Clement v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 50805
| Decision Date | 17 May 1934 |
| Docket Number | Docket No. 50805,50861-50864. |
| Parties | STEPHEN M. CLEMENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM S. ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ELLA C. GOODYEAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM A. ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. NORMAN P. CLEMENT, AS TRUSTEE OF THE ESTATE OF STEPHEN M. CLEMENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Ralph M. Andrews, Esq., for the petitioners.
George D. Brabson, Esq., for the respondent.
The Commissioner determined deficiencies for the year 1926 as follows:
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Petitioner | Docket No.| Deficiency
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Stephen M. Clement ________________________________________ | 50805 | $1,267.00
William S. Rogers _________________________________________ | 50861 | 68.76
Ella C. Goodyear __________________________________________ | 50862 | 32,996.70
William A. Rogers _________________________________________ | 50863 | 15,501.27
Norman P. Clement, trustee, estate of Stephen M. Clement __ | 50864 | 12,228.03
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The sole issue in each case is, Did the petitioner sustain a loss in 1926 from the disposition of common and preferred stock of Rogers-Brown Iron Co., and, if so, in what amount? The facts in all five cases are substantially identical except for the number of shares involved and the amounts of the checks which passed as part of the transaction. The facts have been stipulated. A brief statement of the facts relating to the case of Ella C. Goodyear will suffice for our purposes.
In the latter part of 1925, Ella C. Goodyear was the owner of 5,000 shares of the common stock and 1,600 shares of the preferred stock of Rogers-Brown Iron Co. Her basis for gain or loss on each of these shares was $100.
Rogers-Brown Iron Co. was a corporation engaged in the manufacture of pig iron. Its operations had been successful prior to 1920, but it began to lose money in 1920 and 1921 due to a severe depression in the industry, increased taxes, increased freight rates, and sharp competition. It owned a large and valuable ore property in Minnesota known as the Susquehanna Mine, which it could not operate profitably because of the reduction in the amount of pig iron which it could market. Its earnings declined and its surplus disappeared. At the beginning of 1925 it had a deficit. It did not have sufficient funds with which to meet the next payment of interest on its outstanding indebtedness. M. A. Hanna Co., another iron manufacturer, in August 1925 offered to provide the needed financial assistance. M. A. Hanna Co. wanted to obtain an interest in the Susquehanna Mine, control, jointly with other allied interests, of Rogers-Brown Iron Co., through ownership of 80 percent of its stock, a contract with Rogers-Brown Iron Co. permitting M. A. Hanna Co. to manage Rogers-Brown Iron Co.'s Iron River mines on a commission basis, and a contract with Rogers-Brown Iron Co. for the exclusive sale of its output of pig iron. In consideration of these things M. A. Hanna Co. was willing to take such steps and to provide such additional working capital as might be necessary to relieve the Rogers-Brown Iron Co. from its current difficulties, including (1) refunding of its indebtedness over a substantial period of time; (2) additional working capital; (3) relief from operating the Susquehanna Mine on an unprofitable basis.
An agreement was executed on September 24, 1925. The parties to it included Rogers-Brown Iron Co., certain stockholders of that company, including the petitioner, M. A. Hanna Co., Central Trust Co., Central Securities Co., and a group of banks to which Rogers-Brown Iron Co. was indebted. Central Securities Co. was interested in the plan in order to protect the bondholders of Rogers-Brown Iron Co., for which its affiliate, Central Trust Co., was trustee, and also in underwriting such new securities as might be marketed as a part of the refinancing plan. Central Securities Co. agreed to sell gold notes of Rogers-Brown Iron Co. of the par value of $1,000,000. Rogers-Brown Iron Co. by this plan obtained relief from certain onerous requirements of a mortgage, additional time in which to pay its indebtedness to the banks, and additional working capital, and conveyed the Susquehanna Mine to a new corporation which assumed indebtednesses amounting to about $4,000,000. The following paragraphs are quoted from the agreement:
4. The Rogers Company will issue and sell to the Rogers Stockholders (in proportion to their aggregate holdings of stock—both common and preferred included) and the Rogers Stockholders severally agree to purchase from the Rogers Company (in such respective proportions), One Million Dollars ($1,000000.00) in principal amount of the gold notes maturing January 1, 1931, at par and accrued interest.
5. The Rogers Stockholders, severally owning or controlling the number of shares of preferred and common stock of the Rogers Company set opposite their respective names, collectively amounting to more than eighty per cent. (80%) of the outstanding common and preferred stock of the Rogers Company, severally agree to sell to the Securities Company, and the Securities Company agrees to purchase from the Rogers Stockholders, said $1,000,000.00 of gold notes and (in proportion to their aggregate holdings of stock) $2,040,000 par value of the present outstanding preferred stock and $4,000,000 par value of the present outstanding common stock of the Rogers Company at and for the price of $1,000,604.00 plus any accrued and unpaid interest on such notes.
Each of the Rogers Stockholders, within five (5) days after the execution of this Agreement by him, shall deposit with The Marine Trust Company of Buffalo certificates duly endorsed in blank for the number of shares of preferred and common stock of the Rogers Company agreed by him to be sold to the Securities Company as provided in this paragraph 5, in escrow, to be delivered by said Trust Company to the Securities Company upon the consummation of this contract and to be returned to said respective stockholders if, without default on the part of the Rogers Stockholders or the Rogers Company, the transactions provided for in this Agreement shall not be consummated on or before February 1, 1926.
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8. The transactions hereinbefore provided for shall be consummated substantially simultaneously on or before February 1, 1926; but irrespective of the date when so consummated the transactions shall be deemed to be closed and all adjustments made as of January 1, 1926.
On October 15, 1925, representatives of the Rogers-Brown Iron Co. stockholders orally agreed with Central Securities Co. that, instead of each stockholder depositing his stock within five days after the execution of the written agreement, each should deposit 80 percent of his total stockholdings with the escrow agent on or before the close of business on December 30, 1925, and Central Securities Co. should deposit its check, payable to the respective depositing stockholders, with the escrow agent on or before December 30, 1925. They further agreed that each stockholder should elect, not later than the time at which he deposited his stock, how much of that stock should be delivered to Central Securities on December 30, 1925, and how much should be delivered on January 2, 1926, and Central Securities should then issue its checks dated 1925 or 1926 as the stockholder had elected.
Ella C. Goodyear, in accordance with this agreement, elected to have one half of the...
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