make monthly settlements with Seller for sales of Seller's royalty black. Buyer shall be entitled to deduct from such settlements a commission of 7 1/2% of the market price of said royalty black f.o.b. plant, and said Buyer shall be allowed to make the usual trade discounts without diminution of its commission. Seller shall bear, with respect to its said royalty black, the cost of the insurance thereof while in warehouse and the cost of packaging same for shipment after said black has been delivered in warehouse uncompressed in paper bags. Regardless whether or not said royalty black moves in the domestic or export trade, the price at which same is sold, for every purpose in computing royalties and expense, shall be the domestic price f.o.b. plant.
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18. All rights and obligations hereunder shall extend to and be binding upon the parties hereto, their successors and assigns. It is further agreed that the provisions of this agreement regarding the production and delivery of gas by Seller, and the acceptance and payment for same by Buyer, shall be deemed to be covenants running with the respective lands, leases, purchase agreements, plants and pipe lines, together with their appurtenances, of the parties hereto. And the parties hereto covenant that they will not dispose of any of same in bulk, or in such material part as to disable them from performing their obligations hereunder, without causing the party to whom such property shall be transferred, together with its successors and assigns, to assume and be bound by the terms hereof. Provided, however, that nothing herein contained shall prevent Seller from selling, trading or abandoning any lease or gas contract in the ordinary course of business, or of exchanging any part of its gas resources for other gas resources of substantially equal amount.
Substantially similar provisions were contained in the other two contracts.
Shamrock sent Clyde letters dated October 31, 1935, and December 29, 1936, containing the proposed arrangements for payment of Clyde for his services in negotiating the contracts, on both of which Clyde noted his acceptance. In material part the letter of December 29, 1936, as illustrative of both letters, read as follows:
As a commission for your services in assisting in the negotiation of the above mentioned contract and for your services in the future as long as they are available, or acting in an advisory capacity from time to time in the affairs of The Shamrock Oil Gas Corporation, you are to receive 2 per cent of the cash received by The Shamrock Oil Gas Corporation from the sale of royalty carbon black under the said contract. Your commission is to be paid only out of the proceeds received from the sale of said carbon black royalty and is to terminate when and as the making of carbon black ceases under the above contract. This contract is not to be assigned or pledged as collateral, your commission being payable to you only, and in the event of your death to your legal representatives.
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Your unavailability for acting in an advisory capacity to The Shamrock Oil Gas Corporation both under this letter and under the letter we sent you dated October 31st, 1935, shall not in any way prejudice your right to receive your commission on cash received by The Shamrock Oil Gas Corporation from the sale of royalty carbon black under the contract referred to in this letter and the said contracts referred to in our letter to you dated October 31, 1935.
As a result of controversy as to proper accounting for the proceeds to the carbon black sales contracts, Clyde and Shamrock entered into a settlement agreement on June 1, 1947, whereby Shamrock agreed to pay Clyde $110,000 payable without interest in monthly installments of $833.33 in complete settlement of all claims against Shamrock.
In May 1956, Clyde assigned his rights in the 1947 contract with Shamrock to A. M. Early for $4,625 cash and a 5 per cent promissory note in the amount of $13,875, or a total of $18,500. The Commissioner in his determination of the deficiency has determined that this $18,500 was ordinary income and not long-term capital gain. The Commissioner explained this adjustment in the deficiency notice as follows:
It is determined that the assignment, in 1956, of the balance due you for services rendered for $18,500.00 reported on your 1956 return as gain upon the sale of a long-term capital asset and described as "Shamrock Contract", does not constitute a sale or exchange of a capital asset within the meaning of internal revenue laws and, therefore, results in ordinary income. * * *
OPINION.
We shall consider the issues in the same order in which the facts pertinent to each are set forth in our Findings of Fact.
Issue 1. Royalty Payments as Ordinary Income or Long-Term Capital Gain.
The first issue presented is whether payments received by petitioners during the years in issue on overriding royalty interests received on the sale of their stock in Corpus Christi are taxable as ordinary income subject to depletion or as long-term capital gain. Petitioners, on their income tax returns, treated these payments as ordinary income subject to 27 1/2 per cent depletion. They now claim that they erred in so doing and that they should have treated the payments as deferred payments made on the balance due on the purchase price of their stock in Corpus Christi and that the gain should be treated as long-term capital gain and not as ordinary income.
This same question was raised on essentially the same facts by one of the other shareholders of Corpus Christi before the Court of Claims. Warren v. United States, 171 F. Supp. 846, certiorari denied 361 U.S. 916. That case was decided adversely to the taxpayer. The stipulated evidence on the issue in this Court is a transcript of testimony and copies of exhibits offered in the Warren case before the Court of Claims.
Gain on the sale or other disposition of property is measured by "the excess of the amount realized therefrom over the adjusted basis." Sec. 111(a), 1939 Code. "The amount realized" is "the sum of any money received plus the fair market value of the property (other than money) received." Sec. 111(b), 1939 Code. The Court of Claims held, and we agree, that the overriding royalty interests which the stockholders of Corpus Christi received constituted property. Petitioners agreed to a fair market valuation of the interests in settling their tax liabilities for 1941. There is no reason to believe that they could not have been sold for that amount. We are well convinced that they could have been sold for the amount of valuation fixed by the revenue agent. The royalty interests later proved to be much more valuable than the Internal Revenue Service fixed in 1942, when petitioners' tax liabilities for sale of their stock to Chicago in 1941 were determined and agreed upon. However, we see no reason why petitioners should complain as to that fact. So far as we can see the fact that the value attributed to these royalty interests in 1941 was too low has nothing whatever to do with the issue we have here to decide. Although petitioners have offered extensive arguments why we should not reach the same result as that of the Court of Claims, we are not convinced by their arguments. We hold, therefore, that the payments received by petitioners on their overriding royalty interests are taxable as ordinary income subject to the 27 1/2 per cent depletion allowed by law.
Issue 2. Deductibility of Bad Debt Losses.
The second issue presented is whether Creston, Glenn, and Charles may deduct as business bad debts under section 166(a)(1) of the 1954 Code, or must deduct as nonbusiness bad debts under section 166(d)(1), certain loans and payments on guaranties as set forth in our Findings of Fact. As stated in the statutory notice to Glenn for 1954, the respondent "determined the $14,000.00 deduction claimed on your 1954 return as a bad debt under section 166(a) of the Internal Revenue Code of 1954 is allowable as a nonbusiness bad debt, deductible as a short-term capital loss under section 166(d) of the Code." Similar statements appear in all of the notices disallowing the deductions involved in this issue. At trial, counsel for respondent stated this issue in approximately the same terms. The stipulations filed by the parties contain numerous references to "loans" made by Creston, Glenn, and Charles and others. On brief the respondent urges that many of these loans, and the debts arising upon payment of guaranties of loans, were in fact contributions of risk capital. Such contention is "inconsistent with his own determination as disclosed in the deficiency notices." Vincent C. Campbell, 11 T.C. 510, 511. We reject respondent's contention that the amounts in question were capital contributions and not loans.
SEC. 166. BAD DEBTS.
(a) GENERAL RULE. —
(1) WHOLLY WORTHLESS DEBT. — There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
(d) NONBUSINESS DEBTS. —
(1) GENERAL RULE. — In the case of a taxpayer other than a corporation —
(A) subsections (a) and (c) shall not apply to any nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months.
The stipulation contains much matter dealing with promotional efforts, investments, loans, and guaranties of loans made to various corporations in which Creston, Glenn, and Charles held the controlling stock interests. Respondent urges that the petitioners may not claim these activities as establishing their own business, citing Charles G. Berwind, 20 T.C. 808, affirmed per curiam 211 F.2d 575. In the Berwind case, where we held against the taxpayer, we pointed out that, "He does not contend that he was in the trade or business of promoting, organizing, financing, or lending money to corporations, only that his trade or business is being an officer and director in various corporations." We agree with respondent that the businesses of corporations which petitioners controlled are not the businesses of the petitioners and such activities have not been accorded any weight in reaching our decision as to whether Creston, Glenn, and Charles incurred business or nonbusiness bad debt losses. Similarly, we have not included in our considerations loans and stock purchases made by Creston, Glenn, and Charles as trustees or guardians of their children, for we are not satisfied that such loans and purchases were their own activities, nor that the children were members of the asserted "Alexander group."
The issue of whether losses are business or nonbusiness bad debts is a factual question. Cf. Giblin v. Commissioner, 227 F.2d 692, 697. In the Giblin case the court said: "We recognize the fact that the question whether the activities of a taxpayer constitute carrying on a trade or business is largely one of fact, the solution of which 'requires an examination of the facts in each case.' [Citing authorities.]" Many of the cases cited on brief by respondent are distinguishable on their facts because they involve contributions of risk capital to protect investments, attempts to confuse losses or businesses of corporations with losses or businesses of individuals, or attempted deduction of loans not related to the business alleged. Such issues are not presented in the instant case.
The real question that remains here for decision is whether the individual activities of Creston, Glenn, and Charles, as disclosed by the record and contained in our Findings of Fact, are sufficient to establish that each suffered bad debt losses which "had a direct connection with the business carried on by these petitioners and the losses were directly a result of, and incurred in, the business" carried on by the petitioners. Cf. Vincent C. Campbell, supra.
In our findings of fact on this issue we have endeavored to give a full statement of the facts with reference to petitioners' activities in organizing, financing, and operating corporations and business ventures. At the conclusion of these findings we have made a finding of fact, as follows:
During the years 1954, 1955, and 1956, Creston, Glenn, and Charles were in the business of organizing, financing, and operating corporations and business ventures. These bad debt losses described in the foregoing paragraphs were sustained in this business and are deductible as business bad debts under section 166 (a), 1954 Code.
We think this finding of fact is fully supported by the evidence and that issue 2 should be decided for the petitioners. See Vincent C. Campbell, supra; Henry E. Sage, 15 T.C. 299.
On issue 2 we decide in favor of the petitioners.
Issue 3. Proceeds of Assignment of Settlement Contract as Ordinary Income or Capital Gain.
The third issue presented is whether the proceeds in the amount of $18,500 of the assignment of the 1947 contract with Shamrock are taxable to Clyde as long-term capital gain or as ordinary income. Petitioner contends that in 1935 and 1936 he received an economic interest in the gas that Shamrock sold and that as an economic interest in a mineral in place, it constituted a capital asset. Even if we assume that the services he rendered Shamrock in securing purchasers for its residue gas would constitute an investment requisite to the creation of an economic interest, and that Clyde looked not to the cash proceeds but solely to the carbon black which Shamrock received from the purchasers, it is clear that the carbon black is at least one, and possibly two steps, removed from constituting a mineral in place. Scofield v. La Gloria Oil and Gas Company, 268 F.2d 699; Helvering v. Bankline Oil Co., 303 U.S. 362.
Clyde's 1935 and 1936 contracts with Shamrock constituted rights to income for personal services by way of a 2 per cent commission on cash received by Shamrock from the purchasers of Shamrock's residual gas. Sec. 61(a)(1), 1954 Code; sec. 22(a), 1939 Code; sec. 22 (a), Revenue Act of 1936; sec. 22(a), Revenue Act of 1934. When, therefore, Clyde accepted the agreement of 1947 whereby Shamrock agreed to pay him $110,000 in installments in release of his claims under the earlier agreements, the character of the income received thereunder was not converted from ordinary income to capital gain. Shuster v. Helvering, 121 F.2d 643; Samuel Towers, 24 T.C. 199. Nor did Clyde's assignment of the ordinary income payments in 1956 serve to convert them into capital gain. Commissioner v. P. G. Lake, Inc., 356 U.S. 260. We hold that respondent did not err in treating the $18,500 received by Clyde on the 1956 assignment as ordinary income.
Decisions will be entered under Rule 50.