Edward Securities Corporation v. Commissioner of Internal Revenue
| Citation | 30 BTA 918 |
| Decision Date | 14 June 1934 |
| Docket Number | Docket No. 71208. |
| Parties | EDWARD SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harry N. Wyatt, Esq., for the petitioner.
Bruce A. Low, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for the year 1930 in the amount of $1,824.86.
It is alleged in the petition that the respondent erred in disallowing the following deductions:
1. The sum of $46,052 as a loss on the sale of Foreman-State National Bank stock;
2. The sum of $5,000 as a loss on account of the worthlessness of a note of a certain A. B. Newman; and
3. The sum of $15,100 as a loss on the sale of stock of the Sheridan Trust and Savings Bank.
It was stipulated by the parties that the transaction in reference to which the loss of $46,052 was taken shall be deemed not to have been effected in the calendar year 1930; that the note receivable in the sum of $5,000 shall be deemed not to have become entirely worthless in the calendar year 1930; and that the amounts of $46,052 and $5,000, respectively, shall be disallowed as losses of the petitioner for the calendar year 1930.
The facts are contained in two stipulations, from which we make our findings of fact.
FINDINGS OF FACT.
Petitioner was incorporated under the laws of the State of Illinois on the 11th day of August 1923, under the name of Leona Finance Corporation, and its authorized capital stock consisted of 10,000 shares without par value. Two hundred shares of such authorized capital stock were issued to the initial subscribers for a consideration of $5 a share, paid in in cash. Thereafter, on December 24, 1923, pursuant to due action of the stockholders and directors of petitioner, the name of the petitioner was changed to Edward Securities Corporation, its present name, and its authorized capital stock was changed from 10,000 shares without par value to $1,000,000 consisting of 10,000 shares of the par value of $100 a share, and there were issued to the holders of the 200 shares of capital stock without par value at the time outstanding, in lieu thereof, 10 shares of the new stock.
On December 26, 1923, E. N. D'Ancona, pursuant to due action of the petitioner, assigned, transferred, and delivered to the petitioner certain securities then owned by E. N. D'Ancona, and received in exchange therefor 9,972 fully paid and nonassessable shares of the new stock of the petitioner of the par value of $100 a share, or an aggregate of $997,200 par value of such stock.
Immediately following such transfer the petitioner had 9,982 shares of its capital stock of the par value of $100 per share outstanding, which was owned by the following persons:
E. N. D'Ancona________________________________ 9,980 shares
Alfred E. D'Ancona____________________________ 1 share
Maurice Marwick_______________________________ 1 share
The two shares owned by Alfred E. D'Ancona and Maurice Marwick were directors' qualifying shares.
Pursuant to resolutions duly adopted by the stockholders of the petitioner at a special meeting held June 17, 1927, the authorized capital stock of petitioner was changed and decreased from $1,000,000, consisting of 10,000 shares of the par value of $100, to $500,000, consisting of 10,000 shares of the par value of $50, and the outstanding capital stock of petitioner was changed and decreased from $998,200, consisting of 9,982 shares of the par value of $100, to $499,100, consisting of 9,982 shares of the par value of $50 per share. Such change and decrease in the authorized capital stock of the petitioner was effected by the surrender by the stockholders of the petitioner of 9,982 shares of the par value of $100 then outstanding and the issuance to them, in lieu thereof, of 9,982 shares of the par value of $50 per share.
E. N. D'Ancona owned 9,980 shares of the capital stock of the petitioner out of a total of 9,982 shares outstanding throughout the year 1930.
Under date of November 8, 1926, E. N. D'Ancona purchased on the open market 50 shares of the capital stock of the Sheridan Trust & Savings Bank at $315 a share and paid therefor the sum of $15,750.
On or about October 1, 1929, E. N. D'Ancona sold these 50 shares of the capital stock of the Sheridan Trust & Savings Bank to the petitioner for $317 a share, and the petitioner paid to E. N. D'Ancona on account thereof the sum of $15,850. E. N. D'Ancona reported the profit from this sale to the petitioner in his income tax return for the calendar year 1929.
On December 26, 1930, the petitioner sold the above mentioned 50 shares of the capital stock of the Sheridan Trust & Savings Bank to E. N. D'Ancona for a price of $750, and on the same date received from E. N. D'Ancona the sum of $750 in payment of the purchase price of the stock. Thereafter, on December 30, 1930, the petitioner delivered the certificate of the 50 shares of stock to E. N. D'Ancona. The market value of such 50 shares of the capital stock of the Sheridan Trust & Savings Bank on December 26, 1930, the date of the sale, was $15 a share, or a total of $750.
OPINION.McMAHON:
The only issue to be considered in this proceeding is whether the respondent erred in disallowing a deduction in the sum of $15,100 representing a loss resulting from the sale in 1930 by the petitioner of 50 shares of the stock of the Sheridan Trust & Savings Bank.
The position of the respondent is, first, that the sale was not a bona fide sale, and secondly, if it were a bona fide sale, the stock was sold to an individual who was not only in control of the corporation, but owned all except two qualifying directorship shares out of a total of 9,982 outstanding shares, and, therefore, it would be contrary to the intent of Congress and public policy to allow such a deduction.
The respondent not only concedes that the sale was made, but the parties stipulated that the petitioner on December 26, 1930, "sold" the 50 shares of bank stock to E. N. D'Ancona at the then market value of such shares, or $750. Both contentions of the respondent are based primarily upon the fact that the petitioner sold the stock to its stockholder, who owned practically all of its stock, the respondent conceding that if the petitioner had sold the stock "to some stranger, it would be different." This fact by itself is not sufficient to sustain the contentions of the respondent. As stated in Commissioner v. Van Vorst, 59 Fed. (2d) 667; affirming George W. Van Vorst, Executor, 22 B.T.A. 632:
In the absence of other showing, the mere fact that the purchaser is a stockholder of the vending corporation does not change the character of the transaction. Appeal of McMichael, 4 B.T.A. 266, 269; Fruit Belt Co. v. Commissioner, 22 B.T.A. 440; Taplin v. Commissioner, (C.C.A.) 41 F. (2d) 454; Trust Co. v. Rose (C.C.A.) 28 F. (2d) 767.
In that case a stockholder who held 46,397 of the 50,000 outstanding shares of stock of a corporation purchased certain real estate from the corporation for the sum of $54,559.60, which real estate had a fair market value at the time of $143,559.60. The Board in its opinion in that case stated:
* * * In our opinion the stipulated facts, including the stipulation that the decedent "purchased" the property, made a prima facie case for the petitioner and it was then incumbent upon the respondent to show that although this was in form a sale, nevertheless it occurred under circumstances which indicate that in fact it was a distribution of earnings or profits accumulated since February 28, 1913. In this connection we see no reason to infer that the stockholders ever agreed to an unequal distribution. This majority stockholder undoubtedly purchased at a bargain price and there were stockholders who did not share in the bargain. But bargain purchases do not ipso facto require an explanation by the purchaser to avoid tax. Proof of a prima facie case does not require the elimination of all unfavorable possibilities. The purpose of the rule of evidence is to avoid just such difficulties.
While the above case involves an increase or addition to the taxable income of the purchaser and the instant proceeding involves a deduction from the income of the seller, both involve dealings between corporation and stockholder. The principle in the above case, in our view, is therefore applicable here.
In Fruit Belt Telephone Co., 22 B.T.A. 440, the Commissioner contended that the corporation really sold its assets to the Southern Bell Telephone Co., or in any event did not in good faith sell them to Evans and James, who owned all but one share of petitioner's stock. The Board stated:
On this question, we think the evidence is perfectly clear that the assets were sold to Evans and James and that they sold them to the Southern Bell Telephone Company. So long as neither creditor nor stockholder has any objection to the sale of assets by a corporation, clearly, a corporation is not prohibited by law from selling to its stockholders even at a price less than the value of the assets and there is nothing to prevent a corporation from distributing its assets to its stockholders in liquidation if it desires to do so regardless of the value of the assets distributed. A corporation may clearly do what it has a legal right to do, even for the sole purpose of reducing its tax liability. It is not required to pursue a course which gives rise to a greater tax liability if another course is open to it which will give rise to a less tax liability.
See also David Stewart, 17 B.T.A. 604; Corrado & Galiardi, Inc., 22 B.T.A. 847; and Budd v. Commissioner, 43 Fed. (2d) 509. In the first case just cited, we said:
Ordinarily, where an individual sells securities to a corporation at less than the cost of the securities, the sale establishes the amount of the individual's loss for income-tax purposes. It has been shown in this case that the petitioner sold his...
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