Crosby Valve & Gage Co. v. Comm'r of Internal Revenue
| Decision Date | 22 August 1966 |
| Docket Number | Docket No. 77979. |
| Citation | 46 T.C. 641 |
| Parties | CROSBY VALVE & GAGE COMPANY (FORMERLY CROSBY STEAM GAGE & VALVE COMPANY), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Jack H. Calechman, for the petitioner.
Albert R. Doyle, for the respondent.
Held, a wholly owned subsidiary of a tax-exempt charitable corporation is not entitled to deduct as charitable contributions transfers of its equity in certain bonds to its parent corporation.
Respondent determined deficiencies in income tax for fiscal years ended October 31, 1954, 1955, and 1956 in the respective amounts of $8,465.88, $15,627.17, and $1,379.39.
The deficiencies in question resulted primarily from respondent's disallowance of deductions claimed by petitioner for amortization of bond premiums, for interest expense and for assignments of its equity in said bonds to certain tax-exempt charitable organizations. In a stipulation filed by the parties at the trial, respondent has conceded: (1) That the deductions for bond amortization of bond premiums in the taxable years ended in 1954 and 1955 are allowable as claimed; (2) that the deductions for interest expense in the taxable year ended in 1955 are allowable as claimed; and (3) that petitioner is entitled to a deduction for a charitable contribution in the amount of $4,551.25, made in the taxable year ended in 1954 to the Stone Charitable Foundation (a trust).
The only issue remaining for decision is whether the assignments of petitioner's equity in certain bonds to the Stone Charitable Foundation, Inc., which owned all of the stock of petitioner, were charitable contributions so as to entitle petitioner to deductions as provided by section 170 of the Internal Revenue Code of 1954.
Stipulations concerning other issues will be given effect under Rule 50.
Some facts are stipulated.
The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner is a Massachusetts corporation with its principal place of business in Wrentham, Mass. It filed Federal income tax returns for fiscal years ended October 31 in 1954, 1955, and 1956 with the district director of internal revenue at Boston, Mass.
All the issued and outstanding stock of the petitioner is owned by the Stone Charitable Foundation, Inc., hereinafter referred to as the foundation.
During the taxable years in issue the foundation was an organization of the type specified in section 501(c)(3) and qualified for exemption under section 501(a) of the Internal Revenue Code of 1954. The foundation was established in the late 1940's. Abraham Stone, a brother of Harry K. Stone and Dewey Stone, was secretary and a trustee of the foundation. Harry K. and Dewey Stone were also ‘connected with’ the foundation. Abraham, his nephew Stephen Stone, and Alfred B. Rudnick were the original incorporators. Stephen held the voting proxies for all of the stock of petitioner during the years involved. Most of the charitable contributions to the foundation were received from members of the Stone family.
In 1954 the directors of the petitioner were William P. Husband, Jr.; Harry K. Stone; Dewey Stone, brother of Harry K. Stone; and Hugh David Stone, son of Harry K. Stone. Husband was president and treasurer and Harry K. Stone was chairman of the board of trustees. Hugh David Stone was ‘clerk’ of the corporation in 1954, 1955, and 1956, and later became its president and treasurer.
Prior to June 22, 1954, the directors of petitioner considered a proposal that the petitioner purchase certain bonds to be financed in part by bank loans, hold the bonds for 30 days or more, and then contribute them to charity subject to the bank loan, with the intention that petitioner claim a deduction for amortization of bond premiums and also a deduction for a contribution to charity, from the same transaction. The directors approved the plan.
At a meeting of the board of directors of the petitioner, held on February 16, 1954, the following resolutions were adopted:
At a meeting of the board of directors of the petitioner, held on March 22, 1955, the following vote was adopted:
VOTED: That William P. Husband, Jr., the President and Treasurer be and hereby is authorized for and on behalf of this corporation to make charitable contributions from time to time during the fiscal year ending October 31, 1955 to the Trustees of The Stone Charitable Foundation, or to any other charitable organizations, the aggregate amount of said charitable contributions to be determined by said William P. Husband, Jr., in his judgment and discretion.
On June 22, 1954, petitioner purchased $60,000 Piedmont & Northern Railway 3 3/4-percent bonds of 1966. The purchase was financed in part by Lake View Trust & Savings Bank of Chicago, Ill. On July 26, 1954, petitioner assigned the bonds subject to the bank's lien, to the Stone Charitable Foundation (a trust), hereinafter referred to as the trust. As of July 26, 1954, the fair market value of petitioner's equity in the bonds was $4,551.25.
On June 22, 1954, petitioner purchased $85,100 Hartford Electric Light Co. 3 1/4-percent bonds of 1971. The purchase was financed in part by Lake View Trust & Savings Bank of Chicago, Ill. On September 1, 1954, petitioner assigned the bonds, subject to the bank's lien, to the foundation. As of September 1, 1954, the fair market value of petitioner's equity in the bonds was $5,771.51.
On November 10, 1954, petitioner purchased $95,000 Alabama Power Co. 3 3/8-percent bonds of 1978. The purchase was financed in part by Morgan Guaranty Trust Co. of New York, N.Y. On December 14, 1954, petitioner assigned the bonds, subject to the bank's lien, to the foundation. As of December 14, 1954, the fair market value of petitioner's equity in the bonds was $10,117.50.
On November 10, 1954, petitioner purchased $125,000 Appalachian Electric Power Co. 3 1/8-percent bonds of 1977. The purchase was financed in part by Morgan Guaranty Trust Co. of New York, N.Y. On December 27, 1954, petitioner assigned the bonds, subject to the bank's lien to the foundation. As of December 27, 1954, the fair market value of petitioner's equity in the bonds was $10,292.98.
The transactions, described above, had substance. The designated bonds were in existence and were physically held by the lending institutions as collateral for their loans.
The charitable contribution deductions claimed on petitioner's income tax returns for the fiscal years ended October 31, 1954, October 31, 1955, and October 31, 1956 (contribution carryover), are based solely on the contributions of petitioner's equity in the bonds described above, to the trust and the foundation (with the exception of miscellaneous deductions totaling $50 and set forth separately on such returns).
During the period from September 18, 1953, to July 31, 1958, the following dividends were paid by petitioner:
+------------------------+
¦Date ¦Amount ¦
+---------------+--------¦
¦ ¦ ¦
+---------------+--------¦
¦Sept. 18, 1953 ¦$100,000¦
+---------------+--------¦
¦Mar. 1, 1954 ¦100,000 ¦
+---------------+--------¦
¦Oct. 19, 1955 ¦50,000 ¦
+---------------+--------¦
¦Dec. 9, 1955 ¦75,000 ¦
+---------------+--------¦
¦Sept. 13, 1956 ¦75,000 ¦
+---------------+--------¦
¦Oct. 4, 1957 ¦125,000 ¦
+---------------+--------¦
¦July 31, 1958 ¦35,000 ¦
+------------------------+
The information returns filed by the foundation showed the following contributions from the petitioner:
On its returns for the fiscal years ended in 1954 and 1955 petitioner claimed amortization (difference between cost basis and call price) on each group of bonds purchased and also claimed a charitable deduction for the excess of the fair value over the adjusted basis of such bonds at the time of the assignments to the trust or to the foundation, subject to the 5-percent limitation on such contributions in each year.
The transfers by petitioner to the foundation in its fiscal years ended in 1954 and 1955 of its equity in the bonds above described were not charitable contributions deductible pursuant to section 170, I.R.C. 1954. Petitioner is not entitled to a contribution carryover to its fiscal year ended in 1956 by reason of the transfers above described.
OPINIONIn his notice of deficiency issued September 19, 1958, respondent disallowed certain deductions claimed by petitioner in the taxable years involved for amortization of bond premiums, interest on indebtedness incurred in connection with the purchase of the bonds, and charitable contributions of its equity in such bonds. In disallowing these claimed deductions it was apparently respondent's position that the entire transaction was a sham, having no business purpose other than the creation of tax deductions which were not within the intendment of sections 171, 163, 170, respectively, I.R.C. 1954.
Subsequently, this Court had occasion to consider a...
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