Laun v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 45347
| Citation | 26 BTA 764 |
| Decision Date | 30 July 1932 |
| Docket Number | Docket No. 45347,45348. |
| Parties | ALFRED A. LAUN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. B. LAUN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frederic Sammond, Esq., for the petitioners.
W. Frank Gibbs, Esq., for the respondent.
These are proceedings, duly consolidated for hearing and opinion, for the redetermination of asserted deficiencies in income taxes as follows:
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Docket No. | Year | Amount
-----------------------------------------------------|------|-------------
45347 ______________________________________________ | 1926 | $1,302.88
45348 ______________________________________________ | 1926 | 2,376.35
Do _____________________________________________ | 1927 | 1,008.40
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In Docket No. 45347 the petitioner alleges that the respondent erred in including in gross income as taxable dividends received from the Kiel Furniture Company the amount received by the petitioner upon the selling to the company of 157 shares of its preferred capital stock owned and held by him, and in eliminating from gross income the amount of $1,808.17 reported as a taxable profit arising from the transaction.
In Docket No. 45348 the petitioner alleges that the respondent erred (a) in disallowing as a deduction from gross income for 1926 losses aggregating $5,225.50, sustained upon securities purchased for profit; (b) in treating as dividends subject to tax the amounts of $15,300 and $8,000 received by the petitioner in 1926 and 1927, respectively, upon sales by the petitioner of preferred capital stock of the Kiel Furniture Company, and in failing to compute taxable profits upon the aforementioned sales of preferred capital stock of $3,122.73 and $1,632.80 for 1926 and 1927, respectively.
FINDINGS OF FACT.
The petitioner, Alfred A. Laun, is an individual, with his principal office at the Kiel Furniture Company, Milwaukee, Wisconsin.
The petitioner, J. B. Laun, is an individual, residing at Kiel, Wisconsin.
Alfred A. Laun has been a director of the Kiel Furniture Company (hereinafter called the "Company") since 1923. In 1923 he was secretary-treasurer of the Company and has continuously since then held office in the Company, at the present time being president and treasurer.
The petitioner, J. B. Laun, has been since 1923 and now is a director and chairman of the board of directors of the Company, but was not otherwise actively engaged in the business of the Company.
Alfred A. Laun and his brother, J. B. Laun, owned about 90 per cent of the common stock of the Company and practically controlled it.
At a meeting of the stockholders of the Company held on February 13, 1923, at its office in the city of Milwaukee, Wisconsin, a resolution was adopted authorizing the issuance of first mortgage serial six and one half per cent gold bonds, dated March 1, 1923, in the aggregate principal sum of $400,000, payment of same to be secured by a mortgage or deed of trust constituting a lien on all the properties, rights, privileges and franchises of the Company then owned or thereafter to be acquird by the Company, excepting only current assets.
The stockholders at such meeting also adopted a resolution increasing the authorized capital stock of the Company from 5,000 shares of common stock at $100 per share, which was all issued and outstanding, to 10,000 shares of common stock at $100 per share and 5,000 shares of preferred stock at $100 per share, and amended the articles of organization accordingly. The articles as amended provide that the preferred stock shall be entitled to 6 per cent cumulative dividends, payable on the second day of January, and the first day of July in each year; that the preferred stock shall be preferred over the common stock in any distribution of assets other than profits not exceeding the par value thereof; and that all or any number of shares of preferred stock shall be redeemable at the option of the board of directors at any time at $106 per share together with unpaid accrued dividends. The articles as amended also provide for the creation of a sinking fund for the redemption or purchase of preferred stock out of surplus profits, the amount to be set apart and credited to such sinking fund to be computed by the board of directors as provided in such articles. The articles further provide that the funds in or credited to such sinking fund are to be used in the purchase and cancellation of preferred stock at prices not exceeding $106 per share, in the manner provided for in the by-laws, and the preferred stock so purchased and redeemed shall never be sold or reissued by the Company.
The by-laws of the company were also amended at this meeting. Article VIII, as amended, provides in part that at any time after February 1, 1924, if there shall be funds in the sinking fund amounting to not less than $10,000, the board of directors shall direct the treasurer of the Company to request sealed offerings of preferred stock from the holders thereof, and to accept for purchase and retirement, so far as the funds in the sinking fund may permit, stock offered at the lowest prices, not exceeding $106. Article IX of the by-laws, as amended, provides that the redemption of preferred stock shall be effected by the adoption of a resolution by the board of directors directing such redemption.
At the meeting of the board of directors following the stockholders' meeting on February 13, 1923, the board declared a 30 per cent preferred stock dividend and authorized the issuance to each common stockholder of the number of shares equaling 30 per cent of the whole number of his shares of common stock whenever the Company should be legally authorized to issue such preferred stock, provided that no fractional shares should be issued, but in the event a stockholder was entitled to a fractional share as a part of such dividend, he was to receive in addition to the number of whole shares to which he was entitled in cash the par value of such fractional share, or, upon the stockholder's paying the par value of a whole share, less such fraction, he was to receive an additional whole share.
No resolution to redeem the preferred stock was ever adopted by the board of directors and no preferred stock was ever redeemed in the manner provided in the articles and by-laws of the Company. However, every year from 1924 to 1927, both inclusive, notices were sent to preferred stockholders stating in part that in accordance with the articles and by-laws a certain sum had been credited to the sinking fund out of the surplus profits for the purpose of purchasing and retiring on a certain date, so far as the funds of the sinking fund would permit, outstanding preferred stock at the lowest prices at which such shares may be offered for sale to the Company.
Such notices were sent out to preferred stockholders under the dates and with stated amounts of profit set aside for the purpose of purchasing said stock as follows:
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| | Out of |
| | surplus |
Date of notice | Amount | profits | Date of proposed
| set apart | for year | purchase
| | ended |
| | Dec. 31 |
-----------------------------------------|-----------|----------|--------------------
Feb. 15, 1924 __________________________ | $13,000 | 1923 | Mar. 15, 1924
Feb. 14, 1925 __________________________ | 28,000 | 1924 | Mar. 15, 1925
Feb. 27, 1926 __________________________ | 33,000 | 1925 | Mar. 15, 1926
Feb. 16, 1927 __________________________ | 30,000 | 1926 | Mar. 15, 1927
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No offers to sell preferred stock to the Company were ever made by preferred stockholders in response to such notices.
No sinking fund was ever established. The Company merely set up on its books of account a so-called "Sinking Fund Reserve for the Redemption of Preferred Stock" account, to which it credited the percentage of profit of each year, commencing with profits earned in 1923, applicable for such purpose. These amounts were debited to the surplus account. As and when the preferred stock was purchased the total amount of such purchase was debited to the sinking fund reserve account and credited to the surplus account.
The amounts paid by the Company for the preferred stock purchased by it were credited to the bank account and charged directly to the preferred stock account.
In 1925 the Company purchased 280 shares of its preferred stock; in 1926 it purchased 330 shares, which included 153 shares purchased from J. B. Laun and 157 shares purchased from Alfred A. Laun; and in 1927 it purchased 300 shares, which included 80 shares purchased from J. B. Laun.
The board of directors of the Company did not authorize or direct the above purchases or retirement of preferred stock by resolution or otherwise at any of its meetings, although it was discussed informally at its meetings. On all such purchases the Company paid the par value plus accrued dividends. As the auditors of the Company wanted the sinking fund reserve reduced in order to improve the position of the petitioner, and as no offers had been received from other preferred stock holders, the petitioners, Alfred A. Laun and J. B. Laun...
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