Bartlett v. Commissioner of Internal Revenue

• Decision Date: 06 September 1940
• Docket Number: No. 4624.,4624.
• Parties: BARTLETT et ux. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

114 F.2d 634 (1940)

BARTLETT et ux. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4624.

Circuit Court of Appeals, Fourth Circuit.

September 6, 1940.

Richard W. Kiefer and J. Kemp Bartlett, both of Baltimore, Md., for petitioners.

Howard P. Locke, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Joseph M. Jones, Sp. Assts. to Atty Gen., on the brief), for respondent.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This is a petition to review a decision of the United States Board of Tax Appeals (hereinafter called the Board), which redetermined a deficiency in the petitioners' income tax liability for the year 1935.

The petitioners, J. Kemp Bartlett and his wife, Mary D. Bartlett, filed a joint income tax return for the year 1935 with the Collector of Internal Revenue for Baltimore, Maryland. They deducted from the gross income for 1935 the amount of $4,800, alleged to represent a loss resulting from the worthlessness of Mrs. Bartlett's 120 shares of stock of the Baltimore Trust Company (hereinafter called the Trust Co.). In his deficiency notice, the Commissioner of Internal Revenue stated that the deduction claimed was disallowed for the reason that it was determined that the stock became worthless in the year 1933. It was stipulated at the hearing that the actual cost of this stock was $2,002, and the petitioners reduced their claim for deduction accordingly. The Commissioner of Internal Revenue determined a deficiency in the amount of $1,916.97, but the Board redetermined the deficiency in the amount of $918.89. Only a part of this latter sum is involved on this appeal.

Prior to 1933, petitioner, Mary D. Bartlett, had purchased 120 shares of the capital stock of the Trust Co. In September, 1931, the Trust Co. was subjected to a heavy run by its depositors. Other banks and financial institutions and individuals in Baltimore raised a fund of $7,755,400 as a guarantee fund to be subordinated to the claims of depositors of the bank, but the guarantors were to rank as creditors ahead of the stockholders. The Trust Co. was thus enabled to continue business, and, when examined by the Federal Reserve Examiners and State Bank Examiner jointly on December 19, 1932, showed a capital bank valuation of $1,250,000 and a stockholders' equity of $482,081.63.

On February 24, 1933, the Trust Co., as well as every other state bank in Maryland, was closed by order of the Governor of Maryland, remaining closed through the national bank holiday declared on March 4, 1933, by the President of the United States. And on March 4, 1933, the State of Maryland passed the Emergency Banking Act, Laws Md.1933, c. 46, authorizing the Bank Commissioner to take custody of all banking institutions in the State. Hence, when some of the banks were allowed to reopen with the ending of the national bank holiday, on or about March 13, 1933, the Trust Co. (as well as other state banks in Maryland) found itself in the custody of the State Bank Commissioner. Under the Emergency Banking Act, the Bank Commissioner had three methods open to him concerning those banks which he did not allow to reopen on an unrestricted basis: (1) Put the bank into receivership if it was, in his opinion, in an insolvent condition; (2) place it in the hands of one or more conservators; or (3) allow it to act on a restricted basis under its own board of directors, subject to supervision. The Trust Co. was permitted (under the third of these methods) to continue on a restricted basis under its own board of directors, but subject to the Bank Commissioner's supervision. (The Trust Co. continued on this basis until January 5, 1935, when a receiver was appointed by Circuit Court No. 2 of Baltimore City.)

During the spring of 1933, the board of directors of the Trust Co. worked out a so-called plan of reorganization. The plan provided for the orderly liquidation of the assets of the bank and for the formation of a new bank, the Baltimore National Bank, to take over some of the business and privileges of the institution being liquidated. The preferred stock of the new bank was to be subscribed for by the Reconstruction Finance Corporation and the common stock was to be held in escrow with the right in the old bank to purchase the common stock of the new bank on or before July 31, 1934. Stockholders of the Trust Co. were given certain option privileges in the new bank, but only upon the basis of payment of the full purchase price of the new stock.

In explaining the plan to the stockholders, the chairman of the board, in a letter dated June 14, 1933, stated that they had been "unable to bring about a condition of liquidity in the institution sufficient to enable it to weather the period of unusual withdrawals and destruction of values during February of this year." (See Petitioners' Appendix, p. 50.) The proposed plan provided, in effect, for the following distribution out of assets:

(a) All deposits and claims not in excess of $10.00 at the date of consummation of the plan will be paid in full.

(b) 10% of all other restricted deposits and other unsecured claims as of the date of consummation of the plan, except those for which other special provision is made, will be made available to depositors and other claimants by deposits in the new bank to the unrestricted credit of, or by direct payment to, depositors or creditors.

(c) Claims entitled to preference or priority will be paid in full as and when such preferences or priorities are established.

(d) Certificates of indebtedness will be issued to unsecured depositors and unsecured creditors for the balances of their deposits or claims remaining due after the payment made to them upon the consummation of the plan.

(e) In the case of any deposit fully secured by collateral, such deposit may be paid in full and the collateral redeemed, or the old bank may call upon a depositor holding collateral fully securing his deposit to sell the same.

(f) Liabilities which may be contingent, unliquidated or undisclosed at the consummation of the plan thereafter becoming fixed or disclosed will be placed on a parity with other unsecured claims as and when they become fixed or disclosed, out of general assets when distributable.

(g) Payments will be made to holders of Guaranty Fund Certificates after all other creditors have been paid.

(h) Any assets remaining after the retirement of Guaranty Fund Certificates will be distributed pro rata in cash or in kind among the stockholders. (See Petitioners' Appendix, pp. 64, 65.)

After the plan became effective on August 1, 1933, and the new bank was organized, the Trust Co. still remained in the hands of its officers and board of directors, under the supervision of the Bank Commissioner. The liquidating company which the plan provided might be set up did not take over the assets of the Trust Co. until December 31, 1934. At that time, a trial balance, as of the close of business on December 31st, was submitted to the Bank Commissioner. It showed assets of $36,072,615.99 and total liabilities of $27,520,899.82, which included both the deposits and the guaranty fund.

On January 5, 1935, the Bank Commissioner asked the Circuit Court No. 2 of Baltimore City to appoint his deputy, John D. Hospelhorn, as receiver of the Trust Co. The receiver was appointed for the principal purpose of collecting from the Trust Co.'s stockholders their statutory liability to creditors to the extent needed for payment in full of its remaining indebtedness. However, on February 5, 1935, the receiver filed a Report and Petition with Circuit Court No. 2 which stated in part that the remaining assets, (substantially those held for realization and liquidation by the Trust Co.), would be "grossly insufficient to pay the balance of indebtedness."

In February, 1935, Circuit Court No. 2 signed a show-cause order directing the receiver to collect the statutory liability of the stockholders. A hearing was held on the 25th of February and the order was made final. On appeal to the Court of Appeals of Maryland, the assessment order was reversed on the ground that it had not been shown that the Trust Co. had been determined, judicially or otherwise, to be insolvent. The show cause order was reversed and remanded for further proceedings in accordance with the opinion. See Robinson v. Hospelhorn, 169 Md. 117, 179 A. 515, 184 A. 903, 103 A.L.R. 740. Further hearings were then held by the lower court and on November 13, 1935, Judge O'Dunne, of Circuit Court No. 2 rendered a decision in which he found that the Trust Co. was insolvent. He authorized the receiver to proceed to collect the statutory liability of the stockholders.

The principal question to be answered is whether there was substantial evidence to uphold the Board's finding that petitioners' stock in the Trust Co., (for the purpose of deduction by the taxpayer), became worthless in 1933, and not in 1935. In answering this question, we must first look at the controlling statute and regulations:

Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A.Int.Rev.Code § 23:

"Sec. 23. Deductions from gross income.

"In computing net income there shall be allowed as deductions:

* * *

"(e) Losses by individuals. In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise —

"(1) if incurred in trade or business; or

"(2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *."

Treasury Regulations 86, promulgated under the Revenue Act of 1934:

"Art. 23 (e)-4. Shrinkage in value of stocks. — A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. The loss allowable in such cases is that actually suffered when the stock is disposed of. If stock of a...