Opinion
Docket No. 49618.
1955-09-15
INTERLOCHEN COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bennette E. Geer, Jr., Esq., and Neville Holcombe, Esq., for the petitioner. Alben E. Carpens, Esq., for the respondent.
Basis of stock acquired by petitioner from the father of its principal stockholders held, on the facts and in the absence of other evidence, to be the basis determined by respondent, whether acquired by purchase, by contribution to capital, or by gift. James E. Caldwell & Co., 24 T.C. 597, followed. Bennette E. Geer, Jr., Esq., and Neville Holcombe, Esq., for the petitioner. Alben E. Carpens, Esq., for the respondent.
Petitioner seeks a redetermination of a deficiency of $17,470.33 in income tax for the calendar year 1945. The only issue is petitioner's basis of stock acquired by it from the father of its principal stockholders.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found.
Petitioner is a North Carolina corporation, incorporated in 1929. Its income tax return for 1945 was filed with the collector of internal revenue for the district of North Carolina.
Petitioner was organized through the efforts of John A. Law, Sr. Its stockholders, their relationship to Law, Sr., and their respective shareholdings were and are as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Relationship to ¦Number of ¦ +-------------------------------------------+------------------+--------------¦ ¦Stockholder ¦John A. Law, Sr. ¦shares owned ¦ +-------------------------------------------+------------------+--------------¦ ¦Andrew M. Law ¦Brother ¦1 ¦ +-------------------------------------------+------------------+--------------¦ ¦Jennie Law Alexander ¦Daughter ¦10 ¦ +-------------------------------------------+------------------+--------------¦ ¦Anna Law Child ¦Daughter ¦10 ¦ +-------------------------------------------+------------------+--------------¦ ¦Margaret Law Hill ¦Daughter ¦10 ¦ +-------------------------------------------+------------------+--------------¦ ¦John A. Law, Jr ¦Son ¦10 ¦ +-------------------------------------------+------------------+--------------¦ ¦William S. Law ¦Son ¦10 ¦ +-------------------------------------------+------------------+--------------¦ ¦John A. Law, Jr., trustee for Grace Sibley ¦Daughter ¦10 ¦ ¦Law ¦ ¦ ¦ +-------------------------------------------+------------------+--------------¦ ¦Total shares ¦ ¦61 ¦ +-----------------------------------------------------------------------------+
Its officers were and are John A. Law, Jr., president and treasurer, and William S. Law, vice president and secretary. The incorporation of petitioner was rushed through in the last month of 1929 mainly so Law, Sr., could sell stock to it, fix a loss thereon, and take a tax credit therefor on his own income tax return for 1929. He also wished to convey certain real estate to the corporation.
The first meeting of the incorporators and subscribers for stock was held on June 28, 1930. At that meeting Andrew M. Law, Jennie L. Alexander, Anna L. Child, Margaret L. Hill, John A. Law, Jr., and William S. Law were elected directors of petitioner. The first meeting of the directors of petitioner was held on June 28, 1930. Law, Sr., was present at the meetings and offered to convey to petitioner certain real estate located in North Carolina for 61 shares of petitioner's no-par common stock with the understanding that the 61 shares were to be issued to the original incorporators in full payment of their subscriptions. The directors accepted the offer and directed the issuance of 61 shares of petitioner's common stock to the incorporators. According to the Certificate of Incorporation which had been executed on December 26, 1929, some of the objects of petitioner were as follows:
a. To buy, sell, develop, and deal with real estate of every kind or character.
b. To buy, sell, deal in, and deal with stocks, bonds, and corporation and government securities and debentures.
c. To carry on a general merchandising business.
d. To manufacture and sell merchandise at wholesale and retail.
e. To carry on a general contracting business.
f. To manufacture building and construction materials.
g. To buy, sell, and deal with water power and water power developments.
h. To construct and operate hydroelectric plants.
Petitioner's minute book does not show any further meeting of its stockholders or directors after June 28, 1930, until December 26, 1942.
In 1945 petitioner sold 650 shares of Saxon Mills stock for $117,000. In its 1945 return it reported the sale of this stock for $117,000, showed a cost basis of $123,500, and claimed a capital loss on the sale of $6,500. It reported no capital gains and no capital transactions other than this sale. Petitioner had acquired this stock in 1937 in a tax-free exchange for 650 shares of Chesnee Mills stock. It had acquired the 650 shares of Chesnee Mills stock under the following circumstances:
On December 26, 1929, Law, Sr., transferred to his brother's brokerage firm, A. M. Law & Company, 500 shares of Chesnee Mills stock for $43,470, and on the same day Law Company transferred 500 shares of the same stock to petitioner for $43,575. On December 31, 1929, Law, Sr., deposited $43,575 to petitioner's account at the Central National Bank, Spartanburg, South Carolina. Law, Sr., was president of that bank. Petitioner issued its check, dated December 31, 1929, in the amount of $43,575 payable to A. M. Law & Company, drawn on the Central National Bank, signed by John A. Law, Jr., in payment for the 500 shares of Chesnee Mills stock. No consideration was paid to Law, Sr., for this deposit made to petitioner's account. The stock book records of Chesnee Mills show that 500 shares of its stock were transferred on December 30, 1929, from Law, Sr., to petitioner and that such stock was never issued to Law & Company.
On December 30, 1931, Law, Sr., transferred to Law & Company 100 shares of Chesnee Mills stock for $2,469, and on the same day Law & Company transferred 100 shares of the same stock to petitioner for $2,500. On December 30, 1931, Law, Sr., deposited $2,500 to petitioner's account at the Spartan Savings Bank, Spartanburg, South Carolina. Petitioner issued its check, dated December 30, 1931, in the amount of $2,500 payable to A. M. Law and Co., drawn on the Central National Bank and charged to the Spartan Savings Bank, signed by John A. Law, Jr., in payment for the 100 shares of Chesnee Mills stock. Payment on this check was made December 31, 1931. No consideration was paid to Law, Sr., for this deposit made to petitioner's account. The stock book records of Chesnee Mills show that 100 shares of Chesnee Mills stock were transferred on December 30, 1931, from Law, Sr., to petitioner and that such stock was never issued in the name of Law & Company.
On December 31, 1932, Law, Sr., transferred to Law & Company 50 shares of Chesnee Mills stock for $739.75, and on the same day Law & Company transferred 50 shares of the same stock to petitioner for $750. On December 31, 1932, Law, Sr., deposited $700 to petitioner's account at the Spartan Savings Bank. Petitioner issued its check, dated December 31, 1932, in the amount of $750 payable to A. M. Law & Co., drawn on the Spartan Savings Bank, signed by John A. Law, Jr., in payment for 50 shares of Chesnee Mills stock. Payment on this check was made January 2, 1933. The stock book of records of Chesnee Mills show that 50 shares of Chesnee Mills stock were transferred on January 7, 1933, from Law, Sr., to petitioner and that such stock was never issued in the name of Law & Company.
These deposits made to petitioner's accounts by Law, Sr., were pursuant to an understanding between him and John A. Law, Jr., that the money would be used by petitioner to purchase the Chesnee Mills stock. Petitioner had no cash funds, except approximately $97 on deposit in the Spartan Savings Bank in 1932, other than the funds deposited by Law, Sr., with which it could have acquired the 650 shares of Chesnee Mills stock. Law, Sr., was the president and active operating head of Chesnee Mills from 1912 until 1937, when it merged with Saxon Mills. After Chesnee Mills merged with Saxon Mills, Law, Sr., became the president and active operating head of Saxon Mills.
According to the stock book records of Chesnee Mills, 600 of the 650 shares of Chesnee Mills stock were transferred to the name of Law, Sr., on September 13, 1919; and 5 days prior thereto, on September 8, 1919, the said 600 shares had been transferred from Blair & Company to the names of five of the children of Law, Sr. During 1919, his children were minors of ages 8 to 18 years and did not know that any such stock had been transferred to their names. Law, Sr., acquired 20 of the 650 shares of Chesnee Mills stock from J. S. Burnett on April 2, 1924, and acquired 30 of the 650 shares of Chesnee Mills stock from Fisher C. Bailey on August 17, 1926. Records are not available to show the price, if any, at which he acquired the 600 shares of Chesnee Mills stock or the 20 shares of Chesnee Mills stock from J. S. Burnett. Records of Law & Company disclose that Law, Sr., acquired 30 shares of Chesnee Mills stock on August 17, 1926, from Fisher C. Bailey at $136 per share. Quotations from two stockbrokers show the bid and asked prices for Chesnee Mills stock on April 2, 1924, to be $150 bid, $165 asked, and $135 bid and $145 asked.
Law, Sr., died in 1950. On his income tax returns for 1929, 1931, and 1932, he reported sales of Chesnee Mills stock, reported bases of $190 per share for the entire 650 shares, and claimed capital losses from the transactions of $51,635, $16,525, and $8,756.25, respectively. The deductions for the 1929 and 1931 losses were disallowed by the Commissioner on the grounds that the transactions did not give rise to allowable deductions. Law, Sr., filed a proceeding with the United States Board of Tax Appeals pertaining to the taxable years 1929 and 1931, and presented an issue as to whether he was entitled to deduct the losses reported from sales to petitioner of Chesnee Mills stock. An issue was also raised concerning the expiration of the statute of limitations on assessment of the deficiencies. The Commissioner had determined, against Law, Sr., deficiencies in tax of $7,972.22 and penalties of $4,066.24 for 1929, and deficiencies in tax of $172.26 and penalties of $86.13 for 1931. This proceeding was disposed of by stipulation of the parties whereby it was stipulated that a deficiency of $500 existed for 1929 and $172.26 for 1931 and that no penalties were due for either year. Law, Sr., waived any restrictions on the assessment and collection of the deficiencies, and a decision in accordance with the stipulation was entered by the United States Board of Tax Appeals on March 10, 1938.
Respondent determined that in 1945 petitioner realized a capital gain of $70,175 from the sale of the Saxon Mills stock, using as the basis of the stock the prices at which petitioner acquired the 650 shares of Chesnee Mills stock in 1929, 1931, and 1932.
OPINION.
OPPER, Judge:
Of the three possible interpretations of petitioner's acquisition of the Chesnee Mills stock, none succeeds in overthrowing respondent's determination, as we view the facts. Whether the stock was purchased, was acquired as a gift, or was a contribution to capital, the result must be the same. We accordingly refrain from choosing which description best suits the confused record.
The transaction was purposely given the appearance of a sale. On that assumption petitioner's basis would be its purchase price of $46,825 which is the amount respondent used in determining the deficiency. This action would on that theory be inescapably correct. See Orange Securities Corporation v. Commissioner, (C.A. 5) 131 F.2d 662; Madeira v. Commissioner, (C.A. 3) 98 F.2d 556.
Second, were the acquisition considered as a contribution to capital, its basis would either be no more than fair market value at the time, Fahs v. Florida Machine & Foundry Co., (C.A. 5) 168 F.2d 957, which petitioner concedes to have been $46,825, the same figure as that used by respondent; or it would be the transferor's basis (section 113(a)(8), Internal Revenue Code of 1939) which at best is the same as that of a gift, the final alternative we now proceed to discuss.
If we assume, as the third possibility, that the transaction was a gift its basis would be governed by section 113(a)(2), Internal Revenue Code of 1939.
It is stipulated that ‘No records are available to show what price, if any, (the donor) paid for’ the 600 shares of Chesnee Mills stock. Respondent is unable, as are we, to determine precisely what the basis ‘would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.’ He recognizes that the 1924 and 1926 acquisitions by the donor can be established, the 1926 block by an actual payment and the other through fair market value by reference to bid and asked quotations. But that covers only 50 shares and leaves the 600 acquired by petitioner in 1919 as much without a determinable basis as was the property in James E. Caldwell & Co., 24 T.C. 597.
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—(2) GIFTS AFTER DECEMBER 31, 1920.— If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period prior to the date of the gift as provided in subsection (b)) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor, or the last preceding owner are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner.
Decided since the briefs herein were filed.
It is not, however, necessary to press the result as far here as in that case. The consequence of respondent's present determination is not to ascribe to that stock a basis of zero, but one of a substantial and, we think, reasonable amount. Computing the cost of 30 shares at the price paid, $4,080, and of 20 shares at $3,000, the mean— $150 per share— between $135 low bid and $165 high asked, or a total for the 50 shares of $7,080, there remains to be attributed to the 600 shares $39,745 out of the basis employed by respondent in computing petitioner's gain. This comes to over $66.66 per share or approximately half of what the record shows the donor actually paid in 1926, 7 years later and at a time when security prices were within a few years of reaching their peak. We cannot say that such treatment is unreasonable; and certainly petitioner has utterly failed to establish an equally convincing alternative. James E. Caldwell & Co., supra.
The only indication to support the $190 per share which petitioner uses in its computation is that this is the figure employed by the donor when in his 1929 return he sought to (and incidentally did) obtain the benefit of a loss deduction on the ‘sale’ of the stock to petitioner. Petitioner now contends that it was not a sale, contrary to the statement on the return, but asks us without further evidence to accept another statement in the return— the $190 basis— as correct. But there is no more assurance that one is dependable than the other. Petitioner, in addition, took the position at one stage of these proceedings that the $190 basis was incorrect as being too low. But on the other hand, we now know from the stipulated facts that the donor was in error, at least when he used the $190 basis for the 30 shares bought in 1926. His stipulated cost for those shares is $136. With that unanswerable evidence of inaccuracy as to part, we cannot assume that respondent, or we, are required to accept the whole. It is not necessary to accuse the donor of misrepresentation. A mistake of law— or of fact— could have been made in one statement as well as in others. We say only that against the present background the unsupported self-serving declaration of the donor is not sufficient to carry petitioner's burden of proof of the fact of the donor's actual cost.
In the view we have taken it becomes unnecessary to consider respondent's alternative proposition that petitioner's basis must be adjusted under sections 113(a)(B) or 113(b)(1)(A), Internal Revenue Code of 1939, for the loss claimed by the previous owner of the stock.
Decision will be entered for the respondent.