Hill v. Comm'r of Internal Revenue
| Decision Date | 11 May 1943 |
| Docket Number | Docket No. 105227. |
| Citation | 1 T.C. 1057 |
| Parties | BUNKER HILL AND SULLIVAN MINING AND CONCENTRATING CO., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, owner of a 50 percent stock interest, and others, stockholders and nonstockholders, made advances from time to time to a corporation engaged in acquiring, prospecting, developing, and operating various mining properties. Petitioner's advances were not in proportion to its stock interest, were treated as loans, and interest was paid thereon monthly to March 1931. Its advances aggregated $8,702,000, on which repayments were made from time to time, not in proportion to stock interest and without corporate formality, leaving a balance due of $3,776,000, which amount was evidenced by a demand promissory note dated May 1, 1935, with 5 percent interest payable annually. On December 30, 1937, the debtor, with the consent of its creditors, transferred all its assets to a new corporation in exchange for stock and distributed the stock in liquidation to its creditors and stockholders in amounts previously agreed upon. Petitioner received 658,977 shares in satisfaction of its advances and other shares as a stockholder, valued the stock at par, $1 per share, credited the amount of $658,977 on its note, and ascertained the balance due of $3,117,023 to be worthless, charged it off on its books, and claimed the amount as a deduction in 1937. Held, the advances made by Held, the advances made by petitioner were loans and not capital contributions, the unpaid balance of the principal amount of said advances was properly ascertained to be worthless and charged off in 1937, and the nonrecognition provisions of section 112(b)(5), as amended, and 112(b)(3), Revenue Act of 1936, are not applicable. Henry D. Costigan, Esq., and Henry V. Colby, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
This proceeding involves deficiencies in income and excess profits taxes for the calendar year 1937 in the respective amounts of $315,318.72, and $7,521.96. The sole issue is whether petitioner is entitled to deduct $3,117,023 as a debt ascertained to be worthless and charged off in the taxable year, representing the unpaid balance of advances made by petitioner over a period of years to the Treadwell Yukon Co., Ltd.
Facts deemed material to the issue by both parties were set forth in a stipulation of facts. Certain other facts were agreed upon in a supplemental stipulation, some of which were objected to by petitioner and others by respondent, as being irrelevant and immaterial. The respective objections are overruled, the supplemental stipulation is received in evidence, and exceptions are reserved to the objecting parties. The facts as stipulated are adopted as our findings of fact and the pertinent portions set forth hereinafter.
Petitioner was organized in 1887 as an Oregon corporation. It was reorganized in 1924 as a Delaware corporation. Its income tax return for 1937 was filed with the collector for the first district of California.
The Alaska Treadwell Gold Mining Co. (hereinafter called Treadwell) was organized as a Minnesota corporation in 1889 and continued as such until its dissolution in February 1938; the Alaska Mexican Gold Mining Co. (hereinafter called Mexican) was organized as a Minnesota corporation in 1891 and continued as such until its dissolution in February 1938; and the Alaska United Gold Mining Co. (hereinafter called United) was organized as a West Virginia corporation in 1894 and continued as such until its dissolution in January 1938. Treadwell, Mexican and United are hereinafter referred to collectively as the Douglas Island companies.
At all times petitioner had thousands and each of the Douglas Island companies had hundreds of stockholders located throughout the United States and foreign countries. The capital stock of each of these four companies was at all times owned by substantially different and widely scattered stockholders, and there was never any unified stock ownership or stock control of both petitioner and the Douglas Island companies by any of their respective stockholders. From 1922 until his death in 1933, F. W. Bradley, a mining engineer of international reputation, was president of these four companies, as well as of various other mining corporations. To this extent there was a common management of petitioner and the Douglas Island companies, although the stockholding interests were substantially different in each of them.
In 1919 petitioner joined with the Douglas Island companies in searching for new mining properties. It was agreed that the subsequent costs of the joint venture would be shared in the following proportions: petitioner, 50 percent; Treadwell, 30 percent; Mexican, 10 percent; and United, 10 percent. Thereafter the four companies jointly prospected various mining properties in Alaska and Canada, with the costs of the joint venture being shared in the agreed proportions. By November 1, 1921, petitioner and the Douglas Island companies had jointly acquired options covering various mining properties in Alaska and the Yukon Territory and had determined that their operations would be more satisfactorily conducted through the medium of a corporation.
At the annual meeting of petitioner's stockholders on November 28, 1921, F. W. Bradley, as president, submitted a report in which he covered the operations of the joint venture up to that time. He recommended that a new corporation with a capital of $1,500,000 or less be organized to take over the properties theretofore acquired and to conduct the work of development and exploration, and ultimately the operation, of such properties, as well as such additional properties as might thereafter be acquired. The report stated in part as follows:
It is not believed that this capitalization will prove large enough to enable the new corporation to operate properties as is now contemplated, but it is large enough for the present and as it is not desirable to overcapitalize, it is deemed expedient to organize with this limited capitalization, with a view of increasing the same as soon as the need therefor may arise. Present indications are that the capitalization will ultimately have to be at least doubled * * * .
It is proposed to so continue the operations until the entire capital stock of $1,500,000.00 has been fully paid in and the stock issued in payment therefor. Whereupon if conditions are such as to deem that course expedient, it is proposed to increase the capitalization of the new corporation to a sum not to exceed $3,000,000.00, with the understanding that the three Alaska companies shall pay into the treasury a sum equal to one-half of the amount by which the said capitalization has been increased, and the Bunker Hill and Sullivan Mining Company is to pay in a sum equal to the remaining half and that thereupon stock is to issue to the respective companies so paying at par in amounts equivalent to the amounts so paid.
Early in 1922, shortly after said report and pursuant thereto, petitioner and the Douglas Island companies organized the Treadwell Yukon Co., Ltd., hereinafter referred to as Treadwell Yukon, as an Oregon corporation with an authorized capital of $1,500,000, represented by 1,500,000 shares of stock with a par value of $1 per share. It was reorganized in 1924 as a Delaware corporation with the same capital structure and continued as such until its dissolution in February 1938. F. W. Bradley was president of Treadwell Yukon from its organization in 1922 until his death in 1933.
Upon the organization of Treadwell Yukon, petitioner and the Douglas Island companies transferred to it at cost the various options and mining rights theretofore acquired by them pursuant to their joint venture. In exchange for such transfer Treadwell Yukon issued to them shares of its capital stock at par equal to the cost ($557,112) of said options and mining rights so transferred. Said shares were issued in proportion to their respective interests in the joint venture, viz., petitioner, 50 percent; Treadwell, 30 percent; Mexican, 10 percent; and United, 10 percent. At the same time petitioner and the Douglas Island companies agreed that as and when Treadwell Yukon required further funds for its operations they would subscribe and pay cash for additional stock at par in the same proportions until the 1,500,000 shares were outstanding. This agreement was carried out and Treadwell Yukon took over and carried on the operations previously conducted as a joint venture.
By the end of 1924 Treadwell Yukon's stock was issued and held as follows:
+--------------------------------------------------+
¦Stockholder ¦Shares held ¦Percent¦
+-----------------------------+------------+-------¦
¦Petitioner ¦749,988 ¦50 ¦
+-----------------------------+------------+-------¦
¦Treadwell ¦449,992 6/10¦30 ¦
+-----------------------------+------------+-------¦
¦Mexican ¦149,997 2/10¦10 ¦
+-----------------------------+------------+-------¦
¦United ¦149,997 2/10¦10 ¦
+-----------------------------+------------+-------¦
¦Directors (qualifying shares)¦25 ¦Nominal¦
+-----------------------------+------------+-------¦
¦ ¦1,500,000 ¦100 ¦
+--------------------------------------------------+
After the above authorized shares were issued Treadwell Yukon issued no further shares of capital stock. In 1927 Treadwell and Mexican distributed 120,000 and 36,000 shares of Treadwell Yukon stock, respectively, to their stockholders as liquidating dividends so that the general public would hold at least 10 percent of the authorized stock, which was a prerequisite to listing Treadwell Yukon stock on the Toronto Stock Exchange. These distributions...
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