Opinion
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiffs (citizens of the United States and residents of the State of New York) are the executors under the last will and testament of Henry Hill Pierce, deceased, who was a citizen of the United States and a resident of the State of Maine.
2. At all times since February 1908, the First National Bank of the City of New York (hereinafter referred to as the "Bank") has been a corporation organized and existing under and by virtue of the National Banking Act and has had outstanding 100,000 shares of stock of a par value of $100 each.
3. The Bank was limited by law in its power to acquire and to hold real estate, securities, stocks, and other property, and its officers, directors, and stockholders, desiring to avoid the inconvenience and supposed loss resulting from such limitation of the corporate powers, were advised that they might do so legally by the formation of a business corporation which would have such powers. February 14, 1908, an agreement was entered into between the officers of the Bank, as trustees, and the stockholders of the Bank for the preparation and consummation of a plan for the organization of a business corporation under the following terms and conditions:
(a) The corporation to be known as First Security Company (hereinafter sometimes referred to as the "Security Company") and to have a capital stock of $10,000,000 divided into 100,000 shares each of the par value of $100. (b) Subscription for the capital stock of the Security Company by the trustees as joint tenants, that stock to be held by and be registered on the books of the Security Company in the names of the directors or officers of the Bank or its successor and those persons to exercise all the rights and powers of absolute owners over such stock in trust. (c) The stock of the Security Company was to be paid for by the trustees out of a special or extra dividend to be declared on the shares of the Bank in the sum of $10,000,000. (d) To enable the trustees to acquire the capital stock of the Security Company in that manner, each and every stockholder of the Bank and subscriber to the agreement assigned, transferred, and set over to the trustees as joint tenants all his right, title, and interest in and to such extra or special dividend to be used and applied in making payment for the stock of the Security Company. (e) Each stockholder agreed upon organization of the Security Company to present to the trustees his certificate of stock in the Bank for endorsement as follows: "The registered holder of the within certificate is entitled, for and in respect of each and every share of stock of the First National Bank of the City of new York represented thereby, to share equally and ratably with all other holders of stock certificates of the Bank similarly endorsed, according to their several interests, in the dividends or profits, and, in case of dissolution, in the distribution of the capital, of the First Security Company, a corporation of the State of New York organized in pursuance of a certain written agreement dated February 14th, 1908, between George F. Baker and others, Trustees, and J. Pierpont Morgan and others, Stockholders: such interest of the owner of the within certificate, and of all other like certificates, similarly endorsed, being subject to all the terms, conditions, and limitations of said agreement; such ratable interest to be sold or transferred ratably only by the transfer upon the books of the Bank of one or more of the shares of the stock in the Bank represented by a Bank stock certificate bearing this endorsement; and all of the interest in and to or in respect of said Security Company or its capital stock, represented by a Bank stock certificate bearing this endorsement, shall pass ratably with and only with the transfer of such shares of the Bank represented by such Bank stock certificate, and upon transfer thereof upon the books of the Bank; and an interest in the Security Company attached to any share of the Bank shall be alienable, only in connection with such transfer of such Bank stock. "No holder of the within certificate or any transferee of any share thereby represented shall be entitled in lieu thereof to demand or receive from the Bank a new certificate except with this endorsement thereon; and a transfer of any share of Bank stock represented by the within Bank stock certificate shall be made by any holder thereof only to a transferee accepting therefor a new certificate bearing this endorsement. "No right to vote upon or in respect of any stock of the Security Company passes to or shall be exercised by the holder of the within certificate, such voting right being reserved to and by the Trustees or their successors." (f) From and after the placing of the endorsement upon the certificates the registered holders were to be invested with such rights in respect of the Security Company or of its capital stock as were indicated in the agreement and the endorsement. (g) The trustees agreed to accept assignment of the special dividend and to make payment therewith for the capital stock of the Security Company; to exercise of all the rights and powers of owners thereof except insofar as they should receive express directions in writing signed by the holders of at least two-thirds interest in the certificates of stock of the Bank then outstanding. (h) The trustees further agreed that when, as stockholders of the Security Company, they received dividends either from the profits of the company or upon final dissolution thereof, they would pay the same over to the Bank or its successor for immediate distribution by the Bank to and among the holders of the Bank stock certificates and according to their interest in the shares of the Bank. They further agreed that if for any reason it should become impracticable to distribute Security Company dividends through the agency of the Bank the trustees themselves would distribute such dividends, as and when received, to the persons who would be entitled to the same if the distribution thereof were made by the Bank. (i) The agreement was to continue and be in full force and effect for five years and thereafter until the same should be terminated by the written directions of the holders of two-thirds interest in the stock certificates of the Bank or its successor. (j) Upon termination of the agreement the shares of the stock of the Security Company were to be distributed ratably to and among the holders of record of the stock certificates of the Bank.
4. In accordance with the agreement referred to in the preceding finding, the First Security Company was organized on February 14, 1908, under the laws of the State of New York, with a capital stock of $10,000,000 divided into 100,000 shares of a par value of $100. A special dividend of $10,000,000 was declared out of the surplus or net profits of the Bank in May 1908, and was thereupon assigned and paid to the trustees who used it to pay for the capital stock of the Security Company. All the stockholders of the Bank presented their certificates for endorsement as provided in the agreement, and the Security Company began to operate the business for which it was organized.
5. At all times after February 14, 1908, and until the termination of the agreement on November 29, 19833, the agreement was in full force and effect and each certificate of Bank stock bore the endorsement heretofore referred to. The owner of such certificate could not sell separately either his interest in the Bank as represented by such certificate or his interest in the Security Company as similarly represented, but could sell only his combined interest in both companies.
6. On the dates and at the cost set out below, plaintiffs' decedent purchased shares of Bank stock bearing the endorsement referred to in finding 3(e):
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Date
Number of shares
Unit price
Total cost
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April 16, 1928
15
$3,875
$58,125
March 22, 1930
15
5,905 1/3
88,580
November 23, 1932
5
1,625
8,125
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7. Because the Federal Banking Act of 1933 required national banks to divorce their securities affiliates, the Security company was on November 29, 1933, dissolved in accordance with the laws of the State of New York. Subsequently on the same day the trust created under the agreement of February 14, 1908, was terminated. Thereafter declarations of interest in the distribution of proceeds of dissolution of the Security Company were issued by the trustees under the agreement to the stockholders of the Bank in lieu of the endorsement, which endorsement was then removed from the Bank stock certificates. The declarations of interest contained the following provisions:
"The undersigned, holders as Trustees of stock of First Security Company, a New York corporation, in dissolution, standing in the name of: " 'Trustees under Agreement dated February 14, 1908, between George F. Baker and others, Trustees, and J. Pierpont Morgan and others, Stockholders.' hereby declare that --- is entitled to an interest of --- undivided parts of a total of one hundred thousand (100,000) parts, in the distribution of the proceeds of the dissolution of said First Security Company, as such proceeds from time to time may hereafter be distributed to the undersigned, and the survivors and survivor of them, as stockholders thereof, as such Trustees, by the Directors of said First Security Company in the progress of the dissolution thereof. "This Declaration of Interest and the rights and interests represented hereby are transferable by the registered owner hereof in person or by attorney thereunto duly authorized, by transfer upon the books kept for that purpose by the agent of the undersigned and upon the surrender of this Declaration of Interest properly endorsed. "Title to this Declaration of Interest when duly endorsed may be passed and shall vest with the same effect as in the case of negotiable instruments, and each holder thereof consents and agrees that any delivery hereof, when duly endorsed in blank, shall transfer the title hereto and all rights and interests represented hereby to the same extent, for all purposes, as would delivery under like circumstances of a negotiable instrument payable to bearer. The undersigned Trustees and their agents may treat the registered holder hereof (or, if duly endorsed in blank, the bearer hereof) as the absolute owner hereof for all purposes, including the payment of such money and/or delivery of such security or other property as may be received by them for distribution in the progress of such dissolution, provided, however, that as a condition of making any such distribution hereon the undersigned may, in their discretion, require the transfer hereof to the name of such bearer on said books and/or the presentation hereof for the purpose of notation of each such distribution upon the reverse hereof."
An interest in the proceeds of dissolution of one undivided part of a total of 100,000 parts was issued for each of the 100,000 shares of Security Company stock previously represented by the endorsement on the back of the Bank stock certificates.
No actual or constructive distribution of the assets of the Security Company in dissolution was made prior to January 30, 1934. The proceeds of liquidation of the Security Company amounted to $2,018,523.82 and were delivered in liquidation to the trustees on or after January 30, 1934.
8. Upon the dissolution of the Security Company and termination of the agreement, plaintiffs' decedent received on December 6, 1933, declarations of interest for thirty-five undivided parts in the distribution of the proceeds in dissolution of the Security Company and certificates for thirty-five shares of Bank stock without the endorsement, upon his surrender of the certificates of the Bank stock bearing that endorsement which he had purchased on April 16, 1928, March 22, 1930, and November 23, 1932, as shown in finding 6. On January 29, 1934, plaintiffs' decedent sold those declarations of interest of thirty-five undivided parts for $577.50--that is, at the rate of $16.50 for each declaration of interest.
9. At all times herein referred to the Security Company was operated as an investment company and its assets consisted principally of high-grade stocks together with small amounts of bonds, loans, and cash. investments were always made with a view to long-term appreciation and yield rather than to trading profits and consequently its income consisted principally of dividends.
10. During the entire period of its existence the directors of the Security Company were in all material respects the officers and directors of the Bank so that the Security Company enjoyed the benefits of the same management as the Bank. From 1908 until 1933 the few investments acquired from the Bank were taken over at the fair market value thereof at the time of transfer. All loans by the Bank to the Security Company were at rates of interest at least as high as the prevailing rates for comparable loans, and were adequately secured. The most exacting requirements were observed in regard to these loans with even higher rates of interest charged in some instances than to other customers of the Bank.
11. During the entire period of the existence of the Security Company no rights to subscribe to additional stock nor stock dividends were issued by either the Bank or the Security Company and the capital of the Bank and Security Company remained the same from 1908 until the dissolution of the Security Company in 1933. The Security Company did no underwriting, with possibly one exception, and did not buy or sell stocks or otherwise engage in speculation. It sometimes borrowed money from the Bank to purchase common stock for long-time holding but such loans conformed to the practice set out in finding 10.
12. At all times from the formation of the Security Company the earnings of the Bank and of the Security Company were separately computed. The earnings of the Bank for the year 1927 were $11,850,000, while the earnings of the Security Company for the same year were $6,411,000. In 1929 the earnings of the Bank were $12,675,000, while the earnings of the Security Company were $6,366,000. In 1932 the earnings of the Bank were $6,446,000. In that year the Security Company sustained a loss of $372,000.
13. Dividends were at all times separately paid by the Bank and the Security Company to the holders of shares of the Bank. In 1927 the Security Company paid dividends of $3,500,000, the Bank, $6,500,000. In 1929 the Security Company paid dividends of $8,000,000, the Bank, $2,000,000. In 1932 the Bank paid dividends of $10,000,000, and none were paid by the Security Company.
14. The balance sheets of the Bank and of the Security Company showed assets in the amounts set out below at the dates mentioned:
Apr. 30, 1928
Mar. 311, 1930
Nov. 30, 1932
Bank
$475,011,102.60
$495,909,395.66
$517,982,563.96
Security Co
66,361837.82
70,324,516.88
60,737,476.03
The new asset values exclusive of goodwill and other intangibles, if any, of the Bank and of the Security Company and the percentage of the combined net asset value which such value of each represented on the dates of purchase by plaintiffs' decedent were as follows:
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Date
Net asset value Bank
Net asset value Security Co.
Combined net asset value Bank & Security Co.
Percent Bank
Percent Security Co.
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4/16/28
$111,864,719.41
$73,377,867.29
$185,242,587.70
60.388
39.612
3/22/30
125,718,172.71
72,255,172.88
197,973,345.59
63.502
36.498
11/23/32
89,023,517.49
8,275,405.41
80,748,112.08
110.248
These net asset values represented the amounts by which the respetive assets of the Bank and the Security Company, at their fair market value, exceeded their respective liabilities, exclusive of capital stock.
The reports of the condition of the Bank at the close of business April 30, 1928, March 31, 1930, and November 30, 1932, contain no reference to the Security Company. The Security Company never made public any information concerning its assets, liabilities, earnings, or sources of income.
15. The Bank stock has been actively traded in by unlisted security dealers and brokers on the so-called "over the counter" market since prior to 1908. From the formation of the Security Company until its dissolution, all certificates of Bank stock which were sold bore the endorsement heretofore referred to, and all quotations or prices of Bank stock were for certificates of such stock bearing that endorsement. Quotations or prices of Bank stock from 1903 to 1908, a period prior to the formation of the Security Company, and from 1908 to 1933, the period of the existence of the Security Company, are set out in Exhibits F and G, attached to the stipulation filed in this case, and are made a part hereof by reference. The bid and asked prices for the Bank stock on January 4, 1908, were $570 and $600, respectively, and on April 4, 1908, after the formation of the Security Company, were $640 1/2 and $641, respectively. In all cases, the fair market price of such stock is the mean of the bid and asked prices on such dates. As shown in finding 6, the prices of the Bank stock on April 16, 1928, March 22, 1930, and November 23, 1932, the dates when plaintiffs' decedent made the purchases here in question, were $3,875, $5,905 1/3, and $1,625, respectively.
November 29, 1933, the day of the dissolution of the Security Company and the termination of the trust and the issuance of certificates of beneficial interest in the Security Company and for the day prior and the day subsequent thereto, the quoted market prices of the Bank stock were:
November 28, 1933
$1,025 to $1,075
November 29, 1933
1,040 to 1,090
November 30, 1933
1,055 to 1,105
November 29, 1933, the market value of certificates of beneficial interest in the Security Company's assets was $16 to $17 per share, as evidenced by trading in those certificates.
16. March 13, 1935, plaintiffs' decedent filed a return of income for the calendar year 1934 and then and thereafter paid to the Collector Federal income-tax payments aggregating $26,127.89 in quarterly installments on March 13, June 10, September 6, and December 11, 1935. Subsequently on demand plaintiffs' decedent paid an additional income tax for the calendar year 1934 on May 4, 1936, in the sum of $90.56, making a total payment for 1934 of $26,218.45. In computing the net taxable income on his return for the calendar year 1934, plaintiffs' decedent did not deduct any amount in connection with the sale of the declarations of interest for thirty-five undivided parts in the distribution of the proceeds in dissolution of the Security company.
17. February 18, 1938, plaintiffs' decedent filed a claim for refund in the sum of $13,381.75 for the calendar year 1934. The principal ground assigned in the claim for refund was that a loss had been sustained on the sale of the thirty five declarations of interest in the Security Company and that such loss should be determined on the basis of the difference between an allocated cost of the Security Company's stock and the selling price of the declarations of interest in the Security Company, such allocation being made under a method outlined in the claim. The Commissioner rejected the claim August 10, 1940.
18. During the period from the formation of the Security Company until its dissolution, a unit of the Bank stock represented inseparable and interrelated interests in the Bank and the Security Company, the interlocking character of the two companies and the inseparable character of the interests having an effect on the value of the respective interests. The costs or investments by plaintiffs' decedent in units of the Bank stock on April 16, 1928, March 22, 1930, and November 23, 1932, were single, and it was on those dates and has been ever since those dates impracticable to apportion such costs or investments on those dates between the Band and Security Company stocks.
Lawrence A. Baker, of Washington, D.C. (John A. Selby and Baker, Selby & Ravenel, all of Washington, D.C., on the brief), for plaintiff.
Joseph H. Sheppard, 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 LITTLETON, WHITAKER, and MADDEN, Judges.
MADDEN, Judge.
On February 14, 1908, the First national Bank of the City of New York, in order to give to its stockholders the supposed benefits of investment in kinds of securities which could not be lawfully held by a bank, organized the First Security Company, a corporation authorized to invest in such securities. The story of how the Security Company was set up and how it was related to the bank is told in findings 3, 4, and 5. In brief the arrangement was that there was endorsed on the certificate of stock of each stockholder in the bank a statement that the stockholder had an interest in the dividends or profits, and, in case of dissolution, in the distribution of capital of the Security Company, ratable with his interest in the bank. he was to have no stock in, or right to vote in the Security Company, all the stock and the right to vote it being vested in trustees, who were to be the officers of the bank. The only control expressly given to the stockholders over the trustees was that an express direction in writing signed by the holders of two-thirds of the bank stock would be binding on the trustees. Only by the same kind of direction could the trust arrangement be terminated. Neither the bank stock by itself or the equitable interest in the assets of the Security Company represented by the indorsement could be separately transferred.
Plaintiffs' testator bought 15 shares of the bank stock with the Security Company indorsement in 1928, 15 shares in 1930, and five shares in 1932.
In 1933, a federal statute required national banks to divorce their securities affiliates, and the Security Company was dissolved and the trust agreement terminated. Transferable declarations of interest in the proceeds of dissolution of the Security Company were issued by the trustees to the bank stockholders, and the indorsements were removed from the stockholders certificates of bank stock.
Banking Act of 1933, 48 Stat. 162.
Plaintiffs' testator received his declarations of interest in the proceeds of dissolution of the Security Company on December 6, 1933, and sold them on January 29, 1934. Plaintiffs claim that he sold them for less than he paid for them, and was entitled to deduct that difference from his 1934 income as a loss incurred in a transaction entered into for profit. he filed a timely claim for a refund of $13,381.75 of his 1934 income tax which claim the Commissioner of Internal Revenue rejected.
The defendant contends that the sale by plaintiffs' testator of the declarations of interest in the dissolution of the Security Company may not be treated separately as showing a loss, since his interest in the Security Company was acquired in combination with his stock in the bank, and the answer to the question whether a loss or a profit resulted from the transaction cannot be had until the bank stock is sold, so that it may be known how much the combined investment has sold for.
In order to determine, as plaintiffs would have us do, that the interest in the Security Company was sold for less than it cost, it would be necessary to apportion a part of the price plaintiffs' testator paid for his bank stock with the Security Company indorsement on it, to the interest in the Security Company represented by the indorsement. We could then say that the interest in the Security Company cost so much. We know how much it sold for in 1934, and could determine the amount of the loss or gain.
The defendant concedes that in some instances apportionment of the amount of a single purchase price to several items purchased for that single total price may be had. It contends, however, that this is not a proper case for such an apportionment, since it would not be practicable here. We take this argument to mean that no particular value could be assigned to the interest in the Security Company represented by the indorsement on the bank stock, as of the date of the purchase of the bank stock, with any degree of assurance that that assignment of value was correct, or even approximately so. if that is true, the apportionment should not be attempted, since the exact answer to the question of profit or loss may be obtained by waiting till the bank stock is sold.
We think it is true that an attempt here to attribute a certain value to the interests in the Security Company acquired by plaintiffs' testator involves us largely in guess-work. Plaintiffs suggest two theories according to which apportionment of values might be made. According to one, the value of the net assets held by the bank and the Security Company, respectively, on the dates of purchase by plaintiffs' testator would be computed and added and the ration which the Security Company's net assets bore to the total net assets would be the ratio which the price paid for an interest in the Security company corresponding to a share of bank stock bore to the total price paid for a share of bank stock with the indorsement on it. According to the other of plaintiffs' suggested methods, the fact that at the times of purchase of the stock by plaintiffs' testator, stocks of banks having security affiliates sold at ratio of price to book value entirely different from stocks of banks not having such affiliates is important and should be taken into account in determining how much of the purchase price should be attributed to the bank stock and how much to the interest in the Security Company. But taking this fact into account, plaintiffs' witness suggested values widely different from those arrived at by plaintiffs' other method. Either of these methods seems plausible to us, as a rough guess at a value that might be attributed. But we do not think that the situation calls for such a rough estimate, when by patience the exact answer may be obtained. We think, therefore, that the Commissioner acted within his powers in refusing to permit the deduction.
Other tribunals have reached the same result in comparable cases.
In De Coppet v. Helvering, 2 Cir., 108 F.2d 787, 789 the Court held that when interests in a securities company, which interests had been when acquired locked to bank shares, as they were in our case, became worthless, a loss could not be taken by the owner for deduction from his income for income-tax purposes. The Court in that case stressed, more than we have done, the fact that the "investment was single" and that "the investor could not have dealt with the parts separately," because of the locking device. We do not feel certain that the fact that two pieces of property are locked together by a valid restraint on alienation, so that, at the time of their purchase, one cannot be sold without the other, necessarily means that if later, after the restraint has been removed, one is sold without the other, a taxable profit or a deductible loss may not follow. Of course, as in our case, the locking device increases the practical difficulty of attributing a correct value to either piece of property as of the time of purchase, since the very fact of the restraint usually affects the value of the combination and each of its components in amounts difficult to measure.
The ten Board of Tax Appeals, now the Tax Court of the United States, in Hagerman v. Commissioner, 34 B.T.A. 1158, Plaintiffs' petition will be dismissed.
It is so ordered.
JONES, Judge, took no part in the decision of this case.