232 F.2d 873 (4th Cir. 1956), 7149, Interlochen Co. v. C.I.R.

Docket Nº:7149.
Citation:232 F.2d 873
Case Date:April 24, 1956
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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232 F.2d 873 (4th Cir. 1956)




No. 7149.

United States Court of Appeals, Fourth Circuit.

April 24, 1956

Argued April 16, 1956.

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Neville Holcombe, Spartanburg, S.C., and Bennette E. Geer, Jr. (Holcombe & Bomar, Spartanburg, S.C., on the brief), for petitioner.

L. W. Post, Atty., Dept. of Justice, Washington, D.C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson, Atty., Dept. of Justice, Washington, D.C., on the brief), for respondent.

Before PARKER, Chief Judge, SOPER, Circuit Judge, and HARRY E. WATKINS, District Judge.

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HARRY E. WATKINS, District Judge.

This is an appeal from the decision of the Tax Court, which sustained a deficiency assessment against Interlochen Company, Inc., the taxpayer, in income tax of $17, 470.33 for the year 1945. The taxpayer sold certain corporate stock in 1945, claiming on its tax return the same basis as the stock had in the hands of its transferor, on the theory that it had been acquired by gift. The Commissioner asserted a deficiency on the ground that the stock had been acquired by purchase, and that taxpayer's basis was the amount that it actually paid for the stock. Two questions are involved. (1) Is the taxpayer entitled to compute its tax on the theory that the stock was acquired by gift? (2) If the stock was acquired by gift, has the taxpayer carried its burden of proof of establishing the donor's actual cost to be greater than the basic cost of $46, 825 allowed by the Commissioner? If either question is answered in the negative, the deficiency assessment is proper.

The Commissioner answered the first question in the negative, making it unnecessary to decide the second question. The Tax Court answered the second question in the negative, making it unnecessary to decide the first question. We answer both questions in the negative. The decision of the Tax Court must, therefore, be affirmed.

Petitioner and taxpayer is a North Carolina corporation, incorporated in 1929. It was organized through the efforts of John A. Law, Sr. Its stockholders, officers and directors were his sons and daughters, except a brother was a director and held one of the 61 shares of stock. John A. Law, Jr. was president. The incorporation of taxpayer was rushed through in the last month of 1929 mainly so Law, Sr., could sell stock to it, fix a loss thereon, and take a tax credit therefor on his own income tax return for 1929. He also wished to convey certain real estate to the corporation.

The first meetings of the stockholders and directors of the taxpayer were held on June 28, 1930. Law, Sr. was present at the meeting and offered to convey to petitioner certain real estate located in North Carolina for 61 shares of petitioner's no-par common stock with the understanding that the 61 shares were to be issued to the original incorporators in full payment of their subscriptions. The directors accepted the offer and directed the issuance of 61 shares of petitioner's stock to the incorporators. Petitioner's minute book does not show any further meeting of its stockholders or directors after June 28, 1930, until December 26, 1942.

In 1945 petitioner sold 650 shares of Saxon Mills stock for $117, 000. In its 1945 return it reported the sale of this stock for $117, 000, showed a cost basis of $123, 500, and claimed a capital loss on the sale of $6, 500. It reported no capital gains and no capital transactions other than this sale. Petitioner had acquired this stock in 1937 in a tax-free exchange for 650 shares of Chesnee Mills stock. It had acquired the 650 shares of Chesnee Mills stock under the following circumstances:

On December 26, 1929, Law, Sr. transferred to his brother's brokerage firm, A. M. Law & Company, 500 shares of Chesnee Mills stock for $43, 470, and on the same day Law & Company transferred 500 shares of the same stock to petitioner for $43, 575. On December 31, 1929, Law, Sr., deposited $43, 575 to petitioner's account at the Central National Bank, Spartanburg, South Carolina. Law, Sr., was president of that bank. Petitioner issued its check, dated December 31, 1929, in the amount of $43, 575 payable to A. M. Law & Company, drawn on the Central National Bank, signed by John A. Law, Jr., in payment for the 500 shares of Chesnee Mills stock. No consideration was paid to Law, Sr., for this deposit made to petitioner's account. The stock book records of Chesnee Mills show that 500 shares of its stock were transferred on

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December 30, 1929 from Law, Sr., to petitioner and that such stock was never issued to Law & Company.

On December 30, 1931, petitioner purchased 100 shares of Chesnee Mills stock with $2, 500 furnished to it by Law, Sr. And on December 31, 1932, petitioner purchased 50 shares of Chesnee Mills stock with $750 furnished to it by Law, Sr. In each instance...

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