1931 BTA LEXIS 1628">*1628 Held that the transaction of exchange of property here involved resulted in no taxable income to petitioners.
24 B.T.A. 512">*512 These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners in the following amounts and for the following years:
| Docket No. | Year | Petitioner | Amount |
| 31634 | 1922 | Irving C. Ackerman | $37,521.74 |
| 30311 | 1924 | Irving C. Ackerman | 737.96 |
| 40948 | 1925 | Irving C. Ackerman | 388.07 |
| 40949 | 1926 | Irving C. Ackerman | 140.61 |
| 31632 | 1922 | Simon Harris | 35,909.95 |
In Dockets Nos. 31634, 30311, 40948 and 40949 petitioner Ackerman alleges that the respondent erred in disallowing a deduction for losses incurred by him in the operation of the Humberstone Dog Kennels. In Dockets Nos. 31632 and 31634 the petitioners allege that the respondent erred in charging them with the aggregate profit of $204,002 arising from an alleged exchange of certain contractual interests for all the capital stock of 15 theatre corporations, made with Loew's Incorporated. The petitioners1931 BTA LEXIS 1628">*1629 assert that such exchange was actually made by Ackerman and Harris, Inc., a corporation to which the petitioners, as partners, had transferred their interests prior thereto in consideration of 2,000 shares of the capital stock of the said corporation and that they never, in fact, received the stock in the 15 theatre corporations.
By proper order the proceedings were consolidated.
24 B.T.A. 512">*513 FINDINGS OF FACT.
In 1919 Irving C. Ackerman and Simon Harris (also known as Sam Harris) were partners engaged in operating a theatrical booking agency. On November 5, 1919, they entered into contracts with Loew's Incorporated whereby they were to receive a one-fourth interest in two theatres which Loew's Incorporated proposed to erect on Taylor and Market Streets, San Francisco, and Seventh Street and Broadway, Los Angeles, respectively, under an option which the petitioners assigned to Loew's Incorporated. On the same day the petitioners entered into an additional contract by which they sold their booking agency to the Marcus Loew Booking Agency, a subsidiary of Loew's Incorporated, but were retained as managers thereof for eight years. They also were given the option of purchasing1931 BTA LEXIS 1628">*1630 a 25 per cent interest in any theatrical venture undertaken by Loew's Incorporated in 14 western States and in Manitoba and British Columbia. The agreement was "deemed personal in the sellers (petitioners)." On April 19, 1920, the contract of November 5, 1919, relating to the theatre to be erected in San Francisco was modified by changing its location.
On May 11, 1922, the petitioners assigned to Ackerman and Harris, Inc., a corporation to be formed under the laws of California, all their right, title and interest in the contracts of November 5, 1919, and agreements supplemental thereto, in consideration of all the capital stock of the said corporation, except qualifying shares, to be delivered as soon as the formality of incorporation could be accomplished. On May 29, 1922, Ackerman and Harris, Inc., was incorporated under the laws of California. The purpose of the corporation was stated as follows:
* * * to act as a holding company, and more particularly, to take over that certain contract dated November 5th, 1919, between Loew's Incorporated, party of the first part, and Irving C. Ackerman and Sam Harris, copartners doing business under the firm name and style of Ackerman1931 BTA LEXIS 1628">*1631 & Harris, parties of the second part, thereafter supplemented by a subsequent agreement dated April 19th, 1920, wherein and whereby said Irving C. Ackerman and Sam Harris, copartners, etc. acquired one-quarter interest in any and all net rrofits to be derived from the operation of the following named corporations formed under and by virtue of the laws of the State of California, * * *.
Seventh and Broadway Building Company, Capital Stock $1,500,000.00.
Market and Taylor Building Company, Capital Stock $1,000,000.00.
Loew's Los Angeles State Theatre Company, Capital Stock $100,000.00.
Loew's San Francisco State Theatre Company, Capital Stock $100,000.00.
On May 31, 1922, the corporation accepted the assignment and authorized the issuance of the stock. On the same day the board of directors of Ackerman and Harris, Inc., passed the following resolutions:
24 B.T.A. 512">*514 BE IT RESOLVED:
That said Irving C. Ackerman and S. Harris are hereby appointed attorneys in fact and representatives of this corporation to enter into negotiations with Loew's Incorporated, to make exchange with Loew's Incorporated for all the right, title and interest of this corporation as assignee of1931 BTA LEXIS 1628">*1632 Irving C. Ackerman and S. Harris in the contract and agreement of November 5th, 1919 and April 19th, 1920 respectively, for all the stock which is now owned and controlled by said Loew's Incorporated of its Pacific Coast subsidiary corporations, excepting therefrom, however, the stock owned by Loew's Inc. in those four corporations in which under and by virtue of the conditions of the agreement and contract heretofore mentioned this corporation as assignee of Irving C. Ackerman and S. Harris owns one-quarter interest, and which are the medium of this exchange;
BE IT FURTHER RESOLVED:
That said Irving C. Ackerman and S. Harris, as such attorneys in fact, acting for and on behalf of this corporation, are hereby authorized and empowered to carry out and consummate such negotiations, purchase or exchange, for said stock in said Pacific Coast subsidiary corporations, either in their own respective names or in the name of this corporation as they may deem best for the interest of this corporation, and whatever may be done by said Irving C. Ackerman and S. Harris, or either of them in that behalf, this corporation does hereby ratify and confirm.
Later the petitioners received the stock1931 BTA LEXIS 1628">*1633 of Ackerman and Harris, Inc., as provided by the agreement. They ceased to operate as individuals or as a partnership after the transfer of their assets to the corporation.
In June, 1922, the petitioners went to New York City to negotiate with Loew's Incorporated for the purchase of the interests of the petitioners, assigned to Ackerman and Harris, Inc., in the theatre operations in San Francisco and Los Angeles. Loew's Incorporated, through its officers and representatives, refused to deal with Ackerman and Harris, Inc., as a corporation, but insisted that the agreement be made with the petitioners in their individual capacity, since the petitioners had been the western representatives of Loew's Incorporated for several years. Prior to entering into the contract the petitioners explained fully to the president and the secretary (also attorney) of Loew's Incorporated that they had assigned their rights under the contracts of November 5, 1919, to the corporation, Ackerman and Harris, Inc. However, the secretary and attorney of Loew's Incorporated drew the contract with the petitioners individually and as copartners under the firm name of Ackerman and Harris, Inc. He assured1931 BTA LEXIS 1628">*1634 the petitioner, Ackerman, that it made no difference how the instrument was drawn as long as the terms were carried out, that certain vaudeville contracts had to be taken care of, that he knew the petitioners as individuals and as a partnership, but knew nothing of Ackerman and Harris, Inc., and that the deal would be put through only providing Ackerman would agree to the form of contract proposed by him.
24 B.T.A. 512">*515 Accordingly, on June 5, the petitioners (recited to be acting individually and as copartners) entered into a contract with Loew's Incorporated, as prepared by that corporation's secretary and attorney, whereby they sold their interest in the Loew's State Theatre operations in San Francisco and Los Angeles in exchange for all the capital stock, valued at $204,002, of the following theatre companies:
Fresno Hippodrome Company
Palace Theatre Company
Sacramento Hippodrome Company
California Hippodrome Company
Oregon Hippodrome Company
Cascade Amusement Company
San Jose Hippodrome Company
Salt Lake Casino, Inc.
Regent Theatre Company
Oakland & San Francisco Theatre Company
Long Beach Theatre Company
Loew's Sacramento Theatre Company
United Theatre1931 BTA LEXIS 1628">*1635 Company
Loew's Stockton Theatre Company
Western States Investment & Realty Company
The contract also canceled the contract between the petitioners and the Marcus Loew Booking Agency, dated November 5, 1919, the latter corporation becoming signatory thereto for such purpose. The contract further covenanted:
The Purchasers for themselves and their legal representatives, warrant that they have in no way, assigned, pledged or hypothecated the rights, interests and claims granted to them under the aforementioned agreements of November 5th, 1919 and April 19th, 1920, respectively, and that they are the sole and absolute owners of all the rights, benefits, claims and privileges granted by the Seller herein under and by virtue of the said agreements aforementioned.
and also contained the following provision:
This agreement may be assigned by the Purchasers to a California corporation known as "ACKERMAN & HARRIS, INC." of which the Purchasers own a majority of the capital stock, but the Purchasers, shall nevertheless, continue to remain liable to the Seller as though the assignment had not been made.
The contract was signed by Ackerman individually and as attorney in fact for1931 BTA LEXIS 1628">*1636 Harris who had been compelled to leave the city.
Pursuant to the contract of June 5, 1922, Loew's Incorporated transferred the shares of stock in the 15 companies named to Ackerman and Harris, Inc., and the stock was reissued to that corporation by the respective companies. The petitioners, Ackerman and Harris, received none of the stock individually. The books of Ackerman and Harris, Inc., reflected the issuance of its stock to the petitioners in exchange for their rights and interests in the contracts of November 5, 1919, and contracts supplemental thereto, and also the transactions arising out of and covered by the contract of June 5, 1922. Ackerman 24 B.T.A. 512">*516 and Harris, Inc., later sold the stock in certain of the theatres and reported profits thereon in its income-tax returns.
On June 16, 1922, the minutes of Ackerman and Harris, Inc., set forth in detail the terms of the contract of June 5, 1922, and by resolution ratified the actions of the petitioners taken for and in behalf of the corporation in entering into such an agreement. The corporation further assumed the performance of all conditions and covenants thereof for which the petitioners were liable.
The Commissioner1931 BTA LEXIS 1628">*1637 held that the stock of the several theatres transferred by Loew's Incorporated to Ackerman and Harris, Inc., had a value of $204,002 and that all of the same represented profit to petitioners, Ackerman and Harris, individually.
The petitioner, Ackerman, is a resident of San Francisco. When a small boy he began raising dogs and continued to raise one or two dogs at a time until 1920. During that year he visited some of the larger kennels in the East, where the raising of dogs was carried on as a business, and conceived the idea of doing likewise in California. He made special inquiry as to the profitableness of the business. He was particularly interested in wire-haired fox terriers and Irish terriers. He hoped to establish a monopoly of the business in California, since no previous attempt had been made there to breed such animals. Thereupon he built elaborate kennels at Ocean Beach, about five miles from his office, for the purpose of breeding and raising terriers along scientific lines in order to improve the physique of the dogs and thus make them more valuable on the market. He employed an expert kennel manager and other assistants and laborers. By the latter part of1931 BTA LEXIS 1628">*1638 1920 he had acquired about 100 dogs and during the years under consideration maintained a stock of from 80 to 150 animals. He purchased noted dogs throughout the United States and imported terriers from England. He gave almost daily supervision to the enterprise. During 1920 he expended approximately $20,000 for land, kennels and equipment and $10,000 for dogs.
He did not expect to make a profit during the first year or two because of the heavy initial expense of the venture. The kennels produced income from stud fees, the sale of puppies at from $75 to $100 each and prizes at exhibitions. The business was abandoned about 1928 because petitioner became convinced it could not be conducted at a profit and for the further reason that the neighborhood had become closely settled and objections were raised to the maintenance of large dog kennels in a residence district. The losses for the years involved were as follows:
| 1922 | $8,799.23 |
| 1924 | 8,127.38 |
| 1925 | 4,103.09 |
| 1926 | 2,100.95 |
24 B.T.A. 512">*517 In 1920 the entire net worth of the petitioner, Ackerman, was not over $100,000.
OPINION.
VAN FOSSAN: The first issue in these proceedings is whether a profit of1931 BTA LEXIS 1628">*1639 $204,002 accrued to the petitioners, Ackerman and Harris as individuals, from an exchange of certain contractual interests on June 5, 1922, with Loew's Incorporated for the stock of 15 corporations operating various theatrical enterprises, or, to state the question in the words of respondent's brief:
Did the petitioners, who were partners, sell or surrender their rights under certain existing contracts to Loew's Incorporated in 1922 at a profit of $204,002, thereby deriving taxable income, or did they assign such rights to Ackerman & Harris, Inc., in exchange for its entire capital stock in a non-taxable transaction?
The evidence leads us to the conclusion that petitioners had assigned their rights under the contracts in question to Ackerman and Harris, Inc., prior to the execution of the subsequent contract of exchange dated June 5, 1922, which respondent contends gave rise to the profit in question. Moreover, at the time the contract of June 5, 1922, was prepared and presented to the petitioner, Ackerman, the president and secretary of Loew's Incorporated were fully aware that the petitioners were no longer the real owners of the rights and interests which they agreed to convey1931 BTA LEXIS 1628">*1640 and that they had sold and assigned all such right to Ackerman and Harris, Inc. Under the law of the State of California the assignment made by the petitioners on May 11, 1922, though made prior to the formation of the corporation, constituted, upon incorporation, a valid conveyance of such rights and interest. ; ; ; .
Loew's Incorporated insisted on the petitioners' individual liability for carrying out the contract in order to be assured that certain vaudeville contracts would be fulfilled and for the further reason that they well knew their individual responsibility.
The evidence discloses, however, that all transactions pursuant to the June 5, 1922, contract were carried on with Ackerman and Harris, Inc. The stock certificates of the 15 corporations were transferred directly to that corporation. After that date the petitioners in no instance acted in their individual capacity in the management or operation of the various theatrical enterprises in which they were interested. Their withdrawal1931 BTA LEXIS 1628">*1641 as individuals was further recognized and assured by the cancellation of their contract with the Marcus Loew Booking Agency, a subsidiary of Loew's Incorporated. The practical effect 24 B.T.A. 512">*518 of and intention behind the contract were to make petitioners guarantors of its performance.
Therefore, regardless of what may have been the legal effect or consequences among the parties of the action of Ackerman and Harris in signing the contract of June 5, 1922, individually and agreeing to convey something they did not own, the fact is the petitioners never received the stock which respondent held represented income to them, nor was it received by the corporation on petitioners' behalf. It was transferred directly by Loew's Incorporated to Ackerman and Harris, Inc. - was held by the corporation, and on later sale of the larger part of it the corporation received the proceeds and accounted for the gain. The individual taxpayers here petitioning, whose returns were made on a cash basis, received nothing in 1922 which gave rise to profit.
With reference to the second issue, relating solely to Ackerman, the evidence is convincing that the petitioner established the Humberstone Dog1931 BTA LEXIS 1628">*1642 Kennels as a business enterprise and so operated them during the years under consideration. The sole issue presented at the hearing is whether or not the petitioner was engaged in the transaction as a business or a hobby. The deductions should be allowed. ; .
Judgment will be entered under Rule 50.