Whitney v. Comm'r of Internal Revenue
| Decision Date | 14 May 1947 |
| Docket Number | Docket Nos. 6514-6525,6547. |
| Parties | GEORGE WHITNEY, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In the taxable year 1940, petitioners were members of the New York partnership of J. P. Morgan & Co. On March 29, 1940, under the Banking Law of New York, they organized a trust company in the name of ‘J. P. Morgan & Co. Incorporated. ‘ They acquired more than 72 per cent of its outstanding stock. On March 30, 1940, by bill of sale and agreement, the partnership transferred certain of its assets to the trust company. The latter assumed all the liabilities of the partnership and paid to it in cash the difference between the fair market value of the assets transferred and the liabilities assumed. On the same date, the partnership, on behalf of its members, contributed certain defaulted securities and cash to the surplus of the trust company. The respondent denied to petitioners any losses resulting from these transfers, under the provisions of section 24(b)(1)(B), I.R.C. In Docket No. 6524, respondent included in the gross income of the decedent certain income of a trust created by decedent which was paid to named beneficiaries and, also, included the sum of $25,000 paid by decedent to beneficiaries pursuant to the provisions of the will of decedent's father. Held:
(1) The securities listed in the bill of sale were sold by the partnership to the trust company, and respondent improperly disallowed deduction of the resulting losses under the provisions of section 24(b)(1)(B), I.R.C.
(2) The contribution of the defaulted securities and cash was in effect made by the partners individually to the trust company, and, since there was no sale or exchange, but rather a contribution to the surplus of the trust company, no deductible losses resulted from such transaction in the taxable year.
(3) In Docket No. 6524, respondent properly included the contested items as income of the decedent. Montgomery B. Angell, Esq., and George Craven, Esq., for the petitioners.
Conway N. Kitchen, Esq., for the respondent.
These consolidated proceedings involve income tax deficiencies totaling $883,685.85 for the calendar year 1940, as follows:
+-----------------------------------------------------------------------------+
¦Petitioner ¦Docket¦Deficiency ¦
¦ ¦No. ¦ ¦
+----------------------------------------------------------+------+-----------¦
¦George Whitney ¦6514 ¦$139,638.21¦
+----------------------------------------------------------+------+-----------¦
¦Henry C. Alexander ¦6515 ¦2,876.62 ¦
+----------------------------------------------------------+------+-----------¦
¦Arthur M. Anderson and Alice M. Anderson, Husband and Wife¦6516 ¦83,906.56 ¦
+----------------------------------------------------------+------+-----------¦
¦I.C. Raymond Atkin and Winnifred Atkin, Husband and Wife ¦6517 ¦4,844.08 ¦
+----------------------------------------------------------+------+-----------¦
¦H.P. Davison ¦6518 ¦74,653,50 ¦
+----------------------------------------------------------+------+-----------¦
¦Charles D. Dickey and Catherine C. Dickey, Husband and ¦6519 ¦90,358.81 ¦
¦Wife ¦ ¦ ¦
+----------------------------------------------------------+------+-----------¦
¦Thomas S. Lamont ¦6520 ¦92,992.20 ¦
+----------------------------------------------------------+------+-----------¦
¦Thomas W. Lamont ¦6521 ¦184,060.34 ¦
+----------------------------------------------------------+------+-----------¦
¦R.C. Leffingwell and Lucy H. Leffingwell, Husband and Wife¦6522 ¦50,905.82 ¦
+----------------------------------------------------------+------+-----------¦
¦William A. Mitchell ¦6523 ¦3,911.95 ¦
+----------------------------------------------------------+------+-----------¦
¦Estate of J.P. Morgan, Deceased, Junius S. Morgan, Henry ¦6524 ¦1 ¦
¦S. Morgan and J.P. Morgan & Co. Incorporated, Executors ¦ ¦51,249.08 ¦
+----------------------------------------------------------+------+-----------¦
¦Junius S. Morgan and Louise C. Morgan, Husband and Wife ¦6525 ¦12,889.31 ¦
+----------------------------------------------------------+------+-----------¦
¦Estate of Francis D. Bartow, Deceased, J.P. Morgan & Co. ¦ ¦ ¦
¦Incorporated, Executor, and Sabina R. Bartow, Wife of said¦6547 ¦74,726.83 ¦
¦Francis D. Bartow ¦ ¦ ¦
+-----------------------------------------------------------------------------+
Overpayments for the same year are claimed in Docket Nos. 6514, 6518, 6520, and 6521 in the respective amounts of $57,916.59, $4,092.93, $4,836.33, and $46,047.
The primary issue common to all petitioners is whether certain losses resulting from the transfer, pursuant to a bill of sale and agreement dated March 30, 1940, between J. P. Morgan & Co., a partnership, the partners of that firm individually, and J. P. Morgan & Co. Inc., a trust company, are nondeductible by virtue of the provisions of section 24(b)(1)(B) of the Internal Revenue Code.
A secondary issue is whether with respect to certain other property which was contributed to J. P. Morgan & Co. Inc., any losses are deductible.
An alternative issue is whether the 13 individual petitioners, as ex-partners of J. P. Morgan & Co., sustained a deductible loss of 1940 measured by the difference between the adjusted cost or basis of the interest of each in the firm as of March 30, 1940, and the cash and property received by each in the final liquidation and winding up of the firm on that date.
In Docket No. 6524, in which the estate of J. P. Morgan, deceased, is petitioner, two additional issues are presented:
(1) Whether there should be included in decedent's gross income for 1940 ordinary income of $38,682.24 and a capital net gain of $9,883.54, realized by an irrevocable trust created by the decedent on February 7, 1930, under which the decedent reserved the power to alter or amend without any right to retake the principal or income of the trust, whether ordinary income or capital gain.
(2) Whether there should be included in decedent's income the amount of $25,000 which was payable under the terms of the will of decedent's father (the elder Morgan) to a named beneficiary, Annette B. Markoe, and which was paid by the decedent to such beneficiary pursuant to an obligation imposed upon by such will.
On March 31, 1916, the partnership of J. P. Morgan & Co. was formed for the purpose of carrying on a general banking business in New York City under the name of J. P. Morgan & Co., and in Philadelphia, Pennsylvania, under the name of Drexel & Co.
The 13 petitioners involved herein filed their Federal income tax returns for the taxable year 1940 with the collector of internal revenue for the second district of New York. J. P. Morgan & Co.-Drexel & Co. filed a partnership return on Form 1065 for the period January 1 to March 31, 1940, with the collector of internal revenue for the second district of New York.
On March 30, 1940, the members of J. P. Morgan & Co. and the dates of their admission to this firm or its predecessor firms were as follows:
+----------------------------------+
¦J. P. Morgan ¦Jan. 1, 1892 ¦
+--------------------+-------------¦
¦Thomas W. Lamont ¦Dec. 31, 1910¦
+--------------------+-------------¦
¦Junius S. Morgan ¦Dec. 31, 1919¦
+--------------------+-------------¦
¦George Whitney ¦Dec. 31, 1919¦
+--------------------+-------------¦
¦R. C. Leffingwell ¦June 30, 1923¦
+--------------------+-------------¦
¦Francis D. Bartow ¦Dec. 31, 1926¦
+--------------------+-------------¦
¦Arthur M. Anderson ¦Dec. 31, 1926¦
+--------------------+-------------¦
¦Thomas S. Lamont ¦Dec. 31, 1928¦
+--------------------+-------------¦
¦H. P. Davison ¦Dec. 31, 1928¦
+--------------------+-------------¦
¦Charles D. Dickey ¦Jan. 2, 1932 ¦
+--------------------+-------------¦
¦Henry C. Alexander ¦Feb. 17, 1939¦
+--------------------+-------------¦
¦I. C. Raymond Atkin ¦Feb. 17, 1939¦
+--------------------+-------------¦
¦William A. Mitchell ¦Feb. 17, 1939¦
+--------------------+-------------¦
¦Edward Hopkinson, Jr¦Dec. 31, 1928¦
+----------------------------------+
Hopkinson withdrew in the morning of March 30, 1940, and his interest in the firm was settled.
On February 15, 1940, there was filed with the State Superintendent of Banks of New York a notice of intention to organize a new trust company, pursuant to the Banking Law of New York, under the name of ‘J. P. Morgan & Co. Incorporated,‘ with an authorized capital of $20,000,000, divided into 200,000 shares, each of the par value of $100. Under date of March 29, 1940, the State Superintendent of Banks of New York issued a certificate authorizing J. P. Morgan & Co. Inc. to transact the business of a trust company in New York, N.Y.
On March 30, 1940, a special meeting of the directors of J. P. Morgan & Co. Inc., (hereinafter referred to as the trust company) was held. The directors of the trust company were composed entirely of the then 13 partners of J. P. Morgan & Co. At this meeting a resolution was adopted authorizing the trust company to purchase the assets and to assume the liabilities and obligations of J. P. Morgan & Co. as set forth in a bill of sale and agreement presented to the meeting. On the same date the bill of sale and agreement was executed by J. P. Morgan & Co., the 13 individual partners, and the trust company. At the above mentioned meeting, a letter was...
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