Dallas Rupe & Son v. Commissioner

Dallas Rupe & Son, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Dallas Rupe & Son v. Commissioner Docket Nos. 35688, 35689, 35690 United States Tax Court 20 T.C. 363; 1953 U.S. Tax Ct. LEXIS 158; May 18, 1953, Promulgated *158 In Docket No. 35688 decision will be entered for the petitioner. In Docket Nos. 35689, 35690 decisions will be entered under Rule 50. Petitioners made cash advances to the Dallas Symphony Orchestra, Inc., during the 3 years D. Gordon Rupe, Jr., one of the petitioners, served as its president. Respondent determined that certain of these advances, amounting to $ 34,630.08, were donations and not deductible. Held, the advances were made with the intent and expectation that they would be repaid, and therefore, were loans. Held, further, these nonbusiness loans became worthless during the taxable year 1948 at the end of the fund-raising campaign when it became clear the symphony would have no funds with which to repay petitioners but only sufficient funds to pay its operating expenses. Robert F. Ritchie, Esq., for the petitioners. John W. Alexander, Esq., for the respondent. Black, Judge. BLACK *363 In these consolidated proceedings respondent determined deficiencies in petitioners' income tax as follows: Docket No. Petitioner 35688 Dallas Rupe & Son, a corporation 35689 D. Gordon Rupe, Jr 35690 Ruby L. Rupe Docket No. Year Deficiency 35688 Fiscal year ended June 30, 1949 $ 17,545.25 35689 [1948] 1,664.44 [1949] 1,971.44 35690 [1948] 1,664.43 [1949] 1,971.43 *159 Respondent in his brief has conceded error with respect to the determination of the deficiency against petitioner Dallas Rupe & Son, Docket No. 35688. Certain of the adjustments made in the deficiency notices are not contested by petitioners D. Gordon Rupe, Jr., and Ruby L. Rupe. The issues before us concern only the individual petitioners D. Gordon Rupe, Jr., and wife, Ruby L. Rupe. The year 1949 is involved *364 only by reason of the disallowance of the capital loss carry-over from the years 1947 and 1948. Petitioners make two contentions. First, that their $ 34,630.08 in advances to the Dallas Symphony which was disallowed as a deduction by the Commissioner in his determination of the deficiency, was a nonbusiness debt rather than a contribution. Second, that the debt became worthless during the taxable year 1948. Respondent disallowed the $ 34,630.08 claimed on the tax returns as a nonbusiness bad debt deduction, holding it to be a contribution to the Dallas Symphony Orchestra. Petitioners allege: "The Commissioner erred in treating loans made by petitioner as contributions rather than as bad debts." FINDINGS OF FACT. The facts were stipulated in part; such facts are*160 incorporated herein by this reference. The petitioners D. Gordon Rupe, Jr., and Ruby L. Rupe, husband and wife, reside in Dallas, Texas. They filed separate returns for the taxable years 1948 and 1949 on the community property basis with the collector of internal revenue for the second district of Texas. The term "petitioner" as used hereinafter means D. Gordon Rupe, Jr. Petitioner is the principal stockholder and chief executive of Dallas Rupe & Son, a corporation carrying on the investment banking business in Dallas, Texas. In August 1945, various residents of Texas formed an association under the laws of Texas which they designated "The Society of the Friends of Music." The association was formed "as a civic non-profit organization for the purpose of the promotion of musical and educational activities, having for its primary purpose the organization, management, maintenance, operation and control of a symphony orchestra and of allied and kindred activities." By an amendment to its charter the name of the association was changed shortly after it was organized to "Dallas Symphony Orchestra, Inc." It will be sometimes hereafter referred to as the symphony. In the Fall of 1945 petitioner*161 was induced by certain citizens of Dallas to assume the presidency of the symphony. Petitioner had had no previous experience with the operations of such an organization, and in fact he had never before attended a performance by a symphony orchestra. Petitioner was advised by persons who had previously worked with a symphony orchestra that contributions of approximately $ 75,000 would be needed annually to finance the enterprise. Accordingly, a comprehensive plan was worked out for financing the symphony. This plan called for three classes of contributors or members of the association. The first class was composed of 150 Founders who were to make only one contribution of $ 1,000 *365 for permanent membership. These contributions from Founders amounting to $ 150,000, were to be placed in a trust fund for the symphony. The second class of membership were Sponsors who were to pay annual dues of $ 100. The third class were Sustaining Members whose annual dues were $ 5. Petitioner succeeded in raising the $ 150,000 Founders' Fund almost solely by his own efforts and also with his helpers, secured 600 sponsor memberships amounting to $ 60,000 during the fall of 1945. Dallas*162 Rupe & Son subscribed to five founder memberships totaling $ 5,000. Petitioner and Ruby Rupe were sponsor members of the symphony for each of these years, paying $ 100 per year to support the symphony. In addition petitioner purchased $ 454.40 of tickets for the first season, $ 594 for the second season, and $ 148 for the third. Petitioner gave the tickets to people in order to interest them in the symphony. During the 3 years he was president of the symphony petitioner devoted at least 10 per cent of his time to the symphony. When petitioner first became president of the symphony it had no bookkeeper. For some time the financial records and affairs of the orchestra were handled by Dallas Rupe & Son. During this period substantial amounts were advanced to the symphony by Dallas Rupe & Son. The details of those advances of Dallas Rupe & Son are not set forth here in our Findings of Fact as the issues relating to that petitioner have already been settled by respondent conceding error. Petitioner personally advanced $ 20,000 to the symphony on December 31, 1945, and this sum was repaid on June 30, 1946. The advances which are here in question are two amounts: $ 16,751.17 and *163 $ 17,878.91. During the year 1948 petitioner advanced $ 17,878.91 to the symphony as a loan. This money was delivered to the symphony in the form of a check drawn against the account of Dallas & Gordon Rupe, a partnership, although the advance was solely from petitioner and no part thereof was attributable to Dallas Rupe, the other partner. Petitioner made this loan upon the assurances of the directors and other sponsors of the symphony that a fund-raising campaign would be undertaken to reimburse petitioner. Such a campaign was initiated in 1948, but it was a failure. Consequently, the symphony was wholly unable to repay petitioner the $ 17,878.91 he advanced in the early part of 1948, and its debt to him became worthless at the close of the 1948 symphony season. During the year 1947 Dallas Rupe & Son advanced $ 72,511.17 to the symphony as a loan. Of this amount, $ 16,751.17 was advanced by that corporation on behalf of petitioner, for which it was reimbursed by petitioner. Such debt of the symphony in the amount of $ 16,751.17 also became worthless in 1948. *366 At the close of 1948 petitioner charged off as nonbusiness bad debts the loan of $ 17,878.91 to the symphony*164 and also the loan of $ 16,751.17 made to the symphony by petitioner through Dallas Rupe & Son. Petitioner did not ever intend for this sum, or any part thereof, to be a contribution to the symphony. The total advances made by petitioner D. Gordon Rupe, Jr., beginning with December 31, 1946, amounted to $ 80,630.08. Beginning on August 31, 1945, Dallas Rupe & Son made numerous advances to the symphony. There were 229 of these advances, totaling $ 91,504.04, which were completely repaid by the symphony during 1946 and 1947. Each of the petitioners intended that the foregoing advances were to be loans to the symphony and none of such advances were intended at any time to be contributions or donations to the symphony. These advances were also understood to be loans by all other parties concerned. On December 31, 1947, petitioner charged off on his books and records as a bad debt the $ 46,627 which he had directly paid in to the symphony prior to that date. On his original return for the year 1947, this amount was claimed as a business bad debt, but he filed an amended return for the year 1947 on December 21, 1948, in which he claimed this amount as a nonbusiness bad debt deduction. *165 This amount is not involved in these proceedings. The symphony had net income during the periods indicated as follows: Period Net income or (loss) Aug. 29, 1945, to Sept. 30, 1946 ($ 119,791.75) Oct. 1, 1946, to Sept. 30, 1947 (152,049.61) Oct. 1, 1947, to Apr. 30, 1948 (44,665.58) As a result of these losses 2 the symphony had a deficit as of April 30, 1948, in the amount of $ 316,506.94. It became apparent by the 1946-1947 symphony season that additional funds would be necessary to maintain an orchestra of high quality. In the early part of 1947 petitioner met with a number of civic and financial*166 leaders of Dallas and petitioner advised them of the financial difficulties of the symphony and requested their advice. Subsequently there was a meeting of a larger group of persons interested in the symphony. It was concluded at both meetings that the orchestra was a highly valuable civic asset to Dallas and that it was *367 unthinkable for it to be disbanded. It was decided that every effort should be exerted to raise funds for the orchestra to cover its then deficit and to insure sufficient funds for its 1947-1948 season. Petitioner was reassured by the leading citizens of Dallas on these occasions that his advances to the symphony would be repaid. They promised to exert every effort in the next fund-raising campaign to secure sufficient funds to repay any advances made by petitioner. Each year there is the usual fund-raising campaign for paying the annual recurring deficit of the symphony. The campaign planned in the fall of 1947 was a special campaign, however, for the goal was to raise $ 300,000. Of this amount $ 150,000 was to be used to repay the $ 133,000 of advances by the petitioners including the corporation and other symphony debts, and the remaining $ 150,000*167 was to be used to finance the next symphony season. Two of the outstanding businessmen in Dallas were chosen to spearhead this campaign. It was formally commenced in February 1948. The campaign was only a moderate success. It became apparent during the campaign that donations would be sufficient only to finance the future operations of the symphony. As far as the repayment of the petitioners was concerned the campaign was therefore a complete failure. As of the end of the campaign it became apparent that the symphony's obligations to petitioners would not be paid. At this time the symphony was insolvent. About this same time Stanley Marcus, president of Neiman Marcus, succeeded petitioner as the president of the symphony. Marcus made it clear that he was not interested in becoming president of an insolvent symphony. In order to satisfy Marcus the officials of the symphony discussed among other things the forming of a new corporation to take over the symphony. By means of organizing a new corporation the orchestra would be free and clear of its large indebtedness to petitioners, and continue in existence. Another plan, suitable to Marcus, was adopted. The officials of the*168 symphony felt that the contributions raised in the campaign should be applied first to pay the operating expenses of the orchestra, continuing its life. At this point the petitioners realized that the debt due them by the symphony was uncollectible by virtue of the failure of the Thornton-Hulcy fund-raising campaign. Petitioner D. Gordon Rupe, Jr., then proposed to charge off the amount due him as a bad debt, provided the symphony would assign its royalty contract to Dallas Rupe & Son to pay the $ 53,000 owing that petitioner. The only saleable asset of the symphony having any substantial value was its record royalty contract. This proposition of the petitioner was accepted by the symphony at a meeting of its memberships held on March 26, 1948. The assignment of the royalty contract was formally executed and dated August 25, 1948. *368 In the fall of 1948 R. C. A.-Victor canceled its recording contract with the symphony, and consequently no additional recordings were to be made. Royalties were still being paid under the contract based on sales of past recordings, but royalties were becoming smaller with each successive quarter. The value of the royalty rights was further*169 decreased when Antal Dorati resigned as director of the symphony. For these reasons, Dallas Rupe & Son charged off $ 42,604.12 of the symphony account as a bad debt at the close of its fiscal year ended June 30, 1949, such amount being all but $ 2,000 of the balance then due. That particular deduction is not now in controversy, the Commissioner having conceded that he erred in disallowing it. In their separate returns for the year 1948, petitioners claimed as a bad debt (1) the $ 17,878.91 which they paid to the symphony on January 2, 1948, and (2) the $ 16,751.17 which was charged to the account of D. Gordon Rupe, Jr., on the books of Dallas Rupe & Son, on September 30, 1948, and which represented an advance to the symphony made by the corporation for the account of D. Gordon Rupe, Jr. Ultimate Facts. The advances in question of $ 17,878.91 and $ 16,751.17 constituted nonbusiness loans. These loans became entirely worthless in 1948, when, because of an unsuccessful fund-raising campaign repayment of the debt became impossible. OPINION. As we have already stated, the Commissioner in his brief concedes error in his determination of a deficiency of $ 17,545.25 against the corporation*170 Dallas Rupe & Son. Therefore we need not devote any time to a discussion of the assignment of error in that proceeding. That leaves for our decision only the issues raised in the cases of the individual petitioners. Petitioners made certain advances to the Dallas Symphony Orchestra. Petitioners claim that during the taxable year 1948 advances totaling $ 34,630.08 and constituting nonbusiness bad debts within the meaning of section 23 (k) (4) of the Code became worthless in that year. The applicable Code section is set forth in the margin. 3 The advances of $ 34,630.08 are *369 made up of $ 17,878.91, which was advanced on or about January 2, 1948, by Dallas & Gordon Rupe, a partnership, for the account of petitioner and $ 16,751.17 which was advanced by the corporation Dallas Rupe & Son in 1947 for the account of petitioner but which was charged to the account of petitioner on September 30, 1948. *171 Respondent contends that both these sums constitute contributions. Respondent relies upon the fact that petitioners claimed on their 1947 income tax returns as a nonbusiness bad debt of $ 46,627, a debt owed to them by the symphony orchestra. Respondent reasons if the $ 46,627 was a bad debt on December 31, 1947, then the advance of $ 17,878.91 made 2 days later must of necessity have been a contribution since nothing occurred in the intervening 2 days that improved in any way the financial condition or outlook of the orchestra. As to the $ 16,751.17 which was advanced in 1947 by Dallas Rupe & Son for the account of petitioner and which was actually charged to petitioners' account in September 1948, respondent contends that it also is a contribution. In the alternative, respondent contends that even if it be assumed that this sum was an indebtedness from the outset, this indebtedness existed on December 31, 1947, and should have been charged off with the $ 46,627. In the first place we do not have the year 1947 before us in these proceedings. The taxable year which we have before us in these proceedings is 1948 and what we have to decide is whether petitioners are entitled to*172 a deduction as nonbusiness bad debts which became worthless in 1948, the sums of $ 17,878.91 and $ 16,751.17 which they had advanced to the symphony. That they had in fact made such advancements, the Commissioner does not dispute. The fundamental question to be determined in this proceeding is whether the advances by the petitioners to the symphony were loans or were contributions. The character of the petitioners' advances, whether loans or contributions, depends upon a consideration and weighing of all the related facts and circumstances, especially the intention of the parties. The evidence well supports our conclusion that the advances were intended to be loans. Petitioners' contributions to the symphony were handled differently on their books from the advances. The petitioners recorded the advances on their books as loans. Moreover, the symphony on its books recorded the advances in the same way, that is, as loans from the petitioners. Most of the advances were made when funds were needed by the symphony rather than during the time when fund-raising campaigns were in operation. Officers of the symphony testified that they considered the sums in question as loans from *173 the petitioners. For example Lanham Deal who was the business manager of Dallas Symphony during the period of time here in question, testified as to the nature of the advances made to the symphony as follows: *370 A. The true state of facts as I understand them in connection with Mr. Rupe's debt is that he personally, and that the firm which he represented and is a partner of, advanced money from time to time to the Dallas Symphony Orchestra for its operation, fully expecting to be repaid by the Dallas Symphony Orchestra. I accepted the money and deposited it in the bank with no thought other than it was a loan or an advance that would see us through until perhaps one of those campaigns would succeed to the point that we would have sufficient funds then that we could repay Mr. Rupe the money that he had advanced and still continue to operate. Q. And how was it concluded? A. It was finally concluded that the final evidence after the failure of the campaign in early 1948 headed by Mr. Thornton and Mr. Hulsey, that such funds would not be brought in by that campaign or perhaps any other thereafter, that would bring in money in such amount that the $ 133,000 indebtedness could be*174 paid off at all, whether the orchestra folded or continued to operate. Therefore, Mr. Rupe instructed the business office that the $ 80,000 should be charged off as a bad debt and entered into the agreement that has been discussed on the recording royalty. To be distinguished is our recent case, , involving advances of money to a ballet company. We held there that the advances did not give rise to a debt because the obligation to repay was subject to a contingency that did not occur, and therefore no deduction was allowed under 23 (k). The facts in the instant proceeding are different; here a debt was owed to petitioners by the symphony and was definitely so recognized by all parties concerned. It was not dependent, insofar as being a debt was concerned, upon the happening of any contingency. The only question remaining for decision is: Did the amounts here in question become worthless in 1948? We think they did. The testimony shows that petitioners were reassured on numerous occasions by the leading citizens of Dallas, particularly during the year 1947, that Dallas could not afford to lose the symphony and that they*175 would undertake a campaign to raise the money to repay petitioners if petitioners would continue to maintain the symphony intact until such a campaign could be instituted. Such citizens included the presidents of some of the leading banks of Dallas and other leaders of Dallas industry and, although they did not personally promise to reimburse petitioners, their pledges of active support in a money-raising campaign constituted reasonable assurance that reimbursement would be forthcoming. The campaign mentioned in the preceding paragraph was actually launched in February 1948, under the direction of two of the leading citizens of Dallas as cochairmen. The campaign was actively prosecuted and was widely advertised. It was plainly stated in the advertisements to all concerned that the drive was designed to raise $ 300,000 and that petitioners' advances were to be repaid out of said amount. Unfortunately the campaign resulted in failure, insofar as *371 raising funds to repay petitioner was concerned. Only enough funds were raised to take care of the expenses of the orchestra for its then current season. Nothing was available for the payment of petitioner's indebtedness. Under*176 all the circumstances to be taken into consideration it seems clear that the $ 17,878.99 and $ 16,751.17 here involved became worthless in 1948 and we so hold. In Docket No. 35688 decision will be entered for the petitioner. In Docket Nos. 35689, 35690 decisions will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: D. Gordon Rupe, Jr., Docket No. 35689, and Ruby L. Rupe, Docket No. 35690.↩ 2. The above losses are the net losses sustained after consideration of contributions. For example, take the fiscal period October 1, 1947 to April 30, 1948, the $ 44,665.58 loss sustained is explained by the following summary: ↩ Total operating income $ 91,291.61 Total operating expenses 298,503.50 Loss from operations 207,211.89 Contributions 162,546.31 Net loss $ 44,665.58 3. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (k) Bad Debts. -- * * * * (4) Non-business debts. -- In the case of a taxpayer, other than a corporation, if a non-business 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 term "non-business debt" means a debt other than a debt evidenced by a security as defined in paragraph (3) and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.↩