Interlochen Company v. Commissioner of Internal Rev., 7149.

• Decision Date: 24 April 1956
• Docket Number: No. 7149.,7149.
• Citation: 232 F.2d 873
• Parties: INTERLOCHEN COMPANY, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

232 F.2d 873 (1956)

INTERLOCHEN COMPANY, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7149.

United States Court of Appeals Fourth Circuit.

Argued April 16, 1956.

Decided April 24, 1956.

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.

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 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 the stock was originally owned by Law, Sr., transferred to Law & Company, and then to petitioner in exactly the same manner as the 500 share lot was acquired. In the three transactions 650 shares of Chesnee Mills stock were purchased with money furnished by Law, Sr., in the amount of $46,825. In each instance Law, Sr., deposited the necessary money in the bank to petitioner's account and with this money petitioner issued its checks to Law & Company in payment for the stock.

These deposits made to petitioner's accounts by Law, Sr., were pursuant to an understanding between him and John A. Law, Jr., that the monies would be used by petitioner to purchase the Chesnee Mills stock. Petitioner had no cash funds, except approximately $97 on deposit in the Spartan Savings Bank in 1932, other than the funds deposited by Law, Sr., with which it could have acquired the 650 shares of Chesnee Mills stock. Law, Sr., was the president and active operating head of Chesnee Mills from 1912 until 1937, when it merged with Saxon Mills. After Chesnee Mills merged with Saxon Mills, Law, Sr., became the president and active operating head of Saxon Mills.

According to the stock book records of Chesnee Mills, 600 of the 650 shares of Chesnee Mills stock were transferred to the name of Law, Sr., on September 13, 1919, and 5 days prior thereto, on September 8, 1919, the 600 shares had been transferred from Blair & Company to the names of the children of Law, Sr. During 1919, his children were minors of ages 8 to 18 years and did not know that any such stock had been transferred to their names. Law, Sr., acquired 20 of the 650 shares of Chesnee Mills stock from J. S. Burnett on April 2, 1924, and acquired 30 of the 650 shares of Chesnee Mills stock from Fisher C. Bailey on August 17, 1926. Records are not available to show the price, if any, at which he acquired the 600 shares of Chesnee Mills stock or the 20 shares of Chesnee Mills stock from J. S. Burnett. Records of Law & Company disclose that Law, Sr., acquired 30 shares of Chesnee Mills stock on August 17, 1926, from Fisher C. Bailey at $136 per share. Quotations from two stockholders show the bid and asked prices for Chesnee Mills stock on April 2, 1924 to be $150 bid, $165 asked, and $135 bid and $145 asked.

Law, Sr., died in 1950. On his income tax returns for 1929, 1931 and 1932, he reported sales of Chesnee Mills stock, reported bases of $190 per share for the entire 650 shares, and claimed capital losses from the transactions of $51,635, $16,525 and $8,756.25, respectively. The deductions for the 1929 and 1931 losses were disallowed by the Commissioner on the grounds that the transactions did not give rise to allowable deductions. Law, Sr., filed a proceeding with the United States Board of Tax Appeals pertaining to the taxable years 1929 and 1931, and presented an issue as to whether he was entitled to deduct the losses reported from sales to petitioner of Chesnee Mills stock. An issue was also raised concerning the expiration of the statute of limitations on assessment of the deficiencies. The Commissioner had determined, against Law, Sr., deficiencies in tax of $7,972.22 and penalties of $4,066.24 for 1929, and deficiencies in tax of $172.26 and penalties of $86.13 for 1931. This proceeding was disposed of by stipulation of the parties whereby it was stipulated that a deficiency of $500 existed for 1929 and $172.26 for 1931 and that no penalties were due for either year. Law, Sr., waived any restrictions on the assessment and collection of the deficiencies, and a decision in accordance with the stipulation was entered by the United States Board of Tax Appeals on March 10, 1938.

The Commissioner determined that in 1945 petitioner realized a capital gain of $70,175 from the sale of the Saxon Mills stock, using as the basis of the stock the prices at which petitioner acquired the 650 shares of Chesnee Mills stock in 1929, 1931, and 1932. The Commissioner held that the taxpayer was not entitled to compute its tax on the theory that the stock was acquired by gift, but that the transactions must now be treated as sales, just as Law, Sr., and the petitioner had treated them in 1929. If treated as sales the established sale price of $117,000, less the established cost of $46,825, leaves a capital gain of $70,175, upon which the Commissioner held that there was a deficiency in income tax of $17,470.33 for the calendar year 1945.

We think there is ample evidence in the record to support the finding of the Commissioner. The Commissioner's finding is strongly fortified by the facts that the transactions were purposely given the form and appearance of sales from Law, Sr., to the taxpayer-petitioner; that Law, Sr., actually reported them as sales and claimed consequent losses in his income tax returns for 1929, 1931 and 1932; and the Commissioner eventually allowed him a very substantial part of the losses claimed for 1929. Law, Sr., furnished the money to petitioner with which petitioner purchased the stock. Both actively participated in the plan to cause the transactions to appear as sales instead...