Appeal and cross-appeal from a judgment of the United States Tax Court, Quealy, Judge, T.C. Memo. 1973-227, 32 T.C.M. 1307 (1973), which judgment (1) denied the inclusion of an alleged unconditional debt as part of the cost of a certain joint venture asset, (2) treated the loss which resulted from the termination of the joint venture as a capital loss, (3) treated a certain payment received by the joint venture as ordinary income, (4) denied "innocent spouse" status to the wives of the members of the joint venture, (5) disallowed certain of the joint venture's alleged business expenses and (6) allocated income to one of the venture's members, which member had joined the joint venture in November, based upon the joint venture's income for the entire year.
Lumbard, Waterman and Meskill, Circuit Judges.
This appeal arises from several transactions of a joint business venture ("the joint venture") involving Norman ("Norman"), Martin ("Martin") and Robert ("Robert") Rodman, Sydney Newman and Walter Ornstein as the joint venturers. After the Commissioner of Internal Revenue ("Commissioner") had assessed deficiencies and penalties against Norman and Arlene Rodman, Martin and Phyllis Rodman, and the Estate of Sydney Newman and the decedent's wife, Dorothy, for the years 1956, 1957, and 1959 through 1962, and against Robert and Gertrude Rodman for the years 1956, 1957, 1960 and 1962, the tax court, Quealy, Judge, made determinations of deficiency which Norman and Arlene Rodman appeal with respect to tax years 1956 and 1957, which Martin and Phyllis Rodman appeal with respect to years 1956, 1957 and 1959 through 1962, which the Estate of Sydney Newman and the decedent's wife Dorothy appeal with respect to tax years 1956 and 1957, and which the Estate of Robert Rodman and the decedent's wife Gertrude appeal with respect to tax years 1956 and 1957. The Commissioner has taken a protective cross appeal involving each of the appellants' 1957 tax years. The tax court's opinion, T.C. Memo. 1973-277, is reported at 32 T.C.M. 1307 (1973).
As did the tax court, we shall take up first the claims which apply to the joint venture as a whole and then address the various claims raised by the appellants as individuals. Generally, the points raised on appeal are that the tax court erred when it (1) disallowed the inclusion of an allegedly unconditional $900,000 debt as part of the cost of certain shares of stock owned and traded by the joint venture, (2) characterized a payment of $250,000 received by the joint venture as ordinary income, (3) disallowed certain of the joint venture's alleged business expense deductions, (4) characterized as a capital loss to its members the loss that apparently accrued when the joint venture terminated, (5) allocated to Martin Rodman his share of the joint venture's income based upon the entire calendar tax year even though he joined the venture only in November, and (6) denied the joint venturers' wives the benefits of "innocent spouse" status. We affirm the tax court's judgment in all respects except its allocation of a full year's share of income to Martin Rodman, which allocation we reverse. Because each of the issues raised rests upon different factual footings, the facts germane to each issue will be treated separately.
In 1955 Ornstein, Newman, Robert and Norman entered into a joint venture, the initial objective of which was to attempt to acquire control of A.M. Byers Company, Inc. ("Byers"). By 1956, however, having lost its bid to gain control of Byers, the joint venture's primary activity became trading publicly the stock of Torbrook Iron Ore Mines, Ltd. ("Torbrook"), a Canadian company incorporated in 1956 to promote prospecting licenses issued by the Nova Scotia Minister of Mines. During 1956 the joint venture acquired 1,179,050 Torbrook shares and realized $2,574,903.34 from sales to the public of 835,055 of those shares.
The dispute in the tax court and now on appeal focuses upon the cost of 500,000 of the Torbrook shares that the joint venture, which used the accrual method of accounting, allegedly purchased from one Aurele Brisson, a Montreal attorney who died in 1970. At the time of Torbrook's incorporation in early 1956, Brisson had subscription rights to the 500,000 shares for a stated consideration of $100,000, that is, 20 cents per share. There was no proof, competent or otherwise, that Brisson actually owned the shares introduced at the trial, however, other than a letter written by Robert in May, 1956, on behalf of the joint venture. In that letter Robert confirmed an alleged agreement between Robert and Brisson, whereby Brisson agreed to sell and Robert agreed to purchase the 500,000 shares for the joint venture for the stated consideration of 21 cents per share ($105,000) plus 20 percent of any additional shares of Torbrook stock that the joint venture might acquire in the future.
At the trial, Norman Elliot, the joint venture's accountant, testified that the May 1956 agreement with Brisson first came to his attention in September of that year and that he suggested that the open-ended 20 percent contingent liability be replaced by a definite liability of a fixed amount. Upon request, Elliot drafted a letter to Brisson to be signed by Robert proposing that Brisson cancel the 20 percent agreement and accept in its place a $900,000 non-interest-bearing note payable on November 15, 1960.*fn1
The next time Elliot saw this letter was in May, 1957, when he was preparing the joint venture's 1956 information return. The letter then bore the date "November 3, 1956" and contained signatures purporting to be those of Robert Rodman and A. Brisson.*fn2 Together with the letter, Elliot received a photocopy of what purported to be a note also dated November 3, 1956, by which Robert promised on behalf of the joint venture to pay Brisson the sum of $900,000 on November 15, 1960. Based upon these documents, Elliot accrued on the joint venture's return the sum of $900,000 as part of the cost to the joint venture for the Torbrook stock.
Upon this evidence, the appellants asserted at trial that an unconditional debt of $900,000 to Brisson had been proved and should be included in the cost of Torbrook stock in accordance with the principle enunciated in Crane v. Commissioner, 331 U.S. 1, 91 L. Ed. 1301, 67 S. Ct. 1047 (1947). The Commissioner, however, contended that the authenticity of the documents had never been demonstrated and further that there was significant evidence to show that the note had never been delivered to Brisson, and that it was never intended that the joint venture would incur a bona fide unconditional debt to him. It is noteworthy that the original of the November 3, 1956, note and a letter from Brisson to Robert, dated January 7, 1957, were discovered among Sydney Newman's effects at his death.*fn3 The letter acknowledged receipt from Robert of 200,000 Torbrook shares in full satisfaction of the $900,000 debt. The appellants conceded, however, that the 200,000 shares of Torbrook were never delivered to Brisson.*fn4 Taking the record as a whole, the tax court found that "there was at no time a definitive obligation to Brisson upon which to predicate the accrual of a liability on the part of the joint venture." 32 T.C.M. 1318.
Although the appellants now attempt to characterize the tax court's decision as a departure from the Crane doctrine, it is clear that the decision was no more than a factual finding by the court that the appellants had failed to sustain their burden of proving the existence, the bona fides and the unconditional nature of the $900,000 debt. As a factual finding, the tax court's decision must, of course, be upheld on appeal unless that finding is "clearly erroneous." Commissioner v. Duberstein, 363 U.S. 278, 290-91, 4 L. Ed. 2d 1218, 80 S. Ct. 1190 (1960). There is nothing in the record to indicate that the finding was erroneous, much less clearly erroneous. Indeed, the mere fact that there was no authentication of the documents upon which the appellants base their contention would in itself suffice to uphold the tax court's finding. In addition, however, there was no proof that the original note had ever been delivered to Brisson. That latter failure, together with the proof of possession by Newman of both the original note and the January 7, 1957, letter from Brisson, which obviously misrepresented the facts with respect to the satisfaction of the debt, certainly casts a shadow over the bona fides of the entire transaction. In short, the record clearly supports the tax court's finding that the joint venture owed no definitive obligation to Brisson with respect to the purchase price of the Torbrook stock in question.
As discussed above, the joint venture's initial activity involved an attempt in 1955 to gain control of the management of Byers through proxy solicitations. The joint venture's major competitor in the proxy fight was General Tire & Rubber Company ("General Tire"). In 1956, the joint venture lost the proxy battle and entered into an agreement with General Tire, which agreement resulted in the payment of $250,000 from General Tire to the joint venture. The issue in the tax court and now on appeal is whether that payment should be characterized as a capital gain or as ordinary income to the joint venture. The tax court determined that the entire payment was ordinary income to the joint venture. We agree.
In return for the $250,000 payment, the joint venture agreed, in pertinent part, to the following consideration: (1) to accept an offer by General Tire, if made, to exchange the 25,000 shares of Byers stock "owned or controlled" by the joint venture for General Tire stock ("the option"), (2) to assign to General Tire all of the joint venture's right, title and interest in a pending patent application concerning a rubber bellows pump ("the patent"), (3) to assign to General Tire the joint venture's claims against Byers resulting from expenses totalling in excess of $380,000 allegedly incurred by the joint venture in connection with the proxy solicitations, and (4) to refrain, for a five year period, from opposing or hindering General Tire in its attempt to gain control of Byers.
In its 1956 information return, the joint venture characterized the $250,000 payment as a long-term capital gain from the sale of the patent application.*fn5 The trial in the tax court proceeded upon that assertion. Later, in their brief to the tax court after trial, the appellants further asserted that the payment was also made for General Tire's option to purchase the Byers stock owned by the joint venture, which option apparently was later exercised by General Tire. The appellants reasoned that under both theories the payment was an exchange for a capital asset and hence should be treated as a capital gain. The Commissioner determined that the entire payment was to secure the joint venture's acquiescence in General Tire's further efforts to gain control of Byers and to extinguish the joint venture's claim for reimbursement for proxy expenses. The tax court, finding that the appellants had failed to prove what portion of the payment, if any, should be allocated to the patent or the option, sustained the Commissioner's determination.
At the outset, we note that appellants' assertion that part of the $250,000 payment was attributable to the purchase of the option is an assertion that was not timely raised in the tax court. Appellants' contention at trial was that the payment was attributable solely to the patent application. It was not until after trial that they argued in their brief that the payment constituted consideration for the option. It is well settled in the tax court that an issue raised for the first time in briefs after trial is not timely raised. William E. Robertson, 55 T.C. 862, 864-65 (1971); Sidney Messer, 52 T.C. 440, 455 (1969); cf. Guild v. Commissioner, 543 F.2d 425 (2d Cir. 1976). The tax court nevertheless considered the claim but found the appellants had failed to prove what value, if any, should be placed on the ...