Edwards v. Comm'r of Internal Revenue
| Decision Date | 21 November 1952 |
| Docket Number | Docket No. 33702. |
| Citation | 19 T.C. 275 |
| Parties | EDWARD W. EDWARDS AND ELEANORE Z. EDWARDS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Orie S. Ware, Esq., James C. Ware, Esq., and Frank Gofton Ware, Esq., for the petitioners.
Wm. R. Bagby, Esq., for the respondent.
BASIS FOR DETERMINING GAIN OR LOSS.— Petitioner purchased stock from A; petitioner borrowed money to pay for this stock from B and deposited the stock as collateral to secure the indebtedness. Prior to the discharge of the indebtedness, by payment on the notes and by substitution of other security, petitioner repossessed the original stock. Subsequently and in a separate transaction, petitioner compromised the indebtedness. Seven months later, in another, separate, transaction, the original stock was sold to C. Held, the basis of the stock for the computation of gain or loss was the cost of the stock.
Respondent has determined a deficiency of $353,663.46 in petitioners' income tax for the calendar year 1944.
The sole issue before us is whether the compromise of an indebtedness, evidenced by two notes, resulted in a reduction of basis of common stock; the stock was originally deposited as collateral security, later withdrawn, and after the compromise sold. Respondent made certain other adjustments to the petitioners' net income, but these adjustments are not contested.
All of the facts were stipulated and are so found.
The petitioners are husband and wife, with their residence at Cincinnati, Ohio. They filed a joint return for the calendar year 1944 with the collector of internal revenue for the first district of Ohio. Edward W. Edwards will hereinafter be referred to as the petitioner.
On or about May 28, 1930, petitioner offered to purchase 32,228 shares of stock of the Valvoline Oil Company from the Paragon Refining Company. On June 24, 1930, petitioner's offer was accepted and approved by the stockholders of the Paragon Refining Company. Pursuant to this agreement, on September 3, 1930, petitioner was billed for the stock at the rate of $199.614 per share, or an aggregate of $6,433,157.
On or about October 24, 1930, the stock was tendered to petitioner and demand was made for full payment, plus interest at the rate of 6 per cent per annum from September 30, 1930. On October 28, 1930, petitioner paid Paragon Refining Company the sum of $6,433,157 plus interest in the amount of $49,142.19, as full payment for the stock.
Rather than liquidate his assets, petitioner borrowed three million dollars from the National City Bank of New York and three million from the Chase National Bank of New York to pay for the stock. These two debts were evidenced by collateral loan notes. The original notes matured in six months and thereafter from time to time renewals were executed. These loans, on October 28, 1930, were secured by collateral as follows:
+--------------------------------------------------------------------------+
¦National City Bank of New York: ¦ ¦
+-----------------------------------------------------------+--------------¦
¦16,114 shares Valvoline Oil Company, common stock (cost) ¦$3,216,580 ¦
+-----------------------------------------------------------+--------------¦
¦35,000 shares Columbia Gas & Electric Company, common stock¦1,610,000 ¦
+-----------------------------------------------------------+--------------¦
¦Total ¦$4,826,580 ¦
+-----------------------------------------------------------+--------------¦
¦Chase National Bank: ¦ ¦
+-----------------------------------------------------------+--------------¦
¦16,114 shares Valvoline Oil Company, common stock (cost) ¦$3,216,580 ¦
+-----------------------------------------------------------+--------------¦
¦34,037 shares Columbia Gas & Electric Co., common stock ¦1,565,702 ¦
+-----------------------------------------------------------+--------------¦
¦1,500 shares National Cash Register Co., common stock ¦49,500 ¦
+-----------------------------------------------------------+--------------¦
¦Total ¦1 $4,811,782¦
+--------------------------------------------------------------------------+
Between October 28, 1930, and January 23, 1933, petitioner withdrew from the collateral deposited with the National City Bank of New York 3,426 shares of Valvoline Oil Company common stock, and deposited an additional 5,000 shares of Columbia Gas & Electric Company common stock, 5,496 shares of American Thermos Bottle, 4,000 shares of Corcoran Brown Lamp, and 100 shares of Edwards Manufacturing Company common stock. Prior to the year 1941, the stock of the Corcoran Brown Lamp Company was disposed of by the bank. During the year 1941, 5,496 shares of American Thermos Bottle were sold by the bank, and on December 13, 1941, 500 shares of Valvoline Oil Company common stock were sold by the bank, and the proceeds applied to the loan. On January 13, 1942, 100 shares of Edwards Manufacturing Company common stock were sold by the bank and the proceeds credited to petitioner's note. On April 16, 1942, petitioner received 12,188 shares of the Valvoline Oil Company common stock, held as collateral by the National City Bank, upon payment by him to the bank of $195,008, which was credited to his note. During the period February to September, 1943, the National City Bank sold 40,000 shares of Columbia Gas & Electric Company common stock, held as collateral, and the proceeds applied on petitioner's note. With the sale of the Columbia Gas & Electric Company common stock, the collateral note was then unsecured. On November 17, 1943, the indebtedness to the bank had been reduced to the sum of $1,752,580.53 as principal, and there was accrued interest in the amount of $294,289.47. After protracted negotiations, on November 17, 1943, the National City Bank of New York canceled the indebtedness and interest accruals upon petitioner's payment of $25,000.
Between October 28, 1931, and January 23, 1933, petitioner withdrew from the collateral at the Chase National Bank 2,905 shares of the Valvoline Oil Company common stock, and deposited, during the same period, 1,044 shares of National Cash Register common stock, 11,980 shares of Galina Oil Corporation stock, 4,000 shares Corcoran Brown Lamp Company stock, 80 shares Edwards Manufacturing Company stock, and 2,000 shares of the J. G. Wilson Corporation. The stock of the Galina Oil Corporation, Corcoran Brown Lamp Company, and J. G. Wilson Corporation was disposed of by the bank prior to 1942. On April 16, 1942, petitioner received 13,209 shares of the Valvoline Oil Company common stock, held as collateral by the Chase National Bank, upon his payment of $211,344. This amount was applied on his Chase National Bank note. On August 14, 1942, eighty shares of the Edwards Manufacturing Company common stock were sold by the bank for $160,000 and his note was credited with the proceeds thereof. During 1943 the Chase National Bank sold 2,544 shares of the National Cash Register Company, and thereafter, during the period February to September, 1943, 36,047 shares of the Columbia Gas & Electric Company common stock were sold by this bank and the proceeds from the sale of both stocks applied to reduce his loan. After the sale of the last of the Columbia Gas & Electric Company common stock, in September 1943, the collateral note of the Chase National Bank of New York was then unsecured. On November 22, 1943, the indebtedness to the bank had been reduced to the sum of $1,845,971.75 as principal, and accrued interest in the amount of $90,242.27. On November 22, 1943, as the result of negotiations, the Chase National Bank canceled petitioner's indebtedness upon his payment of $25,000.
Immediately before and immediately after the National City Bank of New York canceled its notes on payment of $25,000 on November 17, 1943, and immediately before and immediately after the Chase National Bank of New York canceled its notes on payment of $25,000 on November 22, 1943, petitioner was insolvent.
The cancellations of indebtedness by the Chase National Bank and National City Bank were disclosed by petitioner on his calendar year 1943 income tax return as an amount received claimed to be nontaxable.
On June 20, 1944, petitioner sold 31,329 shares of the common stock of the Valvoline Oil Company for $103.50 a share, or a total of $3,237,551.50. This sale was reported on his 1944 income tax return as follows:
On June 20, 1944, sold:
+------------------------------------------------------------------+
¦31,329 shares common stock of Valvoline Oil Company,¦ ¦
+----------------------------------------------------+-------------¦
¦Cincinnati, Ohio, at 103.50 per share, total ¦$3,237,551.50¦
+----------------------------------------------------+-------------¦
¦Less legal fees ¦2,500.00 ¦
+----------------------------------------------------+-------------¦
¦ ¦$3,235,051.50¦
+------------------------------------------------------------------+
This stock had been purchased at various dates, as follows:
+-----------------------------------------------------+
¦Sept. 3, 1930,¦25, 433¦shs. at¦199.614¦¦$5,076,782.86¦
+--------------+-------+-------+-------++-------------¦
¦April 8, 1931 ¦4 ¦“ ¦96.00 ¦¦384.00 ¦
+--------------+-------+-------+-------++-------------¦
¦May 21, 1936 ¦5 ¦“ ¦13 ¦¦65.00 ¦
+--------------+-------+-------+-------++-------------¦
¦May 26, 1937 ¦1 ¦“ ¦60 ¦¦60.00 ¦
+--------------+-------+-------+-------++-------------¦
¦Dec. 10, 1942 ¦100 ¦“ ¦14 1/2 ¦¦1,450.00 ¦...To continue reading
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