Kaplan v. Comm'r of Internal Revenue, Docket No. 37873.

• Decision Date: 29 October 1953
• Docket Number: Docket No. 37873.
• Citation: 21 T.C. 134
• Parties: JACOB M. KAPLAN AND ALICE M. KAPLAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

21 T.C. 134

JACOB M. KAPLAN AND ALICE M. KAPLAN, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 37873.

Tax Court of the United States.

Promulgated October 29, 1953.

Harris Berlack, Esq., for the petitioners.

Robert McDonough, Esq., for the respondent.

1. Petitioner contended that 186 issues of securities purchased in his name were so purchased in error, and should have been bought for his wholly owned corporation. Petitioner sold 14 of the issues on the market and later transferred the remaining 172 issues to his wholly owned corporation. Dividends received on the stock and losses on the sale of the 14 issues were included in petitioner's income tax return. Held, on the facts, the 186 securities were petitioner's individual property and the transfer of 172 issues to the corporation was a sale.

2. Losses on the sale by petitioner of certain substantially identical stocks within 30 days of the purchase of 186 issues disallowed as ‘wash sales‘ under section 118(a).

3. Although sales of 172 securities to petitioner's wholly owned corporation were at cost in form, they must be treated as 172 separate sales at fair market value in substance. Gains are taxable and losses disallowed under section 24(b)(1)(B).

4. Where petitioner's wholly owned corporation canceled his indebtedness to the extent of $1,234,079.01 in return for transfer of securities with fair market value of $1,229,890, petitioner realized taxable income of $4,189.01.

5. Insofar as $6,500 expended by petitioner for travel and entertainment expenses was deductible, it was deductible by the corporations of which petitioner was the principal stockholder as expenses of those corporations, and not by petitioner individually.

6. Where petitioner sustained losses on sales of stock to a charitable, non-stock, membership corporation of which petitioner, his wife, and his brother were the only members, the losses are fully deductible. Section 24(b)(1)(B) applies only to losses on sales involving a corporation and an individual owning more than 50 per cent of the value of the outstanding stock of that corporation.

ARUNDELL, Judge:

The respondent has determined a deficiency in the amount of $35,853.24 in the income tax of the petitioners for the taxable year 1946. The issues to be decided are as follows:

1. Whether 172 issues of stock from a block of 186 issues purchased in the name of J. M. Kaplan; hereinafter referred to as petitioner, were bought by him and later sold to Navajo Corporation, hereinafter sometimes referred to as Navajo, or whether the purchased securities were bought for the account of Navajo and in error placed in the name of petitioner and the transfer to Navajo was made solely to correct that err.r

2. Whether the ‘wash sales‘ provisions of section 118(a) of the Internal Revenue Code apply to losses amounting to $12,468.89 sustained by petitioner on the sales on September 10, 1946, of securities identical with stocks included in the purchase of 186 issues on September 25, 1946.

3. Whether the transfer of 172 issues of stock to Navajo on November 4, 1946, resulted in short-term capital gains of $25,468.80, taxable to petitioner, and losses amounting to $30,921.56, not deductible by petitioner because of section 24(b)(1)(B) of the Code.

4. Whether $4,189.01, the excess of the aggregate cancellation of petitioner's indebtedness to Navajo over the aggregate of the closing market prices on the date of the transfer of the 172 security issues, constitutes taxable income to the petitioner.

5. Whether the sum of $6,500 claimed by petitioner for travel and entertainment expense was a proper deduction.

6. Whether losses amounting to $20,240.41 on sales of securities by petitioner to a nonstock charitable corporation, of which petitioner, his wife, and his brother were the only members, were properly disallowed under section 24(b)(1)(B) of the Code.

One additional issue involving charitable contributions was disposed of at trial by agreement of counsel.

FINDINGS OF FACT.

The petitioners herein are husband and wife and filed a joint income tax return for 1946 with the collector of internal revenue for the second district of New York. At all times material hereto, Navajo Corporation was a Delaware corporation of which petitioner was president and owner of all of its outstanding stock. The assets of Navajo in 1946 amounted to at least $10,000,000 consisting mainly of real estate and stocks and bonds, including about 50 per cent of the stock of the Welch Grape Juice Company, hereinafter sometimes referred to as Welch. Petitioner was president of Welch.

In normal course, securities were purchased for the account of Navajo and also for petitioner's individual account through his office in New York City. Petitioner also directed the purchase and sale of securities for the accounts of his wife, his two brothers, his sister, and for the J.M. Kaplan Fund, Inc. Petitioner made the decisions as to what purchases and sales of securities should be made, giving written or verbal instructions to Carl Buchner, an employee of many years' standing. Buchner placed the orders to buy or sell with brokers and gave the necessary instructions for the receipt or delivery of the securities and the payment therefor. He also had authority to sign checks on behalf of petitioner and Navajo. Petitioner generally gave instructions to Buchner as to the account for which the securities were to be bought or sold.

Petitioner was a busy man, frequently working under pressure, and he sometimes told Buchner to buy the securities for the account which had the most funds. On occasion, petitioner failed to tell Buchner which account securities were to be purchased for and, in that event, Buchner used his own judgment, usually buying in accordance with any purchase program then in progress. Occasionally, Buchner made mistakes, in which cases the errors were ordinarily corrected as soon as they were discovered.

In the early part of September 1946, petitioner's funds were fully invested in securities and he was indebted to banks in the amount of about $1,000,000. The funds of Navajo Corporation were also fully invested in securities and it was indebted to banks for more than $1,000,000. As the result of a sudden decline in the market, petitioner, on September 10 and 11, 1946, sold virtually all of his personal security holdings at a loss of approximately $400,000 and paid off his bank indebtedness. At the same time, he directed the sale of a part of the stocks owned by Navajo and substantially reduced its indebtedness. Within the next two weeks petitioner regained confidence in the market and on September 24, 1946, wrote out a list of a large number of stocks to be bought the following morning. Petitioner did not have sufficient available cash to pay for this purchase but Navajo did have sufficient funds available at the time.

Petitioner arrived at his office before 10 a.m. the next morning, September 25, 1946, and, although he was already busy with several visitors, he called for Buchner and handed him the list of securities to be purchased, telling him to buy them at market. Buchner had the impression that he was to buy them for petitioner's personal account. Under Buchner's orders to a number of brokers, 186 different issues of securities were bought in petitioner's name at an aggregate cost of $1,278,815.03. The securities were paid for to the extent of $1,110,000 with funds furnished by Navajo Corporation, which amount was entered on Navajo's books as a loan to petitioner. The transfer of the money was effected by the deposit in petitioner's account of three checks drawn on Navajo and signed by Buchner and one of his assistants. Buchner did not tell petitioner about the transfer of funds nor was it his practice to do so in such cases since he had authority to make such transfers.

During the period from September 25, 1946, to November 4, 1946, petitioner received dividends on the securities totaling $2,993.75, which amount was reported in the petitioners' joint income tax return for 1946 and not in the return of Navajo Corporation. Fourteen of the 186 issues of stock were sold in the open market on September 30, 1946, at an aggregate loss of $2,273.56, which loss was deducted in the petitioners' joint return for 1946 and not in Navajo's return. That return was prepared under the supervision of petitioner's tax counsel. Petitioner was aware of these items in his return at the time he signed it.

In October 1946, about the middle of the month, petitioner's tax counsel telephoned him to inquire about the increase in petitioner's indebtedness to Navajo, pointing out that such borrowing was in conflict with the policies previously recommended by counsel. Petitioner stated that he was not so indebted and that it had been his intention for Navajo to purchase the securities in question. The aggregate market value of the securities at that time was more than $100,000 below their aggregate cost. Petitioner then told Buchner that a mistake had been made which had to be corrected but that on advice of counsel Buchner was not to transfer the securities to Navajo until the aggregate market value of the stocks was approximately equal to the aggregate original cost.

Thereafter, Buchner priced the securities at market each day. On the morning of November 4, 1946, he reported to petitioner that the market value had reached the approximate cost level. Petitioner then directed Buchner to transfer the remaining 172 issues to Navajo. The stock was transferred to Navajo Corporation on November 4, 1946, which transfer was not reflected as a sale of securities or otherwise in petitioners' income tax return for 1946. The aggregates of the fair market values of the securities on November 4, 1946, were as follows:

+-----------------------------------------------------------------------------+
                ¦Based upon the highest market price of each security on        ¦$1,249,747.50¦

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