National Securities Corporation v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 10 March 1942
• Docket Number: Docket No. 103143.
• Citation: 46 BTA 562
• Parties: NATIONAL SECURITIES CORPORATION, SUCCESSOR BY MERGER TO AMERICAN GAS & ELECTRIC SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

46 B.T.A. 562 (1942)

NATIONAL SECURITIES CORPORATION, SUCCESSOR BY MERGER TO AMERICAN GAS & ELECTRIC SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 103143.

Board of Tax Appeals.

Promulgated March 10, 1942.

William H. Harding, Esq., and H. C. Kilpatrick, Esq., for the petitioner.

Dean P. Kimball, Esq., for the respondent.

The respondent has determined a deficiency of $39,367.90 in the income tax for the year 1936 of petitioner's predecessor, the American Gas & Electric Securities Corporation of Jersey City, New Jersey.

The parties have filed a written stipulation of facts, which is supplemented by oral testimony taken at the hearing.

FINDINGS OF FACT.

The American Gas & Electric Securities Corporation, hereinafter referred to as American Gas, was incorporated under the laws of the State of Maryland on June 23, 1925. The National Securities Corporation, the petitioner herein, is a Maryland corporation, incorporated on September 24, 1929. In 1939 American Gas was merged with the petitioner, which succeeded to all the property, rights, privileges, and franchises of American Gas and became liable for all obligations of American Gas. After the merger the separate existence of American Gas ceased. The respondent's deficiency notice is addressed to American Gas & Electric Securities Corporation and the petitioner appeals therefrom as successor to that corporation.

The petitioner's principal office is at 880 Bergen Avenue, Jersey City, New Jersey. The return for the period here involved was filed with the collector of internal revenue for the fifth district of New Jersey.

American Gas, during its entire existence, was a wholly owned subsidiary of the American Equitable Assurance Co. of New York, a fire insurance corporation, hereinafter referred to as the parent. On January 1, 1936, American Gas had issued and outstanding capital stock consisting of 3,000 shares without par value, the parent having paid $300,000 in cash for this stock. The fair market value of the net assets of American Gas at December 31, 1935, amounted to approximately $276,270. The sole business of the American Gas was the investment in and the purchase and sale of securities.

At the close of the calendar year 1935 the parent, the Assurance Co., owned 3,500 shares of the common stock of Standard Gas & Electric Co., hereinafter referred to as Standard, which it had previously purchased at a total cost of $418,780.19. During the year 1935 reorganization of Standard was commenced under section 77B of the Bankruptcy Act. At the close of 1935 the Standard stock held by the parent had a fair market value of approximately $6.25 per share.

During January 1936 the parent sold 2,500 shares of Standard stock in the open market at prices ranging from $7.75 to $9.125 per share. On February 13, 1936, it transferred to American Gas its remaining 1,000 shares of Standard common stock in exchange for 800 shares of the authorized capital stock of American Gas of no par value. These shares of Standard stock had cost the parent $140,378.06 and had a fair market value on February 13, 1936, of $8,562.50. The American Gas shares given in exchange had a declared value of $10 per share and an indicated fair market value of over $92 per share.

On December 11, 1936, American Gas sold the 1,000 shares of Standard common stock, acquired from the parent on February 13, 1936, on the open market, for a net price of $7,175. No part of the price received for the stock has ever been paid to the parent, but it was received and kept by American Gas.

In its return for the year 1936 American Gas deducted as a loss on the sale of the Standard stock the amount of $133,203.06, being the excess of the cost of the stock to the parent over the amount received by American Gas on its sale. The parent's 1936 return discloses an excess of capital losses on the sale of securities over capital gains of approximately $15,600, of which only $2,000 was allowed under the provisions of section 117 of the Revenue Act of 1936. The parent treated the transaction of February 13, 1936, as falling within section 112 (b) (5) and accordingly did not claim a loss deduction thereon in its 1936 return. The respondent has disallowed the deduction of the entire amount of $133,203.06 to American Gas, stating in his deficiency notice:

The amount of $133,203.06 claimed as a loss from the sale of 1,000 shares of common stock of Standard Gas and Electric Company has been disallowed by application of the provisions of Section 45 of the Revenue Act of 1936.

OPINION.

SMITH:

Petitioner's contentions are that the respondent has not applied section 45, as he professes to have done, but has disallowed the claimed deduction in whole and without statutory authority; that in any event section 45 does not give the respondent authority to make an allocation of the loss in question; and that the deduction claimed is clearly allowable under section 23 (f) and (j) and section 113 (a) (8) of the Revenue Act of 1936.

The sections of the statute referred to above, and others which petitioner deems pertinent to the question in issue, read in part as follows:

SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

* * * * * * *

(f) LOSSES BY CORPORATIONS. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.

* * * * * * *

(j) CAPITAL LOSSES. — Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117 (d).

SEC. 117. CAPITAL GAINS AND LOSSES.

* * * * * * *

(d) LIMITATION ON CAPITAL LOSSES. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *

SEC. 112. RECOGNITION OF GAIN OR LOSS.

* * * * * * *

(b) EXCHANGES SOLELY IN KIND. —

* * * * * * *

(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock * * * in such corporation, and immediately after the exchange such person or persons are in control of the corporation; * * *

SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.

(a) BASIS (UNADJUSTED) OF PROPERTY. — The basis of property shall be the cost of such property; except that —

* * * * * * *

(8) PROPERTY ACQUIRED BY ISSUANCE OF STOCK OR AS PAID-IN SURPLUS. — If the property was acquired after December 31, 1920, by a corporation —

(A) by the issuance of its stock * * * in connection with a transaction described in section 112 (b) (5) * * * then the basis shall be the same as it would be in the hands of the transferor, * * *

Section 45 above confers upon the respondent the power, whenever he deems it necessary in order to prevent evasion of taxes or clearly to reflect income, to distribute, apportion, or allocate gross income or deductions. This is a discretionary power and once the respondent has exercised it his action can be set aside only when clearly shown to be "arbitrary and capricious." See Asiatic Petroleum Co. (Delaware) Ltd., 31 B. T. A. 1152; affd., 79 Fed. (2d) 234; certiorari denied, 296 U. S. 645; Welworth Realty Co., 40 B. T. A. 97; G. U. R. Co., 41 B. T. A. 223; affd. (C. C. A., 7th Cir.), G. U. R. Co. v. Commissioner, 117 Fed. (2d) 187.

The section does not authorize the respondent arbitrarily to disallow a deduction, however, General Industries Corporation, 35 B. T. A. 615; Tennessee-Arkansas Gravel Co. v. Commissioner, 112 Fed. (2d) 508, which the petitioner contends is what the respondent has done in determining the deficiency herein.

This contention, we think, is not well founded. As was pointed out in G. U. R. Co. v. Commissioner, supra, the allocation of a deduction to one taxpayer necessarily requires its disallowance to another. The language used in G. U. R. Co. was not intended to deny this postulate. Whether the allocation is of a portion or all of the deduction claimed is of no consequence. Certainly section 45 should not be construed as conferring upon the respondent the power to allocate to one taxpayer a portion of a deduction and not the whole of it. We think that the statement contained in the deficiency notice to the petitioner herein may reasonably be construed as showing a determination in accordance with section 45, that is, an allocation of the entire deduction claimed by the petitioner to its parent company and, necessarily, the resulting disallowance of the entire...