Diamond Vs Moravec

Judicial History: (The Commission Case) Before 1961 Diamond had earned his living as a builder. He became acquainted with Henry Moravec, Jr. and Henry Moravec, Sr., the principal officers of Marshall Savings and Loan. The Moravecs suggested that Diamond serve as a mortgage broker for Marshall. Diamond was to find builders in need of funds and arrange for them to receive loans from Marshall. Diamond would charge the builders a fee for arranging these loans. However, he paid a portion of these fees to the Moravecs. During 1961, Diamond received commissions totaling $145,186.37 and remitted $39,398.50 to the Moravecs. On his 1961 return, Diamond included $145,186.37 in income but deducted the $39,398.50 as an ordinary and necessary business expense.

In the course of this activity he became acquainted with Henry Moravec, Jr. and Henry Moravec, Sr., the principal officers of Marshall Savings and Loan. The Moravecs suggested that Diamond serve as a mortgage broker for Marshall (because of his contacts as a builder and potential business he could bring to the bank). Diamond accepted the position. Diamond was to find builders in need of funds and arrange for them to receive loans from Marshall. Diamond would charge the builders a fee for arranging these loans. However, he paid a portion of these fees to the Moravecs. During 1961, Diamond received commissions totaling $145,186.37 and remitted $39,398.50 to the Moravecs. On his 1961 return, Diamond included $145,186.37 in income but deducted the $39,398.50 as an ordinary and necessary business expense. Alternatively, he now maintains that the $39,398.50 should not have been included in gross income in the first place because he received these fees merely as a conduit for the

Philip Kargman had acquired for $25,000 the buyer's rights in a contract for the sale of an office building. Kargman asked Diamond to obtain a mortgage loan from Marshall Savings and Loan for the full $1,100,000 purchase price of the building. Diamond and Kargman agreed that Diamond would receive a 60% share of profit or loss of the venture if he arranged the financing. Diamond obtained the mortgage of $1,100,000 and on December 15, 1961 entered into an agreement with Kargman that stipulated (1) The two were associated as joint venture for 24 years (the life of the mortgage) unless earlier terminated by agreement or by sale; (2) Kargman was to advance all cash needed for the purchase beyond the loan proceeds; (3) Profits and losses would be divided, 40% to Kargman, 60% to Diamond; (4) In event of sale, proceeds would be devoted first to repayment to Kargman of money supplied by him, and net profits thereafter would be divided 40% to Kargman, 60% to Diamond. Early in 1962, Kargman and Diamond created an Illinois land trust to hold title to the property to insulate Diamond and Kargman from personal liability on the mortgage note. On March 8, 1962, Diamond sold his interest to for $40,000 Liederman, except on a 50-50 basis. On their 1962 joint return, the Diamonds reported the March 8, 1962 $40,000 sale proceeds as a short-term capital