Estate of Foster v. Comm'r of Internal Revenue, Docket Nos. 8936
| Decision Date | 06 November 1947 |
| Docket Number | 8939.,Docket Nos. 8936 |
| Parties | ESTATE OF WILLIAM H. FOSTER, ST. JOSEPH VALLEY BANK, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.L. MAE FOSTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent, to procure working capital for a corporation in which he owned controlling stock, transferred half his common shares to a person furnishing capital to the corporation, and surrendered 1,848 shares of preferred stock to the corporation, of which 1,048 shares were canceled and 800 were resold to the person furnishing capital. Decedent sold his remaining common stock in 1940. Held, on the facts, decedent's basis for stock sold in 1940 includes cost of common stock transferred to the other person plus the part of the cost of preferred shares surrendered which was not deductible as a loss at the time of surrender. Commissioner v. Burdick, 59 Fed.(2d) 395, and Julius C. Miller, 45 B.T.A. 292, followed. Verne G. Cawley, Esq., for the petitioners.
Jackson L. Boughner, Esq., for the respondent.
The respondent determined deficiencies in income tax for 1940 in the amounts of $21,923.34 against the estate of William H. Foster and $1,480.24 against L. Mae Foster. The estate, petitioner in Docket No. 8936, asks that we determine that there was an overpayment of $5,865.89 by the decedent for 1940. The facts are stipulated. The problem is to determine the basis of certain stock sold in 1940.
The facts are found as stipulated. They are here summarized for the purpose of this opinion.
William H. Foster on December 6, 1922, was the owner of 4,160 shares of the common capital stock of the Foster Machine Co., an Indiana corporation. These shares had a cost basis to him of $23,650. Subsequently he acquired other shares and transferred certain shares. In December 1938 he transferred 80 shares by gift to L. Mae Foster, his wife, which shares he had acquired in 1928 at a cost of $4,000 or $50 a share. In November 1940 he sold for cash the 2,059 1/2 shares then owned by him for $205,950 and L. Mae Foster sold for $8,000 in cash the 80 shares then owned by her which she had received as a gift from her husband.
William H. Foster and L. Mae Foster filed separate income tax returns for the year 1940 with the collector of internal revenue at Indianapolis, Indiana. William H. Foster died, testate, on February 8, 1944. The St. Joseph Valley Bank is the duly qualified executor of his will.
On December 6, 1922, Foster and Carl D. Greenleaf entered into a written agreement concerning the Foster Machine Co. and its common capital stock, which recited in part:
WHEREAS, for the purpose of inducing Greenleaf to become associated with the Company as a director and in an advisory capacity and of obtaining additional working capital for the Company, Foster is willing to transfer and assign to Greenleaf twenty-one hundred and eighty (2180) shares of said capital stock for the purposes and upon the terms and conditions hereinafter set forth; and
WHEREAS, Greenleaf is willing to become associated with the Company in an advisory capacity and as a director, and is willing to purchase twenty-one hundred and eighty (2180) shares of the Company's capital stock only on condition that the amount paid therefor by him in cash be payable to the Company and that the amount credited to Greenleaf as hereinafter set forth shall likewise inure to the benefit of the Company, itself, all such payments and credits to be made as hereinafter set forth.
The agreement provided that Foster would transfer 2,180 shares of common stock of the company to a trustee, that Greenleaf would pay certain sums to the company, and that the trustee should deliver to Greenleaf certificates of stock upon presentation of receipts for such sums.
While the 1922 agreement between Foster and Greenleaf was in effect, but before any transfer of the shares to Greenleaf pursuant to its provisions had occurred, Greenleaf and Foster entered into a written agreement, dated February 14, 1927, canceling and terminating the prior agreement. The 1927 agreement provided that in payment of the sum of $105,000 Greenleaf had paid to Foster Machine Co. pursuant to the 1922 agreement, Greenleaf would accept 1,050 shares of the common stock of Foster Machine Co. owned by Foster, which shares Foster should transfer to Greenleaf.
The $105,000 which Foster Machine Co. had received from Greenleaf, pursuant to the provisions of the agreement of December 6, 1922, was credited on its books to its capital surplus account.
The 1927 agreement also provided that Greenleaf should loan to Foster Machine Co. the sum of $89,000, which amount, together with the sum of $24,000 then owing Greenleaf by Foster Machine Co. and evidenced by its notes, would make a total indebtedness owing Greenleaf by Foster Machine Co. of $113,000; that the notes of the company in that amount then held by Greenleaf should be canceled and the company should execute to him new notes payable 2 years after date. The agreement also granted to Greenleaf the option, which he might exercise at the expiration of 2 years from the date of the agreement, of purchasing 1,130 shares of the common stock of Foster Machine Co. owned by Foster, certificates, for which were to be deposited with an escrow agent upon the execution of the agreement, upon surrendering to the company for cancellation its notes in the sum of $113,000. Greenleaf exercised his option on February 14, 1929, and received 1,130 shares of common stock. The company credited on its books to its capital stock account the sum of $113,000.
On October 1, 1935, Foster owned 2,348 shares of the 3,315 shares of preferred stock of Foster Machine Co. then issued and outstanding for which he had paid $234,800.
In order to improve the financial position of Foster Machine Co., Foster, Carl D. Greenleaf, and the Foster Machine Co. entered into a written agreement dated October 1, 1935, by which Foster agreed to transfer to the company, as a donation to it, 1,848 shares of its preferred stock then owned by him, and Greenleaf agreed to purchase 800 shares of such stock from the company for $80,000, and to pay the purchase price by surrendering to Foster Machine Co. $50,000 par value of the bonds of the company owned by Greenleaf and canceling an indebtedness of $30,000 owing Greenleaf by the company.
Pursuant to this agreement, Foster assigned and transferred to the company 1,848 shares of its preferred stock and Greenleaf purchased from the company 800 shares thereof. The 1,048 shares of preferred stock donated to the company by Foster and not sold to Greenleaf were retired and canceled by the company.
Foster did not report for income tax purposes, on any return filed by him from 1922 through 1935, any gain or loss resulting from the transfer to Greenleaf and his nominee on March 16, 1927, of 1,050 shares of common stock of Foster Machine Co., or the transfer to Greenleaf on February 14, 1929, of 1,130 shares of common stock of Foster Machine Co., or the transfer to Foster Machine Co. on October 5, 1935, of 1,848 shares of its preferred stock.
In his returns for 1927, 1928, 1929, and 1935 Foster reported the following income and losses:
+------------------------+
¦1927 (income) ¦$8,305.27¦
+--------------+---------¦
¦1928 (income) ¦63,083.53¦
+--------------+---------¦
¦1929 (income) ¦22,656.93¦
+--------------+---------¦
¦1935 (loss) ¦9,155.78 ¦
+------------------------+
Prior to the transfer of common stock to Carl D. Greenleaf in 1927 and 1929, Foster owned 4,160 shares out of the 5,000 shares of common stock outstanding, or 83.2 per cent, and owned or controlled 4,360 shares, or 87.2 per cent. After the transfers, he owned 2,130 shares, or 42.6 per cent, and owned or controlled 2,360 shares, or 47.2 per cent, and Greenleaf owned or controlled 2,180 shares, or 43.6 per cent.
Prior to the agreement of October 1, 1935, there were outstanding 3,315 shares of $100 par value of preferred stock. After the surrender by Foster of 1,848 shares under the terms of the agreement of October 1, 1935, there were outstanding 2,267 shares, of which Foster held 500 shares. In 1940 Foster held 400 shares of preferred stock. In 1941 he acquired additional shares. In 1943 he disposed of all his preferred shares. In all transactions by Foster the preferred stock was bought or sold at its par value of $100 per share.
In 1938 Foster made a cash contribution of $12,000 to the corporation. At that time he owned 2,976.5 shares of common stock. This contribution increased the basis of the shares sold by Foster in 1949 by $8,303.04 and of the shares sold by L. Mae Foster by $322.53.
The following tabulation shows the total shares of common stock of the company outstanding, the number of shares owned by Foster and by others, and the cost of Foster's shares:
+-----------------------------------------------------------------------------+
¦ ¦ ¦Owned by Wm. H. ¦ ¦
¦ ¦ ¦Foster ¦ ¦
+------------------------------------------+------+------------------+--------¦
¦ ¦Total ¦_________________ ¦Shares ¦
¦ ¦ ¦ ¦owned ¦
+------------------------------------------+------+------------------+--------¦
¦ ¦shares¦ ¦ ¦by ¦
¦ ¦ ¦ ¦ ¦others ¦
+------------------------------------------+------+-------+----------+--------¦
¦ ¦ ¦Shares ¦Original ¦ ¦
¦ ¦ ¦ ¦cost ¦ ¦
+------------------------------------------+------+-------+----------+--------¦
¦Dec. 6, 1922...To continue reading
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