Mark Tanz v. Minister of National Revenue, [1973] CTC 377, 73 DTC 5311

Collier, J:—This is an appeal by the taxpayer from the Tax Appeal Board. (now the Tax Review Board) which affirmed a reassessment by the respondent Minister for the 1963 taxation year. The respondent added to the appellant’s income the sums of $50,000. and $74,750. The latter amount arose out of certain transactions in the shares of a company called Jaton Investments Limited. The appeal in respect of that portion of the reassessment has been abandoned and will therefore be dismissed.

As to the sum of $50,000, the appellant asserts it was not income but arose from the sale of a capital asset, some shares. The respondent, on the other hand, contends it was remuneration for services rendered to certain companies, or alternatively, if the amount was received on the sale of certain shares, it was income from a business and taxable accordingly. I have set out the respondent’s position as stated in the pleadings. At trial, in regard to the alternative argument, counsel contended the $50,000 was a profit realized from an adventure in the nature of trade.

The facts. The appellant is a successful businessman. His initial ventures were in the field of real estate and development. I accept his testimony that in the summer of 1962, and before, he wished to make a substantial investment in something outside the real estate field. He had in mind a public company and his plan was to acquire a large shareholding. He wished to participate in the management of such a company on a long-term basis, not on a day to day basis. A stock underwriter in Toronto brought Milton Brick Co Ltd (hereafter “Milton Brick”) to his attention. As the name indicates it was in the business of manufacturing bricks. It had plans to open a block plant as well. Tanz spoke with one of the directors and presumably made some inquiries of his own. He felt this was the type of investment he had been looking for. The director indicated that if an offer to purchase 300,000 shares at $4 per share were made, it would be favourably received. That number of shares gave control to the extent of approximately 60%.

At that time the appellant could not invest that much money. He thought of one Jack Blume, whom he had met earlier in 1962. Blume was an American businessman who lived in New York but had an Ontario company, Interworld Development and Investment Corporation Limited (hereafter “Interworld”) which was mainly in the business of loaning money to developers and contractors. Tanz testified he and some of his companies were and had been borrowers from Interworld. Perpetual Investments Limited (hereafter “Perpetual”) was one of the companies. Interworld carried on business from an office in a suite of offices where Rose & Persiko, a firm of Toronto solicitors, carried on business. That firm had acted for Blume and Interworld for some time. They had also acted for the appellant and his companies.

Jack Blume was called as a witness on behalf of the respondent. I think it was necessary to do so in order to try and offset the thrust of the evidence given by the appellant and his witnesses. Blume denied knowing in September or October 1962 that Tanz and some of his companies were borrowers from Interworld. I accept the evidence of the appellant and the other witnesses who testified to the contrary. There are other more serious conflicts in the evidence. The testimony of Tanz, and of the solicitors Allan Rose and Bernard Persiko, on many matters, is the opposite of the testimony given by Blume. I should state now, before further reviewing the facts, that I unhesitatingly reject the testimony of Blume where it is in conflict with that of the other witnesses. Mr Blume, in my view, showed disregard for truth. In cross-examination he contradicted himself on several matters and in some instances conceded he had given contrary testimony in other legal proceedings. I do not understand his motivation, but it was obvious to me that his unconcealed antipathy to Tanz, Rose and Persiko has somehow persuaded his mind to believe in the truth of what his tongue said. After observing his manner when giving evidence, his evasiveness in answering direct questions, and considering the contradictions elicited, I cannot, on material matters, accept anything he said.

I resume the narrative. Tanz got in touch with Blume. He indicated interest and came to Toronto. They visited the Milton Brick plant. Tanz said he and Blume agreed to purchase 150,000 shares each of Milton Brick at $4 per share. Tanz intended to,finance his investment of $600,000 through his bank and the sale of his equity interest in two shopping centres. Rose and Persiko prepared a letter of intent to the directors of Milton Brick which was submitted on September 19, 1962. In it, Tanz and Blume offered to purchase not less than 300,000 shares and not more than 310,000 shares at $4 per share. The directors approved this offer the same day. The closing date was October 30 1962.

Tanz testified that as of the date of the letter of intent (September 19, 1962) there had been a change in the earlier arrangement between himself and Blume. Blume wanted Interworld to be the purchaser of the shares and Tanz to purchase 50% of the shares of Interworld. There was a meeting with chartered accountants on October 2, 1962 and the arrangement was once more changed. The accountants sent a letter the following day (Exhibit 5) outlining the method of acquisition of the shares:

1. Interworld would obtain an interim loan from the bank for the cost of the shares.

2. Interworld would then pay to each of Blume and Tanz an amount sufficient to buy the shares.

3. Blume and Tanz would then personally buy the shares with the funds transferred to them.

4, After the shares were acquired, Tanz and Blume would sell them at cost to Interworld and would be paid in preferred shares of Interworld.

The shareholders responded to the offer and 310,000 shares were purchased. I accept the evidence of Tanz, Rose, and Persiko that steps 1 to 3 were carried out, but step 4 was not. The documents filed as exhibits corroborate this finding. Blume and Tanz became the equal owners, in a practical and legal sense, of the shares. The documents in connection with the bank financing (Exhibits 1-3 and 10-16) all indicate ownership in Blume and Tanz.

A draft agreement was prepared by the solicitors sometime in October 1962 (Exhibit 8) but was never signed by Blume or Tanz, although the latter testified it was satisfactory to him. It is predicated on personal ownership of the shares by Blume and Tanz. The draft agreement provided for Tanz buying a 50% interest in Interworld, $100,000 in cash and the balance of $400,000 by the sale of his equities in some shopping centres. Tanz’s company (Perpetual) paid $100,000 to Interworld on October 18, 1962 (Exhibit 9) on the basis of this draft agreement.

On the takeover of Milton Brick on October 30, 1962 Blume became Chairman of the Board and Chief Executive officer and Tanz became Executive Vice-President as well as a director. After the closing Tanz pressed Blume, endeavouring to have him execute the agreements prepared by the solicitors. Blume, according to Tanz, and again I accept the latter’s evidence, delayed and seemed to be worried about his investment, and orally persuaded Tanz to agree to sell Perpetual to Milton Brick. Nothing, however, was drawn up or signed.

Tanz was becoming frustrated for two reasons. Firstly, he was not able to finalize anything with Blume, who kept suggesting changes of some kind, and no documents were signed. I add that not all the draft agreements drawn from October to January 23, 1963 (the date Blume and Tanz concluded their association) were necessarily produced in evidence. Sometime after the material events here, there was a fire in the offices of the solicitors and some records may have been lost. Secondly, on the recommendation of Blume, Milton Brick hired a man named Roberts as executive assistant to Blume. Roberts came to Toronto in November. Tanz and Roberts could not get along. Tanz felt Roberts was hurting the operation, that he was Blume’s man, and that his (Tanz’s) relationship with Blume, who was mostly in New York, was deteriorating.

On December 10, 1962 there was a meeting between the two. Blume had brought a document providing for the transfer of the Milton shares to Interworld. Tanz signed the documents but later that evening following further unsatisfactory discussions, it was agreed the documents would not be acted upon and, in fact, were never acted upon.

Tanz was leaving on a holiday in December and a pooling agreement in respect of the Milton Brick shares, prepared by the solicitors, was signed by Blume and Tanz on December 21, 1962 (Exhibit 20). This was the only formal agreement ever signed by the two protagonists until the break-up of January 23, 1963. The agreement asserts that the two individuals jointly own approximately 320,000 shares of Milton Brick. It was to be replaced by a formal pooling agreement to be completed in the early part of January 1968.

In the first part of January 1963 a number of draft agreements were prepared on the instructions of Tanz and submitted to both parties. None of these were ever signed. Tanz could not reach Blume. He says, and I believe him, he was becoming more frustrated and was having further problems with Roberts. As a result of information given to him by one of the directors (now deceased) Tanz demanded a meeting with Blume. His intention, he says, was to buy out Blume’s interest in Milton Brick.

Blume’s version, which I do not accept, is that the arrangement was, from the inception and throughout, that Interworld would acquire the shares and that Tanz would match Blume’s equity in Interworld. He endeavoured to put the blame for delay in finalizing matters at the feet of Tanz, who he says, endeavoured to change arrangements from time to time. He said Tanz suggested Milton Brick should purchase his interest in Perpetual and another company Tanz controlled. Blume says these were the companies he understood Tanz would bring into Interworld. Blume said that by January 23, 1963 he was totally perplexed. I do not accept his evidence. I think Blume at all times was manoeuvring to acquire somehow control of the Milton Brick shares and of Tanz’s equity in some of his companies through Interworld. I suspect his evidence is now tailored, in part at least, to lend credence to his claim that the sum of $50,000 ultimately paid by Interworld to Tanz, or some portion of it, is deductible as an expense to Interworld.

A meeting was held in Interworld’s office in Toronto in the evening of June 23. Present were the appellant, Blume and his wife, and the solicitors, Rose and Persiko. The latter’s secretary was in and out of the meeting, taking notes and preparing documents. Tanz complained of things he felt were wrong, of Robert’s conduct, of Blume’s actions, vacillation and procrastination and of what he felt were Blume’s allegations against him in regard to the development of the block’ plant. He told Blume he wanted to buy Blume’s shares for their cost plus $75,000. Blume refused and said he would buy Tanz’s shares for cost plus $10,000. Tanz refused. Allegations and counter-allegations were made. Tanz then decided he had to get out of this association. He invited Blume to make the same offer he (Tanz) had made Blume. A further stalemate developed. The atmosphere was very tense. Finally, Blume and Tanz agreed that Rose and Persiko would act as arbitrators as to what Blume should pay Tanz over cost for the shares. Rose and Persiko went to an adjoining office, subsequently returned to the meeting, and stated they felt $50,000 over cost was a proper figure. Tanz accepted this and both agreed documents should be signed that evening.

Rose and Persiko corroborate Tanz as to the details of what happened at this meeting. I have shortened the details in my finding (supra). It was a lengthy meeting, hostile and electric with several impasses, until the sum of $50,000 was accepted.

In the presence of Blume and Tanz, and with suggestions from both of them, Rose dictated the documents (Exhibits 27 and 27A-30) to Persiko’s secretary. By Exhibit 27 Blume purchased all of Tanz’s Milton Brick shares for $50,000. Blume assumed all liabilities in respect of their earlier joint acquisition of the shares. These were set out in a schedule (Exhibit 27A). Blume assumed responsibility for the bank loan. The agreement concluded with a mutual release.

Exhibit 28 was an agreement between Interworld and Tanz providing that Tanz and his companies would, within 15 days, repay all indebtedness to Interworld. Blume signed an Interworld cheque to Tanz for $50,000, which Tanz endorsed back, to be applied against indebtedness of him or his companies. Tanz signed a direction to the bank authorizing it to transfer the Milton Brick shares it held on his behalf to Blume. It was agreed that the $100,000 paid in October 1962 on behalf of Tanz would be applied against the indebtedness of Tanz and his companies. That was done. All matters the parties agreed to do in the carrying out of the agreements of January 23 were eventually performed.

Blume’s version of the meeting is, on material matters, contrary to the testimony of the others present at it. He says the meeting opened by Rose advising him that Tanz did not propose to fulfil the original arrangements, that neither Tanz nor Perpetual had put up any money, and that Tanz wanted $75,000 for his services to Interworld. Blume says he complained to Tanz who replied he did not propose to continue and stated he had performed services for Interworld. Blume says he commented that this was the first he had heard of services having been performed. Blume says he turned to Rose for advice. Rose recommended Blume continue with Milton Brick by himself and asked if he could recommend a figure to be paid to Tanz. Rose and his partner came up with $50,000 and suggested it be paid by. Interworld. Blume’s explanation for having signed the documents I have referred to is that there was nothing he could do. He said he objected to the paragraphs in Exhibit 27 referring to Tanz as the owner of shares.

Again, for reasons I have set out earlier, I do not accept Blume’s evidence. After listening to and observing this witness, I am confident he would never sign any documents he really did not want to sign.

Tanz, Rose and Persiko all positively state that at the meeting Tanz made no claim for payment for any services rendered to Interworld or Milton Brick, or for anything in the way of commissions for having, from time to time in the past, introduced other borrowers to Interworld. They testified there was no mention by anyone of matters of that kind. In his testimony, Tanz said he never expected nor sought any payment for the work he had done for Milton Brick. He had many other interests, and spent only one or two days a week on Milton Brick matters as well as some Saturdays.

Interworld issued a T4 slip showing commissions of $50,000 paid to Tanz in 1963. A copy was sent to the District Taxation Office in Ontario. Tanz said, and I believe him, he never received a copy of the T4 slip. The first knowledge he had of it was at the hearing before the Tax Appeal Board on May 30 and 31, 1968.

I have finished with the essential facts.

Counsel for the respondent argued firstly that the $50,000 was remuneration for services rendered by Tanz to Interworld in regard to the acquisition of the Milton Brick shares and for services rendered to Milton Brick. It was also suggested that payment for having introduced other borrowers to Interworld was included in the sum. This argument assumes two things: that Interworld was the real owner of the shares and that Blume’s evidence is to be accepted. Counsel contended that whatever one may think of his credibility as a witness, his version is the only one that fits with the real facts. I cannot accept this first argument or the premises on which it is based. It is true that prior to the closing date for the acquisition of the shares, Blume and Tanz had agreed they would eventually be transferred to Interworld. In fact and in law the shares never did get to Interworld. As planned, and, as I find, agreed to by the two parties, the shares were acquired personally by Blume and Tanz. No further steps were taken in the overall plan, because Blume delayed signing documents and proposed from time to time changes in the scheme. As I have earlier mentioned I do not accept Blume’s testimony that Interworld was the actual purchaser of the shares from Milton Brick shareholders. Further, the evidence which I accept is clear, that the payment of $50,000 was not payment for services rendered to anyone or any company, nor was it some type of commission. The credible evidence here impels me to conclude the payment of $50,000 by Blume’s company was payment for shares, a capital asset.

Mr Thomas, for the respondent, said in argument he was not contending the appellant was at the relevant times a trader in shares.

Secondly, it was argued by the respondent that the profit realized by Tanz was an adventure in the nature of trade and therefore taxable. It is argued that Tanz got something (the right to shares) for which he laid out no money. The only liability he incurred was by virtue of a guarantee to the bank of the Interworld loan; that three months later he sold this right at a profit. It follows, it is said, that the transaction was an adventure in the nature of trade either because the right re- ferred to should be regarded as inventory, which the respondent sold at a gain, or was the type of transaction which a business broker might carry out.

I cannot accede to this second argument. I think it incorrect to say the appellant did not lay out any money for the acquisition of the shares. interworid borrowed the money from the bank and then loaned Blume and Tanz the funds. Tanz later paid Interworld $100,000: I see nothing unusual in someone using borrowed money to finance a stock take-over. These shares were not inventory in the hands of Tanz. I accept his testimony he was looking for a long-term investment, in my opinion, he would have remained in Milton Brick but, for reasons I have given, decided he must dissociate himself from Blume. He attempted unsuccessfully to buy him out to retain his investment. When Blume refused, his alternative, it seems to me was to sell to Blume. In my view, this was not the sale of inventory nor the type of transaction a business broker might carry out. It was not, therefore, an adventure in the nature of trade.

The appeal in respect of the $50,000 is allowed. The reassessment for 1963 is referred back to the respondent with the direction that the amount of $50,000 profit on the sale of shares in Milton Brick be deleted from the appellant’s income and his tax recalculated accordingly.

The appellant is entitled to his costs.