Street v. Commissioner , 36 B.T.A. 391 ( 1937 )

RALPH W. STREET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Street v. Commissioner

Docket No. 72609.

United States Board of Tax Appeals

36 B.T.A. 391; 1937 BTA LEXIS 720;

August 3, 1937, Promulgated

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Petitioner conceived the idea of developing a hydro-power project and associated with him his wife and others, agreeing to share with them in the venture. He subsequently made an assignment to his associates of interests evidencing the prior understanding of the parties. Held, petitioner's wife had a property interest in the venture and her share of the profits, amounting to $36,000, was not taxable to the petitioner.

Ralph W. Street, Esq., pro se.

A. H. Fast, Esq., for the respondent.

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ARNOLD

The respondent determined a deficiency in income tax in the amount of $5,011.80 for the year 1931. The petitioner brings this proceeding for a redetermination of his tax liability. The only question is whether the amount of $36,000 received by petitioner's wife, Alice B. Street, in 1931 and reported by her as income for that year is taxable to petitioner. The case was heard on a partial stipulation of facts and oral evidence.

FINDINGS OF FACT.

Petitioner is an individual, residing in Kansas City, Missouri.

In September 1933 the petitioner organized a reconnaissance party for the purpose of making a preliminary investigation of the hydroelectric possibilities of the Osage River in Miller, Camden, Morgan, and Benton Counties, Missouri. This party included A. Bickel, an experienced contractor of Kansas City, Walter Eyssell, an electrical engineer, and the petitioner. Headquarters were established at Linn Creek, and from there trips were made up and down the river and along the principal tributaries to carry on the investigational work. One of the principal features of this investigation was the determination of elevations, and for this purpose two aneroid barometers were carried, one retained at headquarters and read every 15 minutes, and the other carried to the points where elevations were to be determined. By reason of the readings made at headquarters, the readings of the other barometer could be corrected for changes in atmospheric conditions, in order to reduce such readings to actual variations in elevations.

Following this reconnaissance trip, the data collected was worked up and the studies made therefrom indicated every clearly the soundness of the conclusions made in the field that the situation made possible an economic hydro-electric development. The petitioner then agreed with Walter Cravens to give him a half interest in the project in consideration of his agreement to do the preliminary financing. Thereafter, as the work on the project accumulated, the petitioner agreed with L. D. Duff and V. E. Jenkins that they should have an interest in the project in consideration of the services they were rendering in an effort to carry the development through to a successful conclusion.

During the summer of 1924 the general topographic survey of the reservoir area was made, geological investigations were made to determine the watertightness of the reservoir and the soundness of the site selected for the dam, and in 1925 the dam site was core drilled to establish suitable subsurface conditions and the actual preliminary work of construction was undertaken; water works and sewerage system were built for the construction camp, a highway was constructed, and a railway nearly completed into the dam site; and housing facilities were erected, including an executive cottage, clubhouse, mess hall to seat 200 persons, etc.

The Missouri Hydro-Electric Power Co., a corporation, was organized for the purpose of carrying on this project, and in the fall of 1925 an item of $200,000 was set up on the books of this company entitled "Preliminary expenses and services, Osage River Project", which as stipulated was to "represent certain preliminary expenses and compensate in part for the value of conceiving and planning the project as an economic development"; and in November and December of 1925 application was made to the Public Service Commission of Missouri for a certificate of convenience and necessity and approval of the issuance and sale of securities, to which a copy of the balance sheet of the company was attached showing the $200,000 item.

During 1925 a tentative contract was made for the financing of the project, under the terms of which the bankers were to receive one-third third of the common stock of the Missouri Hydro-Electric Power Co. as part compensation for their services. This would have left one-third for Cravens and his associates and one-third for the petitioner and his associates. On the basis of this set-up, estimated earnings available for the common stock were $300,000 per year, which, capitalized on a 10 percent basis, would have meant a million dollars in value accruing to petitioner and his associates. The banking syndicate which made this agreement withdrew when the Government began its investigation of the Land Banks on December 14, 1925.

The petitioner then spent the greater part of the time until the end of April 1927 in an effort to interest capital in the development, and negotiated with one group after another, and every negotiation was based upon retaining a substantial equity interest in the project. The next to the last contract so negotiated provided for the bankers' receiving one-half of the common stock of the Missouri Hydro-Electric Power Co., the other half remaining in the hands of Walter Cravens and the petitioner, again with a set-up that would provide an estimated net income available to the common stock of $300,000 a year, of which one-fourth would have accrued to the petitioner and his associates. It was not until the final negotiations with Dillon, Read & Co. and Stone & Webster, Inc., which were consummated in the contract of April 28, 1927, that it became apparent that the interest of the petitioner and his associates in the project might be limited to their interest in the $200,000 item. Those firms were interested only on the basis of taking the project over in toto, leaving to the originators in the way of profit only the item of $200,000, one-half of which was credited on the books of the company to Walter Cravens, and one-half to the petitioner. The option contract given to Stone & Webster, Inc., and Dillon, Read & Co., provided that the Osage project could be taken over upon their paying $594,483.80 plus certain accruals to represent amounts actually expended or incurred in connection with the Osage development, with interest at 6 percent, and $200,000:

on account of the item appearing in Exhibit A (balance sheet) hereto attached as "preliminary expenses and services Osage River project", if the Missouri corporation shall be duly authorized by order of the Missouri Public Service Commission to include the whole of said sum as a part of the cost of the project; or, in the event the Missouri corporation shall not be authorized to include the whole of the said sum as a part of the cost of the project, such amount thereof as it shall be authorized to include; provided, however, that in lieu of paying said $200,000, or such lesser amount as the case may be, in cash, you shall have the right to pay the same by delivering to theMissouri corporation preferred stock of any class of any company which you shall organize or cause to be organized to acquire and develop said Osage River hydro-electric project, which said preferred stock shall be delivered to the Missouri corporation in lieu of cash on the basis of the price which said new company shall obtain from the underwriters for other preferred stock of the same character.

Under the option contract the item of $200,000 now became the maximum amount that the originators could realize out of the project. The option contract further provided:

* * * and said Mr. Cravens and Mr. Street further agree that they will not sell, assign or transfer their respective claims against the Missouri corporation during the continuance of this option, and that they will, during such period, forbear the collection thereof; provided, however, that nothing herein shall be deemed to prevent said Mr. Cravens and Mr. Street, in the event of a receivership for of bankruptcy of the Missouri corporation, from doing such things and taking such steps as will protect their rights as such creditors.

In July 1929 Stone & Webster, Inc., and Dillon, Read & Co. exercised the option of April 28, 1927, in behalf of the Union Electric Light & Power Co., of St. Louis, and authority of the Public Service Commission of Missouri was sought on behalf of the Missouri Hydro-Electric Power Co. to sell and the Union Electric Light & Power Co. to purchase the Osage development. The public service commission, in approving the consideration to be paid, unanimously allowed the item of $200,000 as part of the consideration.

In 1929, upon the exercise of the option in the agreement of April 28, 1927, by Stone & Webster, Inc., et al., on behalf of the Union Electric Light & Power Co., certain moneys became due and payable to the Missouri Hydro-Electric Power Co. Numerous claims for portions of said moneys were made by persons claiming to be creditors of the Missouri Hydro-electric Power Co. Said company then filed a bill of interpleader in the District Court of the United States for the Western Division of the Western District of Missouri (equity suit No. 1365) in which bill it is stated that the Missouri Hydro-Electric Power Co. owes all of said moneys to various creditors and that, simultaneously with the filing of the bill, has caused certain sums of said money to be paid to the clerk of the court for the benefit of the claimants as shall be found or decreed to be entitled thereto, and prays that the claimants be decreed to interplead together that it might be ascertained to which of them said sums of money ought to be paid.

Among the sums of money listed in the above bill of interpleader was $100,000 (one-half of the $200,000 described in the option agreement as "preliminary expenses and services Osage River project") claimed by Walter Cravens to be due him for promotion services. The balance of the $200,000 was by stipulation paid to the Commerce Trust Co. in escrow pending the determination of a motion to require the latter $100,000 to be included in the interpleader fund also.

Mrs. Street, petitioner's wife, was not in favor of his undertaking a project involving so much risk and in 1923 on the first preliminary inspection trip petitioner and his wife agreed that she should have a half interest with him in the project. On this first trip Mrs. Street remained at headquarters and made readings of the aneroid barometer every 15 minutes, which were checked against the field readings. Thereafter, as the work progressed, she made frequent trips to the project and assisted in various ways in its development. She assisted in planning the clubhouse and bunkhouses, selected and purchased the furnishings, planned and assisted in entertaining the engineers and guests brought to the place. She participated in conferences and in her husband's absence interviewed creditors, insisting on payment of their accounts, and used her best endeavors to preserve the enterprise and make it a success.

On July 29, 1927, the petitioner executed assignments to L. D. Duff, V. E. Jevkins, and his wife. The assignment to the wife reads as follows:

Whereas, the Missouri Hydro-Electric Power Company on the twenty-eighth day of April, 1927, entered into a contract with Stone and Webster, Inc., and Dillon, Read and Company, granting unto them an option to acquire the Osage River development of the Missouri Hydro-Electric Power Company; and

Whereas, In the event said option is exercised and the transaction approved by the Public Service Commission of Missouri, R. W. Street would become entitled to a fee of One Hundred Thousand Dollars ($100,000.00); and

Whereas, the said R. W. Street has this day given to L. D. Duff an assignment of twelve per cent (12%) of said fee and to V. E. Jenkins an assignment of eight per cent (8%) of said fee;

Now Therefore Witness that the said R. W. Street does by these presents assign and set over to his wife, Alice B. Street, forty per cent (40%) of said fee, it being explicitly understood that the said R. W. Street shall not be personally liable on this assignment beyond the payment to the said Alice B. Street of 40% of said One Hundred Thousand Dollars ($100,000.00) or such part thereof as he may actually receive.

In Witness Whereof the said R. W. Street has hereunto set his signature this 29th day of July, 1927.

R. W. STREET

Witness

V. E. JENKINS L. D. DUFF

The assignments to L. D. Duff and V. E. Jenkins were to the same effect, except as to the percentage assigned.

In March 1931 pursuant to a stipulation settling the interpleader suit, the Commerce Trust Co., by order of the court, paid L D. Duff $10,800, V. E. Jenkins $7,200, Alice B. Street $36,000, and the petitioner $36,000. Those sums, aggregating $90,000, were accepted in full payment and satisfaction of the $100,000 referred to in the assignment as a fee to which R. W. Street would become entitled. The $36,000 paid to Mrs. Street was deposited in her personal bank account, and thereafter expended by her in the purchase of securities and real estate and for her own personal uses. Such expenditures were made from her own personal bank account by her personal check.

Mrs. Street had a joint interest in the enterprise with her husband from their first visit to the project in 1923 and thereafter was recognized by her associates therein as being jointly interested with him.

Petitioner and Mrs. Street each reported $36,000 as income in their respective returns for 1931. The Commissioner has added the $36,000 paid to Mrs. Street to the income of petitioner in determining the deficiency here in question.

OPINION.

ARNOLD: The respondent contends that the assignment by petitioner to his wife under date of July 29, 1927, was not effective to relieve him of the tax (1) because he had agreed not to assign his claim against the Missouri corporation during the continuance of the option and (2) because it was, if effective, an assignment of future income and taxable to the assignor under the rule laid down in , and .

Petitioner contends that the assignment in 1927 was only an evidence of the agreement made in 1923; that there was a joint venture and that Mrs. Street had a property interest of one-half of her husband's interest therein from the time of the agreement in 1923.

Considering all the evidence in the record, we agree with the contention of the petitioner. The evidence shows that long before the assignment in 1927 petitioner and his wife agreed that they should be associated in the enterprise and share equally. He and his wife were joint adventurers in the enterprise, cf. ; ; ; . Each participant in a joint adventure is taxable on the profits he realizes from the joint enterprise and it is not necessary that they furnish capital and services in equal amount, and the fact that one contributes property previously acquired does not destroy the validity of the arrangement, . As the wife was a joint adventurer in the enterprise, the amount she realized therefrom was taxable to her and not to petitioner, ; ; affd., . His interest, and consequently hers, was indefinite and uncertain prior to the contract of Afril 28, 1927. When it was ascertainable the assignment was made, which simply evidenced their understanding as it existed from the time they embarked in the enterprise. Mrs. Street was actively engaged in promoting the enterprise from its inception and we think had a property right in the profits. This right existed and was enforceable regardless of the assignment of July 29, 1927. Cf. (and cases cited therein); affd., ; ; ; ; certiorari denied, .

The fact that petitioner had agreed not to assign his claim during the period of the option did not preclude him from making an assignment evidencing the rights of those associated with him in such amount as should ultimately be realized from the venture. This we think is all he did.

It is immaterial that the $100,000 was carried on the books of the Missouri corporation as a credit to petitioner or that it was termed a promotion "fee" by various parties. It represented the interest of petitioner and his associates in the enterprise and came to be the only profit made by them. He was acting for himself and those associated with him in what he did. Nor do we think the fact that the stock of the Missouri corporation stood in the name of petitioner and Cravens is controlling. It appears from the balance sheet that the stock was "authorized but not issued" on December 31, 1926, and from the various contracts, it is clear that there was no permanent arrangement as to the final disposition of the stock before the option agreement was entered into. Moreover, the $200,000 was carried on the books of the Missouri corporation as a credit to petitioner and Cravens.

Considering all the facts in the record, we think the $36,000 was properly returned by Mrs. Street and therefore sustain the contention of the petitioner.

Reviewed by the Board.

Decision will be entered for the petitioner.

MORRIS dissents.