Opinion
Charles B. Rugg, of Boston, Mass. (John Richardson, H. Brian Holland, James T. Mountz, and Ropes, Gray, Boyden & Perkins, all of Boston, Mass., on the brief), for plaintiffs.
S. E. Blackham, of Washington, D. C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington D. C., on the brief), for defendant.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, and WHITAKER, Judges.
These cases having been submitted to the Court of Claims, the court, upon the evidence adduced and the reports of a commissioner, in each case makes the following special findings of fact:
The facts peculiar to each case are as follows:
Jane Bancroft v. United States, No. 43816
1. During the year 1936 plaintiff, who resides at Cohasset, Massachusetts, was the owner of 100 shares of stock of The Atlantic National Bank of Boston (hereinafter referred to as the 'Atlantic'), which she had acquired on July 16, 1934, as a distribution of the principal of a trust under the will of Clarence W. Barron, of which plaintiff was the sole beneficiary. The shares had been acquired by the trustee of that trust on July 24, 1929, in a transaction entered into for profit at an aggregate cost of $8,173.70.
2. Plaintiff filed an income-tax return for the calendar year 1936 on March 15, 1937. The amount of tax shown on that return was $4,070.70, which plaintiff paid to the collector of internal revenue at Boston, Massachusetts, as follows: $1,017.68 on March 22, 1937; $1,017.68 on June 18, 1937; $1,017.67 on September 17, 1937; and $1,017.67 on December 18, 1937.
3. In that return plaintiff claimed a deduction from gross income in the amount of $8,173.70, representing the adjusted basis to her of the 100 shares of stock of the Atlantic, on the ground that that stock had become worthless during the year 1936. Upon audit of the return the Commissioner of Internal Revenue added to gross income an item of $327.24, which is not now in dispute, and disallowed the deduction of $8,173.70 on the ground that the stock became worthless in the year 1932, and determined a deficiency of $2,088.21, of which $2,012.95 resulted from the disallowance of the deduction of $8,173.70.
4. July 31, 1937, plaintiff paid to the collector, pursuant to assessment, an additional income tax for the year 1936 of $2,088.21, with interest thereon in the sum of $47.26, of which $45.55 represented interest on $2,012.95.
5. August 16, 1937, plaintiff duly filed a claim for refund of the additional tax and interest, asserting that the stock of the Atlantic did not become worthless in 1932, but became worthless in 1936. This claim was disallowed by the Commissioner by registered letter dated December 6, 1937.
First National Bank of Boston et al. v. United States, No. 44632
First National Bank of Boston et al. v. United States, No. 44633
6. Plaintiffs in the two above-styled cases are the executors under the will of Emily L. Ainsley (hereinafter referred to as the 'decedent'), who died November 27, 1936, a resident of Boston, Massachusetts.
7. During the year 1935 and up until the decedent's death in 1936 she owned 50 shares of stock of The Atlantic National Bank of Boston. The decedent had acquired these shares in transactions entered into for profit on October 25, 1929, at an aggregate cost of $6,450.
8. On February 18, 1936, the decedent filed an income tax return for the calendar year 1935. The amount of tax shown thereon was $1,988.83, which the decedent paid in full February 19, 1936.
9. On April 3, 1937, the plaintiffs on behalf of the decedent filed an income tax return for the period from January 1, 1936, to November 27, 1936. The amount of tax shown thereon was $1,118.63, which plaintiffs paid in full on April 7, 1937.
10. In the return filed for the year 1936 plaintiffs claimed a deduction of the cost of said shares on the ground that the stock had become worthless during the period for which the return was filed, to wit, January 1, 1936, to November 27, 1936. The Commissioner disallowed the deduction on the ground that the stock had become worthless in 1932, and determined a deficiency in the amount of $1,012.85.
11. This amount having been paid, plaintiffs filed a claim for refund on December 21, 1937, on the ground that the stock had become worthless in 1936.
12. On March 8, 1938, plaintiffs, on behalf of the decedent, filed a claim for refund of $1,056.50, being a portion of the income tax paid by the decedent for the calendar year 1935, on the ground that if her stock in The Atlantic National Bank did not become worthless in 1936, as claimed, it did become worthless in 1935, and that the plaintiffs were entitled to a deduction of its cost by reason thereof.
13. Both the claim for 1935 and that for 1936 were disallowed by the Commissioner on August 8, 1938.
14. The parties have stipulated that the amount claimed for 1935 is the amount to which plaintiffs are entitled if the Atlantic stock became worthless during that year.
William E. Baker v. United States, No. 43846
15. Plaintiff is an individual residing at Boston, Massachusetts.
16. During the year 1936 plaintiff was the owner of 406 shares of stock of The Atlantic National Bank of Boston. Plaintiff had acquired these shares in transactions entered into for profit as follows:
50 shares by subscription July 2, 1929.....
$3,125
156 " " " March 1, 1932....
3,120
200 " " purchase February 23, 1934......
106
Total cost..................................
$6,351
17. Plaintiff filed an income-tax return for the calendar year 1936 on March 15, 1937. The amount of tax shown on that return was $1,129.93, which plaintiff paid in full March 17, 1937.
18. In his income-tax return for the year 1936 plaintiff claimed a deduction in the amount of $6,351, representing the adjusted basis to him of the 406 shares of stock of the Atlantic acquired by him as set out above, on the ground that that stock had become worthless during the year 1936. Upon audit of that return the Commissioner of Internal Revenue added to gross income an item of $821.17 which is not now in dispute, and disallowed the deduction of $6,351, on the ground that the stock of the Atlantic became worthless in the year 1932. As a result of these adjustments the Commissioner determined a deficiency of $1,101.51, of which $1,033.93 resulted from the disallowance of the deduction of $6,351.
19. August 14, 1937, plaintiff paid, pursuant to assessment, an additional tax for the year 1936 of .1,101.51, with interest thereon in the sum of $27.34, of which $25.84 represented interest on $1,033.93.
20. August 16, 1937, plaintiff duly filed a claim for refund of the additional tax and interest thereon paid by him, asserting that the stock of the Atlantic did not become worthless in 1932, but became worthless in 1936. That claim was disallowed by the Commissioner by registered letter dated February 1, 1938.
Arthur N. Maddison, Executor, v. United States, No. 43785
21. Plaintiff is the duly qualified executor under the will of George L. DeBlois (hereinafter referred to as the 'decedent'), who died May 4, 1939, and who at the date of his death was a resident of Boston, Massachusetts. actions entered into for profit at various times between 1917 and 1932, inclusive, at an aggregate cost of $11,562.74.
23. Decedent filed an income-tax return for the calendar year 1932 on or about March 15, 1933. The amount of tax shown on that return was $10,390.76 which decedent paid as follows: $2,448.94 on March 23, 1933; $595 on May 4, 1933; $2,448.94 on June 21, 1933; $2,448.94 on September 20, 1933; and $2,448.94 on December 18, 1933.
24. June 10, 1935, decedent filed a claim for refund of $999,31 of the income tax paid by him for the year 1932 as set out above, asserting that the 157 shares of Atlantic stock which he owned became worthless during the year 1932. That claim was disallowed by the Commissioner of Internal Revenue by registered letter dated December 11, 1935.
25. Thereafter decedent requested reconsideration of his claim for refund. In reply the Commissioner wrote decedent on December 3, 1937, conceding plaintiff's contention that his Atlantic stock had become worthless in 1932 and determining on that account an overassessment of $2,852.33. The said certificate of overassessment was delivered to the Collector, but was not transmitted by him to decedent because, as the Commissioner advised decedent, suits had been filed in other cases contending that the Atlantic stock became worthless in 1936. For this reason the certificate of overassessment was canceled pending final determination of the year in which the stock in fact became worthless. No part of the tax for 1932 has been refunded to plaintiff or his executor.
Mary B. DeBlois v. United States, No. 43803
26. Plaintiff is an individual residing at Boston, Massachusetts.
27. During the year 1932 plaintiff was the owner of 150 shares of stock of The Atlantic National Bank of Boston. Plaintiff had acquired these shares in transactions entered into for profit at various times between 1920 and 1929, inclusive, at an aggregate cost of $8,250.
28. Plaintiff filed an income-tax return for the calendar year 1932 on or about March 15, 1933. The amount of tax shown on that return was $2,127.21, which plaintiff paid as follows: $531.81 on March 16, 1933; $531.80 on June 21, 1933; $531.80 on September 20, 1933; and $531.80 on December 18, 1933. Thereafter the Commissioner of Internal Revenue determined that plaintiff was subject to an additional tax for the year 1932 of $402.71, which amount, with interest in the sum of $33.23, plaintiff paid July 27, 1934.
29. On June 10, 1935, plaintiff filed a claim for refund of $1,998.11 of income taxes paid for the year 1932, on the ground that the 150 shares of Atlantic stock which she owned became worthless in 1932. This claim was disallowed by the Commissioner by registered letter dated January 9, 1936. Thereafter plaintiff requested reconsideration of that claim by the Commissioner and under date of January 27, 1939, the Commissioner advised plaintiff by letter that her request for reconsideration was denied.
The facts applicable to all the cases are as follows:
Findings of Fact Common to All Six Cases
30. The Atlantic was organized as a State bank in 1828 and converted into a national bank in 1864. It had a main office and branch offices in Boston, Massachusetts. November 20, 1931, it had book assets of approximately $142,000,000, deposits of $116,000,000, and a net worth of $17,587,000. Its capital was then $9,875,000, consisting of 395,000 shares with a par value of $25 each. It was the third largest bank in Massachusetts.
31. The senior national bank examiner for the First Federal Reserve District made an examination of it as of November 20, 1931, and rendered a report in which he classified assets to the extent of $2,909,947.65 as 'Doubtful' and $3,068,418.89 as 'Loss' and in addition classified items as 'Slow' to the extent of $16,318,816.12. December 24, 1931, the City of Boston withdrew from the Atlantic approximately $1,500,000 in cash. Rumors were circulated regarding the condition of the bank and a substantial amount of other deposits were withdrawn. January 9, 1932, representatives of the Atlantic conferred with representatives of The First National Bank of Boston (hereinafter sometimes referred to as the 'First'), the largest bank in New England, and of the National Shawmut Bank of Boston, the second largest, about the need of the Atlantic for new capital. The conferees believed that $10,000,000 of new capital would make the position of the Atlantic impregnable and that a lesser amount, about $8,000,000, would adequately protect that bank. It was proposed that the par value of the Atlantic stock should be reduced from $25 per share to $10 per share, that the Atlantic stockholders and their friends should subscribe $5,000,000 for new stock, and that the clearing-house banks would match this money dollar for dollar up to $5,000,000. The new stock was to consist of 500,000 shares to be sold at a price of $20 a share, of which $10 was to go into capital and $10 into surplus. Atlantic stockholders and their friends promptly subscribed more than their allotment of 250,000 shares. Of these shares Atlantic directors agreed to take approximately 85,000, savings-bank stockholders approximately 100,000 costing $2,000,000 and other stockholders approximately 65,000. The clearing-house banks, instead of subscribing directly for the remaining 250,000 shares as originally proposed, formed a syndicate which loaned $5,000,000 to the Post Office Square Securities Corporation, a former subsidiary of the Atlantic, the First National Bank participating to the extent of approximately $2,500,000. The Post Office Square Securities Corporation then purchased 250,000 shares of the new stock for $5,000,000, and pledged this stock to the syndicate as security for the loan.
32. March 8, 1932, the capital of the Atlantic was reduced from $9,875,000 to $3,950,000 by the reduction of the par value of its shares from $25 per share to $10 per share, and then increased from $3,950,000 to $8,950,000 by the issuance of 500,000 new shares. New money in the amount of $10,000,000 was paid into the bank, $5,000,000 going into capital and $5,000,000 into surplus. This recapitalization was effected with the knowledge and approval of the Comptroller of the Currency.
On the same day the directors authorized the charging off of $10,500,000 book value of assets, including all items shown as 'Loss' and most of the items shown as 'Doubtful' in the report of the national bank examiner. By reason of these charge-offs the book net worth was not substantially affected by the addition of the new capital.
33. November 20, 1931, the total deposits of the Atlantic were approximately $116,000,000; January 1, 1932, $96,000,000; January 31, 1932, $85,600,000; April 1, 1932, $82,800,000, and April 21, 1932, $82,500,000. April 25, 1932, the Exchange Trust Company, a small independent Boston bank, closed its doors, and as a result further rumors concerning the condition of the Atlantic were circulated and a run occurred on the latter for several days prior to May 3, 1932, which run was the immediate cause of the closing of the Atlantic. April 26, 1932, Atlantic deposits had fallen to approximately $78,500,000, and April 30, 1932, to $67,500,000. May 3, 1932, the deposits were $64,100,000.
34. May 1, 1932, after conferences between representatives of the Atlantic, the First, and the National Shawmut Bank, it was decided that the First should take over the Atlantic. May 2, 1932, at the request of the First, the Atlantic applied to and obtained from the Reconstruction Finance Corporation a secured loan of $10,000,000. The purpose of this loan was to provide ready cash in case withdrawals of deposits should continue after the take-over.
35. May 3, 1932, the Atlantic and the First entered into an agreement (hereinafter referred to as the 'May 3 agreement'), the significant provisions of which were as follows:
(a) The Atlantic transferred to the First all of its assets (except leases, employment contracts, office furniture and fixtures and property held as fiduciary). The First assumed the deposit and acceptance liabilities of the Atlantic and was authorized to pay other claims against the Atlantic. (b) The First agreed to apply the assets transferred to it as a credit upon the liabilities assumed by it as follows: Cash, forthwith; United States Government obligations, forthwith, at May 3 prices; loans, at face value plus accrued interest whenever the First was willing to purchase them on that basis; other assets, which the First was willing to purchase at less than face value, as agreed to by the First and a representative of the Atlantic. The First agreed to liquidate all other assets with due and reasonable care and diligence and to credit the net cash proceeds thereof as received. The Atlantic agreed to pay interest on the daily balance of liabilities assumed by the First, less credits applied, at the rate of 5% per annum, chargeable quarterly. Such interest as it accrued was to be treated as a liability assumed. The First agreed to turn over to the Atlantic any surplus remaining after payment of all liabilities assumed by it. (c) The agreement was for a term of three years, expiring April 30, 1935, subject to extension at the option of the First for a further period ending not later than April 30, 1936. The Atlantic agreed to pay the First on demand at the end of the three-year period, or any extension thereof, any unpaid balance of the liabilities assumed by the First. Upon payment of such balance the First agreed to return to the Atlantic any remaining assets. (d) The First agreed to render quarterly accounts to the Atlantic covering the operations of the First under the agreement, such accounts to be presented for approval by the Atlantic and submitted to arbitration in the event of any dispute. (e) The First could at any time and from time to time sell, assign, transfer, and deliver the whole or any part of the assets of the Atlantic transferred under the agreement at public or private sale at the option of the First and without advertising the same and without notice to the Atlantic or to anyone else, and with the right in the First to be a purchaser at any public sale or sales. (f) If at the expiration of the liquidation period the liabilities assumed exceeded the proceeds realized from the assets, the First had the right to assert against the stockholders of the Atlantic a claim for the deficiency up to the limit of their additional liability under the law.
The May 3 agreement was treated by the parties as a collateral-loan transaction under which the First assumed substantially all the liabilities of the Atlantic, taking as security the assets of the Atlantic which the First agreed to liquidate in an orderly fashion, turning over to the Atlantic any surplus remaining after repayment of the loan, and the Atlantic being liable for any deficiency.
36. May 5, 1932, the Atlantic, in a letter to its stockholders, signed by Harry K. Noyes, after explaining the agreement between the two banks, stated, in part, as follows:
'It will convert the assets of the Atlantic Bank in an orderly fashion with due regard for your interests as shareholders of the Atlantic Bank, accounting to the Atlantic Bank for any excess aft proper charges, the Atlantic Bank being liable for any deficiency. Until the Atlantic Bank's assets are converted, its liabilities paid, and its affairs wound up, it remains in existence and holders of its stock remain shareholders. 'Surplus assets, if any, will be distributed to Atlantic Bank shareholders when the affairs of the Bank are would up. Your directors are hopeful that there will be a surplus available for distribution.'
37. June 6, 1932, the Atlantic stockholders voted to ratify the May 3 agreement. June 24, 1932, they voted (a) to place the bank in voluntary liquidation under Sections 5220 and 5221 of the Revised Statutes; (b) to appoint Waldron H. Rand Jr., a former vice-president of the bank who had been made president after May 3, as liquidating agent; and (c) to close the stock transfer books.
38. July 14, 1932, the First paid off the $10,000,000 Reconstruction Finance Corporation loan of May 2, 1932, and thereafter administered under the May 3 agreement the collateral pledged to secure that loan.
39. The original three-year term of the May 3 agreement ran to April 30, 1935. April 29, 1935, the term of the agreement was extended by the First to November 30, 1935. In fixing this date for the termination of the extension, the representatives of the First were influenced by the fact that two of the largest holders of Atlantic stock, Messrs. Charles H. Farnsworth and Harry K. Noyes, had died in 1933 and 1934, respectively, and that the period of limitation for enforcing stockholders' liability against Mr. Farnsworth's estate would expire on March 23, 1936. December 2, 1935, immediately following the expiration of the extension period, the First, to preserve its rights, made formal written demand on the Atlantic for payment of the balance of the liabilities assumed. No steps were taken at that time to enforce the demand, and the liquidation proceeded as before without the demand having been met by the Atlantic.
40. In March 1936 the Comptroller of the Currency made examination of the Atlantic to determine whether a receiver should be appointed and an assessment levied in order to fix the liability of the stockholders, particularly in view of the approaching expiration of the period of limitation in the case of the Farnsworth estate. He determined that on the basis of quick realizable values there was a deficiency and on March 18, 1936, he appointed a receiver. March 21, 1936, the Comptroller assessed Atlantic stockholders $10 per share, the full amount of their statutory liability, payable March 26, 1936. However, the full amount assessed was not paid, as will hereinafter appear from finding 48.
41. The liquidating agent of the Atlantic rendered annual reports to the Comptroller of the Currency as of January 31, 1933, 1934, and 1935 showing net book worth on each of those dates as follows: January 31, 1933, $14,957,307.05; January 31, 1934, $11,664,967.93; January 31, 1935, $10,739,505.28.
42. The liquidating agent also rendered reports to the stockholders of the Atlantic at their meetings held January 10, 1933, January 9, 1934, and March 3, 1936, showing net book worth as of the preceding October 31 as follows: October 31, 1932, $15,677,155.20; October 31, 1933, $12,152,034.06; and October 31, 1935, $10,546,233.42. In each of his reports to the stockholders and to the Comptroller the liquidating agent stated that it was impossible to forecast the final result of the liquidation.
43. The senior national bank examiner, who had made the examination of the Atlantic on November 20, 1931, made an examination of the First National Bank as of June 24, 1932. This examination included an appraisal of the interest of the First (approximately $2,500,000) in the $5,000,000 loan made by the syndicate of clearing house banks to the Post Office Square Securities Corporation, which involved an appraisal of the Atlantic stock held as collateral. The examiner classified the loan as 50% 'Loss,' 25% 'Slow,' and 25% 'Doubtful.' As of November 25, 1932, he again examined the First and appraised the loan, classifying it this time as 75% 'Loss' and 25% 'Doubtful.' As of June 9, 1933, he again examined the First and again classified the loan as 75% 'Loss' and 25% 'Doubtful.' The bank examiner, in making these three appraisals, had before him the records of the First in regard to the liquidation.
44. In July 1934 an examination of the Atlantic assets was made by the Reconstruction Finance Corporation in connection with the application of the Atlantic for a long-term loan of approximately $12,000,000 for the purpose of assuring a more gradual liquidation of its assets at a reduced rate of interest. The loan was to be secured by certain of the Atlantic assets then held by the First. In addition, the First was prepared to purchase certain other Atlantic assets with a book value of $9,020,335.15 for approximately $7,029,000. The proceeds of the proposed loan and sale of assets were to be used to discharge the indebtedness then owing to the First of $19,220,900.41.
The examiner valued the collateral to be given the Reconstruction Finance Corporation at $13,656,360.18 on the basis of a liquidation period of at least five years, and recommended a loan of $11,250,000.
The remaining assets, exclusive of those to be sold to the First, were appraised at $1,204,885. Based on the foregoing valuations the total assets of the Atlantic were $21,890.245.18, which was $2,669,344.77 in excess of its total liabilities as of that date. On this basis the 895,000 shares of Atlantic stock outstanding had an ultimate liquidating value of approximately $2.98 a share.
45. Discussions and negotiations with the view of extending for a further period of several years the time for the liquidation of the remaining Atlantic assets were begun in the spring of 1935. In general the plans proposed contemplated that the period of liquidation should be extended for several years; that the stockholders should retain their equity in the assets and be relieved of double liability on their shares, provided additional collateral should be furnished to the First in the form of immediate advances of from $1.00 to $2.00 a share by stockholders and their agreement to make further specified payments, if called for by the First, at stated intervals. The additional collateral called for by these plans was to replace the right held by the First to enforce the double liability of the stockholders.
46. A rough appraisal of the Atlantic assets as of September 18, 1935, was made by officers of the First, the liquidating agent, and representatives of the Atlantic. The appraisal was made on two bases, one assuming an immediate sale of the assets and the other assuming liquidation over a period of at least three years. On the immediate-sale basis the appraisal showed a value for the assets of $12,528,509 and a basis, a value of $15,964,868, and a recovery for the stockholders of $1,157,413. Bonds and securities were valued, for the purpose of the immediate-sale basis, at the market price as of that date, whereas on the deferred basis allowances were made for possible increases over a three-year period. In making the appraisal no consideration was given to recoveries on charged-off assets; collateral loans were valued solely on the basis of the collateral even though the borrower was making payments of interest and principal; and the bank building which had been erected by the Atlantic in 1930 at a cost of approximately $4,000,000 was valued at $1,000,000 on the basis of immediate sale and at $2,000,000 on the deferred basis. In general the values on the immediate-sale basis represented the amounts at which the First stated that it would be willing to take over the assets in settlement of the Atlantic's indebtedness to it. The Atlantic representatives were of the opinion that any deficit resulting from immediate sale of the assets would be considerably less than $2,300,000, but all agreed that the deficit would be not less than $1,000,000.
47. During 1935 and the early part of 1936 there were frequent conferences between representatives of the Atlantic, the other Boston banks, and the First, on a plan for deferred liquidation of the remaining assets, and plans for the settlement of the assessment against stockholders by a single payment and the surrender of their interest in the assets. In June 1936, an 'alternative plan' was suggested under which stockholders could elect either (a) to settle their liability by paying $1.60 per share and surrendering their equity or (b) to retain their equity and settle their liability by paying $1.10 per share forthwith, an additional $1.05 at the end of three years, if called for by the First and another $1.05 at the end of six years, if called for by the First.
48. Finally a plan was proposed, and later accepted, which provided that each stockholder of the Atlantic desiring to participate should pay to a depositary the sum of $1.75 per share; that upon approval of the plan by the United States District Court, the depositary should pay to the receiver from $1.50 to $1.60 per share on all participating shares, depending on the number of shares participating; that the depositary should thereupon deliver to each participating stockholder a release and discharge of his statutory liability; that payment of expenses, not to exceed 15 cents per share, should be made by the depositary; and that any balance of funds remaining should be distributed to participating stockholders. Upon final approval by the court, all the remaining assets of the Atlantic, together with the sums paid in by the stockholders and all rights against nonparticipating stockholders, were to become the property of the First, which was then to exchange mutual releases with the receiver.
This plan was duly accepted by holders of 600,938 1/2 shares of Atlantic stock, who paid to the depositary $1.75 per share of stock held by them. On November 13, 1936, the United States District Court approved the plan and authorized its consummation. Shortly thereafter the plan was consummated.
49. The participation of the First in the $5,000,000 loan to the Post Office Square Securities Corporation was not charged off as a loss on the books of the First until 1936.
50. There were sales of Atlantic stock at public auction and at private sale from May 3, 1932, to June 24, 1932, while the transfer books were open, and thereafter from time to time up to and in the year 1936. Prices paid for the stock at public auction in the year 1932 after May 3 ranged from 40 cents to $2.06 1/4, the highest price being paid in the month of September. Prices paid at private sales during the same period ranged from 10 cents to $1.50 per share. In 1933 prices at private sale ranged from 10 cents to $1.50 per share, and at auction from 12 cents to $1; in 1934 at private sales from 10 cents to $1.00 and at auction there was a sale at 20 cents; in 1935 prices at auction ranged from 31 cents to 75 cents; in 1936 the stock was quoted at 10 cents to 40 cents, and prices at auction ranged from 33 cents to 39 cents.
After the closing of the transfer books on June 24, 1932, the seller, at each public and private sale, agreed to pay over any dividends to the purchaser. The purchases and sales of stock at both private and auction sales were made without agreement as to stockholders' liability.
51. Until the year 1935 it was reasonable to expect that the Atlantic stockholders would recover some part of their investment in the Atlantic stock, though throughout such period, after the summer of 1932, the Atlantic stock had no, or at most only a nominal, readily realizable cash value. In the year 1935, on or about December 2, it ceased to be reasonable to expect that the Atlantic stockholders would recover any part of their investment in that stock.
WHITAKER, Judge.
The plaintiffs in all of the above styled cases were stockholders in The Atlantic National Bank of Boston. On May 3, 1932, this bank closed its doors and entered into an agreement with The First National Bank of Boston for the liquidation of its affairs. This liquidation proceeded until March, 1936, when the Comptroller of the Currency appointed a receiver and levied an assessment against the stockholders of the bank, which was satisfied on August 17, 1936, by the payment of $1.75 per share. The question presented is the year in which the stock of the Atlantic became worthless and its stockholders thereby sustained a loss.
The Commissioner of Internal Revenue has held that the loss was sustained in 1932. In the cases of Bancroft v. United States, Baker v. United States, and First National Bank of Boston et al. v. United States (No. 44633) the plaintiffs filed claims for refund claiming the loss was sustained in 1936. In the Maddison and DeBlois cases the plaintiffs claimed the loss was sustained in 1932, and in the case of First National Bank of Boston et al v. United States, No. 44632, the plaintiff claimed the loss was sustained in 1935. They all now take the position that the loss was sustained in 1936.
Section 23(e) of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Code, § 23(e), permits a deduction of 'losses sustained during the taxable year and not compensated for by insurance or otherwise.' Article 23(e)--1 of Treasury Regulations 94 provides, in part: 'In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses.' Article 23(e)--4 provides, in part: 'If stock of a corporation becomes worthless, its cost or other basis as determined and adjusted under Section 113 is deductible by the owner for the taxable year in which the stock became worthless, provided a satisfactory showing is made of its worthlessness.' Articles 141 and 144 of Treasury Regulations 45 contain provisions similar to the above except that in them it is not provided that the loss should be fixed by identifiable events. These regulations were approved by the Supreme Court in United States v. S. S. White Dental Mfg. Co., 61 Ct.Cl. 143; Id., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120.
The question presented is one of fact. It was presented to the District Court of Massachusetts in the case of Smith v. United States, D. C., 16 F.Supp. 393. That court held that the stock became worthless in 1932 when the bank closed its doors. It relied upon and quoted from the opinion of the District Court for the Eastern District of Pennsylvania in the case of In re Hoffman, D. C., 16 F.Supp. 391, which was later affirmed by the Circuit Court of Appeals, 3 Cir., 87 F.2d 200. The facts in the two cases are the same except that in the Hoffman case the bank had been closed by order of the authorities, whereas, in the Smith case it voluntarily closed.
We are unable to agree with the District Court that this loss occurred in 1932. The record before that court was by no means so full as the one before us. What its decision would have been had it had before it all the facts now presented is a matter of conjecture.
After a report of the national bank examiner in November 1931 had shown that the bank's affairs were in an unsatisfactory condition, its representatives met with representatives of the First National Bank and of the National Shawmut Bank of Boston, the two largest banks in Boston, with the view of increasing its capitalization, and so putting it on a sound financial basis. The representatives of these three banks agreed among themselves that additional capital of $8,000,000 would adequately protect the bank, but that if $10,000,000 of additional capital could be secured, the position of the bank would be impregnable. It was decided to raise $10,000,000. The Atlantic stockholders, to whom one-half of the stock was offered, immediately subscribed more than their allotment. The other one-half of the stock was to be subscribed for by the clearing-house banks in Boston. These banks did not subscribe directly for the stock, but instead loaned to the Post Office Square Securities Corporation $5,000,000 with which this corporation purchased the remaining $5,000,000 of the new capital, pledging this stock as security for its note with the banks. The new stock was sold at a price of $20 a share, $10 of which was paid-in surplus. The par value of the old stock in the bank was reduced from $25 a share to $10 a share.
This readjustment of its capital took place on March 8, 1932. At that time it is beyond question that not only the bank's own stockholders, but also the other financial institutions of the City of Boston believed that the stock in the bank was worth approximately what they paid for it. They were not making donations to charity.
Nothing happened in the year 1932 to make them change their minds except the closing of the bank and the transfer of its assets to the First for liquidation. Was this sufficient to cause them to reverse their opinion of two months ago? We think not. The bank was closed not because it was insolvent or because the stockholders believed it to be insolvent, but because confidence in it had been impaired and because the deposits were constantly declining, culminating in a run on the bank for several days prior to its closing. No bank, of course, maintains its affairs in a sufficiently liquid state to pay all of its depositors at one time. For exactly this reason it was necessary for it to close its doors and liquidate its affairs gradually. There is nothing to indicate that such a gradual liquidation would not have produced amounts sufficient to return to the stockholders their investment or a substantial part thereof, except only the fact that no institution in liquidation can realize from its assets as much as it can as a going concern. But while this made the value of the stock decline in value, it certainly did not make it worthless. Lyon v. United States, 78 Ct.Cl. 545, 5 F.Supp. 138.
In this connection it is interesting to note that the records of the office of the Comptroller of the Currency show that of the 6,007 banks which went into voluntary liquidation from 1865 to 1938 and transferred their assets to some other bank, only 258 of them later went into the hands of a receiver. His records further show that of the 2,974 banks that actually went into the hands of a receiver in the years 1865 to 1939, 293 of them, or about 10 percent, have paid their creditors in full, leaving $6,000,000 in cash and $35,000,000 book value of other assets for distribution to the stockholders. The mere closing of the doors of this bank did not make its stock worthless.
The only other things which happened in this year which reflect on the value of this stock are the reports of the senior national bank examiner for the First Federal Reserve District on the loan of the First National Bank to the Post Office Square Securities Corporation, which was secured by the Atlantic's stock. On June 24, 1932, he classified this loan as 50 percent 'loss,' 25 percent 'slow,' and 25 percent 'doubtful.' Subsequently, in November 1932, and again in June 1933, he classified it as 75 percent 'loss' and 25 percent 'doubtful.' It thus appears that in the opinion of this qualified authority there was in 1932 a not inconsiderable prospect of realizing a substantial amount on this stock. If this be true, it cannot be said that the stock was then worthless.
Nor can we say this stock was worthless in 1934. In that year the bank's total liabilities were $19,220,900.41, all of which it owed to the First National Bank. It was proposed to discharge this indebtedness by a loan of $12,000,000 from the Reconstruction Finance Corporation and by the sale to the First of a portion of its assets for $7,029,000. The Reconstruction Finance Corporation made an appraisal of all of its assets, exclusive of those to be sold to the First National Bank, at $14,861,245.18. This, added to the $7,029,000 to be paid by the First National Bank, gives a total valuation for all of its assets of $21,890,245.18, an excess of assets over liabilities of $2,669,344.77. It then had 895 shares of stock outstanding, which indicated a value of about $3 a share. The par value of the shares was $10.
In view of the foregoing, we do not think it can be said that the stock was worthless even as late as July 1934, the date of the appraisal by the Reconstruction Finance Corporation.
However, an event happened in 1935 which in our opinion demonstrated in that year that the stock was worthless.
The liquidation agreement between the First National Bank and the Atlantic National Bank provided for a liquidation over a period of three years, subject to the option of the First National Bank to extend this period for an additional time not to exceed one year. If at the end of the liquidation period the proceeds of the assets had not been sufficient to repay the First for the liabilities assumed, the First had the right to demand payment from the Atlantic of this deficiency, and upon default in its payment, to assert against the Atlantic stockholders a demand for the payment of their additional stockholders' liability in an amount sufficient to meet the deficiency.
Just before the expiration of the three-year term the First extended the liquidation period, not for an additional year, but only until November 30, 1935, since two large stockholders of the Atlantic had died since the liquidation agreement and the time within which the First could assert claims against their estates for additional stockholders' liability would shortly expire. Two days after the expiration of this extension on December 2, 1935, the First made demand on the Atlantic for the payment of the balance due on the liabilities assumed. The Atlantic was unable to meet the demand. Thereupon the liability of the Atlantic stockholders for any deficiency became fixed.
A rough appraisal of the Atlantic's remaining assets made by representatives of the First and of the Atlantic at about this time showed a deficit of $2,278,946, based upon an immediate sale. Based on liquidating the assets over a three-year period, they were appraised at something over a million dollars more than the liabilities; but it seems to us that only their cash price was material. The liquidation period was over. When it expired the First had the right to put up the remaining assets for immediate sale. What the assets would bring if the contract were carried out according to its terms is the material inquiry; not what they would bring if the contract was voluntarily set aside or amended. If this be correct, on the date of the default in meeting the demand of the First the stockholders of the Atlantic became liable for the payment of approximately $2,278,946, and the value of their stock was then extinct. It is true the First did not put up for sale the Atlantic assets, but their forbearance to do so was a matter of grace, and not a right which the Atlantic stockholders could demand. United States v. S. S. White Dental Mfg. Company, 61 Ct.Cl. 143; Id., 274 U.S. 398, 402, 47 S.Ct. 598, 71 L.Ed. 1120.
We hold accordingly that the stock was determined to be worthless not later than the date of the demand of the First for the payment of the deficiency. At that time 'all reasonable possibility of realization of something on the stock' was 'destroyed.' Montgomery v. United States, 87 Ct.Cl. 218, 23 F.Supp. 130, certiorari denied, 307 U.S. 632, 59 S.Ct. 833, 83 L.Ed. 1514; Forbes v. Commissioner, 4 Cir., 62 F.2d 571.
It results that the petitions of Jane Bancroft v. United States, No. 43816, and of the First National Bank of Boston and Annie B. Coolidge, Executors under the will of Emily L. Ainsley, deceased, v. United States, No. 44633, and William E. Baker v. United States, No. 43846, and of Arthur N. Maddison, Executor of George L. DeBlois, v. United States, No. 43785, and Mary B. DeBlois v. United States, No. 43803, must be dismissed; and it further results that plaintiffs in First National Bank of Boston and Annie B. Coolidge, Executors under the will of Emily L. Ainsley, deceased, v. United States, No. 44632, are entitled to recover of the defendant the sum of $1,056.50, with interest as provided by law. It is so ordered.