Appendix — Charles Town, Inc. v. Commissioner

APPEN DIX.

Bac of the Court of Appeals for the Fourth

Circuit. |

“United States Court of Appeals, fm the Fourth

Circuit. -

- “.~Charles Town,. fnnoryiorated, Petitioner, versus Co

missioner ‘of. Internal: pact Respondent. No. .

. 10,645,

ot On Petition to Review the Detision of the Tax

Court of the United States. at

(Argued December: 6, 1966. Decided Jnsary 31,

1967.)*

Before Haynewocth, Chief Judge, — Bryan and

Craven, Circuit Judges. LAF

George T. Altman (Stanley H- Wilen on brief ) for:

Petitioner, and Albert J. Beveridge, III, Attorney, De-

partinent of Justice, (Richard C. Pugh, Acting. Assist-

ant Attorney General, Lee A. Jackson and Gilbert E.

Andrews, Attorneys, ah ch of Justice,’ on 5 Be

'. for Respondent. 3

; Craven, Circuit Judge:

The,Tax Court sustained the action of the Commis-

sioner of Internal. Revenue in redistributing i income for

fiscal years ending November 30, 1958, -and 1959, |

from Fairmount Steel Corporation to Charles Town,

Aarcsaetin’, wiles Secticee Gtk 902 00,08 Maher -

Revenue Code of 1954." The: Commissioner's alloca-

‘ ————e

WReported at 372 F/ 2a 415... sae

‘ The Commissioner’s ‘iafemson ot Adj” veh

gs ry Bs Mev whee Town: of the determination

" “of a tax deficiency for the years in question stated that the

rae (This tootsie is cootiued on the: nest ge)

a 2-- Si,

tion under Section 482 is predicated on the alleged —

' shifting of profits from one controlled entity (Charles.

: Town) to another (Fairmount) for the purpose of utiliz-

ing net operating loss carryovers of the latter. Charles _

Town has petitioned this court under 26 U.S.C.A. Sec-

- tion 7482 to review @iid..reverse the decision of the

Tax Court. The facts are related in exhaustive detail

in the opinion of the Tax.Court.* —

_ ‘Fairmount was admittedly controlled at all relevant

times by two brothers, Ben and Herman Cohen. Fair-

_ mount had allowable net operating loss carryovers from

its taxable years ended June 30, 1955, 1956, and 1957,

~ in the amount of $852,105.37.

income reported: by Fairmount “consti constituted additional income

to . (Charles Town) under the provisions of Section 61

and, Section 482 of the Internal Revenue Code of 1954 .

‘items:

PANG U2, Compensation for services, including fees, . commis-

sions, and siniilar items ; °

(2) Gross income derived from business .

Section 482 reads:

: cick came we

‘fillated) owned ‘or controlled directly or indirectly by ‘the

‘same jnterests, the Sécretary. or his delegate may distrib-

ute, apportion, or allocate gross income, deductions, cred-

its, allowances between or among such i

he determines that such -distribu- —

8,

-

my ‘Housing advanced on March 28, 1958 $900,000.00. to .

The Cohens also controlled other business’ enter-

prises including Housing Engineering Corporation and

C.B. Associates, a partnership which succeeded Hous-

ing Engineering upon its liqyidation in April 1958. .

Fairmount which ultimately enabled Fairmount to make

available a like amount to Charles Town. The advance

‘to Fairmount was not evidenced by any debt instrument,

did not bear interest, was made without security, and

carried no date for repayment. It was reflected on

Housing’s books as a debit to “Accounts Receivable”

and on Fairmount’s books as a credit to “Loans Pay-

able No. 1.” The advance’ eventually was returned in

various forms to C.B. Associates with an initial pay-

ment being made by Fairmount on March 26, 1959.

Ben Cohen had evinced interest in acquiring the

Charles Town Race Course (hereinafter referred to as

the Race, Course) in Charles Town, West Virginia,

_ -since the late 1930’s. The opportunity. finally came in .

1958 when the widow of the former owner, under

threat of. State franchise revocation, deemed | it advis-

_ able to carry on serious negotiations.

Ben Cohen was the primary negotiator on behalf of

himself ‘and his brother in their individual capacities.”

Ben Cohen had not determined whether a sale, if con-

- summated, would -be to “any particular corporation or /

individual” and, specifically, did not inform the pro-’

spective “seller that he was acting in the a ars a fot

Fairmount. |

‘The Cohens were unable. to meaptiote a cities but

’ a lease of the Race Course was executed May 20, 1958,

with “Ben Cohen, acting for Charles Town, Incorpor-

ated, a corporation to be hereinafter [sic] created... . as

olla

‘the Lessee.” (Emphasis added.) The initial lease cOvV-

ered the period between May 22 and September 10,

1958.

"Concurrently with the execution of the lease’ on.

_ May 20, 1958, an agreement was entered into between

Fairmount and Charles Town under which the former

agreed to provide the necessary funds for conducting

the contemplated racing meet and the latter agreed to

operate it for the benefit of former in exchange for ten

' percent of the net profits. The agreement® provided

that the directors and officers:of Charles Town w

be Ben and Herman Cohen and Louis Pondfield, a fi

‘cousin and business associate of the Cohens with ex-

perience in managing racing events. The agreement

also provided that the majority of the officers should

‘make all major decisions in the management of the

racing meet “so: (te as Charles Town shall. be indebted

to Fairmount. .

A Certificate of Hei ciation was formally issued

‘by West Virginia to Charles Town on May 22, 1958.

_ The tain object of the corporation was to “engage in :

and carry on the business.of operating a race track .

Its principal office was listed as Ahe Baltimore of:

dress of the Cohen brothers. One “fieetslired shares ‘of

Charles Town stock were issued. Ninety-eight were _

in’ the name of Louis Pondfield and one each in the ©

names of Ben and Herman Cohen. ,

Charles Town assumed its obligations under the

: or and the agreement with Fairmount and adopted by-

ws providing that its board of directors would

cate pod manage the corporation, ‘Ben Cohen, Her-

" ®The agreement in full is included in ‘the opinion of. the Tax

—5—

‘man Cohen, and Louis Pondfield were elected directors

and. constituted: the full board) of directors until May

15, 1961.’ ‘They also served’ during this time as presi-

_ dent, secretary-treasurer, and ‘vice-president respectively.

- Following subsequent negotiations ‘conducted by .

Ben Cohen on behalf of Charles Town, a second lease

"was executed on November 3, 1958, granting: -Charles

Town use of the Race Cours§*for the period of No-

vember 20, 1958, through February 20, 1959. The ©

second lease was similar in all pertinent. respects to the

original lease. A second idéntical agreement was en-

tered into with Fairmount providing for the financing

of a winter racing meet during the term of the new .

Sense." | Bh

a the course of the period with which we are con- =

cerned, running until the close of Charles Town’s fiscal

year on November: 30, 1959, Fairmount made payments :

to and on behalf of Charles Town, pursuant to its two

agreements, in the aggregate amount of $986,525.00.

These included funds for rent of the Race Course, open-

ing balances in Charles Town’s various bank accounts,

and the “bankroll” necessary to commence wagering

operations. These advances were credited on Charles

Town’s books to an account styled “Account Payable—

Fairmount Steel Corporation,” with the exception of .

$20,000.00 which. was credited’ to. an account entitled

_ “Advances from Fairmount Steel Corporation.” .The

‘advances. were debited on Fairmount’s books to an ac-

count termed simply “Charles Town, Inc.”

The income and. expenses with respect to the two

- racing meets were reflected on the books of Charles

Town. However, by a journal entry all the income and

expenses, with the exception of officer’s salaries, were

transferred to the books: of Fairmount, and a. second

journal entry was used to allocate ten percent of the

net profits to Charles Town. The entries were made on

June 30, 1958, covering tramsactions to that date,

which.was the end of Fairmount’s fiscal year; in No-

vember. 1938, covering the remainder of the first racing

meet ; and in the spring of 1959, covering the second

Sakanoes reported on its federal i income ‘tax returns

_ the gross receipts and all the expenses in connection with

- the operation of the two racing meets and claimed a |

deduction for commission expense representing the ten ©

percent of the net profits allocated to Charles Town.

Fairmount’s return for its fiscal year ended June 30,

1959, showed a net profit of $732,299.86 from the

- racing meets, but because of its allowable net operating

loss carryover, it a no federal income tax on this

, amount.

On its federal tax returns for the periods in question

_ Charles Town reported gross. receipts representing ten |

percent of the net profits from the racing meets.

Charles Town claimed deductions for the compensation

paid its officers and for small contributions ‘to the Her-

' man and Ben Cohen Charitable Foundation.

Although Charles Town now contends it was wees

in a joint venture with Fairmount, no partnership re-

_ turns were filed with the Internal Revenue Service re-

fleeting any of the income or expenses from either -

the racing meets.

‘Charles Town Properties, which had buen incorpo- °

rated on April 19, 1958, consummated a contract for the

- purchase of the Race Course on May 7, 1959. ° Ninety

percent of the stock in Charles Town Properties was

acquired by the Cohen interests and since May 19,

1959, the Cohen brothers have coristituted its’ principal |

officers and a majority of its board of directors. ne

Fairmount was liquidated on June 1, 1962. Charles

Town, Incorporated, has been dormant since the spring .

of 1959—having conducted no business other than the

two racing meets under consideration here.

‘The Commissioner, acting pursuant to. Sections 61

_ - and.482 of the Internal Revenue Code, allocated addi- :

tional income to Charles Town of $732,299.86,. represent-

ing the ninety percent of the profits from the racing

meets which had been reported by Fairmount. A

deficiency, as a result; was assessed against Charles

Town for the fiscal year ended November 30, 1958, of

$258,616.93 and for the year ended cg 30, 1959,

of $117,367.57.

The Tax Court, in sustaining the Commissioner,

found as ultimate facts that Charles Town. was or-

' ganized for the purpose of conducting the two racing

meets in its own right; that it performed substantial -

income-producing activities; and that it produced or

earned. the total net income from the racing meets. In

addition, the Tax Court found that the Commissioner, .

. -in allocating the income reported by Faimount to Charles

Town, did not act unreasonably, arbitrarily, or capri-

ciously, and that-the allocation was necessary in order to.

prevent the evasion of taxes and to clearly reflect the’

taxable income of Charles Town, within the meaning of

Section 482 of the Internal Revenue Code. The tax

. Court concluded that “no serious question can arise as:

to control of both Fairmount and Charles Town by the _

Cohen brothers” as control is used in Section 482.

, It also found that the advances to Charles Town by.

Fairmount, were in substance equity investments,

8 :

Section-482 of the Internal Revenue Code authorizes

in any case where two businesses are controlled directly

or indirectly by the same interest an allocation of, gross |

income and deductions between them if it is determined

that this is necessary to prevent tax evasion or clearly

to reflect the income of either business. The purpose

' Of this provision “is to place a controlled taxpayer on a

tax parity and an uncontrolled taxpayer, by determining,

“according to tlie standard of an uncontrolled taxpayer,

the true taxable income from the property and business

of a controlled taxpayer.” Treas. Reg § 1.482-1(b);_

see, e.g., Aiken Drive-In Theatre Corp. v. United States,

- 281 F.2d 7, 9-10 (4th Cir. 1960). The legislative

‘history of Section 482 indicates it was “designed to

Rs prevent the-avoidance of tax or the distortion of income

by the shifting of profits from one business to another.”

Rooney v. United States, 305 F.2d 681, 683 (9th Cir.

fo, ahelayiammaiten, | |

, ‘Charles Town contends that there was not on the

present facts sufficient control of both it and Fair-

\

.

4Section 1.482-1(c) of the Treasury Regulations under the -

Internal Revenue Code of 1954 provides:. _

“Transactions between one controlled taxpayer and an-

other will be subjected to special scrutiny to ascertain

whether the common control is being used to reduce,

. avoid, or escape taxes. In determining the true taxable. —

- income. of a controlled taxpayer, the district director is not

' festricted to the case of improper accounting, to the

. case of a fraudulent, colorable, or sham transaction, or

_. to the case of a device designed to reduce or avoid tax by .

shifting’ or distorting income, deductions, credits, or al-

lowances. The, authority to determine true taxable income

extends to any case in which either by inadvertence or de-

sign the taxable income, in whole or in part, of a controlled

. taxpayer,“is other than it would have been had the tax-

“payer in the conduct of his affairs been an“ uncontrolled

_.. taxpayer dealing at arm’s. length with another uncontrolled

taxpayer.” | | ie as

vee

— —9— :

mount by the “same interests” to justify the Commis-_

sioner’s application of Section 482, Charles Town’s

position is that “section 482 applied only to transactions

between already controlled taxpayers” and’ that control

by the Cohens of Charles Town was affected by and

wholly dependent on the intercorporate agreements of ——

May 20 and November 3, 1958,:which are themselves

_ the transactions which governed the original distribution —

of income challenged by the Commissioner. It is true _

that common“ control or > ownership must exist when

‘the taxpayers deal with each other.” Rooney v, United

States, 305 F.2d 681, 683 (9th Cir. 1962).

The question of control is one of fact which was

determined adversely to Charles Town by the Commis-’

sioner and in the Tax Court. : The Tax Court’s finding

may not be reversed unless it is “clearly erroneous.”

See Int. Rev. Code of 1954, § 7482, Commissioner v.

_ Duberstein, 363 U.S. 278, 291 (1960); Hall. v. Com-

missioner, 294 F.2d 82, 85 (Sth Cir. 1951). By the

very terms of Section 482 control can be either -direct

or indirect. The regulations promulgated under Sec-

tion 482 define control to include “any kind of control

. » - whether legally enforceable, and however exercis-

able or exercised. It is the reality of control which

is decisive, not its form or the mode of its exercise.” .

‘Treas. Reg. § 1.482-1 (a) (3).

We cannot say that the Tax Court was clearly i in

error when it determined there was sufficient control —

of Charles Town and Fairmount by the same interests

‘(the Cohens) to permit the Commissioner’s ‘application

of Section 482. “We agree with the Tax Court that the

control exercised by the Cohens by reason of the inter-

: corporate — between Charles Town and Fair-

aoe

mount “was only onespf several facts... by which their

actual and. effective control of the corporation was

acquired and exercised.”

The Cohens, of course, retained control of Charles

' Town until: May 1961 by reason of their election to

positions as directors and officers which occurred upon

organization of the corporation. However, they also

‘controlled the’ negotiations and ‘entire course of events

which led to the creation of Charles Town, the acquisi-.

tion of the lease for the Race Course, and the execution

of the agreement between Fairmount and Charles Town

assuring essential capital for the new corporation and

their continued control of the business venture. The

_Cohens caused the actual incorporation of Charles Town,

as shown vividly by the incorporating attorney’s testi-

mony that it was the Cohens “at . . . whose request .. .

[he] set up this corporation.” The documents rélating

to the incorporation were, in fact, forwarded to the

offices of the Cohens in Baltimore where Charles

Town’s books and records were maintained..

Notwithstanding the ownership by Louis Pondfield of

ninety-eight percent of the outstanding shares of Charles

_ Town-upon incorporation, the: Tax Court’ was justified

_ in.concluding that the Cohen brothers were at all times

. in effective “control” of the business known as Charles

Town, Incorporated. Pondfield gave up the control

he could have exercised as majority stockholder when

he permitted Charles Town to contract that the Cohen

brothers could not be removed from majority control

of the Charles Town Board of Directors until the

money advanced by Fairmount was returned. This was

_ Sthe ee of la ” ee

\

The Tax Sian voncluded, abies making a thorough .

examingtion | of the relationship between Charles Towh

_, and Fairmount and relying on National Carbide Corp.

- uv. Commissioner, 336 U.S. 422 (1949), that though in.

form the \inter¢orporate agreements’ here purport to.

constitute Charles Town an agent of Fairmount for con-

ducting the racing meets in question, no agency for tax

ee purposes was established. Counsel. for. Charles Town

| | now agrees that an agency relationship was not created,"

‘ but continues to maintain that the racing meets were

conducted as a joint venture to which Fairmount con-

tributed capital and Charles Town undertook manage-

ment with the income to be divided as provided in the -

intercorporate agreements. . The Tax Court found, how-

| ever, that there was in fact no joint venture but that

“Charles Town earned the income in question.”

The determination of whether the income was is carded :

by Fairmount and Charles Town participating in a joint

‘venture or by Charles Towp itself.“‘is, at least, primarily,

‘e the determination of a question of fact, and, in order . \

- for this. court to reverse the finding of the Tax Court,

it must be shown that the finding is clearly erroneous.”

Ballentine: Motor Co. v. Commissioner; 321 F.2d 796,

798 (4th Cir. 1963). After carefilly reviewing the —

record, we believe the Tax Court was justified in find-

-ing that the racing meets were conducted and the income

from them ‘earned by Charles Town in its own right.

5The concession was twice made in oral argument itive

this court.

6As was noted above, the Tax ‘Court found that the ad-

“vances to Charles Town ‘were in substance contributions to.

5% __. capital by Fairmqunt. Thus, the payment of ninety percent of

the net income from the racing.meets to Faimount would to the

extent it exceeded Fairmount’s advances be cliaracterized as.

(This footnote is continued on the next page)

oJ

/ a

iccascilite shan duran dni

=]

“name the licenses to ccnduct the meets from the West .

Virginia Racing Commission, and represented in sup-

porting statements that it was the applicant, that the

Race Course was to be conducted by the corporation

. under the name of Charles Town, Incorporated, and

ee. that Fairmount had “advanced by. loan, or otherwise,

the capital invested in the business.” Charles Town

maintained four separate bank accounts in its name and .

- its own books of account which reflected all transactions

in respect to the meets. Charles Town itself hired the

' substantial number of employees necessary to operate

the Race Course, and paid to them more than $630,-

000.00 in wages over the period of the two racing meets." !

Charles Town also entered into in. its own name

numerous contracts for materials and services rquired

to conduct the racing meets. Charles Town acquired

membership i in and paid ‘assessments to the Thorough-

bred Racing Association of the United States whose

bylaws provide that members shall consist of thorough-

bred racing associations duly organized and conducting

business. Charles Town elected to participate in the

West: Virginia Workmen’s Compensation Plan and filed ©

7 various state and federal tax information forms.

dividends, and would be subject, bly, to the intercor-

: Gicitend deduction provided ta Int. Be Code of 1954,

F243.” It has never been contended by Charles Town that the

w fla ie felted stesement for the Wer Virgic

.. Charles Town obtained in its —

| 3 :

Thus, the facts may be viewed as supporting the —

conclusion of the Tax Court that the “business purpose

of Charles Town was the ‘operation of the track in its

own right” and that it did “all things necessary to earn

| the income in: queqlion” hy: operating. the two, tacheg

" meets. : uN ie

_ The present position of Charles Town that it-wasa

‘party to a joint venture with Fairmount in which Fair- ©.

mount contributed the capital and Charles Town the ~

management services does not find convincing support

in the record. The reasoning of the Tax Court on this’

question is persuasive. . The Tax Court noted

“that is not the ‘way the contract between them

was drawn. The agreement was that Charles |

Town was to operate the race track ‘for the benefit‘.

of Fairmount’ except that ‘Charles Town: shall —

receive 10 per cent (10%)=of the profits for its -

services. This is. not the language of a joint

venture. The parties did not hold themselves out -

to the public as joint venturers... . . The fact that

the perties treated the income retried by Charles

Town as ‘commissions’ is further indicative that,

the parties were not joint venturers. Under West .

Virginia, case law, a joint venture is considered

to bea limited partner.. Horchler v. Van Zandt,,

| _ 120.W. Va. 452, 199 S.E. 65 (S. Ct. App. 1938).

| No partnership returns were filed. The only re-

turns that were filed were those of Fairmount and —

Charles Town as separate corporations.” ;

T é In addition, it was important for the Cohens and

Fairmount to have. the racing meets conducted by a .

corporate entity as opposed to having Fairmount enter

into a joint venture in order to limit Fairmount’s liabil-

"4

‘

.

a

_ =

. ity to the aidvances- scaly made to Charles Town.

~ The Tax Court specifically found that “one of the

‘purposes of forming Charles“Town was to limit liability

for. possible | claims for personal injuries’ and other

Sa, liability that | i could arise out of the operation of the

meet.” ‘Wh n the lease was executed for the Rate

_ Course ‘ ‘over 100 improvements were required by the

“insurance company as a condition of writing the policy .

: Despite such improvements there was still danger

of claims in excess of the insurance coverage.” a”

Charles Town contend3“that the clauses i in: the inter-

corporate agreements with Fairmount providing that “if -

the résult of the operation shall résult in a loss, such

loss shall be borne by Fairmount . . » and_that - “any

oA loss shall be ‘borne entirely by Fairmount” obviates in

any case the ordinary protective attribute afforded by

‘the corporate form. . We do not agree with Fairmount’s

interpretation of these clauses. We believe they were~

inserted to prevent Fairmount from charging back any

of its capital losses against Charles Town and would -

not extend Fairmount’s financial responsibility beyond

-. the agreed advances for failires by Charles Town or

liability fot its torts. Here the Cohens selected the .

-corporate form the operation of the racing meets.

One “is free to adopt such organization for’ his affairs

as he may choose and having elected to do . . . busiriess

as amgorporation, he, must accept the tax Cinitcaiihente. ai

. Higgins v: Smith, 308 U.S. 483; 477 (1940).

Finally, Charles Town objects to the allocation to it

of the entire net income from the racing meets on’ the’

- basis that the “allocation of all the fruits to Charles .

Town alone is directly contrary to the requirement” in

Séction 482 that “the Secretary ‘or his delegate may

=i

distribute, sense or allocate . . . between or among :

:?’ the controlled beineneee. This. contention is —

without merit. The Commissioner has broad discretion

in making such allocations and they ‘will not be counter-

manded unless the taxpayer shows them to be unreason-

able, arbitrary, or capricious. E.g., S picer Theatre Inc.

v. Commissioner, 346 F.2d 704, 706 (6th Cir. 1965) ;

Balentine Motor Co..v. Commissioner, 321 F.2d 796,

800 (4th Cir. 1963) ; Aiken Drive-In Theatre Corp. v.

United States, 281 F.2d 7, 10 (4th Cir. 1960); Dil- .

lard-Waltermire, Inc. v. Campbell, 255 F.2d 433, 435-36

(5th Cir. 1958). Moreover, this circuit recently has

held specifically that the Commissioner may transfer ~

the total income and expenses.of one controlled corpora-

tion to another under Section 482. J. R. Land Co. v.

United States, 361 F.2d 607 (4th Cir. 1966).

In view of our conclusion that the Tax Court was

~ not clearly erroneous in finding that Charles — itself

earned the income from the two racing »/, the

Commissioner’s allocation of the fotal net ; inc to

~ Charles Town plainly is not unreasonable or arbitrary. ~~

Anticipatory agreements designed to prevent the vesti

‘of income in the owners, which was determined to be

the essential nature of the intercorporate agreements -

in the instant ¢ase, will be disregarded and the tax as-

sessed against the entity earning the income. National

Carbide Corp. v. Commissioner, 336°U.S. 422 (1949) ;

Commissioner v. Sunnen, 333 U.S. 591 (1948); Hel- |

“«* > ering v. Eubank, 311 U.S. 122 (1940); Lucas Vv.

. . Eérl, 281 U.S. 111 (1930). .

. The decision of the Tax Court is affirmed.

| - Affirmed.

16

Order Denying Petition for Rehearing.

United States Court of - ie for the Fourth Cir-

cuit.

: Charles Town, Raconporated, Petitioner, ‘versus ne

missioner of Internal Revenue, Respondent. No. 10,645.

After consultation with all the members of the court,

the petition for rehearing en banc or, alternatively,

before the panel is denied.

This 23rd day. of March, 1967. | :

‘Clement F. i a Jr. oe

Chief Judge, Fourth Circuit

Albert V. Bryan é |

United States Circuit Judge

J. Braxton Craven, Jr.

United States Circuit Judge

A true copy,

Teste:

»

Maurice S. Dean, Clerk, | ,

U.S. Court of Appeals for the Fourth

Circuit

[Seal]

_—, a

- Findings and Opinion of the Tax Court.

T. C. Memo. 1966-15

Tax Court of the Umted States

Charles Town, I. ncorporated, Petitioner v, Cc ommis- .

sioner of Internal Revenue, Respondent. Docket No.

3517-62. |

Filed January 19, 1966.

Held, rs income derived from the operation of two

- horse racing meets was earned by petitioner, and peti--

tioner is subject to Federal income taxes on such income..

George T. Altman and ae H. Wilen, for the

_ petitioner.

+ Stuart E. Seigel and Denms R. Powell, for ‘the

respondent. .

' MEMORANDUM hci sisidecad OF

FACT AND OPINION. - .¢

ARUNDELL, Judge: Respondent. determined defi-

_ Ciencies in petitioner’s income tax for the period May

22, 1958, to November 30, 1958, of $258,616.93, and

for the fiscal year ending November. 30, 1959, of

$117,367. 57. tem teens! : :

Petitioner assigned error as follows:

(a) The Commissioner erred by including the.

income of Fairmount Steel Corporation in the in-

.. come of the petitioner in the following amounts:

Gross Income . Taxable Income |

| 7 Erroneously - Erroneously

Fiscal Year Ended . _ Included Included

November 30, 1958 — $2,808,220.18 $497,833.02

November 30,1959 2,056,444.34 234,466.84 _

/ mii |

FINDINGS OF FACT -

Some facts aré stipulated and are found accordingly.

Charles Town, Incorporated,. hereinafter sometimes

referred to as Charles Town, is a corporation incor-

porated on May 22, 1958, under the laws of the State of

. West Virginia.

-Charles Town filed Federal corporation income tax

returns for the period May 22, 1958, to November 30,

1958, and for the fiscal year ended November 30, 1959,.

-with the district director of internal revenue, Baltimore,

Mid - Baier ats

Fairmount Steel Corporation, . hereinafter sometimes

referred to as Fairmount, was incorporated on July 5,

1951, under the laws of the Commonwealth of Penn-

sylvania. Ske. ;

The issued arid outstanding stock of Fairmount, at all

times material hereto, consisted of Class A common

‘stock, which had the exclusive voting rights, and Class

B common stock. The Class A common stock was is-

sued for $1 per share as follows: Pat alge’

Ben Cohen. .......... ecovinerguesjenvesee tt, GBEGS,

Herman Cohen ona w2eseeeesesDO Shares

_At all times material hereto, Ben Cohen and Herman

Cohen’ have held all the issued and outstanding Class A

common stock of Fairmount.. The Class B common

stock was issued for $50 per share as follows:

» Ben Cohen ( younger brother of Her-

See EP Gs coe 175 shares

Herman Cohen ( older brother of Ben) | :

tsi Se eNO on RO saaideions 175 shares |

—19— .

Herman, Cohen, Ben Coheri, and Stanley

H. Wilen, Trustees for Charlotte Cohen

(daughter of Bony now Charlotte Wein-

_- berg ) . 100 shares

. Rosalee Cohen (daughter of Ben) ..-- 100 shares

Jacob Kartman, Ben Cohen, and Rosa

L. Cohen (wife. of Hernan), Trus-

tees for Nathan L. Cohen (son of

Herman) ........ . ...200 shares -

Raymond Voyes : ...250 shares

In March 1953 the shares of stock ‘siginally issued

to Raymond Voyes were transferred to a partnership

consisting- of Herman Cohen and Ben Cohen. — In

1957 the shares of stock originally issued to the afore-

mentioned trustees for Charlotte Cohen were distributed —

by said trustees to Charlotte Cohen, individually. There

were'no other changes in\the ownership of the Class B

common stock at any time material hereto, and the

foregoing represented all the issued and outstanding’

Class B common stock. ,

. The officers of Fairmount, from its inception and at

all times material hereto, all of whom constituted its

board of directors, were as follows:

President oss: ‘ Herman Cohen

Vice President and Secretary- ‘Ben Cohen

Treasurer — oe

Assistant Seciétss'y Treasures ' Rosa L. Cohen

Assistant phe dines? _ Zelda G.-Cohen

(wife of Ben)

In addition, i in 1954 and at all times material there-‘

after; Richard Davison (husband of Rosalee) became

an assistant secretary of Fairmount, although he did

not serve as a director.

Housing Engineering Corporation, hereinafter some--

times referred to as Housing, . was incorporated under

the laws of.the State of Maryland, on June 25, 1952.

~ Its. issued and outstanding capital stock, all of which

. was common stock, was held at all times during its

existence as follows:

7 : : No. of

Name - . _ Shares

Ben Cohen ........ | scnk! 100

Herman. Cohen ..............:. ences 100

Zelda G. Cohen . . 100.

Rosa L.’ Cohen ae iiiiain BOD

Herman Cohen, Zelda’ G. Cohen, and F eck

Kartman, ‘Trustees for Charlotte Cohen

now Charlotte Weinberg: ..:....... 100

~~ Herman Cohen, Zelda G. Cohen, and Jacob

Kartman, Trustees for Rosalee Cohen, now

Rosalee Davison “a 100

Ben Cohen, Rosa: L. Cohen, and Jacob Kart-

man, Trustees for Nathan L. Cohen .......... 200

At all times during its existence, the following were.

the officers and also conetstyand the board of directors

wf Housing: -

‘President _ Ben Cohen

Vice President Herman Cohen

Treasurer : Ben Cohen

Secretary _ Herman Cohen

Assistant Treasurer —- —_—- Rosa L. Cohan

‘Assistant Secretary _ Richard Davison

Assistant Secretary-

Treasurer ~ Zelda G. Cohen

| Mes

. Housing was liquidated on April 29, 1958, and was 3

¢ succeeded by a partnership known as €.:B. Associates;

: composed of the same persons who were the stockholders

_ of Housing, retaining the same percentage interest in the

' partnership as they had held in the corporation.

In December 1952 Herman and Ben Cohen. atcidiied

controlling interest in the Maryland Jockey Club of

Baltimore City, Inc., hereinafter sometimes referred

to as the Maryland Jockey Club. At or about the same

time Louis Pondfield (a first cousin .of Herman, and

- Ben) acquired an interest in the Maryland Jockey Club

which eventually amounted to 7% percent. Since that

time the Maryland Jockey Club-has owned and operated

the Pimlico Race Course, Baltimore, Md.

Ben Cohen had at various times dating back to: the

1930’s: been interested in acquiring the Charles Town

Race Course in Charles Town, W. Va., hereinafter

_ sometimes referred to as the Race Course. In his dis- .

cussions and negotiations in that connection Berr Cohen

__ was always accompanied by Pondfield who brought this

opportunity to his attention. 3

' Albert Boyle, the’ owner of the Charles Town Race

Course, died in November 1957. Some: time thereafter

Ben and Herman Cohen, hereinafter sometimes referred

to collectively as the Cohen brothers, accompanied by _

Pondfield, had negotiations, with regard to purchasing .

the Race Course, with Harry Byrer, an attorney who |

represented Boyle’s widow, Helene W. Boyle, herein-

after sometimes referred to as Helene Boyle, and the

Estate of Albert Boyle, deceased. Ben Cohen was the

primary negotiator on behalf of the Cohen brothers

/ during these negotiations.

—22—

Ben Cohen carried on these negotiations on behalf of

himself and Herman Cohen in their individual capaci-

ties and had not determined whether the purchase, if

consummated, would be effected in their individual ca-

pacities, by some existing corporation, or by a corpo-

ration to be organized for that purpose. He intended to

make the .decision after the deal was, ‘concluded. He.

never advised Byrer that he was acting ori behalf of °

Fairmount.

By letter dated February 3,- 1988, from Byrer to

“Messrs. Cohen Bros.,” an offer was made to sell the

Race Course upon ‘specified terms and conditions. The

_ proposal provided, in part, that the property would not’

be assignable to any person or corporation without the

written consent of Helene Boyle except that a West

Virginia.corporation could be formed to which the. prop-

erty could be transferred. However, such a corporation

was to be prohibited from assigning or transferring the

property without Helene’ Boyle’s written consent.

By letter dated February 5, 1958, feta Ben Cohen

to Byrer, a counteroffer was made in accordance with

the terms of an offer made in the previous year. -

‘By memoranduin dated March 24, 1958, Herman

Cohen advised Ben Cohen that further proposals which

he and Pondfield had discussed that _ with ‘aati

were under consideration.

ONE. FOO

On March 28, 1958, Housing paid $900,000 to Fair-

mount. Said payment was reflected on Fairmount’s

books. as follows: A debit to cash in the amount of

$900,000 and a credit to an account entitled “Loans

Payable # 1,” entry dated April 3, 1958. Said pay-

ment was reflected on Housing’s books as # credit to

/

ws

cash and as a debit to an‘account entitled “Accounts

Receivable.” ‘ ETH

~ This payment was not evidenced by any notes or

other debt instrument, did not bear interest, was made

without security, and no. date for. veya was

specified. : : ) 7

At the time these funds were ‘advanced to Fairmount,

Fairmount was insolvent. A

By letter dated March 31, 1958, from Byrer ad- :

dressed to “Messrs. Cohri Bros.,” the proposals rée-—

ferred to ‘by Herman Cohen in the memorandum of

“March 24, 1958, were rejected. Bs

|

Subsequently, about the middle of ‘May 1958, the

West Virginia Racing Commission issued an ultimatum

to Helene Boyle that if a summer meet of that race”

track was not operated, they would take her: franchise

away. This led to the immediate negotiations between

’ Ben Cohen and Byrer relative’ to the leasing of the

track by Helene Boyle to a West Virginia corporation

to be formed, known as Charles Town, Incorporated.

’ On May 20, 1958, a. lease was executed, the first |

nennerae of which read as follows: © :

THIS LEASE made and executed this 20th day

a May, 1958, by and between Helene W. Boyle.

* * * as the Lessor, and Ben Cohen, acting for

Charles Town I ncorporated, a corporation to be

hereinafter created under the laws of the State of

West Virginia, hereinafter designated and referred

" toas the Lessee. [Emphasis supplied. ] ee

The Cohen brothers requested Clarence E. Martin, Jr., - -

an attorney in Martinsburg, W. Va., to cause Charles

‘welen

Town to be created. Martin sigieel the senbidi for

charter which was executed on May 17, 1958. at ,

Charles Town was duly incorporated under the laws

of the State of West Virginia on May 22, 1958. Its

certificate of incorporation provided, in part, that the

principal office of the corporation would be located at —

1229 Mt. Royal Avenue, Baltimore Md.,. which ad-

_ dress was the office of the Cohen b s. The ob-

_ jects for which the corporation was formed were. to~

engage in and carry on the business of, operating a -

race track, The corporation’s authorized capital stock

was 1,000 shares of common stock of a par value of -

$10 each. - However, only 100 shares, were issued by. '

certificates dated May 22, 1958, as follows:

. Certificate No. _ Issued to No. of Shares

a, a i Herman Cohen . L

2... Ben Cohen 1

3... _Lowis Pondfield 98

The said stock was issued for the total - sum. of

~ $1,000 which was not paid until July 22, 1958. Dur-—

ing taxable ..periods here,involved, no additional stock

‘ was issued to any person and the aforementioned 100

shares represented all of the issued. -and outstanding

stock during said periods of time.

The previously méntioned: lease executed on May 20, .

1958, between Helen Boyle and Ben Cohen, et for

Charles Town, provided in part as follows:

This lease shall begin on the 22nd day of May,

1958, and unless sooner terminated as herein. pro-

vided shall continue to and include the: 10th day of

September, —

2 |

As rental for said premises for the full term of

this lease, said Lessee shall pay to the Lessor the

- sum of Two Hundred and ‘Twenty Five Diopennd

- Dollars, rMtay eis

4.

kk we *

_ The Lessee shall be entitled to all incgme from

the operation of the horse racing meets to be con-

ducted on said premises and from any and all other —

commercial operations conducted thereon * * *,

* * * and the Lessee assumes all risks to’ persons

or property from latent’ or patent defects in the

premises and fixtures thereon; the Lessor shall not

be liable to the Lessee or any. other person:for any |

loss or claim of any kind whatsoever resulting. .

from the operation of the aforesaid premises and

‘the use thereof by the Lessee; that the Lessee shall’. ;

immediately, upon ‘execution .of this instrument

secure and keep. in force and effect’ during the

continuarice of this lease, proper and effective

comprehensive liability insurance in the sum of

$500,000.00, issued by > reputable solvent insur-

ance company qualified and asthorised to do bust

tess in the State of West Virginia.

eee .

It is expressly understood and agreed eciie

the parties hereto, that this lease is entered into,

upon the express condition that the Lessee or his

assignee aforesaid, shall be able to secure from,

and be granted, a license by, the West. Virginia -

Racing Commission, permitting him or his said

"assignee to conduct a horse race meeting on the

aforesaid premises “for at least 56 days during | N

the ricco’ — aforesaid, and. in the event

‘ A

—26—

J oust license shall not. be seishiia or secured’ as

tied aforesaid, then this lease shall be forthwith null and

void and of no-effect and thereupon all rights and

obligations of the parties hereto will be at an end, _

except that the Lessor shall forthwith return to.

~ the “Lessee the « consideration ‘paid to the Lessor

ine by-the Lessee as aforesaid; ‘the Lessee agrees, how-.

ever, to make prompt-and diligent application for -

such license and use every available effort to se- .

- cure the same, subject to.the check\{or $225,000.00

' being good.

By check dated May’ 20, 1958, Fairmount a the

sum of, $225,000 to Helene Boyle, which payment’ was

. reflected on Fairmount’ s books at a debt to an ac-

' €ount entitled “Charles Town, Inc.” and a credit to cash’

A supplemental, agreement dated May 22, 1958, was

executed. between Helene Boyle and Ben Cohen, acting

for Charles Town whereby an additional rental of

_ $25,000 was agreed upon in view of the fact that the

West Virginia Racing Commission authorized racing

dates at the Race Course for a period in excess of that

originally contemplated by the parties. The additional

_, $25,000 was to’be paid “$15,000.00 upon the execution

- af’ this agreement becw $10,000.00” on. — 2,

S OR

; By check dated May 2, 1958, Fairmount paid the

sum of. $15, 000 to Helene Boyle, which payment was --

', reflected’ on Fairmount's books as a debit to an’account - ~

entitled ‘“Charles. Town, Inc.” and a credit to cash.

* Fairmount also paid to or on behalf of Charles Town

the following amounts on the dates indicated, which

amounts. were all reflected on Fairmount’s books as

——

debits to the accourit on “Charles Town, . Inc.” and

| credits to cash: !

eA 1958 er ROIRY 2 ie Mae Be $ 5,000

30 May’ 26): 91956 i2ci jit SR

May. 2B, 19GB 2--crinvcaienpeovensiconcneodie’ 2,025*

May 28, 1958 ..... | 1,000

May 28, 1958 ..... 7 ia 1000 °

May 28, 1958 .........: veer * 229,000.

Nov. 5; 1966. ........ - .224,250**

Nov. 5, 1958 seovssesenneecennnesiennesnnnneseces | | 63,250***

Ce. Be ee ectttetinin ------ 200,000

Nov. 24, 1959 .............. sipulidadices 20,000

*Reimbursed by Charles ‘tins to F airmount on June

10, 1958. :

**Payable to the Citizens: National Bank of Martins- |

burg, West Virginia. ;

*** Payable to Helene Boyle.

The foregoing advances made-by Fairmount .to

Charles Town in the total amount of $986,525 were

reflected on Charles Town’s books as credits to an ac-

count entitled ‘Account Payable—Fairmount Steel

Corp.” with the exception of the payment of $20,

which ‘was credited to a ledger account entitled “Ad

vances from Fairmount:Steel

' The advances from Fair t to/Charles Town were

not evidenced by any. notes oO er| debt Anstruments,

did not bear interest, were made without security, and

_ no date for repayment was Re They were not:

intended as loans.

=

The said sdvances’ were made pursuant to aad in ©

_ accordance with the agreement hereinafter mentioned, .

dated May 20, 1958, between Fairmount and Charles

. “ ; ba . x!

on $ —~h——

Town for the purpose of furnishing the capital neces-

_ §Sary to run. the racing meets and were used ‘to. make

Sa Tental payments to Helene Boyle, for deposits of open-

ing -balances in various bank accounts, and for “bank-

roll,” which are the funds necessary to be on hand to

commence wagering operations:

The officers of Charles Town, from its inception « «

until May 15, 1961, all of whom constituted its board of

directors, were as follows: : 7

President _ Ben Cohen

Vice President = ~— Louis Pondfield

Secretary-Treasurer - Herman Cohen —

The bylaws of Charles Town provided that the board

of directors shall have the control and management of

the affairs, business, and properties of the corporation.

Because of the poor condition of the grandstand and —

other hazardous conditions when the May 20, 1958, lease .

-was executed, over 100 improvements were required

by the insurance company as a condition of writing the

policy; and the-said improvements were made. Despite

such improvements there was still danger of claims in ©

excess of the insurance coverage. _

One of the purposes of forming Charles Town was to

limit liability for possible claims for personal injuries

and other liability that could arise out of the operation

of the meet. . Its chief purpose, however, was to op-

_ eratearacetrack. peste

On May 20, 1958, conetirrenthy with the deacution of

the lease of that date, an agreement was entered into be- -

tween Fairmount-and Charles Town under which Fair-

mount agreed to pravide the funds necessary for con-

ducting said meet and Charles ‘Town agreed to operate’

_*

—29—

said meet for the benefit of Fairmount. The agreement ~

_Ar vided as follows:

‘THIS AGREEMENT, Made and entered into

this 20th day of May, 1958 by. and between FAIR- -

MOUNT STEEL CORPORATION, a Pennsyl- .

vania. corporation (hereinafter referred to as °

“Fairmount”) and CHARLES TOWN. INCOR-

PORATED, a corporation created under the laws

of West Virginia (hereinafter referred to as.

“Charles Town’’).

STATEMENT OF FACTS

Fairmount, through its officers, has for some-

time been negotiating with the attorneys represent-

-ing Helene W. Boyle, in her own right and as

Executrix of the Estate of Albert J. Boyle, de-'

ceased, for the purchase of the Charles Town Turf _

Club in Charles Town, Jefferson ‘County, West

Virginia, and —

Whereas, Charles Town has leased the ‘eid

Charles Town race track for the purpose of op

_ erating a racing meet for such number of days as |

the West Virginia Racing Commission will grant a

license to. conduct a-horse racing meet on the

premises, and 7 . .

_ Whereas, Charles Town does not have the Saini,

_ nor the credit, with which to operate the said racing

meet, and .

Whereas, Charles Town ° an: snictinted with

Fairmount for the purpose of obtaining the neces-

sary funds for the financing of the said racing

" meet and :

———e

Whereas, Fairmount has agreed to’ advance to

Charles Town a minimum of Four: Hundred Fifty

Thousand Dollars ($450,000.00) for the financing

of the racing meet, including the sum of Two Hun-

- dred Twenty-Five Thousand Dollars ($225,000.00)

.» which Fairmount has already advanced for the

payment of the rent due pursuant to the said

lease, provided that Charles Town agree: to operate

the said race meet for the benefit of Fairmount

_ and shall receive for this operation ten per cent

(10%) of the net profits for its services there-

under, and if the result of the operation shall re- -

‘sult in a loss, such loss shall be borne by Fair-

mount, and é ,

Whereas, it was understood that the operations

of said race meeting shall be conducted pursuant to

the terms of this Agreement.

Now’ Therefore This Agreement Witnesseth that .

in consideration of the mutual covenants and con-

ditions herein contained and other good and valu-

able considerations, the parties agree as follows: °

. 1. Charles Town shall apply for a licence to con-

‘duct ‘a’ racing meet at the Charles Town Race -

- Track in Charles Town, Jefferson County, ‘West *:

Virginia for as many days as said club shall be

permitted to operate, said meeting to be conducted ©

between the days of May. 23, 1958 and September :

‘10,1958.

2. The said race meeting , shall be operated by

Charles Town, but the profits therefrom shall be

for the benefit of Fairmount except that Charles.

‘ Town shall receive ten per cent (10%) of the .

profits for its services in the operation of the said

nies

racing meet and any loss shall be borne entirely by

Fairmount.

3. In consideration of Fairmount receiving ninety

per cent (90%) of the profits of the said meet, ,

Fairmount agrees to advance all monies necessary

for the operation of the said meet, it being under- —

stood that Fairmount will advance a minimum of

Four Hundred’ Fifty Thousand Dollars ($450,-

000.00) to finance -said. costs of operations of said

meet. | ores bie |

4. No interest will be charged by Fairmount for

the use of ‘its monies, it being understood that its

- share of the profits shall be in lieu of all interest

charges of any kind. : ,

5. Charles Town ‘shall pay all officers for their

services on behalf of both corporations, out ‘of its -

share of the profits of the meet and no part thereof’.

shall be charged to Fairmount. |

6. Full and complete records of all receipts and

disbursements in connection with the said meet shall

be maintained by Charles Town and no expendi-

tures, out of the ordinary course of business shall

be made without the approval: of Fairmount.

Charles Town shall, at the request of Fairmount,

make a complete accounting of all such receipts and —

disbursements. ’

' . 7. So long as Charles Town shall be indebted to

Fairmount, the officers and directors of Charles

Town shall be as follows:

President and Director "... Ben Cohen -

' Vice President and Director Louis Pondfield

Secretary, Treasurer and |

Director Herman Cohen

—32—

8. The majority of the above officers shall make

all major decisions ‘as to the allocation. of income

and engenens and .in the management of the race

meet. :

9. Deterel and State ‘taxes on income of the

- respective parties shall be a separate obligation to

be borne by each party as to its own income . Lae

_ 10. Charles Town shall. carry, all necessary in-

surance to protect itself as well as Fairmount from

all hazards. The-cost of said insurance shall be

regarded as an expense. of’ oe of the said

_ racing meet. :

In Witness Whereof, the parties: have ieiiied

this Agreement to be executed the day and. year

first above written.

This agreement was executed oni behalf of Fair-

mount by Herman Cohen as its president, and on be-

| half of Charles Town by Pondfield as its vice president.

At this time, Fairmount had allowable net operating

loss carryovers from its taxable years ended June 30,

1955, June 30, 1956, and June 30, 1957, in the total

amount of $852,105.37. |

The minutes of the organization meeting of the

_ stockholders of Charles Town, -dated May 22, 1958, |

state in part as follows:

' Thereupon, Aecttiaice was had relative ( to the

lease contract between Ben Cohen, agent, and Hel-

ene W. Boyle concerning the lease by him an be-

half of this corporation * * *, Said lease agreement

. being laid before the meeting. vali

Upon motion duly made and seconded it was

tnanimousiy,

- Resolved that the lease agreement between

Helene W. Boyle and Ben Cohen, agent, acting

on behalf of this corporation, dated the 29th day

of May, 1958, and the supplemental agreement

affixed thereto, dated the 22nd day of May, 1958,

be and the same are, in every réspect, hereby ac-

cepted, ratified confirmed and approved by this

corporation, all acts of the said Ben Cohen, acting

as aforesaid, be and the same are hereby ratified,

confirmed and approved by this corporation, with-

out recourse upon the said Ben Cohen.

Thereupon, a discussion. was had relative to the

financing of the racing meeting: provides for un-

— der the lease agreement aforesaid.

Upon motion duly made and seconded, it was

unanimously

Resolved that the Directors and Officers of this

corporation, enter into and execute such loans,

agreements and obligations on behalf of this cor-

poration, as necessary in order to provide for and

*..

_ conduct. a horse race meeting on the properties

leased by. this corporation as aforesaid.

Thereupon a proposed contract between this cor- -

poration and Fairmount Steel Corporation, having

been read to the meeting, discussion was had upon

the same, and thereupon on motion duly made and —

seconded, it was unanimously

Resolved that this corporation enter into al

contract with Fairmount Steel Corporation, thatthe

appropriate officers of this corporation, when.

elected, execute the same on behalf of this corpora-

‘tion, and a copy thereof be placed in the files of

‘this corporatien. ie

a

The minutes of a meeting of the board of directors of

Charles Town dated May 22, 1958, authorized the

Peoples Bank of Charles Town, Charles Town, W. Va.,.

the Bank of Charles Town, Charles Town, W. Va., and ©

the Merchants. and Farmers Bank of Martinsburg,

W. Va., as depositories ‘of ‘the corporation and resolved

that “all funds belonging to the corporation be depos-

ited in said banks.”

A press release contained in the files of ‘Charles

Town, located at the offices of Cohen Brothers,

1229 Mt. Royal, Ave., Baltimore, Md., stated in part:

Charles Town, W.'Va., race track will open a

75-day meeting on Friday, June 6, under new

_ management headed by the present officers of

Pimlico Race Course in Baltimore, Maryland, it

“was announced at noon today.

Assuming operating control of the three-quarter

mile track‘ is Charlestown, Inc., headed by Ben

’ Cohen, President, Herman Cohen, Secretary-Treas-

urer, and Louis Pondfield, Vice-president. |

All are native Baltimore businessmen who have

operated Pimlico Race Course since 1953.

_ The new corporation will. assume operating con- -

trol’of the Charlestown track immediately under

terms of a private agreement with Mrs. Albert. J.

Boyle, widow of the founder of the. West Virginia

track who died last November.

On November 3, 1958, a: tose eahentiiee sometimes

referred to as the second lease, was executed between

Helene W. Boyle and Charles Town covering a lease of _

the Race Course for the period November 20, 1958,

through February* 20, 1959. This lease was in all

Sas,

alll Be

material respects similar to the first, lease except that .

the rental provided for was the sum of $63,250 pay-

- able on execution of the Jease,.plus an additional sum

of $5,750 per day multiplied by the number of racing

days to be allotted by the West Virginia Racing Com- “

mission, hereinafter sometimes referred to as the Racing °

Commission, during the period January 1, 1959, -

through February 14, 1959. It was further proyided, “

however, that in the event 2 percent of the total amount

wagered at the track ‘during: the period of ‘the léase

should aggregate a sum in excess of the aggregate

thereinbefore provided on a daily basis of $5,750 a day

for the total number of racing days, Charles Town .

was to pay such excess at a specified time. The lease

also required Charles Town, during the period of the © |

lease, to keep in force and effect comprehensive liability .

insurance inthe sum of $1 ,000,000. Charles Town «@

was also required to make application to the Racing —

Commission for a license permitting it to conduct

a horse racing meeting on the leased premises beginning

December 17, 1958, through February 14, 1959. This

‘ lease was not. assignable without the written consent of

the lessor. ‘It was executed by Ben Cohen as president

of Charles Town. .

_ The negotiations for the second i aes were + onan

by Byrer representing the owner, and Bid Ben Colien. on

behalf of Charles Town.

| Horse racing méets were conducted at the Race

Course by Charles Town during the period June 6, 1958,

through ‘September 1, 1958, hereinafter referred to as

the summer meet, and during the period December 18,

1958, through February - 7, 1959, hereinafter referred

to as the winter meet. Charles Town’s business was

operating the track.

ae oe 2.

_ When Charles Town filed with the Racing Commis-

* sion its. application for license to conduct the meets, it

_ was required to file a supperitng statement to the ap-

.\ plicatiori. In the-supporting statements, Charles Town _

represented to the Commission that Charles Towri was

the applicant ; that the name to be uséd in the opera-

tion was “Charles Town Incorporated ; ’ that the race

track and racing were to be conducted by a corporation ;

that Charles Town was that corporation; that’its stock-

_ holders, ‘officers, and directors were Ben Cohen, Pond-

field, and Herman Cohen; that the Fairmount Steel

Corporation had “advanced by loan, or otherwise, the

capital invested in the business” in the arhount’ of

_ $500,000; and that Herman Cohen, Pondfield, and Ben

Cohen had all been interested i in ‘the operation of a race

track in Baltimore, Md., called the Maryland Jockey

Club, in the capacity of president, vice president, and

secretary-treasurer, respectively.

Charles Town was duly licensed by the Racing Com-

mission to. conduct horse .racing meets for: the period

June 6; 1958; through September 1, 1958, excepting

June 16, 1958, through June 21, 1958, and for the

Period December 18, 1958, = Rarawiif 7, 1959,.: “

excluding December 25, 1958 :

Charles Town maintained its own bisitis of silicunt:

which included a. cash receipts book, a cash disburse-

’ ments book, a general. ledger, and a general journal.

These books of account reflected the receipts, disburse-

ments and other accounting entries with respect to the

operation of the two racing meets in question. The |

cash receipts book contained columns -which provided

for the classification of cash receipts as follows: Pari-

mutuel commissions and surplus; program ‘sales, ad-

—7—

missions; parking; concession; and other miscellaneous | :

The cash disbursements book contained columns for -

‘the classification of disbursements as follows: track °

expenses ; payrolls; repairs; publicity ; programs;-travel —

and entertainment; stationery and printing; office ex--

_ pense; photo-finish; totalisator ; film patrol; West Vir-

ginia Racing Commission; racing purses; and other

miscellaneous entries. Charles Town’s. books were kept

at the offices of the Cohen brothers under. the supervi:

sion of a bookkeeper employed by pa oe gl

During the period July 5, 1958, through Vebalary 10, ‘

1959, Charles Town “paid $1,741,112.47.to Fai t.

These amounts were reflected as debits to the following

. accounts on Charles Town’s books : .

Rent vitae $ 731,500.00

Account Payable— 7 '

Kairmount Steel Corp. 009,612.47

AAA, 112.47 ..

Total

Charles Town, maintained bank accounts as follows:

. : Title of :° Date - Date

‘Name of Bank ee Opened Closed

Peoples Bk. of Charles Town, | Poni choiag 5

Charles Town, W.Va. . Regular May 28, 1958 Nov 11, 1963

Peoples Bk. of Charles Town, - * | ‘

Charles Town, W. Va. Payroll “May 28, 1958 June 16, 1959

Bank of Charles Town,

Charles Town, W. Va. Racing “May 29, 1958 Oct. 31, 1963

Bank of Charles Town, nse

Charles Lown, W. Va. Outs May 29, 1958 Oct. 31, 1963

The receipts from the operatior’of both racing meets

_ here concerned were deposited in the-regular account

_ of Charles Town ifi the Peoples Bank of Charles Town,

Charles. Town, ‘W. Va.; from anéin account all ex-

| | penses and charges ‘incident to the operation of both

| | {4 racing meets were paid by Charles Town. y rheas:s:

.' . During the period May 28, 1958, through Febicui¥y

17, 1959, deposits i in the total amount of $6,523,215.27

‘were’ made «in the regular ‘account- at the Peoples”

Bank. During the period February 21, 1959, through

: November 6, 1959, additional deposits cen thin $78, -

234. 80 Were made in this account. |

During the period May 29, 1958, through ebediry

3 20, 1959, 847 checks were drawn by Charles Town on

- the regular account totaling $6,270,972. 25.. During | ee

period February, 24, 1959, ‘through June 17, 1960,65

additional checks were drawn on the ‘regular 2 account - |

totaling $305,115.47. .

Signature ‘cards for these. anepunts were skendi by

Hermasi Cohen, Ben Colten, and Pondfield. °

"The payroll: account had a $5, 000' balance. At the

end of the regular payroll period the net payroll would

be withdrawn from the regular account and deposited

in the payroll account against which the payroll checks ©

would be drawn. ee |

' The racing account was used, to pay winning purses

son races: .The necessary amounts were withdrawn

from the ‘regular account and deposited in, the .racing

account; against which the checks for: this item’ aha ex--

Pense were drawn. : .

/ ., + “The outs account was cmintdined to Sake with the

+ provision of ‘state law reqitiring amounts ’due.on un-

cashed winning wagering tickets to be kept in a separate _

»

- Negotiations and correspondence with the Racing

Commission concerning the: summer and winter ‘meets

were transacted i in the name: of Charles Town by Ben’

Cohen ‘as president. ee

A comprehensive. liability j insurance ee was issued i

by the Standard Accident Insurance Company covering :

_ “the period November 1, 1957, to November 1, 1960, to

‘ Cohen Brothers, et. al., which was a comprehensive

policy insuring ' Property of the various. ‘Coben enter-

prises including ::

Bodily injury, except. auto

Bodily injury, auto. i, vision

- Property damage, auto.

Automobile physical damage ini

The name of the insured on such policy was set

. forth as follows: “Herman, Ben,’ Rosa L. and. Zelda

_ G. Cohen, t/a Cohen Brothers and” 21 financially con-

trolled siibsidiary corporations ° ( including Housing, io

_ Maryland cae ‘Club, Fairmount, but not* ‘Charles a

Town).

On May 20, 1958, the path was “extended to: cover

3 “public liability of Charles Town for hazards such as —

. injury. to the public, horse racing, and accidents to

participants. This coverage was limited to a maxi-

mum amount of $1,000,000. This coverage was in ef-

: fect during both the summer and winter meets. There .

_ was a substantial risk of liability: in: excess of' this

-amount, due in'part, ‘tothe’ fire hazard created by’ the

Recall of the Teal Fae Se ee

De

o

ant

sill

Certificates of | insurance were’: furnished to Helene

een insurance ——- and attorney, stating, inter.

aha: ee

Name of insured 9: Chaties Town, Inc.,a

Se ee ee . West Virginia corporation ©

- Location of works : ° Charles Town, Jefferson

Pi rye ei ~ Co, W.Va.

Description of : Thoroughbred Racing ani

operations _: club operations —

~ Coverage of Fairmount under this policy was limited |

to its operations at New Cumberland, Pa., which in-

volved construction of.a housing project. —

An endorsement dated June 5,. 1958, attached to the

comprehensive dishonesty, disappearance and destruc- —

. tion policy issued by the Standard Accident Insurance

Company in favor of the Maryland Jockey Club pro- ‘-

_ vided that in consideration. of an additional premium of

$1,837.52, additional insurance was added as follows:

: “Charles Town, Incorporated, Charles Town,West_Vir- __

ginia, owned, operated asd controlled by the owners

of the Maryland Jockey Club of Baltimore City, Pim-

lico Race Course, Baltimore, Maryland.” This endorse-

ment was accepted as follows: .

/s/ Ben Cohen, Secretary—Maryland Jockey. Club at

of Baltimore -

/s/- Ben Cohen, President—Charles Town, Tie.

: Charles Town Secured jockeys’ accident insurance _..

‘covering both meets and paid the Premiums thereon.

‘The. fire insurance covering the premises at the —

Charles Town Race Track during the time that the two

Fs meets, Pee in gate were srotusted had been se-

; - he eee

- cured by the ln Helene Boyle. Charles ‘teen paid *

- @ pro rata share of ‘the’ fire insurance premiums, for

said periods to Helene Boyle. : |

_-.| On June. 2, 1958, Charles Town pbiiinis ‘a lacie of

. the ‘Thoroughbred Racing Associations of the United -

States, Inc., hereinafter ‘referred to as TRA, an organ-

ization ‘dedicated to the promotion and maintenance of

public interest and confidence in thoroughbred racing.

The: bylaws of TRA provide that members of TRA —

shall consist of thoroughbred racing associations duly

organized and conducting business in any state, dis-

' trict, or territory of the United States or in’ Canada,

~* While -a—member— of: the TRA, Charles Town paid

$7,283.34 and $11,750 as assessments oe. the pesiops

here involved. |

Charles Town entered into. contracts with the Ameri-

- can Totalisator Division of Universal Controls, Inc.,

for totalisator services during the periods here involved.

: The contracts were signed by Ben Cohen, president. |

Charles Town-received and deposited in its bank ac-——--

count the commissions or royalties due from the cater-

ing firm of Harry M. Stevens Company on sales of

.. refreshments.at the Race Course mee the two racing

meets here in question. ~

All disbursements relative to -the operation of the

two. horse racing: meets here’ involved were made by x

Charles Town on checks bearing its name.

Charles ‘Town. used stationery bearing the name,

“Charles Town, Inc., Charles Town Race Course,

Charles Town, West Virginia. during the periods here

i the Court.

’ Charles Town. maintained a seleghinne: in i own =

name at the Race. Course and ‘paid’ the belephone: |

charges. e

beet Legal, fees incident to organizing Charles wen.

and representing Charlés ‘Town before the Racirig Com-

- : ‘mission and in’ other incidental ‘legal matters in con-

cs '.. nection with the’ operation of the horse racing meets.

: here concerned, .were paid by Charles Town to. Martin. ~

- Charles Town filed quarterly report of total earnings

' of'employees with the West Virginia Workmen’s Com-

pensation Department for. the sécond, third, and fourth

_ quarters of 1958, and the first and-second- quarters

of 1959, reflecting its business to be “Race Track.”

~ Charles Town filed an election agreement to partici-

pate in the Workmen’s Compensation Plan of the

_ State of West Virginia for- the ‘periods here in ques--

tion. On the election form, Charles Town stated its

business to be “Operation of Race Track and all opera-

tions incidental thereto.” == ; |

Charles . Town filed. an cioiiies's: initial ibid

_ with the West Virginia Department, of Employment

| “Security for the periods here in question, reporting

employment of over 350 employees during’ a. typical

‘week for its reported business of cron Horse

Racing.” . R

. aie Tome, bls arene, basinces.4003 conntiitlen

tax returns: ‘with the State of West: Virginia for

a ma and 1959, Teporting its business to be!

s Rt” Bie ae aa

Reese NT can Cit decatic cocperetionsUccasn tax

ie returns with the State of West Virginia for the years

_ 4958 and- 1959, stating the kind of business it was’

ae engaged in to be “operation of race track.”

account title.

2

‘ ia 8

éDraring the periods here spinhind Charles. Town..0p- |

. erated-under an oral agreement, with the advertising

' agency: of Kal, Ehrlich & Merrick, Washington ‘D.C.,

with respect to advertising the. racing meets here in

question. Monthly billings from. June 1958 through

February 1959 were sent to Charles. Town, thereafter

reverting to the Charles Town Race ea | = vie

?

Charles Town filed Form 941, ps s aioe

Federal, tax return, reflecting _the _ follwing total

number_of.employees employed daring each of the in-

dicated quarters :

: er 2 aD Nociob:': aldo

24/0/58 ; : 416

34/0/58 7 rae

: MOJQISE oe ESA

Ast /Q/59 fe OEE 388

~ Charles Town issised 569-W-2 Forms to persons em- +

ployed at the Charles Town Eee ee See e

two meets here in question.

Charles. Town paid total sainile to ie persons pew

ployed im the.operation of the two racing meets here dn

. question in excess of $630,000. .

Charles: ‘Town. paid* West Virginia consumers. iin

tax -on- parking fees, program’ sales,~ and additional

charg Settee staring: oth of ie: horas, cage moeetd

here in question. . ina

Charles Town coritracted, dy: tsiseenc geht el

more & Ohio Railroad: Company for- the. kano of

ipeniiane Ween faring :

scents teichareare: ta cam tcp

as - In the ordinary course of -busiriess, while operating

- tow-two horse racing meets: here involved: during 1968—

and‘ 1959, i addition to the contracts specifically men-

tioned in. other paragraphs, Charles Town entered into |

ties conttacts,-oral or’otherwise, in its own name and paid

: —— tatewerieccounts, "among others, with the following

: ge feo of Company “Nature. of Servite

fal Printing’Co. “°' —~Printing ®

n Maintenance Co. . Track cleaning

“Segbardonien Regier. Printing

eee : wh geet Be Stationery’

White Filly a Automotive

onan © Pond Electricity.

Peoples Wai Service Co. - Water

Western Union .))s Telegraph

Plaza Wine & Liquor,’ Entertainment -

ne Charles Town ld guarty ‘Pedr Casa Ge

"turns; "Form 720 arid remitted to the Federal admis-

sae th ret 4 Bh re aie

ee

“ane Paid

: 12/31/58 Oe ae

Rea “ide pe ote ee) pt so Meri 10,235.78 ° }

Jo, “pO 1B194 €3 af’: is HM SQUS Me 95 2g 25 3

( : ci manta

, pps pea ”

Form 941, with respect to persons it employed. inthe

operation of both horse racing meets as follows:

Quarter © © =FICA’ _——- Withholding"

Ending Taxes Paid — _ Taxes Paid

6/30/58. $4,518.97. ar

9/30/58. —=—- 13,324.10

12/31/58 3,186.73 e 15,604.82 _

3/31/59° - 8,146.06 20,338.74

By letter dated May 28, 1959, Ben Cohen «as presi- ts

t of Charles: Town closed out the corporation's ac-

count with the State. -compensation commissioner.

2 p Fairmount never filed the information with the ap- =

i - propriate state authority to ee to do | business in

West Virginia.

Alt incoil sind ‘hepetin ic ect. hus ra

meets: ‘were reflected on the books of “Charles Town.

By means of a journal entry-all the income and ex:

“penses, with the exception of officers’ salaries, were.”

transferred to the books of Fairmount. By.means of

EEE another journal entry, 10 per cent of the net profits

« ‘was allocated to Charles Town. These entries were ,

made .on, June 30, 1958, covering the period) of. the .

summer meet through said date which: was the end. of |

Fairmount’s fiscal year; in November 1958, -coyering

3 the remainder’ of the summer meet; and, in the spring

ne of 1959; covering the winter meet.” |

‘Prtinabei repbrted olf ite Fededat tnconue Gt’ Seearn |

the ‘gross: receipts and all the expenses in connection

with the operation of the two racing meets. Tn addi- :

_.. tionyyitclaimed..a deduction’, for ‘commission expense _

Be représenting the 10 percent, of, the net: profits: allocated

to Charles Town.. ‘Fairmount’s return for the, taxal

j . A 5 . £

eee ; . a ia

J “ : . ¢ °

“= :

year ‘erided “June 30) 1959, reflected a net profit of

- $732,299.86 from ‘the racing ‘meets. ‘By virtue of the —

- available: net’ operating loss carryover it arte no Fed- :

‘etal inconte tax with respect thereto. 3

ee On its Federal income tax returns fon lee tadable |

periods ended November 30, 1958, and November, 30, ©

‘1959, Charles Town, reported gross receipts in the |. |

~. respective amounts of $64,886.53 and $26,051.87,

‘which amounts Tepresented the 10. percent allocated

to Charles Town and which corresponded, with the |

deductions claimed by. Fairmount sigict commission ex- 3

ie -tes edéced:tncomie’ tax ‘return’ oi the’ taxabls ‘

period: ended’ November 30, 1958, Charles Town claim-

ei: Gedeetin in the acnixmt bf $40,000 for: compensa.

tion of officers as follows: |

‘Loni’ Pondfield © nie 3 - $25,000

"i aon, i amet a detction of $1,000 ied

bution ty te Herman and Ben Cohen Charitable :

eed die: te Snape

re led November ber 30,; 1959, Charles Town claimed

gi . a iene: 8 NO fearon

oer eS AES

pd Eo a MS

_ The income and. expenses of the two’ horse. racing — i

meets here concerned were reported only on the Federal ©

‘income tax returhs of Charles Town and Fairmount.’

, .. No partnership information returhs were ‘filed ‘with the—

' 'Tntertial; Revenue Service ‘reflecting any ‘of the: ‘income

or’ enpenees’if erty tate Yad: nee Se AA

_ @emned. F 3

Fairmount and. ‘Chaces Town never declared’ or soa

formal dividends on the capital stock they issued.

On July: 29, 1959, Charles Town instituted an action

in the Circuit, Court of Jefferson Couty, West. Vir-

ginia, against Helene e Boyle to recover an alleged ovez- -.

/ payment of rental due in. accordance with the provisions.

of the second lease. As a result of ‘said litigation, —

Helene Boyle, on November 6, 1959, paid to Charles

Town the sum’ of $38,698.82, which amourit was de-

posited by Charles Town in ‘its regular’ account at: the

Peoples Bank,-Charles Town, W. Va.

On March 26, 1959, Fairmount paid to C: B. Asso>. |

_* ciates $400,000 which was debited on. Fairmount’s sep Ns

! to, the:account entitled “Loans Payable #1.” On

‘: " September 29; 1959, Fairmount: received from ¢. 3

Associates $100,000, which was credited to the account:

g entitled “Loans Payable, #1.” .

As of September 29, 1959, $600,009" of the $900,000

advance made by Housing to Fairmount was still out-

standing. At this time C. B. Associates’ had succeeded ©

Housing. . This amourit of $600,000: was repaidas fol-

: lows: ‘a $5,000 cash payment and, fp he a

_ against the purchase ‘price’ of $654,867.13 payable by °

US) (i Associates to Fairmount for Fairmount’s’ interest —

Se Sartnershlp with Forest’ Hill allege, Inc., annie

- as Forest Hill ‘Village, which gesting interest was

_ assigned by Fairmount to C.. i ascannc on March

: 28, 1962. dees Sesg is! : ee

: Charles. Town ‘Priests hac, a ormun tien some-

~ times referred to as Properties, is. a corporation in-

"+ eorporated on April 19, 1958; under the laws of the

| ‘State’ of West Virginia.

On Apiil 24, 1959, Pivperties ‘act into a con-

. tract with Helene Boyle tor the purchase of the | Race

"Course. ©

On oe ; At May 7, i660, ser iced the

contract for the purchase of the Charles Town Race

Track and acquired said race track, .On or about

May 19, 1959, there were issued and outstanding 10

shares of the capital stock of Properties; which 10 '

_ shares were acquired by Pondfield on the same date —

for a consideration of $1,000. The previous directors

of Properties tendered their -resignations, and Pond-

field, Herman Cohen, and Ben Cohen became the

directors of Properties on said date.

- On the same ci the following officers of Properties

oisWios President... .3--> Initia Poadfield

se geical catered Herman Cohen

On. or about. ‘May 19, 1959, additional shares of the

capital stock. of Properties were issued upon —

‘of the cin of $9,000 a follows: id Ee

¢ ; 2

sige Pes as cue | 3 _. No. of

_ Name - sa asael Bee _Shares

| Ben Cohen $35

’ Carroll A. Weinberg, Charlotte Cohen Wein- —

berg, and Zelda G. Cohen, Trustees for

the . Descendants of Charlotte Cohen

- Weinberg ° 20 .

_ -Richard S. Davison, Rosalee Cohen Davies.” et ee

and Zelda Cohen, Trustees for the De- _ 3

' scendants of Rosalee Cohen Davison ~ .20 ;

Ben Cohen, Herman Cohen, and Stanley H.

Wilen, Trustees for the : ‘Descendanits of

Nathan L. Cohen ; . 45

No additional captial stock of mR has been is-

sued.since that time. Since that time and until the -

present, Properties has owned and operated the Charles

Town Race track and there has been no change in the

ownership.

On May 20, 1959, the , Bauitable Trust Coliuiis of

_ Baltimore, Md., loaned $2,000, 000 to Properties, bear

ing interest at 5 percent per annum. Cohen cies

participated in the loan to the extent of $1,500,000.

- The note for. $2,000,000 executed by Properties to

the Equitable Trust Company was endorsed by -Ben

Cohen and’ Herman Cohen. “These funds were used

by Properties for the purchase of the Race Course,

- Fairmount was liquidated. on june :¥ OR, =e has

since then been dormant.

The minutes of the annual meeting of steicdsobdiry

_ of Charles Town held on May 15, 1961, provide in

‘ part as follows: — |

_. "The Corporation has finished its racing season -

and has concluded its arrangements with Fair- —

mount Steel Corporation according with the agree-

ments previously entered into. Mr. Louis Pond-

field stated that the two (2) shares heretofore

held in the names of Herman Cohen and Ben

Cohen had been -returned to him in view of the

- completion of the arrangement with Fairmount |

Steel Corporation. | ‘

ae aK RK

The meeting then. proceeded to the election of

_ Directors for the ensuing: year or until their. suc-.

cessors are duly elected and qualified. Upon mo-

tion duly made, seconded, and passed, the follow-

ing were elected: be

Louis Pondfield — |

_ John J. Pondfield

Rose Pondfield

Charles Town never conducted any business other | -

than the operation of the two racing meets in question _

and was.a dormant corporation at the time of the trial

OR this capes, , | :

In a statement attached to ‘the deficiency’ notice the

respondent explained his adjustments for the period —

May 22, 1958, to November 30, 1958, as follows:

_ (a) Additional :income .... | % $497,833.02

si

It is held that income in the amount of $2,808,220.18,

included in the return of Fairmount Steel Corporation

for the taxable year ended June 30, 1959, constituted

additional income to you under. the provisions of sec-

tion 61 and section 482 of. the Internal Revenue Code

of 1954, resulting in additional taxable income, in the

amount of $497,833. 02, computed as follows:

| “Mutuel Dept. Commission .......:...... $2,389, 637. 03

- Mutuel Dept. Breakage siteaone <M 2 ' 220,678.86

Programs ........... USE ese es es 21,837.60

~ Grandstand 2... fea 51,984.45

COMRROUNE (ons See 49,208.81

Box Seats = ihe CEs aS Sa 8,958.64 ©

Club House Complimentary sean etclee 1h SS

Concessions © .............-+.04i- oe ee ? 43,773.12

Valet parking seibaceid peassapieltsies $3824.25

Miscellaneous Income ............... Se eT

Federal Admission ........ coer

Teen CNS ne $2,808,220.18

Less: Total Expenses 20...00...2..cccccccoceccoose 2,308,885.46

, = $ 499,334.72

Less: Unknown DIETER CIEE vip cereennctetcsere 1,501.70

Race Trae 8 ees 497. 833 02

A similar explanation was made for the additional in- _

come of $234,466.84 for the fiscal year ended Novem-

ber 30, 1959. .

A:

a : Ultimate Findings of aye

: ‘Charles Town was organized for the purpose of

conducting the rating meets in question in its own

right.

| Charles Town performed substantial ae eeeeee

ing activities. .

| | The total net income ‘anced from ‘the operation of |

the two racing meéts in question’ was produced and

earned by Charles Town.

The respondent, in allocating the income reported by

_ Fairmount from these racing meets to Charles Town,

did not act unreasonably, arbitrarily, or capriciously.

Said determination of the respondent was necessary

in order to prevent the evasion of taxes and to clearly

reflect the taxable ‘income, of Charles Town, within

the meaning of section 482 of the 1954 Code.

The advances to Charles Town by Fairmount con-

stituted in substance an equity investment.

OPINION

The question presented is whether net income in the —

amounts of $497,833.01 and $234,466.84, representing

90 percent of the profits derived from the operation of

two horse racing meets during the years 1958

“and 1959, is taxable to Fairmount, as petitioner con-

- tends, or to Charles Town, the petitioner, as the respond-

ent. has, determined. We agree with the respondent

‘ that the said net income is, taxable to Charles Town.

_ ‘The answer ‘to the question depends upon the legal ef- 7

_. fect of the May 20,1958, agreement between Fairmount

“\. and Charles Town, which agreement we ‘have set out in

. full in our findings. Under this agreement Fairmount

¢

—53—

- was to furnish the necessary capital with which to con-

duct the meets and Charles Town agreed to. operate'the -

meets “for the benefit of Fairmount” and to’ receive

for this operation 10 percent of the net profits for its

services. On its face, the agreement has the appearance

‘: of a pure agency. But when we look .at how the rac-

ing meets were actually contacted the agency feature —

melts away.

First, Ben Cohen, in obtaining the lease of the race

track property from Helene Boyle, acted not f for Fair- _—

‘mount but. “for-Charles-Town Incorporated, a corpora-

tion to be hereinafter created.” Nowhere in the’ lease -

was Fairmount ever mentioned. The lease was: the-

property’ of. Charles Town. As rental for the leased

property the lease provided that “said Lessee [Charles .

Town, not Fairmount] shall pay to the ‘Lessor the sum”

of $225,000. The lease was made subject to the ex-

press condition that the lessee “shall be able to secure .

from, and be granted, a license by, the ‘West Virginia

Racing Commission” permitting the lessee to conduct

a horse race meeting on the leased premises. In apply-.

ing for the license, Charles Town. gave no indication

that it was acting ‘as-agent-for another. The Racing

- Commission granted the license to Charles Town and

authorized Charles’ Town to’ hold race ‘meetings on

. Charles Town’s premises.

_ , Charles Town operated the property as if it was its

/ own. It secured. the leases: it secured the’ licenses; it

hired all the employees ;, it collected all: the receipts; it

paid all the expenses; i hl dak sells ie gta

contracts ‘in its own name for materials and services’ ae

_ needed to conduct the meets; it filed all the necessary —

State and Federal reports ; it ere TRA, an association °

—54—

| of ‘ncmeiih operators ; it al the lessor in its own

name for excessive rent allegedly paid to the lessor;

: _and in fact it did all the things necessary to earn the

_ income in question. Charles: Town’: s activities were not

_ the usual activities of an agent and its business purpose.

was not the carrying on of the normal duties of agent

_ but, rather, to conduct and operate the race track meets

in its own right. 7 .

We think the facts and principles hede are very ‘much

_ like the facts and principles involved in National Car- —

bide Corp. v. Commissioner, 336 U.S. 422. In that.

- cas@the taxpayers were three wholly owned subsidiaries

“of another | corporation, Airco. The taxpayers and

° Airco had entered into ‘contracts which provided, in sub-

‘stance, that the subsidiaries were employed as agents

- to manage and operate plants designed for the produc-

- tion of products-assigned to it, and as agents to sell the

output of the plants. Airco was to furnish working

capital, executive management, and office facilities.

‘Phe subsidiares were to pay Airco all profits in excess

of 6 percent on their outstanding capital stock, which

in each case was nominal in amount. Title to the as-

sets utilized by the subsidiaries was held by them, and

the amounts advanced by Airco for the purchase of

assets and working Capital were.shown on the books of

the subsidiaries as accounts payable to Airco. No i in--

terest ran on these accounts, :

The profits turned over by the ‘are subsidiaries

to Airco were reported as income on Airco’s returns.

The taxpayers reported as ‘income only. the 6 percent:

‘return on capital specified in the contracts. The Com-

missioner determined that the taxpayers. were taxable —

on the income turned over to Airco as well as on the

| “nominal ‘amounts: retained. ‘The Court “Sustained th

ee: Serco tha ty and rejected’ the taxpay- .

‘ _\ -eP's~cantention. that ~ acted merely as — iy

sexs ‘\ Airco.

: In so holding? the Coiirt noted that the fact ve.

+ fireo furnished the funds necessary to. acquire the as-

a sets held by the taxpayers did not detract from the

reality of their owriership of such assets. - Moreover,

the Court held that it made no difference whether the ©

' funds advanced constituted capital contributions or

loans—the important fact’ was that the taxpayers held -

title to the assets and. regardless of the characterization —

of the source of the funds, it could not make the in- -

come earned by the. utilization of the assets the income

of Airgo, the supplier of the funds. es so holding,

the Supreme Court: stated :

We think that. it can sisal no ‘ens that fi- —

nancing of ‘the subsidiaries’ was carried aut by

- means of book indebtednesses in lieu of increased

book value of the subsidiaries’ stock. A corpora- .

tion must derive its funds from three sources: cap-

ital contributions, loans, and profits from opera-—

tions. The fact that Airco, the sole«stockholder,

preferred to supply ‘funds to its subsidiaries pri-

marily by the second method, rather than either of

the other two,"* does not make the income earned by

their utilization income to Airco. We need not |

decide whether the funds supplied to. petitioners

by Airco were captial contributions. rather than

loans. It is sufficient to say that the very factors, °

_ which, - as petitioners contend, show that Airco

“supplied” and “farnished”’ their assets also jindi-

cate that petitioners weré the recipients of copie :

contributions rather than loans." 3

ay .

.. Nor do the contracts between Airco and. peti-

» tioners by which the latter agreed to pay.all profits

above a nominal return to the former, on that ac-

count, become “agency” contracts within the mean-

>» ing of our decisions. The Tax Court felt that the

_ fact,/that Airco was entitled to the profits by.con- |

‘shows that the income “belonged to Airco”

and should not, for that reason, be taxed to peti-

‘tioners. -Our decisions requiring that income be .

taxed to those who earn it, despite anticipatory

_ - agreements designed to prevent vesting of the in- —

come in the earners, foreclose this result. incase.

Earl, 1930, 281 U.S. 111 * * * | ‘

_ What we have said does not Aeatitiane a true

¢ te agént or trustee from -handling the

property and income of its owner-principal without

being taxable therefor.: Whether the corporation ~

-:operates in the name and for the.account of the

| principat; binds the principal, by its actions, trans-

mits fnoney received to the principal, and whether

.' receipt of income is attributable to the services

of employees of the principal and to assets belong-.

- ing to the: principal’? are some of the relevant con-

siderations in determining whether a true agency

exists.. If the corporation is a. true agent, its

relations with its principal must not be dependent

_ upon the fact that it is owned by the principal, if

such@s the case. Its business purpose must be the.

nervy, an ak: the cncirieah diatien: of an: agent.”

* ** [Footnotes omitted]

: “ip gahithont Gk’ is Wiatidadd’ set forth: by the: Su

_preme Court in National Carbide to determine, the ex-

of a true agency relationship reveals that the | |

agency form here was a mere facade and that sucha

_ . Felationship did not exist’ as a matter of. substance. |

__. The evidence clearly established that Charles Town, the

' _ purported agent, did not operate in the name and for

the account of Fairmount, it did not bind Fairmount

by any of its actions, did not transmit money received

to Fairmount on a regular and preestablished basis, -nor

- was the receipt of- income attributable either to the

- employees or assets of Fairmount, Finally, and con-

os clusively, Charles Town’s business purpose was not the

carrying ‘on of the normal duties of agent. Its business

_ - purpose, .as revealed in its certificate of incorporation’

_ and by the testimony of both Ben Cohen and Pondfield

was to conduct horse racing: meets, with no. limitation |

' that such activity be conducted in the capacity as agent

for: another. Significantly, its charter does not author- ~

ize it to conduct business in the capacity of an agent.

There is a factual distinction between National Car-

bide and the instant case which we think is of no im-

’ portance. In ‘National Carbide, ‘Airco, the’ alleged

principal, owned all the oo of the three ‘subsidiaries,

the ‘alleged agents. Here, Fairmount, the alleged prin-

_ cipal, owned no stock in Charles Town; the allezed .

agent. Ni inety-eight percent of the “issued and out-

‘standing stock of Charles Town-was owned: by Pondfield

for which he paid $980 on July 22, 1958. _ This techni-

bt eae ownership of stock and the small capital furnished

ae by him are, we think, of little importance when com-

pared with the control exercised, and the capital ar-

ranged for, by Ben and Herman Cohen. These two

. \ brothers controlled and dominated a group of organiza-

x tions, including Housing, Fairmourit and Charles Town. |

Nid tala eaminiirenieatancs ~ an @ They |

—_——* -

: | _sg_ : . o ‘

caused Housing to turn over to Fairmount, who was

then insolvent, $900,000 so that Fairmount-could fur-

nish to Charles Town the capital necessary to conduct

_ the two contemplated racing meets. Fairmount actually

advanced to Charles Town $986,525 for that ‘purpose.

We think it is obvious that what the Cohen brothers

were trying to accomplish was to arrange the operation rs

of the racing meets in such a way that at least the

"greater part of the earnings from the meets would be

the income of Fairmount, so:that Fairmount could take |

advantage of the net. operating loss carryovers in the

= total amount of $852,105.37 and thus pay no tax on the

income from the ‘meets .until that sum “was realized.

'. The Cohens evidently did not want Fairmount to carry

on the actual ‘operations. . ‘They organized Charles

‘Town for that purpose and by the agreement dated

May 20, 1958, attempted to create a principal-agent -

relationship between Fairmount and Charles. Town..

For reasons: previously given we do not think a true —

agency relationship was thus created. National Carbide

Corp. v. Commissioner; supra; Spicer Theatre, Inc., 44

T.C. 198, affd. 346 F. 2d 704 (C.A. 6, 1965).

Sed also Fairmount Park Raceway, Inc. v, Commis-

. Stoner, 327 F.2d 780 (C.A. 7,°1964), affirming a

Memorandum Opinion of this Court. In that case a

group of individuals formed a partnership which ob-

tained a lease of a race track. The same individuals —

formed a corporation which, as indicated in the minutes

of a meeting of its board of directors was “to function

_only ag an agent” for the partnership in the operation.

of tating meets under a sublease from the partnership.

- These minutes further indicated that the corporation

Ae np Rapa te fee saree a toe pertneritip, be sup-

_ plied with: cpiersting:anstesttition:temdasSiy the

partnership, and will account to the partnership for all-

actions taken.and monies expended on its behalf.” oS aiae

- The partnership subleased the race track to the ar

poration, which during the years before the Court pro-

vided that 100 percent of the net profits: from, the op-

eration would’ be paid over to the partnership as rental... —

Z Applications for race. meetings were filed with the

state racing commission by the corporation. in its name,

At the end of a racing meet, the corporation paid its.

entire net income over ‘to the partnership, deducted these

amounts as “rent,” which amounts were reflected as”

rents received in the partnership returns. .. : ;

_ The amounts claimed as rent by the corporation were

disallowed in part by the Commissioner as being ex- -

- céssive. The taxpayer contended, in part, that the cor- —

poration was the agent of the partnership and that a

proper way to ascertain a reasonable rental for the

property was to determine the amount of thé corpora-

“-tion’s earnings the partnership would allow the corpora-

* tion to retain as compensation for operating the track. |

In rejecting the contention that the corporation was a

mere agent, the U. S. Court of Appeals, Seventh Creme,

said: |

. The Tax Court could. properly reject the notion

advanced that the corporation was in reality—con-

sidering the investments of the | partners in the”

track and the corporation’s use of the partners’

borrowing power, and its capital of only $17,500.00

a _ —merely an agency of the partners which was en-

' '* titled not to the earnings the ‘Commissioner deter-

im mined for. it, but really: entitled to only a isa The |

’

—60—

eras “business ‘purpose” of the corporation was opera-_

tion of - the track in its own right ‘and not the

normal duties of an agent. National Carbide

~ Corp. v. Commissioner, 336 U.S. 422, 437 * * *.

By the lease it appears that the partnership chose

to avoid the burdéns’, of principalship. 336 U.S.

at 438, 69 S.Ct. at 734.

In thie instant case, we think the tessiness purpose of.

‘Charles Town was the operation of. the track in its

own: right and not the normal duties of an agent and

' that Fairmount oe to avoid the burdens of principal-

mt ship. | iat ist

There are, of course, other considerations that re-

quire comment. For instance the large payments

| made by Fairmount to Charles Town, although reflect-

_ed on Charles Town’s books: as accounts payable, were

definitely not loans and petitioner does not so contend.

In fact, in paragraph 18 of its ‘requested findings of -

fact, it requested us to find that “The said advances_

to petitioner were not, made to it as a loan.” The

payments were not evidenced by any notes or other debt

instruments id not bear interest, were made without

security, ES with no date for repayment. In fact,

. according .to the agreement between Fairmount and

Charles Town, if the payments were lost, “any loss. -

. Shall be borne entirely by Fairmount.” The Supreme

- Court,. in. National Carbide ‘Corp. v. Commissioner,

supra, said that a- corporation must derive its funds

from: three sources, namely, (1) capital contributions,

(2) loans, and (3) profits from operations. The pay-

ments here were ‘not from class (3) and, since they.

z "were not loans, they must be: fégarded as capital

contributions. Although the Supreme Court in Nation-

6h

al Carbide Corp. v. Commissioner, supra, said it was

not necessary in that case to decide whether the funds

supplied by Airco. were capital contributions or loans,

it said by-way of obiter dictwm that the facts “indicate

' that petitioners were the recipients of capital contribu-

_ ‘tions rather than loans” and, in footnote 16, ‘said in .

part: | senate

ae Since no interest ran on these accounts, the

. “loans” were identical, except in name, with contri-

butions of capital. [citing several cases]

In holding that the payments made by Fairmount to

Charles Town were capital: contributions, it is im-

material that Fairmount itself was not a stockholder

of record in Charles Town. Motel Co. v. Commis- -

sioner, 340 F.2d 445 (C.A. 2, 1965), affirming a .

Memorandum Opinion of this Court; Sherwood Me-—

_morial Gardens, Inc., 42 T.C. 211, affd. 350 F. 2d 225.

(CA. 7, 1965). | ti ae

Petitioner’ makes ‘a belated deviates” to the effect.

that it and, Fairmount were joint venturers. That is _

not ‘the’ way the contract. between them was drawn.

The agreement was that Charles Town was to operate

the race track “for the benefit of Fairmount” except -

that “Charles Town shall receive 10 per cent (10%) ©

of the profits for its services.” This is not the lan-

guage of a joint venture. .The parties did not hold

themselves out to the public as joint venturers. Much

that we said of the pure agency relationship can be |

repeated here. The fact that the Parties treated the

income returned by. Charles’‘Town as “commissions”

is further indicative that the parties were not. joint

venturers. Under West ‘Virginia case law, a mon ven-

a

turer is considered to be a limited partner. Horchler v.

Van Zandt, 120 W. Va. 452, 199 S.E. 65 (S. Ct. App.

1938). No-partnership returns were filed. The only

returns that were filed were those of Fairmount and

Charles Town as separate corporations. We hold that

Fairmount and Charles Town were not joint. venturers.

It follows from all of the foregoing that Charles

Town earned the income in question; The attempted

shifting of this income to Fairmount may properly be ~

corrected by the application of the provisions of section

482 of the 1954 Code." falas

Petitioner contends that there was insufficient cqm-

mon control existing between Fairmount and Charles

Town to sustain the applicability of section 482 to this

case. In support of this position petitioner states that

‘the agreement which provided for the Cohens’ control —

of Charles Town, by placing both Herman and Ben

on the board of directors of Charles Town, also pro-

vided for the division of income between Charles

Town and Fairmount, and that as ‘section 482 applies

only to transactions “between already controlled tax-.

payers,” control required for the application of section

482 is wanting. The only authority cited in support — .

3 an :

1Sec, 482. ALLOCATION OF INCOME AND DEDUC- |

TIONS AMONG TAXPAYERS. ta :

‘In any case of two or more organizations, trades, or busi-°

nesses (whether or not incorporated, whether or: not organized

in the United States, and whether or not affiliated) owned.

or controlled directly. or indirectly by the same interests, the

Secretary of his delegate may distribute, apportion, or allocate

gross income, deductions, credits, or allowances between or

- among such’ izations, trades, or businesses,. if he .deter-

mines \ that distribution,. apportionment, or allocation is

y in order ‘to prevent evasion of. taxes or clearly to —

reflect the income of any of such orgainizations, trades, or

of this position is section 1.482-1 '(c)? of the regula-

tions. A perusal of that. section reveals that it sets

forth the general circumstatices in which the Commis-

sioner’s authority under section 482 may be exercised.

Of itself, it lends no support to petitioner’s position.’

Petitioner is in error in assuming that only by vir-

tue of the agreement between it and Fairmount were

the Cohens endowed with control of. Charles ‘Town.

That was only one of several facts, previously men-

‘tioned herein, by which their actual and effective con-

trol of the corporation was acquired and exercised. _

The statute speaks in terms of organizations “owned

or controlled directly. or indirectly by the same in-

terests.” [Emphasis supplied.] Furthermore, the term

“controlled” as used in section 482, “ ‘includes any kind

of control, direct or indirect, whether legally enforceable,

and however exercisable or exercised. It is the reality

of the control: which is decisive, not its form or the —

mode of its exercise.’ ” L. E. Shunk Latex Products, ,

_ Inc., 18 T.C. 940, 956. 3

281 482-1 DETERMINATION OF THE TAXABLE IN-

COME OF A CONTROLLED TAXPAYER. -

‘(c) Application. Transactions between one controlled taxpayer

payer and another will be subjected to special scrutiny to as-

certain whether the common control is being used to reduce,

avoid, or escape taxes.‘In determining the true taxable income

of a controlled taxpayer, the district director is not restricted

| to the case of im r accounting, to the case of a fraudu- ~

| -- + Jent, colorable, or sh transaction, or to the case of a

| device designed to reduce or avoid tax by shifting or distorting

income, deductions, credits, or allowances. The: authority to

. determine true taxable income extends to any case in which

_ ~tither by inadvertence or design the taxable income, in whole

_ or in part, of a controlled taxpayer, is other than it would

have been had the taxpayer in the conduct of his affairs been

_.an uncontrolled taxpayer ee at arm’s length with another

uncontrolled taxpayer.

ESAS RAI AAO RETA RR SEES SS a NNR MELONS MA tA C ASE TATRA ER SEO AIRS = A BALE ENEMA AERIS AEN NE BERRA NTO RE

. ee

No serious question can arise as to the control of —

both Fairmount and Charles Town by the Cohen

brothers, That they-owned all of Fairmount’s voting

stock alone establishes their control of that entity...

Their actual control of Charles Town is made evident

by the facts of record disclosing that they constituted,

at all times material, the majority of the board of di-

rectors of Charles Town; that they caused its creation;

were principal officers of the corporation and active in

_ its management; that, they caused the -capital neces-

’ 2 gary. to conduct the. meets to be furnished. to Charles .

Town; and, by the fact that as the majority of the offi-

cers of Charles Town, they. were, according to the May

. 20, 1958 agreement, to “make all major decisions as

to the allocation of i income and expenses in the erg, af

ment of the race meet.” é;

- The ‘shifting of seh from pa enardiet entity

- to another for the purpose of utilizing a net operating

loss carryover, as is the situation here, warrants the —

-feallocation of that income under the provision of sec-

tion 482. Spicer Theatre, Inc., supra.

The respondent’s determination is sustained.

Decision will be entered

for the respondent.

Decision 1. Pri? so

Tax Court of the United States .

Washington :

Charles Town, Incorporated, Petitioner, v. Gomenie-

sioner of Internal Raven Respondent. Docket. No.

. 3517-62, 7

Pursuant to the determination of the Court, as ‘set

' forth in its Memorandum Fj indings of Fact and. Opin-

ion, filéd January 19, 1966, it is |

Ordered and Decided: That‘ there are deficiencies ’

in petitioner’s income tax for the period May 22, 1958,

to: November 30, 1958, of $258,616.93, and for the fis-

cal year os November 30, 1959, of $117, 367.57.

_ (Signed) C. R. Arundell 3

Judge.

[Seal]

_’ Entered Jan. 19, 1966.

.#

*. ,

~ Portions of the Evidence.

‘STIPULATION OF FACTS

eR

7. The isedad and. outstanding stock of Charles

~ Town consisted of 100 shares of common stock issued

by certificates dated May 22, 1958, as follows: :

Certificate © , No. of

No. . ~~ Issued To Shares

Betis: Herman Cohen . 1

22334) > Ben Cohen: 1.

Ps Louis Pondfield 98

Said stock was issued for the total sum of $1, 000.00

which was paid as follows:

Date Paid Payor Amount

July 22,1958 © Herman Cohen: $ 10.00

July 22,1958 BenCohen | 10.00 .

Std July 22, 1958 - Louis Pondfield 980.00 -

During the taxable periods of Charles Town, here

‘before the Court, no additional stock. was issued to any

person and the aforementioned 100 shares represented’ .

-all of the issued and outstanding stock during. said

periods of time.

24. By check dated May 20, 1958, Fairmount iid

“the sum of $225,000.00: to Helene W. Boyle, which

payment was reflected on Fairmount’s books as a debit

ee eK KEK. ase

. to an account entitled “Charles Town, Inc.” nor aa:

credit to » Cae.

él

ee RR

27. ‘Tn addition to the foregoing, the following .

amounts. were paid by Fairmount to or on behalf of

Charles Town on the dates indicated, which amounts

_ were all reflected on Fairmount’s books as debits to the

account “Charles Town, ‘In€”"and as credits to cash:

"May 26, 1958 ae $5,000.00

May 26, 1958 | 5,000.00

May 28, 1958 —. 2,025:00"

. May 28, 1958 ~$ 1,000.00

May 28,1958 |" —._:1,000,00

May 28, 1958 225,000.00

November 5, 1958 . 224,250.00.

November 5, 1958 $63,250.00?

December 5;-1958-- $200,000.00

Nowssiber 24,1959 ‘20,000.00

Sis wks eects a t of a deposit to ‘the

Was reimbursed by Charles Town to Fairmount on June 10,

2Payable to the Citizens National Bank of Martinsburg, West

Virginia.

Peed to Helene W. Boyle.

Teeeave”

67. Charles. Town paid the following sums to Pair

mount on the indicated dates, said payments being

reflected on Charles’ Town’s ‘books as credits to cash

git

a

4 ' ” 4

ee ete tener —6g— >.

Dec. 1, 1959

\ and as‘debits to the” oe seme ledger account titled as

indicated: ; '

Date Kamel Aanounk Debited .

July -5, 1958 $100,000.0 Rent

July 12, 1958 140,000.00“ |

: Fly 24,1958 137,000.00 _ Account payable—

teas baiy/ (Postedin Fairmount Steel Corp.

5 the “ : “

_ amount of

Aug. 9,1958 100,000.00 - "

T3 1 50,000.00 , “ec “ ;

~ Aug.-20, 1958 150,000.00 4 @¢

Sept. 1, 1958 225,000.00 a“ a

Nov. 17,1958 554,612.47. a. a“

Jan. 12, 1959 200,000.00 oe hac

” ~ 63,250.00 . Rent Expense

Feb. 3, 1959 178,250.00 “ *

Feb. 10,1959 250,000.00 “ “

30,000.00 Advance from Fair-

mount Steel Corp.

An amount of $20,466.85 as of June 12, 1959, is re-

flected in the cash receipts book of Fairmaqunt and is

credited there to the account entitled “Charles Town,

_. Ine.” No disbursement of said amount is reflected

_ in Charles Town’s cash disbursements book,

eee ee

(4) new Ne Lseraol, edt

* BENJAMIN\BRILLIANT

| DIRECT EXAMINATION

By Mr. Aleman:

ke ee

(47) Q. Mr. Brilliant, in paragraph 67 of our r stipu-

lation (48) there is a reference to a figure of $137,000

which was posted ‘in the amount of $130,000. . Can’

you explain the difference? A. Yes. When they started .

the operations at Fairmount Steel, they needed. several

bank accounts. They opened up one .account. called

“Pay Roll Account” for $5,000; another account called

“The Horseman’s Account” for $1 ,000 and another

account for $1,000 called the “Outs Account.” - That °

was $7,000 that was not credited to the advance ace .

count shown on Fairmount Steel’s books, NG

-- Q. In the same paragraph of the stipulation, Mr.

Brilliant, there is a referegce to an amount of $20,-.

466.85, stating that no-disbursement of said amount

‘is reflected in Charles Town’ $ cash disbursements book:

Can you explain that? A. You mean it is Charles

Town’s disbursements book, I think you said Fairmount

Steel. ;

Q. No, Charles Town: A.° Those’ very same ~ ac-

- counts were closed out and I closed them out by journal

entry although a check was issued to tlose’ theni out.

There was a. check for’ $5,019.80 to close out’ the pay

roll account. ‘$1,000 to close out: the Horsemen’s Ac-

count. $1,000 to close out the “Outs” account, and there _

was something like $13, 000-some ‘odd from the regular

account also transferred’ at. the same time. Those

four checks added together made up that $20,000 fig-

ure that 7o referred to.

&

them out. instead | going sbichaile the cash disburse-.

ments book of Charles.Town.

5 | ddd

; CROSS ‘EXAMINATION

(50) : 3 '

.. By Mr. Seigel: , Bi es

ek eK ’

(55) Q: Now, do you know what the financial con-

.. dition of Fairmount was at the time of that advance

of $900,000? (56) A. Fairmount Steel, I believe, had a

deficit.

Q.In other bards, are you saying it was insolvent at

that time as a matter’ of book entries? A. As far as

the books were concerned, it may have been insolvent

but t do not hee it was actually insolvent. ;

ee kkk & “

(7) Q. That was $200,000 paid by whom. to. whom,

do you recall? A. Fairmount. Steel advanced Charles.

Town $200,000 for its operations for.that fall meet.

Q. Do you know what. that $200,000 was used for?

A. For a. bank roll. . 7

-Q. What is a bank roll? A. The track has to‘have .

cash money on hand to start operating with. They

call it a “bank roll.” — :

Q. Wiis lo witusdesy.ta commience a day's betting, in

o effect, .wagering? (72) A. Right. To start. the track’s °

; re} That, money was fe Ranke es Fairmount a

; Charles Town? A. That is correct. ”

— sss 2 sD

a

- (74) © eRe Us re

Cte | LOUIS PONDFIELD

; @ witness called by counsel for the Petitioner, having

- been first duly sworn,\was examined and testified as

follows: =. Bei .

) : _ DIRECT EXAMINATION

‘By Mr. Altman: Bist

a a | he

(75) Q. What business are you in now? A. Race

track management. ==

Q. What race track. is that? A. Well, I-

Charles Town Race Course, and the Pimlico Race

Track. . | : D

‘Q. How long have you been in that business? A.

Since 1949, | ss 3

In actual management. oa ea

Q. How long have you had any connection with horse

racing? A. I have had connection with horse racing

“all my life actually, or since'I was old enough to do it.

Q: Well, before 1949 what was your connection with

‘horse racing? ‘A. Well, from about 1920 I owned race

horses and raced them. I was close to management. I

was friendly with management, and bred some horses

a little bit later on which I do presently, : x

Q. You do what? A. I bred some, horses. I run

_ ° a breeding farm. :

Q. I see. Now, referring to 1949, what connection

- to you have from there on—, A. 1949 I entered into 3

negotiation to purchase Randall Park, a race track”

in Cleveland, Ohio. § : |

(76) Q. Can you. state how that negotiation de-

' veloped? A, Well, actually another group of people |

including myself,. purchased it. In 1950, that is.

Pa tcene |

ae hme .

\ Q. What interest did you acquire in it? A. Five

‘

\ Jy I wound up with 10 per cent of it, and-a management

contract: ?

: OW What was your part i in the ‘idaeectiaicads A. I

7 think ° 4 spearheaded the complete negotiation such as |

«we set the. price, means of amortization, down payment,

_. rate of interest—who was to be eniployed, and all that

Sort of thing—everything. | ,

Q. Did you havé-any part in the oo A. Yes, 3

sir, I completely. operated it or I managed it rather.

Q. Were Herman. and “Ben Cohen connected with

_ that? A. No, sir. | ia

ae Q. I mean, ‘in the acquisition ? wx No. They had _

eS /pateing to do with it. However, I did discuss the ac-

quisition of that race track Prior to the final deat-that

we did make. c

_ _Q. With whom? ‘A. Well, you mean the prospective :

purchaser? —

Q. Yes. A.. That was Sol Silberman and Ralph De .

ae Chiaro and Herman Siskind, and myself.

, ._. (7) Q. Were those the actual purchasers? A. Well,

no, I was to participate in it arid the other three gentle-

men were the actual purchasers. Four in.the corpora-

—.. tion. é

: Q.. Did you enter: Dane in betibeticin with |

the . isition of. any racing track after that? A.

. Yes, have been in a number of negotiations prior to

and since then.

J ~Q.Prior towhen? A. 1949. :

Q. In other words, I have been in some magutiotions

to buy race tracks which were never effected.

Q. Prior to 1949? A. Right.

. . bh» ‘ . A

73

Q. Now, since 1949, can you give me deivecloniadly

just what you did? A. Yes, sir. In 1951 I arranged a

group ‘which consisted of Cuilly Boshamer, Mack Les-

nich and myself, and we purchased two race tracks in .

the Cleveland area, namely, Thistle Downs and Cran-

wood.

. Q. Did-you have any connection with their operation? |

A. Yes, I managed that, too. .

Q. Did Herman or Ben Cohen have any connection

_ with that? A, None.”

Q. After that were. there any? (79) A, Well, in

1951 I initiated’ some negotiations whereby the Mary-

land Jockey Club or the Pimlico Race track.

Q. Well; now what is the difference between those

two? Is the Maryland Jockey Club— A, The Mary-

land Jockey Club operates the Pimlico Race track.

Q. As lessee or owner? A. ‘Actually they are own-

ers. And the “Pimlico Race Course” is just a name.

Q. I see. Are the Cohens, were they aval in

that? A. They finally entered into that negotiatio

In other words, it was initiated _by myself and then Se

Cully Boshamer and Mack Lesnich and the Cohen /

Brothers, —

Q. Did you acquire an interest in it? A. Yes, sir.

’- Q. What’ percentage? A. I presently own 7% per

cent of it. ‘

Q. Have there been any others since then? A. We

tried to buy a few other race tracks. :

WF dey “KKK KK &

(85) °. In your management of the Charles Town

Racing meets, didyyou get any interference from the

Cohens? A. None whatever.

—/4—

(8) Q. Do you ‘know why they were placed on the

- Board of Directors under this contract? A: It was a

; mutual idea. It was both their idea and mine, so that |

they could vote and I could not—and it would be a little

unfair if I walked in there and spent a half million

dollars for an improvement for a race track that did not

“belong to use so, naturally, they were in a position to

out vote me on the Board of Directors and’ the only

time I ever conferred with them was a matter of policy,

important policy or some expenditures, large eK

tures, aside from the daily operation.

ARKH

| (87 ) Q. Mr. Pondfield, again in your opinion, based -

on your experience in the racing business, was the ten

per cent for operation received by Charles Town, Inc.,

a fair compensation for the operation? A. I’ can only

tell you that in 1950 I had an arrangement similar ‘to

that with Randall Park, the race track in’ Cleveland, —

‘Ohio, where I was to get 10 per cent of the net profits

- at the end of the year. eee: |

( The Court) ‘Why not answer the question Srvaarad

then? :

By Mr. Altman:

Q. Yes, my question was— A. Ifyou will put it

ph | . °

. Q. —was ten per cent a fair compensation for the

Soreties? (88) A. Yes, sir.

a a ee

| —75—

| (129): | ‘BEN COHEN

a witness called by the Petitioner having been daly

‘sworn, testified as follows:

DIRECT EXAMINATION ~ ___-

By Mr. Altman: : |

. ROR KR OK

(129).Q. At the time you went into the deal that—

this contract that you just looked at with Charlestown,

Incorporated, did you anticipate at that time more than -

one racing meet? A. There was only one racing meet

3 that we nap ae That is all we negotiated for.

xx KKK K

~ (129) 9. Showing you exhibit ISR, can you identify —

that—(130) being supporting statement to the applica- ~

tion for license for the second meeting, I ask you again

were you able to find the copy - the first meet? |

A.. No.

Q. Now, let 1 me ask you dine there is any similar- e

ity between this supporting statement for the second

meet and the one that was filed for the first meet?

A. They are the same. .The forts are the same, the

questions and answers are the same.

CROSS EXAMINATION

By Mr. Seigel:

ee

(144) (The Court) How was it put, =) you gave a

check | as the money was needed?

( The Witness) ‘Yes, sir. : .

In other, words, when. this lease was Pas I did.

not have a Fairmount check but I happened to have a .

es - :

eit

check on the bank. I wrote in Fairmount’s name and .

put the money up, the $225,000. Then when they open-

ed the account, in the “Ins” and “Outs” account’ and

the payroll dccount, we advanced them the money ‘for

that. a

(The Court) You mean now Fairmount? _

_ (The Witness) Fairmount advariced it.. Then when

they needed the bank roll, ‘which is the amount of ©

money that you get in different denominations, so. that

the cashiers can cash. tickets without running over to

the seller to get the money to hold up the business, we .

advance $200,000 and when Charles Town accumulated

enough money of their own as they did for the out -

moneys that come in daily, they paid back the’ $200,000 ©

- for the bank roll and then at a later date they paid back

the other money as it accumulated because in the first

- place, Fairmount ‘could use the money and the. other

thing is that it was a small bank up in Charles Town and

you do not like to leave fifty or one hundred thousand

dollars in a. bank that only has about $50,000 (145)

capital.

+k eK |

(156). Q. Did Fairmount Steel have *any business °

activity in the area of New Cumberland, Pennsylvania?

A: Yes. .

ie, What was that activity? A’ That was a Cape- ;

hart Housing job which Fairmount was using our

money for. It required-a million four hundred thousand

dollars. It was a:construction job, built for the Army

_ under competitive contract. —

Q. Fairmount wound up with a profit on it? A. Yes.

* +k eK *

L ~ UMAR ME OE RATT I EAI, OT

ee

ao. $C

Corporation Income Tax Return

Name Fairmount Steel Corporation

Calendar Year

Or fiscal Year Begin July 1, 1958 and Ended June

30, 1959 ~

. Schedule L. —Balance Sheets (See fostructipai)

Beginning of Taxable

: } Year

Assets — -_ Amount —_‘ Total |

_ 1. Cash 3 : ed * ~ - $9,000.00

2. Notes and accounts receivable......... $384,453.98 ©

__ (a) Less: Reserye for bad debts... = - 384,453.98

3. Inventories: (a) Otherthan last i in, |

. first-out dad

(b) Last-in, first-out. 9 -.........

4. Prepaid expenses and supplies.......... 624.88

5. Investments in governmental obliga-

tions:

(a) Obligations of a State, Terri-

tory, or a possession of the

United States, or any politi-

cal . subdivision of.any of \ the

foregoing, or of the District of

Columbia

(b) Obligations of the United es

States and its instrumentalities aakiniaeeii

Mortgage and real estate loans... § 50,000.00

Other investments, capital stock J

_ joint venture 493,013.13.

8. Buildings and other fixed depreci-, .

able assets 4,366.32

(a) Less: Accumulated amortiza- ;

tion and serene otececceeéertece 94.59 . 4,271.73

9. Depletable assets ,

(a) Less: Accumulated depletion... hep seme ro

' 10. Construction in.progress ................ Ai. 765,201.84

shan

11. Intangible assets (amortizable | eee

(a) Less: Accumulated anne.

tion

12. Other assets (Attach schedule} org.

evceseoresen = £=— ss Se eee decese *

expense | 497.35

13. Total Assets . ; 1,707,062.91

+e ee * P fee

i ee re ree a

%

: PEE nee nT a wa ‘ , ;

ee oe 8 :

[JOINT] EXHIBIT 17-Q”

No. 3 Eek SHI

: 3 Under Act 1935

WEST VIRGINIA RACING COMMISSION

License . Hs

’ This -is to Certify, That on the 21st day of May of

1958 a license was granted to CHARLES TOWN,

-INC., by which it is authorized to hold race meetings

on its. premises at Charles Town, West Virginia.

From June 6, 1958 to September 1, 1958, leclitee

excepting June 16th through June 21st.

This License is issued with the conditions stipulated

- as follows: ) :

FIRST. No racing official shall act at its meeting

except by approval of the. West Virginia Racing

Commission.

SECOND: All race meetings conducted under this

license shall be subject to the rules, regulations

. and conditions, from time to time, prescribed by the

. West Virginia Racing Commission and may be

e. revocable. for any violation thereof, or whenever

tthe continuance of such license may be deemed

not conducive to the best interests of racing.

JAMES G. McCLURE, Chairman.

W. D. POLAND, Secretary. |

Cet mm

--F9-—

[JOINT] EXHIBIT 18R

_ SUPPORTING STATEMENT TO

APPLICATION FOR LICENSE _

All questions must be answered in full. This state-

ment is to be considered as a part of the printed form

for Application for License. Fill in and execute in

quadruplicate, and send with printed form to:

West Virginia Racing Commission

Capitol Building

Charleston 5, West Virginia

1. Name.and address of applicant.

- CHARLES TOWN IN CORPORATED

(a) Name to be used in the operation

‘CHARLES TOWN INCORPORATED

2. Is the race track and racing to be conducted by |

an individual, a partnership, or a ‘corporation?

- Corporation

- (b) If a corporation, give the following:

~ Date of State in which Authorized’ Paid-in

Incorporation . Incorporated Capital Capital

May 22, 1958. ’ West Virginia $10,000 $1, 000 .

Names and Addresses of Officers |

* and Directors > % Title

. Ben Cohen, 1229 Mt. Royal Ave., ee

Baltimore 17, Md. President & Director -

Louis Pondfield, 1229 Mt. Royal Ave.,

Baltimore 17, Md. . Vice-Pres. & Director

erman Cohen, 1229 Mt. Royal Ave., :

- Baltimore 17, Md. Secy-Treas. & Director

F aes . P

. * ‘ =

- , —80—

26 -

.

3 ee Page Two

2. (b) Continued. ee .

Give below the names and address of all stockholders

as well as all beneficial owners of such stock, and shares

- held by each:

; - Names and Addresses

Shares Held

Louis Pondfield, 1229 Mt. Royal Ave., +

- Baltimore 17, Md. . - 8

Ben Cohen, 1229 Mt. Royal Ave., |

Baltimore 17, Md. ; i.

Herman Cohen, 1229 Mt. Royal Ave.,

Baltimore 17, Md. —

“(c) What is the source of funds invested in the

business?

3. Give the following le relating to per-

sons who hold, or are expected to hold, a ee in-

terest in the enterprise:

Names and Addresses ; Amt. of Int.

Same.as 2, (b)

4. Give the following information relating to persons

who have advanced by loan, or otherwise, the capital

invested in the business.

(Do Not Include Persons Named in No. 3 Above)

Names and Addresses) Amount :

* - Fairmount Steel Corporation, iy

1229 Mt. Royal Ave., ‘ | ie

Baltimore 17, Md. : Pcaney

—81—

JOINT EXHIBIT 47-AU

ORGANIZATION MEETING

3 May 22, srannis

eke KK &,

Thereupon the meeting recessed) for a suriod of one

half hour, and upon reconvening it was ascertained that

during the aforesaid recess the original subscribers or

incorporators, Doris E. Kuhn had assigned her sub-

scription to one share of common. stock in this corpora-

tion, to’Ben Cohen and, Joyce B. Seticindiver, had as-

‘signed her subscription to one share pf common stock -

in this corporation, to Herman Cohen, and Clarerice E.

Martin, Jr:, had assigned his subscription to-four shares

of capital stock in this corporation to Louis Pondfield,

and Doris E. Kuhn and Joyce B. Sencindiver, their

, subscription, each to two shares of common stock in

this corporation, to Louis Pondfield, and each had au-

thorized the Secretary of this corporation, when elect-

ed, to issue the same in accordance with ‘the assign-

ments aforesaid, in their respective places and stead,

and ” of said stock was Brenean in person or by

proxy.

Thersipon it having been ascertained ‘that the per-

manent certificates for capital stock in this corporation,

are not now available, and that Ben Cohen. has: sub-

scribed to one (1) share of common stock, and that

Herman Cohen, has subscribed to one (1) share of com-

mon. stock and Louis Pondfield has subscribed to 98.

shares of common stock of this corporation and that

they are ready to pay for the same upon the issuance .

_ of. the. respective certificates therefor to them, upon :

‘motion it was unanimously.

Resolved that the officers of this cornpidiind. pd

elected, issue to the said Ben Cohen, Herman Cohen and

\

\

Louis Pondfield, appropriate certificates of stock in

accordance with their subscriptions, as aforesaid, when

—————

full payment has been made therefor. |

‘Thereupon, upon motion duly made and seconded, ‘the

_by-laws of this corporation. were adopted and the Sec-

retary was directed to insert a copy theneof immediately

following the transcript of this hecieiicens in the minute

book ‘of this corporaton.

: Thereupon, upon motion duly made and \seconded, the»

\\ following were unanimously elected as ‘the Board of

_ Directors of this corporation: .

Neier Cohen

Louis Pondfield

such Directors to serve until their successors are

_ elected and are qualified.

Thereupon, discussion was had relative to thé lease

contract between Ben: Cohen, agent, and Helene W.

Boyle concerning the lease by him on behalf of this

corporation of certain properties in Charles Town Dis-.

trict of Jefferson County, West Virginia, that had there-

- tofore been used by the said Helene W. Boyle and Al-

bert J. Boyle, deceased, in tht operation and conducting

of horse racing meets in said District * and: ‘County;

‘ said lease agreement being laid before the meeting.

Upon motion duly. —_ and seconded it was unani-

mously,

Resolved that the lease agreement between Helene W.

Boyle and’ Ben Cohen, agent, acting on behalf of this

corporation, dated the 20th day of May, 1988, and the

supplemental agreement affixed thereto, dated the 22nd:

day of May, 1958, be and the same are, in every respect,

rocthygt 4 accepted, aaenee, confirmed and approved by |

/

this corporation, all: acts of the. said Ben Cohen, acting a

as aforesaid, be and: the same are hereby ratified, con-.

a firmed arid approved by. this corporation, and that all ...

obligations and rights thereunder, be and the same are

hereby, assumed by this corporation, without recourse

upon the said Ben Cohen.

‘t Thereupon, a discussion was had selative to the fi- rs

-nancing of the racing meeting sa for under the —

_ lease agreement aforesaid. __ ,

__ Upon motion duly made and seconded, it was unani-

mously

Resolved that the Directors and Officers of this cor-

_ poration, enter into and execute such loans, agree-

gents .and obligations on behalf of this corporation, ’

* ag necessary in order to provide for and conduct a horse

race meeting on the properties leased by this Ge pane

tion as aforesaid. ‘

Thereupon a proposed contract between this corpora-

tion and Fairmount Steel Corporation, having been read

to the meeting Afiscussion was had upon the same, and

thereupon on motion duly made and seconded, it was

unanimously

Resolved that this corporation enter into. such ¢on-

_ tract with Fairmount Steel Corporation, that the ap-

propriate officers of this corporation, when elected; ex- _

ecute the same on behalf of this corporation, and a copy

thereof be placed in the files of this corporation.

Thereupon, upon motion duly made and seconded, the

meeting was adjourned to meet at the call of the me ;

dent.

, Clananee E. Martin, jr.,

Chairman. © =’

Doris E. Kuhn,

Secretary:

‘to act as Secretary.

rn

si - YOINT] EXHIBIT 49-AW

jee - October 22, 1958

A special mesting of the Board of Directors of

Charles Town Incorporated was held at the offices of

the corporation, 1229 Mt. Rayal Avenue, Baltimore,

‘Maryland, on October 22, 1958, at 10:30 o’clock A.M.

Those present were: Mr. Ben Cohen, Mr..Louis Pond- ©

_ field and Mr. ‘Herman Cohen; being all of the Direc-

% tors of the corporation. Mr. Ben Cohen acted as chair-

man of the meeting and. appointed Mr. Herman Cohen

xk KKK

Resolved, that the ‘salary of Louis “Pondfield,

General Manager and Vice President of the corpora- |

tion, be and hereby is determined to be $25,000

for. the’ fiscal year: ended November 30, 1958; and

be it: ~

Further Resolved, that the ‘ane ar Ben Cohen,

President of the corporation, and Herman Cohen,

Secretary and Treasurer:of the corporation, ‘be

and hereby is ype ize to be $7,500 each; and be

it

Further Reaived, that the liaaatie: of, the cor-

rhs: poration be and hereby i is authorized and directed

to pay the said‘salaries to the respective officers

on or before November 30,1958.

~The meeting then discussed the future operations of

‘the corporation: Mr. Ben Cohen stated that Fairmount —

. Steel Corporation. is negotiating for a lease for the

1958-59 winter season at Charles Town and Stated that,

\in the event that Fairmount Steel were successful in

-_,

obtaining the said lease, it would be. willing to enter

- into a new agreement with Charles Town Incorporated |

for the operation of the Charles Town Race Track op-

"erations of the’Fairmount Steel Corporation, said agree-

ment to embody essentially the: ‘same terms and condi-

tions as ‘the agreement under. which the operations were

conducted during the summer season of 1958. Mr. Pond-

field stated that, in his opinion, the summer season was

_ very beneficial to the horsemen and the community of

Charles Town, and he believed that if Fairmount Steel

Corporation could negotiate: another lease, He could con-

tinue to build up the good will among the patrons of the

track. Mr. Ben Cohen then stated that Fairmount Steel

Corporation would consider the agreements at its next

meeting, and in the evenf that the Board of Directors

would: approve same, he would advise them that Charles

Town Incorporated would undertake the management

of the track duting the winter season of 1958-59.

There being no further business, the —— was |

adjourned.

Respectfully submitted,

Herman Cohen, Sefretary.

Approved: Ben Cohen

Lou Pondfield

—

[JOINT]: EXHIBIT: 50-AX ©

November 12, 1958

A special meeting df the Board of Directors of

Charles ‘Town Incorporated was held at the offices of the

corportion, 1229 Mt. Royal Avenue, Baltimore, Mary-

land, on November 12, 1958, at 10:00 o’clock A.M.

Those present were: Mr. Louis Pondfield, Mr. Her-

man Cohen and Mr. Ben Cohen. Mr. Ben Cohen acted

as chairman of the ‘meeting and appointed Mr. Herman

Cohen to act as Secretary.

Mr. Ben Cohen reposted that he =a Mn a

_ Lease with Mr. [Mrs.] Albert J. Boyle for the winter .

season of 1958-59, and that he signed the lease on be-

half of Charles Town Incorporated for this Meet. |

He further reported that Fairmount Steel Corporation

paid to Mrs. Boyle $63,250 and deposited in escrow an ~

additional check of Fairmount Steel Corporation for

$224,250, guaranteeing to Mrs. Boyle the minimum rent

for a Race Meet to be conducted sometime between ~

December 15, 1958, and’ February 20, 1959; and that

Fairmount Steel would enter into a contract with

Charles. Town Incorporated for the latter to conduct

the Meet under the same terms and conditions as

- Charles Town. Incorporated conducted the Meet for

' Fairmount Steel ‘Corporation in the summer of 1958.

Upon motion made by Mr. Pondfield and’ seconded

by Mr. Herman Cohen, it was unanimously agreed to

enter into the: same contract .with Fairmount Steet

snliliais.:

Corporation to conduct the Meet during the 1958-59

winter season as the previous contract, and Fairmount

Steel Corporation is to ‘provide Charles Town. Incor-

porated with bankroll and any other money necessary

for Charles Town Incorporated to conduct this Meet. . ,

There being no further business, the meeting .was ad-

journed at 11:15 o’clock A.M.

_ Respectfully submitted,

- Herman Cohen, Secretasy,

Approved:

Ben Cohen

_ Louis Pondfield

[JOINT] EXHIBIT 66-BN

West Virginia Racing Commission

_ Charleston 5, West Virginia

May 21, 1958 |

: Seniiane Clarence Martin —

Attorney at Law |

Martinsburg, West Virginia

Dear Clarence : .

Bill Poland called me last night and told me that he

had actually seen Mrs. Boyle sign a lease to the outfit

which runs Pimlico, and that you represent them in this

-_ transaction. He said he had an application for dates

from them to operate Charles Town from June 6

through September 1,; and that there is a provision in

the lease which permits the horse show to operate. I

asked him to get in touch with you so that we may

know wheni the horse show will operate. |

I am sending you five copies. of “Supporting State-

ment to Application for License,” asking that, after

execution, you return four copies—one directed to our

office in Charleston, one to me, one to Malcolm Lowe,

and one to Bill Poland.

*exexe KK K

I understand that Mr. Pondfield will be the manager,

and I am enclosing herewith a letter directed to him,

and ask that you turn it over to him at the proper

time. As you will note, the letter names the officials

whom we will appoint for this meeting.

o i eeeEK KK

Very truly yours, ;

James G, McClure, Chairman, _

; West Virginia Racing Commission. °

JGMcC: ew | |

-cc: Mr. Wilam Poland

Mr: Malcolm Lowe

keke K EK