Pacific Affiliate, Inc. v. Comm'r of Internal Revenue
| Decision Date | 30 September 1952 |
| Docket Number | Docket No. 12836. |
| Citation | 18 T.C. 1175 |
| Parties | PACIFIC AFFILIATE, INC., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Items includible in petitioner's borrowed invested capital, determined.
2. Status of certain securities held and sold by petitioner during taxable years, determined.
3. Period determined over which the premium paid for certain Federal Land Bank bonds purchased and sold in 1943 is amortizable.
4. Whether or not certain dividends received during taxable years are excluded from petitioner's excess profits net income, determined.
5. Contracts to purchase or to sell certain corporate securities when, as and if issued, held, properly recognizable as individual assets on a ‘gross basis‘ in computing the percentage of inadmissible to total assets under section 720, I.R.C. George H. Koster, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
This case involved deficiencies in income tax and excess profits tax for the taxable year ended December 31, 1943, and a deficiency in excess profits tax for the taxable year ended December 31, 1944, as follows:
+----------------------------------------+
¦Year ¦Income Tax ¦Excess profits tax ¦
+------+------------+--------------------¦
¦1943 ¦$9,992.35 ¦$169,500.52 ¦
+------+------------+--------------------¦
¦1944 ¦ ¦425,725.10 ¦
+----------------------------------------+
Petitioner paid the foregoing deficiencies after issuance of the deficiency notice, and here seeks refunds of the amounts so paid.
Several issues raised in the original petition have been abandoned, conceded, or adjusted by stipulation of the parties. Effect will be given to all such agreements in the computation under Rule 50. There remain for consideration:
1. Whether the margin account liability to Bear, Stearns & Company is allowable as borrowed invested capital, within the meaning of section 719 of the Internal Revenue Code.
2. Whether certain Federal Land Bank bonds, purchased and sold in 1943, were held primarily for sale to customers in the ordinary course of petitioner's business and the loss claimed by the petitioner is deductible.
3. Whether certain debts incurred by petitioner in 1943 and 1944 are includible as part of invested capital, within the meaning of section 719 of the Internal Revenue Code.
4. Whether the Commissioner erred in disallowing as part of petitioner's invested capital for the years 1943 and 1944 the amount of $278,240.98 as capital paid in to petitioner by its sole stockholder in the year 1934.
5. Whether gains and losses from the sales of certain securities in 1943 and 1944 were from sales of capital assets, as claimed by petitioner, or from assets held primarily for sale to customers in the ordinary course of business.
6. Whether the petitioner sustained a short term capital loss on the sale of 20,000 shares of Chicago & North Western Railway System preferred stock.
7. Whether petitioner realized short term capital gain or ordinary income in 1944 upon the sale of 22,174 shares of Western Pacific Railway Company new preferred stock.
8. Whether certain dividends received by petitioner in 1943 and 1944 were received on capital assets and excludible from excess profits net income.
9. Whether petitioner realized long term capital gain or ordinary income upon the assignment or discount of its ‘when, as and if issued‘ contracts respecting Chicago & North Western Railway securities in 1944.
10. Whether the respondent erred in determining petitioner's inadmissible assets.
The facts that were stipulated are so found and made a part hereof.
Petitioner is a California corporation with its principal office in San Francisco, California. It was originally incorporated under the name of Bankamerica Company. Subsequently, on April 20, 1945, petitioner duly changed its name to Pacific Affiliate, Inc. Petitioner keeps its books and files its tax returns on the accrual basis of accounting. The tax returns for the years here under review were filed with the collector of internal revenue for the first district of California, at San Francisco.
In his determination of deficiency for 1943, respondent included in petitioner's income as ordinary gross profit from sales, the amount of $455,505.46 which had been reported by petitioner as short term capital gains. Petitioner, on brief, now acquiesces in respondent's action except in so far as it pertains to $204,141.34 of such gains. Petitioner has also expressed on brief its acquiescence in respondent's action with respect to the following dividends received by it in 1943:
+-----------------------------------------------+
¦Electric Bond & Share Co. Pfd ¦338 ¦$507.00 ¦
+-------------------------------+------+--------¦
¦Electric Bond & Share Co. Pfd ¦470 ¦587.50 ¦
+-------------------------------+------+--------¦
¦Dewey & Almy Chemical Co ¦372 ¦93.00 ¦
+-------------------------------+------+--------¦
¦North American Co ¦10,000¦2,975.00¦
+-------------------------------+------+--------¦
¦North American Co ¦5,000 ¦1,450.00¦
+-------------------------------+------+--------¦
¦Tidewater Associated Oil Co ¦5,200 ¦780.00 ¦
+-------------------------------+------+--------¦
¦Tidewater Associated Oil Co ¦1,700 ¦255.00 ¦
+-------------------------------+------+--------¦
¦White Sewing Machine Corp., Pfd¦310 ¦155.00 ¦
+-----------------------------------------------+
In addition to the foregoing stipulations, petitioner now concedes on brief that the profit derived from the sale in 1944 of certain Chicago, Rock Island & Pacific bonds in the amount of $226, and the loss sustained on the sale in 1944 of 2,000 Chicago, Milwaukee & St. Paul 5 per cent bonds in the amount of $5,693.75 are properly taxable as ordinary gain or loss rather than as long term capital gain or loss as reported.
In February 1943 the petitioner opened a margin account with Bear, Stearns & Company (hereinafter sometimes referred to as Bear, Stearns), New York, New York, a firm engaged in business as a broker and dealer in securities. Upon the opening of this account the petitioner executed several documents. One document was a ‘corporate account‘ agreement whereby the company notified Bear, Stearns of official authorization for the opening of the account. A second document was a certified copy of the resolution of petitioner's Board of Directors containing such authorization. A third document was a ‘customers' agreement‘ which read, in part, as follows:
Any transaction made for my/our account(s) is subject in all respects to all applicable State or Federal legislation, and the regulations thereunder, and to the constitution, rules, by-laws and customs of the Exchange on which executed, and of its clearing house or clearing association. Actual delivery of all securities and commodities bought or sold for my/our account(s) is contemplated, and I/we so understand and agree.
For the purpose of expressly giving the consents required by any applicable State or Federal Law or Regulations, I/we hereby consent that all securities and/or contracts for commodities now or hereafter carried in my/our account(s) or deposited to protect the same, may, without further notice to me/us, be (sic) hypothecated by you, either separately or commingled with the securities and/or contracts of your other customers, either for the sum at any time due thereon from me/us to you, or for a greater sum, not in excess of the aggregate indebtedness to you of me/us and of such other customers whose securities and/or contracts are so pledged or hypothecated with mine/ours.
I/We hereby further consent that whenever my/our margin is deemed by you insufficient, or for any other like or unlike reason, any or all securities and/or commodities and/or contracts for purchase or sale of securities or commodities carried or borrowed for my/our account(s), may be sold or bought at public or private sale without demand for margin or additional margin and without notice of the time and place of the sale or purchase of said securities, commodities or contracts, and no specific demand or notice, if given by you, shall invalidate or affect this consent.
During the years 1943 and 1944 petitioner purchased a considerable amount of securities from Bear, Stearns which securities were held by the latter in this margin account. The following are the month-end balances of such account, all figures representing amounts owing from petitioner to Bear, Stearns except those figures in parentheses which represent balances owing from Bear, Stearns to petitioner:
+--------------------------------------+
¦ ¦1943 ¦1944 ¦
+------------+------------+------------¦
¦January (31)¦$132,809.12 ¦$967,966.27 ¦
+------------+------------+------------¦
¦February ¦(18,434.16) ¦350,651.17 ¦
+------------+------------+------------¦
¦March ¦973,696.44 ¦642,594.72 ¦
+------------+------------+------------¦
¦April ¦(572,036.32)¦902,252.77 ¦
+------------+------------+------------¦
¦May ¦148,007.07 ¦466,071.68 ¦
+------------+------------+------------¦
¦June ¦1,054,016.73¦525,303.69 ¦
+------------+------------+------------¦
¦July ¦910,559.71 ¦1,605,852.82¦
+------------+------------+------------¦
¦August ¦1,177,099.95¦1,611,748.91¦
+------------+------------+------------¦
¦September ¦619,487.29 ¦1,335,367.43¦
+------------+------------+------------¦
¦October ¦(83,045.48) ¦961,544.82 ¦
+------------+------------+------------¦
¦November ¦678,222.63 ¦(457,062.65)¦
+------------+------------+------------¦
¦December ¦268,484.56 ¦609,136.69 ¦
+--------------------------------------+
On April 2, 1943, the petitioner purchased certain Federal Land Bank 4 per cent 7-15-44-64 bonds of a par value of $4,810,000 at a cost of $5,014,672.15. The purchase price of the...
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