Granite Trust Company v. United States

• Decision Date: 30 November 1956
• Docket Number: No. 5109.,5109.
• Citation: 238 F.2d 670
• Parties: GRANITE TRUST COMPANY, Plaintiff, Appellant, v. UNITED STATES of America, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

238 F.2d 670 (1956)

GRANITE TRUST COMPANY, Plaintiff, Appellant, v. UNITED STATES of America, Defendant, Appellee.

No. 5109.

United States Court of Appeals First Circuit.

November 30, 1956.

Melville F. Weston, Boston, Mass., Richard F. Barrett and Powers & Hall, Boston, Mass., on the brief, for appellant.

Grant W. Wiprud, Atty., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., Anthony Julian, U. S. Atty., and Arthur I. Weinberg, Asst. U. S. Atty., Boston, Mass., on the brief, for appellee.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

MAGRUDER, Chief Judge.

Granite Trust Company sued the United States in the federal court for the District of Massachusetts to recover an overpayment of income tax and declared value excess profits tax for the year 1943. From a judgment for the defendant the taxpayer has taken this appeal.

Many of the facts were stipulated. It is agreed that if taxpayer's losses realized upon its disposition in 1943 of certain shares of common stock of the Granite Trust Building Corporation (hereinafter called the Building Corporation) are entitled to be "recognized," then Granite Trust Company should recover in this action an overpayment in the sum of $57,801.32, with interest according to law.

In 1928 the Building Corporation was organized by Granite Trust Company for the purpose of acquiring land and constructing an office building thereon to be occupied by the bank. The land and building cost over $1,000,000 and were financed through the purchase by the taxpayer bank of all the stock of the Building Corporation. The Building Corporation rented a portion of the premises to Howard D. Johnson Company for a rental of approximately $13,700 per year. This last-named corporation was in 1943 wholly owned by Howard D. Johnson, an individual. Neither Howard D. Johnson Company, nor Johnson, owned any stock in Granite Trust Company, and no shareholder or officer of Howard D. Johnson Company was a director in, or otherwise connected with, Granite Trust Company, though both Howard D. Johnson Company, and Johnson, were depositors in the taxpayer bank.

Beginning at least as early as 1936, the amount at which the stock of the Building Corporation was carried upon the taxpayer's books was subjected to continuous criticism by various banking authorities. As a result, the taxpayer wrote down the value of the stock on its books, but nevertheless the examining authorities continued to press for further annual reductions.

At some time prior to October, 1943, the taxpayer's management commenced the formulation of a plan to bring this issue to a close by the expedient of having Granite Trust Company purchase the real estate from the Building Corporation for $550,000, a fair current appraisal, after which the subsidiary Building Corporation was to be liquidated. The practical problem in the execution of this plan resulted from the fact that the distribution in the liquidation of the subsidiary corporation was expected to amount to something between $65 and $66 per share upon the shares of common stock in the Building Corporation for which the taxpayer had paid $100 per share. In thus contributing to the simplification of the corporate structure of the taxpayer as a holding company, an end deemed desirable by the Congress, Granite Trust Company naturally wanted to be assured that its prospective loss to be realized upon the liquidation of its subsidiary would lawfully be "recognized" at once so as to be available as a tax deduction.

In order that this forthcoming loss upon its investment might not be denied recognition by § 112(b) (6) of the Internal Revenue Code of 1939,¹ the taxpayer, on advice of counsel, proceeded to divest itself of some of its shares of common stock in the Building Corporation by means of several purported sales and of a gift, the facts concerning which are as follows:

As of December 1, 1943, the outstanding capital stock of the Building Corporation, all owned by the taxpayer, consisted of 2,250 shares of preferred stock and 5,000 shares of common stock, the latter being the sole voting stock. On December 6, 1943, the taxpayer sold to, or went through the form of selling to, Howard D. Johnson Company 1025 shares of common stock of the Building Corporation, that being 20.5 per cent of the outstanding voting stock. Howard D. Johnson Company paid $65.50 per share, a total of $67,137.50, and delivered to the taxpayer its check for this amount, which was charged to the deposit account of Howard D. Johnson Company on December 6, 1943, and credited to the general funds of the taxpayer. On the same day the taxpayer surrendered to the Building Corporation certificates covering 1,025 shares of common stock, and the Building Corporation issued to Howard D. Johnson Company a new certificate for that number of shares, which certificate was held by Howard D. Johnson Company until it was surrendered on December 17, 1943, in the course of the final liquidation of the Building Corporation.

At a meeting of the Building Corporation stockholders held on December 10, 1943, the taxpayer submitted a written offer to purchase the real estate for $550,000. The stockholders voted to accept this offer, and at the same meeting the following vote was taken:

"That if and when this Corporation shall receive $550,000, adjusted as provided in the vote with regard to the sale of the Corporation\'s real estate, this Corporation shall be completely liquidated, and after payment or provision for payment of all debts of, claims against and obligations of this Corporation, all of its remaining assets shall be distributed at such time or times to stockholders of record at such date or dates, and under and subject to such circumstances as the Board of Directors may determine, to the stockholders of the Corporation pro rata in accordance with the respective priorities of the outstanding shares of the Corporation, provided, however, that such liquidation and distribution shall be made and shall be entirely completed prior to December 30, 1943."

At the date of the foregoing corporate action by the Building Corporation, namely, December 10, 1943, Granite Trust Company was the legal and equitable holder of 3,975 shares (79.5 per cent) of the then outstanding 5,000 shares of common stock. Howard D. Johnson Company, which as above stated held a certificate for 1,025 shares of common stock, waived notice of the stockholders' meeting and did not attend. Taxpayer's 3,975 shares were the only shares represented and acting at the meeting.

Thereafter, on December 13, 1943, the taxpayer sold, or went through the form of selling, ten shares each of the common stock in the Building Corporation to Howard D. Johnson individually and to one Ralph E. Richmond, for a price of $65.50 per share. On the same day the taxpayer donated to the Greater Boston United War Fund two shares of the common stock of the Building Corporation. Johnson and Richmond duly paid by check for the shares they bought, and the taxpayer delivered to them and to the United War Fund certificates sufficient to cover the shares sold or donated, which certificates were held by Johnson, Richmond, and the United War Fund until surrendered by them on December 17 in the course of the final liquidation of the Building Corporation.

At no time after the making of the above sales and gift did the taxpayer acquire any additional common stock in the Building Corporation.

On December 15, 1943, the real estate was conveyed to the taxpayer by the Building Corporation, and the taxpayer paid the Building Corporation the price of $550,000, appropriately adjusted for local taxes, rentals and insurance. The real estate was thereby brought on to the taxpayer's books at a cost equivalent to current fair market value, thus satisfying the banking authorities.

On December 17, 1943, the Building Corporation called for retirement at par of its outstanding preferred stock and paid the taxpayer therefor the sum of $225,000. On the same day the Building Corporation paid a final liquidating distribution in the amount of $65.77 per share with respect to each share of its outstanding common stock, and all holders surrendered their certificates for such outstanding shares. The taxpayer, as the owner of 3,953 shares of common stock, received $259,988.81. The owners of the other 1,047 shares of the Building Corporation common stock received, respectively: Howard D. Johnson Company, $67,414.25; Howard D. Johnson, $657.70; Ralph E. Richmond, $657.70; Greater Boston United War Fund, $131.54. Each payee received and retained these amounts.

On December 30, 1943, a final meeting of the Building Corporation stockholders was held, there being represented at the meeting the taxpayer, Howard D. Johnson Company, Howard D. Johnson, Ralph E. Richmond, and Greater Boston United War Fund. Dissolution was voted, with authority to the corporation's directors and officers to take all steps necessary or advisable to that end.

The taxpayer concedes that it would not have made the sales described above had it not been for § 112(b) (6) of the Internal Revenue Code of 1939. While the taxpayer maintains that the gift to the United War Fund was but part of the total gift to that organization for the year 1943, it seems clear, because this was the only case where shares of stock rather than cash were distributed to the charity, that at least the specific object given at this time was dictated by § 112 (b) (6).

The precise issue before us is whether or not to give effect for tax purposes to the aforesaid sales and gift by the taxpayer. If the answer is in the affirmative, there is no doubt that the liquidation distribution of the property of the Building Corporation was not in "complete liquidation" within the very special meaning of that phrase in § 112(b) (6) of the 1939 Code, and, accordingly, the taxpayer may...