Opinion
Docket No. 6365.
1946-05-21
SAMUEL J. RISSMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
E. J. Brunenkant, Esq., for the petitioner. Carroll Walker, Esq., and J. O. Kramer, Esq., for the respondent.
1. The ownership of certain stock in three separate corporations and the basis thereof to petitioner under the statutes which are applicable for purposes of computing a net long term capital loss from the sale of such stock in the taxable year 1941, are determined from the evidence.
2. Upon the evidence, held, petitioner has failed to prove any error in the disallowance by the respondent of a certain expense item. E. J. Brunenkant, Esq., for the petitioner. Carroll Walker, Esq., and J. O. Kramer, Esq., for the respondent.
This proceeding involves the determination by the respondent against petitioner of a deficiency in income tax for the calendar year 1941 in the amount of $11,301.18, all of which is in controversy.
The deficiency is due primarily to two adjustments to petitioner's net income as disclosed by his return in the amounts of $35,669.06 and $1,100, respectively, which were explained in a statement attached to the deficiency notice as follows:
(a) The long-term capital loss of $35,699.06 (sic), claimed in your 1941 Federal income tax return, in connection with the sale, during that year, of certain shares of capital stock of the 714 Buena Building Corporation, the 737 Cornelia Building Corporation and the Forty-Third Michigan Corporation has been disallowed in the absence of proof of ownership of and the lack of substantiation of the cost or other basis of the said stock.
(b) It is held that $1,100.00 of the expense deduction of $1,767.73, claimed in connection with your salary income, does not constitute an allowable deduction under any of the provisions of Section 23 of the Internal Revenue Code.
By appropriate assignments of error petitioner contests these two adjustments in his net income.
FINDINGS OF FACT.
Petitioner is an individual, maintaining residence in Chicago, Illinois, with his principal place of business in the same city. He filed his return for the calendar year 1941 with the collector for the first district of Illinois. His wife, Esther J. Rissman, filed a separate return for the same year, which is not here in controversy. Petitioner's return was filed on the cash basis. On this return petitioner deducted $35,669.06 as a net long term capital loss from the sale or exchange of capital assets, which deduction he explained in schedule F substantially as follows:
+-----------------------------------------------------------------------------+ ¦Property ¦Date ¦Date ¦Sales ¦Cost ¦Loss ¦ ¦ ¦acquired ¦sold ¦price ¦ ¦ ¦ +----------------------------+---------+------+---------+----------+----------¦ ¦25 shs. Buena Bldg. ¦7/1/28 ¦10/31/¦$1,464.82¦$55,169.15¦$53,704.33¦ ¦Corporation ¦ ¦41 ¦ ¦ ¦ ¦ +----------------------------+---------+------+---------+----------+----------¦ ¦25 shs. Cornelia Bldg. ¦7/1/28 ¦10/31/¦4,260.81 ¦21,544.42 ¦17,283.61 ¦ ¦Corporation ¦ ¦41 ¦ ¦ ¦ ¦ +----------------------------+---------+------+---------+----------+----------¦ ¦25 shs. 43rd Michigan ¦7/1/28 ¦10/31/¦21,387.99¦21,738.17 ¦350.18 ¦ ¦Corporation ¦ ¦41 ¦ ¦ ¦ ¦ +----------------------------+---------+------+---------+----------+----------¦ ¦Total ¦ ¦ ¦27,113.62¦98,451.74 ¦71,338.12 ¦ +----------------------------+---------+------+---------+----------+----------¦ ¦Net long term capital loss, ¦ ¦ ¦ ¦ ¦35,669.06 ¦ ¦50 percent ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
In his return the petitioner also deducted as expenses the amount of $1,767.73, which he explained in a statement attached to the return as follows:
Sales executive expenses incurred in obtaining $782,000.00 of business including sales promotion, incidental gifts, entertaining, hotels, traveling, etc. . . . . . $1,767.73
On October 31, 1941, petitioner was the owner of 24 shares of capital stock of 714 Buena Building Corporation; 24 shares of capital stock of 737 Cornelia Building Corporation; and 24 shares of capital stock of Forty Third Michigan Corporation. These corporations will hereinafter sometimes be referred to as Buena Corporation, Cornelia Corporation, and Michigan Corporation, respectively. At that time his wife was also the owner of one share of capital stock in each of these corporations. On October 31, 1941, petitioner and his wife sold these shares of stock to the Union Bank & Trust Co. of Los Angeles for a total sales price of $27,113.62, which amount was received by petitioner and his wife as follows:
+------------------------------------------------------+ ¦ ¦Received by ¦Received by ¦ +--------------------------+--------------+------------¦ ¦Stock sold ¦petitioner for¦his wife for¦ +--------------------------+--------------+------------¦ ¦ ¦24 shares ¦1 share ¦ +--------------------------+--------------+------------¦ ¦Buena Corporation stock ¦$1,406.23 ¦$58.59 ¦ +--------------------------+--------------+------------¦ ¦Cornelia Corporation stock¦4,090.38 ¦170.43 ¦ +--------------------------+--------------+------------¦ ¦Mich. Corporation stock ¦20,532.47 ¦855.52 ¦ +--------------------------+--------------+------------¦ ¦Total sale price ¦26,029.08 ¦1,084.54 ¦ +------------------------------------------------------+
The three above named corporations were incorporated at some time between April 27 and July 1, 1928.
In April 1924 Lizzie P. Cohn acquired the legal title to a piece of property known as the ‘714-30 Buena Avenue‘ property, hereinafter sometimes referred to as the Buena property. The consideration for this acquisition by Lizzie P. Cohn was furnished one-half by her husband, Jacob W. Cohn, one-fourth by petitioner's father, John Rissman, and one-fourth by petitioner. This consideration consisted of the acquisition of the Buena property subject to a first mortgage of $190,000, the payment of cash in the amount of $52,000, the giving of a purchase money mortgage of $40,000, and the transfer to the sellers of the Buena property of a piece of property known as the Clark Street property. The fair market value of the Clark Street property at the time of the exchange was a net value of $80,000, or, stated in another way, it was $115,000, less two mortgages against it totaling $35,000. These two mortgages totaling $35,000 were assumed by the sellers of the Buena property.
The record does not show the date of acquisition or the cost of the Clark Street property which petitioner, his father, and Cohn exchanged in part consideration for the Buena property.
On June 3, 1924, Lizzie P. Cohn and her husband, by deeds conveyed and quitclaimed to John Rissman and Esther J. Rissman an undivided one-fourth interest each in the Buena property. On the same day Esther J. Rissman and her husband, the petitioner herein, by deed conveyed and quitclaimed to petitioner ‘all interest in‘ the undivided one-fourth interest in the Buena property which had just been conveyed and quitclaimed to Esther J. Rissman by Lizzie P. Cohn and her husband.
Between April 1924 and July 1, 1928, the owners of the Buena property had paid off the purchase money mortgage of $40,000 and $34,833.34 of the principal of the first mortgage of $190,000 that was on the property at the time of its acquisition in 1924. The amount of depreciation allowed and allowable on this property during this period was $30,625.
On April 27, 1928, Lizzie P. Cohn and Jacob W. Cohn, her husband; John Rissman and Bessie Rissman, his wife; and Samuel J. Rissman and Esther J. Rissman, his wife, as grantors, by warranty deed conveyed and warranted unto the Buena Corporation the Buena property, subject to, among other things, ‘encumbrances of record,‘ which would include the unpaid principal of the first mortgage of $190,000 less $34,833.34, or $155,166.66. The consideration given by the corporation for this transfer was 100 shares of its capital stock, 50 shares of which were issued to Cohn, 25 shares to John Rissman, 24 shares to petitioner, and one share to petitioner's wife.
On November 3, 1922, ‘The Grantors, Bela E. Halas, a bachelor and Andrew G. Halas, also a bachelor * * * for and in consideration of * * * $200,000,‘ by warranty deed conveyed and warranted to Cohn and petitioner certain real estate, hereinafter sometimes referred to as the Cornelia property, ‘Subject to a trust deed, dated February 24th, 1920 * * * given to secure * * * $115,000.00 * * * .‘ Notwithstanding the consideration stated in the above mentioned deed dated November 3, 1922, the actual consideration for the Cornelia property consisted of cash paid by petitioner of $12,750. cash paid by John Rissman of $12,750, cash paid by Cohn of $25,500, and the assumption by these three individuals of a first mortgage for $97,500 and of a second mortgage for $20,000. Between November 3, 1922, and July 1, 1928, the owners of the Cornelia property had paid off the second mortgage of $20,000 and $28,750 of the principal of the first mortgage. The amount of depreciation allowed and allowable on this property during this period was $21,993.75.
On April 27, 1928, Lizzie P. Cohn and Jacob W. Cohn, her husband, John Rissman and Bessie Rissman, his wife, and Esther J. Rissman and Samuel J. Rissman, her husband, as grantors, by warranty deed conveyed and warranted unto the Cornelia Corporation the Cornelia property, subject to, among other things, ‘encumbrances of record‘ which would include the unpaid principal of the first mortgage of $97,500 less $28,750, or $68,750. The consideration given by the corporation for the transfer was 100 shares of its capital stock, 50 shares of which were issued to Cohn, 25 to John Rissman, 24 shares to petitioner, and one shares to petitioner's wife.
About 1926 or 1927 petitioner and Cohn purchased a lot at 43d and Michigan Avenue at a cost to them of $30,567. Petitioner paid one-half of that amount as his share. He then sold one-half of his share to his father, John Rissman. The owners of the lot then erected on the lot a 16-story building at a cost of $79,830.38. This lot, with improvements, is hereinafter sometimes referred to as the Michigan property. In order to finance the acquisition of the Michigan property the amount of $85,000 was borrowed from the Continental Commercial National Bank. The amount of depreciation allowable on this property up to July 1, 1928, was $3,090.63; the amount allowed was either $3,090.63 or $7,321.87.
On May 7, 1928, petitioner and his wife and Cohn and his wife, as grantors, by quitclaim deed conveyed and quitclaimed unto the Michigan Corporation the Michigan property. The consideration given by the corporation for the transfer was 100 shares of its capital stock, 50 shares of which were issued to Cohn, 25 shares to John Rissman, 24 shares to petitioner, and one share to petitioner's wife.
On April 22, 1935, a four-party agreement was entered into among Lizzie P. Cohn individually and as executrix of the last will and testament of Jacob W. Cohn, deceased, as first party, Union Bank & Trust Co. of Los Angeles, as second party, John Rissman, Samuel J. Rissman and Esther J. Rissman, as third parties, and the three corporations herein involved as fourth parties. The agreement recited that at the time of the death of Cohn there existed and that there still exists certain indebtedness, namely:
+--------------------------------------------------+ ¦714 Buena Building Corporation owed: ¦ ¦ +---------------------------------------+----------¦ ¦Forty Third Michigan Corporation ¦$47,298.92¦ +---------------------------------------+----------¦ ¦737 Cornelia Building Corporation ¦22,100.00 ¦ +---------------------------------------+----------¦ ¦737 Cornelia Building Corporation owed:¦ ¦ +---------------------------------------+----------¦ ¦Forty Third Michigan Corporation ¦4,600.00 ¦ +---------------------------------------+----------¦ ¦Jacob W. Cohn ¦1,000.00 ¦ +---------------------------------------+----------¦ ¦John Rissman and Samuel J. Rissman ¦1,000.00 ¦ +---------------------------------------+----------¦ ¦Forty Third Michigan Corporation owed: ¦ ¦ +---------------------------------------+----------¦ ¦Jacob W. Cohn ¦13,500.00 ¦ +---------------------------------------+----------¦ ¦John Rissman and Samuel J. Rissman ¦13,500.00 ¦ +--------------------------------------------------+
The agreement also recited that since the death of Cohn ‘the party of the first part, as Executrix of his Last Will and Testament, and the parties of the third part have advanced for the benefit of the said Forty Third Michigan Corporation in proportion to their respective holdings of stock in said Forty Third Michigan Corporation, the additional sum of $35,668, no part of which has been repaid * * * .‘ The agreement further recited and provided as follows:
WHEREAS, the party of the first part is, concurrently herewith, about to sell, transfer and assign to the party of the second part, Union Bank & Trust Co. of Los Angeles, as Trustee under its Private Trust No. 914, that portion of the capital stock of the parties of the fourth part formerly held by the said Jacob W. Cohn, deceased, and by the party of the first part individually; and
WHEREAS, the parties hereto, being the only persons in any manner interested in said inter-corporate debts, and said debts of the parties of the fourth part to their respective stockholders, are desirous of releasing, cancelling and extinguishing said debts, and each of them; and to transfer the amounts thereof to the capital accounts of the respective debtor corporations as paid in surplus;
NOW, THEREFORE, THIS AGREEMENT WITNESSETH that for and in consideration of the sum of One Dollar ($1.00) by each of the parties hereto paid to each of the others, the receipt whereof is hereby acknowledged, and for other good and valuable considerations, the parties hereto do mutually covenant and agree as follows: (Here follow separate paragraphs in which each creditor remised, released, and forever discharged its or his respective debtor and each creditor thereby acknowledged full satisfaction and discharge of all of the above mentioned indebtedness, including the above amount of $35,668.)
The last paragraph of the agreement was as follows:
Lizzie Pestine Cohn, individually and as Executrix of the Last Will and Testament of Jacob W. Cohn, deceased, John Rissman, Samuel J. Rissman and Esther J. Rissman, as the owners of all of the issued and outstanding capital stock of the corporate parties of the fourth part, and Union Bank & Trust Co. of Los Angeles, as Trustee under its Private Trust No. 914, as the prospective purchaser, transferee and assignee of one-half of said issued and outstanding capital stock, do hereby request, consent to and ratify the several releases, cancellations and satisfactions of indebtedness above set forth.
Petitioner's income tax return for the taxable year here involved was prepared by Leon J. Busby, a certified public accountant and a partner of the firm of Busby & Oury. The ‘Cost‘ set out in the above mentioned schedule F was determined by Busby substantially as follows:
+-----------------------------------------------------------------------------+ ¦25 Shares of 714 Buena Building Corporation. ¦ +-----------------------------------------------------------------------------¦ ¦Origional cost to Cohn, petitioner, and ¦ ¦ ¦ ¦ ¦John Rissman of the Buena ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦property: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Land ¦ ¦ ¦$62,000.00¦ +-------------------------------------------+----------+-----------+----------¦ ¦Building ¦ ¦ ¦300,000.00¦ +-------------------------------------------+----------+-----------+----------¦ ¦ ¦ ¦ ¦362,000.00¦ +-------------------------------------------+----------+-----------+----------¦ ¦Less: Depreciation allowed and allowable to¦ ¦ ¦30,625.00 ¦ ¦July 1, 1928 ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Adjusted basis of property exchanged for ¦ ¦ ¦ ¦ ¦capital stock subject to ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦certain liabilities ¦ ¦ ¦331,375.00¦ +-------------------------------------------+----------+-----------+----------¦ ¦Less: Stockholders' liabilities assumed by ¦ ¦ ¦ ¦ ¦the corporation: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Real estate mortgage ¦ ¦$155,166.66¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Deduct contra receivable ¦ ¦3,000.00 ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦ ¦ ¦ ¦152,166.66¦ +-------------------------------------------+----------+-----------+----------¦ ¦Net stockholders' equity at date of ¦ ¦ ¦179,208.34¦ ¦incorporation ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Add: Stockholders' pro rata contributions ¦ ¦ ¦ ¦ ¦to capital subsequent ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦date of incorporation: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Intercompany loans canceled and ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦transferred to capital as per agree- ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦ment dated April 22, 1935: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Mich. Corporation ¦$47,298.92¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Cornelia Corporation ¦22,100.00 ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦ ¦ ¦$69,398.92 ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Less: Contra receivables: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Mich. Corporation ¦13,380.66 ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Cornelia Corporation ¦14,550.00 ¦ ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦ ¦ ¦27,930.66 ¦ ¦ +-------------------------------------------+----------+-----------+----------¦ ¦ ¦ ¦ ¦41,468.26 ¦ +-------------------------------------------+----------+-----------+----------¦ ¦Total cost (base) of capital stock ¦ ¦ ¦220,676.60¦ +-------------------------------------------+----------+-----------+----------¦ ¦Cost to petitioner of 25 shares (1/4 of ¦ ¦ ¦55,169.15 ¦ ¦total cost) ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦25 Shares of 737 Cornelia Building Corporation. ¦ +-----------------------------------------------------------------------------¦ ¦Origional cost to Cohn, petitioner, and John Rissman ¦¦¦ ¦ ¦ ¦of the Cornelia ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦property: ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Land ¦¦¦ ¦$40,000.00¦ +-----------------------------------------------------+++----------+----------¦ ¦Building ¦¦¦ ¦127,500.00¦ +-----------------------------------------------------+++----------+----------¦ ¦ ¦¦¦ ¦167,500.00¦ +-----------------------------------------------------+++----------+----------¦ ¦Less: Depreciation allowed and allowable to July 1, ¦¦¦ ¦21,993.75 ¦ ¦1928 ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Adjusted basis of property exchanged for capital ¦¦¦ ¦ ¦ ¦stock subject ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦to certain liabilities ¦¦¦ ¦145,506.25¦ +-----------------------------------------------------+++----------+----------¦ ¦Less: Stockholders' liabilites assumed by the ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Corporation: ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Real estate mortgage ¦¦¦$68,750.00¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Bank overdraft ¦¦¦84.84 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Rental deposit ¦¦¦2,500.00 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦ ¦¦¦71,334.84 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Deduct contra receivables ¦¦¦23,850.00 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦ ¦¦¦ ¦$47,484.84¦ +-----------------------------------------------------+++----------+----------¦ ¦Net stockholders' equity at date of incorporation ¦¦¦ ¦98,021.41 ¦ +-----------------------------------------------------+++----------+----------¦ ¦Add: Stockholders' pro rata contributions to ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦capital subsequent to date of incorporation: ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Mortgage installment paid by stockholders ¦¦¦$1,250.00 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Mortgage interest paid by stockholders ¦¦¦2,406.25 ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Net intercompany and stockholders' loans ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦canceled and transfered to capital as per ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦agreement dated April 22, 1935: ¦¦¦ ¦ ¦ +-----------------------------------------------------------------------------+
Receivables Payables Buena Corporation $20,100.00 Mich. Corporation 2,000.00 $4,600.00 Cohn 1,000.00 John Rissman 500.00 Petitioner 500.00 22,100.00 6,600.00 1 1 (15,500.00) (11,483.75) Total cost (base) of capital 86,177.66 stock Cost to petitioner of 25 shares 21,544.42 (1/4 of total cost)
+-----------------------------------------------------------------------------+ ¦25 Shares of Forty Third Michigan Corporation. ¦ +-----------------------------------------------------------------------------¦ ¦Origional cost to Cohn, petitioner, and John Rissman ¦¦¦ ¦ ¦ ¦of the Michigan ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦property: ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Land ¦¦¦ ¦$37,288.00¦ +-----------------------------------------------------+++----------+----------¦ ¦Building ¦¦¦ ¦79,830.38 ¦ +-----------------------------------------------------+++----------+----------¦ ¦ ¦¦¦ ¦117,118.38¦ +-----------------------------------------------------+++----------+----------¦ ¦Less: Depreciation allowable to July 1, 1928 ¦¦¦ ¦3,090.63 ¦ +-----------------------------------------------------+++----------+----------¦ ¦Adjusted basis of property exchanged for capital ¦¦¦ ¦ ¦ ¦stock subject to ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦certain liabilities ¦¦¦ ¦114,027.75¦ +-----------------------------------------------------+++----------+----------¦ ¦Less: Stockholders' liabilities assumed by ¦¦¦ ¦84,280.91 ¦ ¦corporation ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Net stockholders' equity at date of incorporation ¦¦¦ ¦29,746.84 ¦ +-----------------------------------------------------+++----------+----------¦ ¦Add: Stockholders' pro rata contributions to capital ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦subsequent to date of incorporation: ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Payment by stockholders of interest and principal ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦on Continental Bank loans ¦¦¦$50,668.00¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦Net intercompany and stockholders' loans canceled ¦¦¦ ¦ ¦ +-----------------------------------------------------+++----------+----------¦ ¦and transfered to capital as per agreement dated ¦¦¦ ¦ ¦ ¦April 22, 1935: ¦¦¦ ¦ ¦ +-----------------------------------------------------------------------------+
Receivables Payables Buena Corporation $47,298.92 Cornelia Corporation 4,600.00 Stockholders $13,500.00 Stockholders 13,500.00 Stockholders 35,668.00 51,898.92 62,668.10 10,769.08 $61,437.08 Total cost (base) of capital stock 91,183.92 Cost to petitioner of 25 shares (1/ 22,795.98 4 of total cost)
Petitioner's Exhibit No. 38, which was admitted in evidence, reconciles the above claimed cost of $22,795.98 with the amount claimed on the return, as follows:
+-----------------------------------------------------------------------------+ ¦Cost as shown in return ¦$21,738.17¦ +------------------------------------------------------------------+----------¦ ¦Correction for error in duplication for depreciation write-off ¦ ¦ ¦prior ¦ ¦ +------------------------------------------------------------------+----------¦ ¦to incorporation ¦1,057.81 ¦ +------------------------------------------------------------------+----------¦ ¦Cost now claimed by petitioner ¦22,795.98 ¦ +-----------------------------------------------------------------------------+
Petitioner was president of John Rissman & Son, a company engaged in the manufacture of sportswear. He did all of the selling for the company. He did some traveling in connection with his business. Of the $1,767.73 deducted by petitioner on his return as expenses, the respondent allowed $667.73 and disallowed the remainder. Petitioner could not recall what any of the separate items of expense were. He kept vouchers of his expenses, but was unable to produce any of them at the hearing.
OPINION.
BLACK, Judge:
The two issues presented in this proceeding are (1) whether the respondent erred in disallowing an aggregate of $35,669.06 or any part thereof claimed by petitioner as a net long term capital loss from the sale in 1941 of certain shares of stock in three separate corporations, and (2) whether the respondent erred in disallowing $1,100 of the $1,767.73 claimed by petitioner as deductible expenses.
Issue (1). The manner in which petitioner computed the claimed loss aggregating $35,669.06 in schedule F of his return has been set out in our findings. The respondent disallowed the deduction on two grounds, namely, that petitioner had not proved that he owned the 25 shares of stock in each of the three corporations and that he had also failed to substantiate the cost or other basis of the stock.
In his brief the respondent in effect now concedes that petitioner has proved ownership of at least 24 shares in each of the 3 corporations here involved, for in his request for findings of fact he has requested us to find that ‘In 1941 petitioner was the owner of 24 shares of 714 Buena Building Corporation stock, 24 shares of 737 Cornelia Building Corporation stock and 24 shares of Forty Third Michigan Corporation stock,‘ and that his wife, Esther J. Rissman ‘was the owner of one share of the stock of each of said corporations. ‘ We think the evidence supports these requested findings and we have accordingly so found. We do not think petitioner has proved ownership of the one share in each of the corporations that was issued to his wife. There is some evidence that petitioner owned the share issued to his wife by the Buena Corporation, but the weight of the evidence is otherwise. We, therefore, hold that petitioner has only proved ownership as to 24 shares in each of the corporations here involved.
The respondent still contends that petitioner has failed to substantiate the cost or other basis of the stock. In this connection the applicable statute is section 113 of the Internal Revenue Code, the material provisions of which, as amended, are set forth in the margin.
Minus item.
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—(6) TAX-FREE EXCHANGES GENERALLY.— If the property was acquired, after February 28, 1913, upon an exchange described in section 112(b) to (e), inclusive, or section 112(l), the basis (except as provided in paragraphs (15), (17), and (18) of this subsection) shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by section 112(b) or section 112(l), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of exchange. Where as part of the consideration to the taxpayer another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for the purposes of this paragraph, be considered as money received by the taxpayer upon the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.(12) BASIS ESTABLISHED BY REVENUE ACT OF 1932.— If the property was acquired after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof, for the purposes of the Revenue Act of 1932, 47 Stat. 199, was prescribed by section 113(a), (6), (7), or (9) of such Act, then for the purposes of this chapter the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932.(16) BASIS ESTABLISHED BY REVENUE ACT OF 1934.— If the property was acquired, after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof, for the purposes of the Revenue Act of 1934 was prescribed by section 113(a)(6), (7), or (8) of such Act, then for the purposes of this chapter the basis shall be the same as the basis therein prescribed in the Revenue Act of 1934.(b) ADJUSTED BASIS.— The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.(1) GENERAL RULE.— Proper adjustment in respect of the property shall in all cases be made—(A) For expenditures, receipts, losses, or other items, properly chargeable to capital account * * * ;(B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this chapter or prior income tax laws. * * *(2) SUBSTITUTED BASIS.— The term ‘substituted basis‘ as used in this subsection means a basis determined under any provision of subsection (a) of this section or under any corresponding provision of a prior income tax law, providing that the basis shall be determined—(A) by reference to the basis in the hands of a transferor, donor, or grantor, or(B) by reference to other property held at any time by the person for whom the basis is to be determined.Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in paragraph (1) of this subsection shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases. 2. No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment, or if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.
The respondent argues first that petitioner's entire case falls because he has failed to prove that the stock of the three corporations was acquired in a transfer of properties to controlled corporations within the terms of section 112(b)(5). At the time the Buena, Cornelia, and Michigan properties were transferred in 1928 to the three corporations, respectively, section 112(b)(5) of the Revenue Act of 1928 provided that:
No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
The respondent correctly argues that in order to satisfy the requirements of section 112(b)(5) ‘it was incumbent upon this petitioner to establish (1) who owned the properties transferred to the corporation, (2) the exact interests of each of said transferors in the properties, (3) that immediately after the exchange said transferors were in control of the corporations, and (4) that each of said transferors received in the exchange stock substantially in proportion to his interest in the property.‘ We, however, do not agree with the respondent that petitioner has failed to satisfy these conditions. Although the evidence was not as satisfactory as it might have been, we believe that a careful consideration of the entire record supports the ultimate facts we have found, namely, that prior to the transfers to the corporations the respective properties were owned one-fourth by petitioner, one-fourth by John Rissman, and one-half by Cohn, and that immediately after the transfers the entire capital stock of the corporation was owned by the same parties in the same proportions, with the exception of the one share in each of the corporations that was issued to petitioner's wife and which apparently petitioner gave to his wife. On the foundation of these facts, we hold that the transferors of the properties realized no gain or loss on the transfers in 1928, and that the basis to them of the properties transferred is required to be substituted for the stock received by them. This ‘substituted basis‘ must then be adjusted as provided for in code section 113(b)(2), set out in our footnote 1 above.
In the event of our holding contrary to the respondent's contentions as to whether petitioner was satisfied the requirements of section 112(b)(5), the respondent, as an alternative, has requested us to find as an ultimate fact the following:
23. If any part of such capital loss is allowable, the amount of $35,669.06 claimed in petitioner's return is excessive:
(a) as to each of the stocks of Buena Building Corporation, Cornelia Building Corporation and Forty-Third Michigan Corporation, to the extent that petitioner claimed a loss with respect to the share of stock of each of said corporations owned by petitioner's wife, Esther J. Rissman; and
(b) as to the Buena stock, to the extent that the claimed basis of $220,676.60 for the entire 100 shares included the cancelled inter-company loans in the net amount of $41,468.26, and included the alleged equity of $80,000.00 for the Clark Street property; and
(c) as to the Forty Third Michigan stock, to the extent that the claimed basis of $91,183.92 for the entire 100 shares included the cost of the original land at $37,288 in lieu of the correct cost of $30,567.
In view of our above holding relating to the ownership of the stock in question, it follows that the respondent's request for the ultimate finding set forth in paragraph 23(a), supra, should be and is allowed.
We also think that the respondent's request for the ultimate finding set forth in paragraph 23(b), supra, should be allowed. The claimed basis of $220,676.60 for the entire 100 shares of Buena Corporation was computed by Busby in the preparation of petitioner's return. The computation is set out in our findings. The amount of $362,000 stated in the computation is the total of cash paid in by Cohn, petitioner, and John Rissman of $52,000; the acquisition of the Buena property subject to a first mortgage of $190,000; the giving of a purchase money mortgage of $40,000; and the transfer to the sellers of the Buena property of the Clark Street property at an agreed figure of $115,000, with the sellers of the Buena property assuming two mortgages on the Clark Street property totaling $35,000. The record does not show the cost of the Clark Street property to Cohn, petitioner, and John Rissman. The fair market value of their equity in the Clark Street property at the time of the 1924 exchange was $80,000. Petitioner has used the $80,000 as a part of the cost of the Buena property on the theory that the 1924 exchange of the two properties was a taxable exchange rather than a tax-free exchange under section 203(b)(1) of the Revenue Act of 1924.
In so doing, we think petitioner has erred. It is our opinion that the exchange of the Clark Street property in part consideration for the Buena property in 1924 was a tax-free exchange and that the depreciated cost basis of the Clark Street property should have been substituted as a part of the basis of the Buena property. Since petitioner has failed to prove the depreciated cost of the Clark Street property as of the date of the exchange in 1924, after a suggestion from the bench that such evidence be submitted, it follows that no figure of cost can be allowed in the computation for the Clark Street property as a part of the substituted basis.
In his brief the respondent goes one step further than his requested finding number 23(b), supra, and argues that the claimed basis of $220,676.60 should not only be reduced by the $80,000 included by petitioner, but also by the $35,000 of mortgages assumed by the sellers of the Buena property in 1924. In so contending the respondent relies upon code section 113(a)(6), as amended, set out in footnote 1 above. On this point we disagree with the respondent. The first sentence of section 113(a)(6) requires that we look to the ‘law applicable to the year in which the exchange was made.‘ The exchange now in question was made in 1924 and the law applicable thereto, in our opinion, was section 203(b)(1) of the Revenue Act of 1924, which is set out in Footnote 2. The sentence of section 113(a)(6), as amended, particularly relied upon by the respondent is the next to the last sentence, reading: ‘Where as part of the consideration to the taxpayer another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for the purposes of this paragraph, be considered as money received by the taxpayer upon the exchange.‘ This sentence was inserted in the code by section 213(d) of the Revenue Act of 1939 and, by section 213(e) of the same act, was specifically made ‘applicable to taxable years beginning after December 31, 1938.‘ We hold it was not applicable to the exchange made in 1924 and that the claimed basis of $220,676.60 should not be reduced by the $35,000 in addition to the said $80,000.
As previously indicated, we are of the opinion that the claimed basis of $220,676.60 set out in our findings should be reduced by the canceled intercompany loans in the net amount of $41,468.26. This net amount of $41,468.26, as shown by Busby's computation of the claimed basis of $220,676.60, represents ‘inter-company loans cancelled and transferred to capital as per agreement dated April 22, 1935.‘ The material parts of this agreement are set forth in our findings. In support of the inclusion of the net amount of $41,468.26, petitioner relies upon Helvering v. American Dental Co., 318 U.S. 322, wherein the Supreme Court, among other things, said:
* * * Where a stockholder gratuitously forgives the corporation's debt to himself, the transaction has long been recognized by the Treasury as a contribution to the capital of the corporation. Regulations 45, Art. 51, through to Regulations 94, Art. 22(a)-14. Commissioner v. Auto Strop Safety Razor Co., Inc., 2 Cir., 74 F.2d 226.
In the instant proceeding no stockholder of Buena Corporation forgave any debt owed by that corporation to its stockholders. The net amount of $41,468.26 that was forgiven was owed by Buena Corporation to Cornelia Corporation and Michigan Corporation, and it was forgiven by those two corporations. This transaction among the three corporations did not effect any change in petitioner's substituted basis of the 24 shares of stock of the Buena Corporation. Petitioner's contention on this point is denied.
We hold, therefor, that petitioner's substituted basis for the 24 shares of stock of the Buena Corporation is 24 percent of the claimed basis of $220,676.60 after that amount has first been reduced by the above mentioned amounts of $80,000 and $41,468.26, or a corrected substituted basis for petitioner of $23,810. Petitioner, therefore, sustained a loss on the sale of this stock of $22,403.77 ($23,810 cost minus $1,406.23 received in the sale) 50 percent of which, or $11,201.88, is deductible as a net long term capital loss under section 117 of the Internal Revenue Code.
As an alternative proposition, the respondent has not objected to the claimed basis of $86,177.66 for the entire 100 shares of Cornelia Corporation which was computed by Busby in the preparation of petitioner's return. This computation is set out in our findings. The figures there used were all taken from the books of Cornelia Corporation.
The petitioner claims, however, that he has proved a larger cost basis for his Cornelia Corporation stock than he alleged in his pleadings and, therefore, his loss on the sale of that stock should be increased. We shall not discuss the figures upon which petitioner claims an increased cost of this Cornelia Corporation stock. Petitioner did not amend his pleadings so as to raise such an issue. In his petition, petitioner alleged that the cost of his stock in Cornelia Building Corporation was $21,544.42, that he received for it in the sale $4,260.81, and that his loss from the sale was $17,283.61. Even if we should assume that the proof at the hearing shows that the cost to petitioner of his stock in Cornelia Corporation was in excess of the figure which he claimed in his petition, we would be without authority to allow it, because petitioner did not ask or receive permission to amend his petition to conform to the proof. Issues must be raised by the pleadings and not on brief. North American Coal Corporation, 28 B.T.A. 807; General Utilities & Operating Co. v. Helvering, 296 U.S. 200. The petitioner has established by evidence that the cost of the 25 shares in Cornelia Corporation owned by himself and his wife was at least $21,544.42, as alleged in the petition. Of this, petitioner is entitled to use 24/25 in a computation of his loss on the sale of his 24 shares of Cornelia Corporation stock.
As an alternative proposition, the respondent has only objected to the claimed basis of $91,183.92 for the entire 100 shares of Michigan Corporation to the extent of his requested finding 23(c).
The petitioner claims, however, that he has proved a larger cost basis for his shares of stock in Michigan Corporation than he alleged in his pleadings, even after giving effect to the adjustment which respondent claims should be made under his suggested finding 23(c), and, therefore, his loss on that particular sale should be increased. We shall not discuss the figures upon which petitioner claims an increased cost basis of his Michigan Corporation stock. Petitioner did not amend his pleadings so as to raise such an issue. In the petition it is alleged that the cost of petitioner's stock in Michigan Corporation was $21,738.17, that he received for the stock in the sale $21,387.81, and that his loss from the sale was $350.18. Even if we should assume that the proof at the hearing shows that the cost to petitioner of his stock in Michigan Corporation was in excess of the figure which he claimed in his petition, we would be without authority to allow it, because petitioner did not ask or receive permission to amend his petition to conform to the proof, for, as we have stated above, issues must be raised by the pleadings and not on brief. See the same authorities as cited above with reference to Cornelia Corporation stock. In our judgment, the petitioner has established by evidence that the cost basis of the 25 shares in Michigan Corporation owned by himself and wife, Esther, was at least $21,738.17, as alleged in his petition. Of this cost basis, petitioner is entitled to use 24/25 in a computation of his loss on the sale of his 24 shares of Michigan Corporation stock.
Issue (2). As to this issue, we hold that petitioner has failed to prove any facts which would indicate that the respondent erred in disallowing $1,100 of the $1,767.73 claimed by petitioner on his return as deductible expenses.
Decision will be entered under Rule 50.