Bissell v. Wis. Tax Comm'n

• Decision Date: 09 April 1940
• Citation: 234 Wis. 421,291 N.W. 325
• Parties: BISSELL v. WISCONSIN TAX COMMISSION.
• Court: Wisconsin Supreme Court

234 Wis. 421

291 N.W. 325

BISSELL

v.WISCONSIN TAX COMMISSION.

Supreme Court of Wisconsin.

April 9, 1940.

Appeal from a judgment of the Circuit Court for Marathon County; George J. Leicht, Judge.

Affirmed.

Action begun March 1, 1937, by the executors of the will of Walter H. Bissell, deceased, under the provisions of sec. 71.16, Stats., to review a decision and order of the Wisconsin Tax Commission affirming an additional assessment of income taxes on the income of the estate of the deceased, for the years 1934 and 1935. From a judgment in favor of the plaintiffs modifying the additional assessment for the year 1935, and allowing a loss claimed as a deduction for that year, the Wisconsin Tax Commission appeals.

W. H. Bissell, deceased, was an officer and stockholder of the Bissell Lumber Company, a Wisconsin corporation. In order that it might obtain a loan from the First Wisconsin National Bank of Milwaukee, he and his son F. K. Bissell, signed a guaranty on May 21, 1931, by which they undertook to assure payment of the company's debts for a three year period up to the amount of $150,000. The bank called for collateral to support the loans to the lumber company, and W. H. Bissell responded on April 10, 1933, by offering certain securities which he owned. At the same time he signed a pledge agreement concerning the collateral. Between that time and his death on December 11, 1933, the company's indebtedness to the bank increased so that it was $152,000. This amount was loaned on four notes. Two of them were by the lumber company; one was by F. K. Bissell to the lumber company; and one was by W. W. Gamble to the lumber company.

On January 9, 1934, the will of W. H. Bissell was admitted to probate in the Marathon County court. Two sons, Walter H. Bissell, Jr., and F. K. Bissell, together with W. W. Gamble, were appointed executors.

In 1934 the lumber company ran into difficulties due to inadequate working capital. Efforts to secure loans were unsuccessful. Because of the insistence of the bank upon the payment of its loans and threats to sell the collateral, the company on June 6, 1934, assigned all its assets to three trustees. The purpose was “to get as much out of the business as possible, liquidate the loans and if possible have a balance left over for the stockholders.” The trustees hoped to reduce the company's debts by cutting the timber, converting it to lumber, and selling the lumber. Their purpose was not to conduct a jobbing business for the company, and in fact they did no such business.

A timber cruise in 1935 showed that the holdings were only 55 to 65 per cent of what they had been estimated to be. There were also tax liabilities. These facts caused the trustees to abandon their original purpose and attempt to liquidate the business. Contracts for the purchase of timber were terminated by returning the timber to the vendors, and obtaining a release from liability for deficiency. One-third of the timber was sold to the Tomahawk Kraft Company for about $20,000 cash. The remaining two-thirds was sold for $35,000 on a land contract to A. J. Bissell, wife of F. K. Bissell. Payment was made by $10,000 in cash and two notes, one for $15,000, and one for $10,000. Remaining odds and ends were sold to W. W. Gamble and W. H. Bissell, Jr., for $2,500, each giving his note for $1,250.

When the value of the securities pledged by W. H. Bissell to the bank to secure payment of the guaranty had materially increased in value, the bank, pursuant to the pledge agreement, sold a large portion of this collateral, the avails of which were applied on the debts of the Bissell Lumber Company. Because of the increase in value of these securities after the death of W. H. Bissell, the sale resulted in income to the estate, the amount being the difference between the appraised value of the securities and the sale value thereof, or $123,299.87. In 1935 the bank indorsed the company's two notes, one for $130,000 and one for $2,500, over to the estate of W. H. Bissell.

It is this transaction which the respondents claim caused the loss at that time-i. e. in 1935-and therefore was a legitimate deduction in computing income taxes for that year. In a letter of December 30, 1935, the executors directed the trustees to pay certain of the lumber company debts and turn over to the estate the remaining assets. On December 31, 1935, the assets in the hands of the trustees which were $11,277.44 cash, two notes of A. J. Bissell totaling $25,000, and two notes of W. W. Gamble and W. H. Bissell, Jr., for $1,250 each, totaled $38,777.44. At that time $18,650 was due on two notes payable, one of $3,650 owing to the Bank of Marathon, and the other of $20,000 to Mrs. Anderson on which $5,000 had been paid. These company assets and liabilities were then turned over to the executors. That meant it acquired assets of $20,127.44 and debts of $134,283.31.

At a stockholders' meeting on February 26, 1936, the trustees' disposition was ratified and approved. A resolution of dissolution of the Bissell Lumber Company was recorded March 5, 1936. On April 24, 1936, the trustees met and by resolution approved the turning over to the executors of the assets totaling $23,119.12, and declared the trusteeship dissolved. On the same date the executors in writing acknowledged receipt of the assets.

The alleged loss attributable to 1935 was computed by subtracting the total of the company's assets from its liabilities. It amounted to $114,155.87.

After a field audit of income for the years 1934 and 1935, the claimed deduction was disallowed by the assessor of incomes on the ground it was not definitely fixed in 1935, and he gave notice February 15, 1937, of an additional assessment on 1935 income. There followed a hearing before the Marathon county income tax board of review which allowed the deduction; an appeal by the assessor to the Wisconsin Tax Commission which held the loss was not actually sustained in 1935; and an appeal by the executors to the Circuit Court for Marathon county which reversed the commission and held the loss was deductible as sustained in 1935, and modified the additional assessment for 1935. The appeal is from the Circuit Court judgment.

John E. Martin, Atty. Gen., and Harold H. Persons, Asst. Atty. Gen., for appellant.

Lecher, Michael, Whyte & Spohn, of Milwaukee, and Louis A. Pradt, Jr., of Wausau, for respondents.

FAIRCHILD, Justice.

The respondent taxpayer (the estate of Walter H. Bissell, deceased) was surety for the Bissell Lumber Company to the First Wisconsin National Bank of Milwaukee. Bissell in his lifetime was an officer and stockholder of the lumber company. In order to enable that company to borrow money, Bissell and his son F. K. Bissell on May 21, 1931, guaranteed payment to the First Wisconsin National Bank of any indebtedness then existing or thereafter to be incurred by the lumber company to the extent of $150,000. F. K. Bissell was also an officer of the company, but the father's resources and interests were primarily involved. The guaranty so signed was for a period of three years. In 1933, however, upon the request of the bank, W. H. Bissell signed a pledge agreement by which he pledged securities to support the guaranty. These securities so pledged were sold under advantageous circumstances after Mr. Bissell's death at a price which was considerable of an increase over the appraised value at which the estate held the property, so that a profit of $123,299.65 was realized.

In 1935, exercising the rights of subrogation to the bank's claim against the lumber company, the taxpayer took over the available assets of the lumber company and realized therefrom the sum of $20,127.44. Hamill v. Kuchler, 203 Wis. 414, 232 N.W. 877, 234 N.W. 879;In re Estate of Bienenstok, 208 Wis. 676, 242 N.W. 572. Upon payment of the company liabilities of $134,283.31 a loss to the taxpayer of $114,155.87 resulted. There can be no serious dispute as to the existence of a loss and the elements...