Nicholson v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 32 BTA 977 |
| Decision Date | 19 July 1935 |
| Docket Number | Docket No. 66966,66967. |
| Parties | JAMES NICHOLSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ADA M. NICHOLSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Chase Morsey, Esq., for the petitioners.
Nathan Gammon, Esq., for the respondent.
These proceedings, consolidated for hearing and report, are for the redetermination of deficiencies in income tax and penalty as follows:
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Docket No. | Year | Tax | Penalty | Total
---------------------------|------|-----------|-----------|-----------
66966_____________________ | 1929 | $5,516.51 | $2,758.26 | $8,274.77
66967_____________________ | 1929 | 1,334.71 | _________ | 1,334.71
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In Docket No. 66966 it is alleged that the respondent erred:
(a) In increasing the amount of interest received by the petitioner by $683;
(b) In increasing the amount of dividends received by the petitioner by $475.32;
(c) In increasing the amount of interest paid by the petitioner by $70.78;
(d) In disallowing the loss on the sale of stock in the amount of $21,485.13;
(e) In increasing the amount of capital gain realized by the petitioner from the sale of Ellis Adding Typewriter Co. stock from $54,350.75 to $69,000; and
(f) In asserting any penalty under section 293 (b) of the Revenue Act of 1928.
In Docket No. 66967 it is alleged that the respondent erred:
(a) In increasing interest received by petitioner by $215.01 and decreasing interest received by petitioner by $449;
(b) In decreasing the amount of taxes paid by $3; and
(c) In disallowing losses in the amount of $21,485.13.
FINDINGS OF FACT.
The petitioners are husband and wife, residing in St. Louis, Missouri. The petitioner, James Nicholson, is a traveling salesman for a handkerchief manufacturer.
Prior to January 31, 1929, petitioner James Nicholson was the record owner of 172½ shares of stock of Ellis Adding Typewriter Co., hereinafter called the Ellis Co., and petitioner Ada M. Nicholson was the record owner of 118 1/8 shares of stock of the same company, which shares were acquired from time to time after 1904.
In January 1929 the Ellis Co. was sold out to the National Cash Register Co., hereinafter called the National Co. On January 31, 1929, each of the petitioners exchanged the stock in the Ellis Co. recorded in his or her name, receiving outright for each share thereof one share of class A (no par) stock of the National Co. and a cash bonus of $400 per share. In addition thereto, and pursuant to the exchange agreement, one half of a share of the same stock of the National Co. was issued in the name of James Nicholson for each share of stock of the Ellis Co. standing in his name and exchanged, and one half of a share of the same stock of the National Co. was issued in the name of Ada M. Nicholson for each share of stock of the Ellis Co. standing in her name and exchanged. These 86¼ shares issued in the name of James Nicholson and 59 1/16 shares issued in the name of Ada M. Nicholson were, pursuant to the exchange agreement, placed in escrow until February 1935, by way of indemnity to cover pending and future claims of former stockholders of the Ellis Co. who had sold their stock to the Ellis Co. treasury for less than its real value. No part of the stock issued in the names of the petitioners and so placed in escrow has yet been released to them or either of them by the escrow agent.
The basis for determining gain or loss on the sale or other disposition of stock of the Ellis Co. was $50 per share.
In their respective Federal income tax returns for 1929, each of the petitioners reported the sale of 145 shares of Ellis Co. stock, showing the cost thereof to be $16,699.25, the sale price to be $71,050, and the profit on the sale to be $54,350.75. In the notice of deficiency issued to petitioner Ada M. Nicholson, the profit on the exchange of Ellis Co. stock for National Co. stock and cash was shown to be $47,250, which was the amount of cash which she received in such exchange. In the notice of deficiency issued to James Nicholson, the profit on the exchange of stock of the Ellis Co. for National Co. stock and cash was shown to be $69,000, which was the amount of cash which he received in the exchange.
A check in payment of the above amount of $69,000 was deposited in the joint account of petitioners in the Bank of Commerce. James Nicholson called this account his account. Although Mrs. Nicholson had the right to draw checks against this account she did not do so generally. The other check was deposited with Scruggs, Vandervoort & Barney to the joint account of petitioners. Both petitioners drew checks against this account, Mrs. Nicholson usually paying the household expenses therefrom. One of these accounts has been held jointly by petitioners since November 16, 1916, and the other since December 8, 1917.
Before leaving St. Louis, James Nicholson made arrangements with Knight, Dysart & Gamble, brokers, who were carrying his loan in a considerable amount, to credit the above amounts against his account leaving quite an amount to his credit on which they were to pay him 5 percent interest until invested. He wished also to deposit this money with the brokers as he intended to buy some National Co. stock. Mrs. Nicholson drew a check against each bank account for deposit with said brokers. When James Nicholson returned to St. Louis, he discovered that the brokers had opened an account in the name of Mrs. Nicholson and had credited both amounts to her account because the checks had been signed by her. James Nicholson did not approve, so the brokers gave him a paper which he took to his wife and had her sign in order to change such account to a joint account of himself and wife.
Prior to October 28, 1929, James Nicholson attended a general meeting of salesmen at San Francisco, California. While there he was advised by the president and general manager of the National Co. not to sell his stock in that company until he received $300 a share for it. When he returned to St. Louis he bought, on October 28, 1929, another 100 shares of that stock. As shown by the records of the brokerage concern, he acquired a total of 500 shares of that stock by purchase as follows:
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Date | Shares | Cost
------------------------------------------|---------|--------
Nov. 5, 1928_____________________________ | 100 | $9,070
May 17, 1929_____________________________ | 100 | 12,025
May 21, 1929_____________________________ | 200 | 23,050
Oct. 28, 1929____________________________ | 100 | 10,025
| _______ | _______
Total______________________________ | _______ | 54,170
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On November 30, 1929, the "regular" and "safekeeping" accounts of James Nicholson at his brokers were credited with a total of 794 shares, including the above 500 shares of purchased stock, the 290 shares received January 31, 1929, in exchange for the Ellis Co. stock, which were entered in his regular account October 31, 1929, and 4 shares credited January 23, 1929, acquired upon subscription under rights at a cost of $240.
On October 29, 1929, the market price of such stock dropped to 64. This upset James Nicholson considerably and he wanted to dispose of the stock. His son-in-law, Joseph B. Morrill, who had been informed early in the day that there was a break in the market and who, knowing that James Nicholson had recently bought and held a substantial amount of National Co. stock, was very much concerned about it on his behalf, followed the action of the market that day and in the evening called upon the petitioner, James Nicholson. He found James Nicholson quite perturbed about the situation and he expressed his intention of selling on the market all the National stock the next day. The son-in-law was of the opinion it would be a mistake to sell such stock at the time. After some discussion he persuaded James Nicholson to hold 500 shares and asked him whether he would sell the 290 shares to him, 172 of which were in the name of James Nicholson and 118 shares in the name of Mrs. Nicholson. It was agreed that James Nicholson would "sell" the 290 shares to his son-in-law at 64, which was the low on October 29, 1929, taking his note therefor and the shares as collateral on the note. The price was satisfactory to Joseph B. Morrill because he thought the stock would go up and to James Nicholson because he thought it would go down. The following day, October 30, 1929, the son-in-law executed two demand notes, one payable to James Nicholson in the amount of $11,008 with interest at 6 percent from date, secured by 172 shares of National Co. stock and the other payable to Ada M. Nicholson in the amount of $7,552, with interest at 6 percent from date, secured by 118 shares of National Co. stock. The stock was turned over by James Nicholson October 31, 1929, to Knight, Dysart & Gamble and entered in his regular account for transfer to Joseph B. Morrill. When the stock had been so transferred the brokers called Joseph B. Morrill and James Nicholson, to their office, where Joseph B. Morrill endorsed the new certificates.
J. B. Morrill had been the son-in-law of petitioners since 1916. He was 50 years of age in 1929. He was employed by the Central Transfer Co. and also the Trorilicht, Derncter Carpet Co. In 1929 he received a salary of $9,300, and owned a house worth about $25,000 and some stock of the Central Transfer Co. of a value of approximately $15,000. This stock was hypothecated at times. The house was mortgaged in a small amount at two different times. There may have been a small...
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