Opinion
Docket No. 29339.
1951-10-31
GRANT B. SHIPLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Sidney B. Gambill, Esq., for the petitioner. Kalman A. Goldring, Esq., for the respondent.
Sale of corporate stock at nominal price held not to result in taxable loss, where only evidence of value in prior years is corporation's book figures which are shown not to have any relation to actual value. Frank C. Rand, 40 B.T.A. 233,affd. (C.A. 8) 116 F.2d 929,certiorari denied313 U.S. 594, followed. B. F. Edwards, 39 B.T.A. 735, distinguished. Sidney B. Gambill, Esq., for the petitioner. Kalman A. Goldring, Esq., for the respondent.
Petitioner contests respondent's determination of a deficiency of $6,538.33 in income tax for 1945. One adjustment is not contested. The issue is whether petitioner is entitled to a deductible capital loss either by reason of a stock transaction during the taxable year, or, in the alternative, by reason of a capital loss carry-over resulting from the fact of the worthlessness of the stock in question in an earlier year.
FINDINGS OF FACT.
Petitioner, a resident of Pittsburgh, Pennsylvania, filed his return for 1945, on the cash method of accounting, with the collector of internal revenue for the twenty-third district of Pennsylvania.
Petitioner was born in 1880. He has worked as a machinist, draftsman, and engineer and has held positions with several industrial concerns. Among other activities, he has designed machinery, equipment, and plants for mining, has engaged in the valuation of mineral deposits, and participated in the organization of a company to manufacture glass foundry sand. He has organized and been an officer in various manufacturing companies, and is chairman of the board of the Elliott Company, which operates four manufacturing plants. He is also engaged by the International Nickel Company and is a consultant to the Koppers Company, Inc. Since 1911 he has maintained a consulting engineering office, specializing in designing mining plants.
American Minerals Corporation, hereinafter called the Corporation, is a Virginia corporation organized in 1935 with 4,005 outstanding shares of no par common stock which were carried on its books at $10 per share. The principal asset held by the Corporation has been a mineral lease, acquired from the United States, on 3,813 acres of land located near Goshen, Virginia, and situated approximately 3,000 feet from the main line of the Chesapeake and Ohio Railroad. The property contains minerals such as limestone, marble, and silica sand, the latter being suitable for the manufacture of glass and foundry sand.
Prior to December 19, 1939, John B. Catlett owned 2,200 shares in the Corporation. Petitioner had previously loaned $25,000 in cash to Catlett on the latter's notes. Catlett had put up his stock in the Corporation as collateral, petitioner having examined and had a survey made of the Corporation's property. Subsequently Catlett failed to make repayment. On the above date the stock was formally transferred to petitioner.
At the time of acquisition of the stock petitioner believed that the construction of a plant on the property for the production of sand would result in a profitable enterprise. The plant would cost about $300,000. Subsequently the cost of material and labor increased during the war, and in 1944 petitioner estimated that an investment of $500,000 would be required. In 1945 petitioner concluded that such an investment would be unwise in view of business conditions.
At various times between 1939 and 1945 petitioner offered Catlett the opportunity to redeem the stock in return for repayment of the loan. In 1944 petitioner offered to sell the stock to Catlett for 20 cents on the dollar. At one time during that year Catlett requested petitioner to hold the stock, stating that another party might be interested on those terms, but no transaction was consummated. With the exception of these developments and of the events leading to the transaction in controversy, petitioner never solicited or received offers and never negotiated for the sale of the stock. On December 14, 1945, in order to take a loss for tax purposes, petitioner sold the stock to the brokerage concern of Thompson & Taylor for $1 plus stamp tax.
The Corporation's balance sheets as of December 31, for the years 1939 to 1945, inclusive, show the following: Total assets on the books on those dates varied from $40,512.26 to $40,547.56 and consisted of cash and deferred charges in varying amounts, plus the Corporation's interest in the above-described property which was called ‘Mineral Rights‘ and which was carried at a fixed value of $40,000. The capital stock account on each of those dates was carried at $40,050. Total liabilities varied from $981.18 to $1,916.13, and earned surplus deficits ranged from $483.62 to $1,453.87.
Petitioner's 1943 tax return reported a long term capital loss of $61.25. His 1944 return reported a long term capital loss of $87.50.
Petitioner's 1945 tax return reported adjusted gross income of $123,971.47, consisting of income from salaries totaling $52,599.96, income from dividends and interest of $9,293.40, income from an annuity of $5,531.28, net loss from business as an engineer of $4,248.99, income from a trust of $8,369.75, and net gain from the sale or exchange of capital assets of $52,426.07, computation of the latter amount taking into account a long term capital loss of $12,499.50 resulting from an asserted loss of $24,999 on the sale of the Corporation's stock.
Respondent's notice of deficiency disallowed the loss on the stock transaction, stating that: ‘It is determined that the amount of $12,499.50, claimed by you * * * is not allowable, as a deduction.‘ The petition alleged that respondent erred in making that disallowance.
The corporation's stock had as great a fair market value, if any, in 1945 as in any year after 1939.
OPINION.
OPPER, Judge:
The sale by petitioner of his stock in American Minerals Corporation for the nominal amount of $1 for 2,200 shares would not entitled him to a deductible loss in the instant year 1945 when the sale took place, if the stock had already become worthless in a prior year. Frank C. Rand, 40 B.T.A. 233, affd. (C.A. 8) 116 F.2d 929, certiorari denied 313 U.S. 594; Claude D. Cass, 32 B.T.A. 713, affd. (C.A. 8) 83 F.2d 841. From 1939, the date of its acquisition, until the year of sale, we have no evidence of the value of the stock to sustain petitioner's burden of proof. The books of the corporation which show the net assets to have been virtually unchanged during that period are of no probative value in the light, on the one hand, of the testimony that the stock was worth $25,000 in 1939, and, on the other, that it was apparently worthless in 1945. Frank C. Rand, supra; cf. B. F. Edwards, 39 B.T.A. 735.
Even if we assume with petitioner that a worthlessness in 1943 or 1944 would entitle him on this record to a loss carry-over to some extent, there is no greater proof that the worthlessness occurred in either of those years than as to the instant year, on the one hand, or the years 1940, 1941, or 1942, on the other.
It necessarily follows that on this record, even if the stock had value in 1939, it could as well have become worthless in the period 1940 through 1942. If so, petitioner would be entitled to no deduction. His burden has accordingly not been met.
To the foregoing, the following may be added. B. F. Edwards, supra, stands for the proposition that ordinarily a corporation's books are some evidence of the value of its stock. This means that if the value of the stock is in controversy and if there is no other information whatever in the record, petitioner may have sustained his burden.
There are at least two ways by which the effect of such evidence may be overcome. One is for the record to contain independent evidence of the value of the corporation's property or of its stock from which their true value may be ascertained. Another is for the facts otherwise appearing to demonstrate that contrary to the usual circumstances, the corporate books do not bear any relation to the actual value of the stock. That was the situation in Frank C. Rand, supra. It is our view that the same situation obtains here.
Unlike the Edwards case,
the books of the corporation involved in this proceeding were virtually unchanged for the 7 years of which we have a record. The assets shown on the books varied from high to low by under $100, and that included the year in controversy. The net worth showed no significant change. It appears that no business operations were ever conducted. Accepting the books as evidence therefore would mean that the value of the stock was virtually unchanged during that time. Petitioner testified that the shares in question had a substantial value— $25,000— when he acquired them in 1939. If the evidence of the books is to be credited, they would have approximately the same value in 1945.
In the Edwards case, as the facts state, the balance sheets differed substantially in the various years with marked alterations in assets and liabilities. As a result, the financial statements showed a surplus of $1,257,897 on December 31, 1935. The capital was always carried at $2,600,000. Thus the balance sheets showed an increasing impairment of capital and a deteriorating financial situation. Consequently the fact that the stock was worthless in December 1935 did not indicate that the balance sheets of prior years had no probative value. On the contrary, since they portrayed a more favorable financial situation than the 1935 balance sheet, it was logical to conclude that the stock had a value greater than zero in the earlier years.
There is some indication that petitioner himself did not rely on the book figures, although he was the controlling stockholder, and was indirectly responsible for the books, unlike the petitioner in the Edwards case. But in any event, when this petitioner sold the shares in 1945 for less than one-twentieth of a cent apiece, only three conclusions are possible. Either petitioner's valuation of the stock on receipt was erroneous, in which event, unlike the Edwards case, there is no proof of basis since he did not purchase the stock, First National Bank, Philipsburg, Pa., 43 B.T.A. 456; or the stock was still worth approximately $25,000 in 1945, in which event for reasons not appearing in the record petitioner voluntarily sold the stock for a minuscule fraction of its true worth, not in a bona fide sale;
or the books of the corporation bore no relation to the true value of the stock in which event there is, as previously stated, a complete failure of proof that the shares had any value in prior years. Whichever proposition is adopted, petitioner cannot succeed.
‘ * * * A sale of stock at a nominal price may not of itself establish worthlessness or the existence of value. Claude D. Cass, supra (32 B.T.A. 713, affd. (C.A. 8) 83 F.2d 841); De Loss v. Commissioner, 28 Fed.2d 803. However, if bona fide, it must establish that the stock is worth no more than the sale price. Rhodes v. Commissioner, 100 Fed.2d 966.‘ Frank C. Rand, supra, 239.
The only thing the books can be taken to show on this record is that the value of the stock was virtually unchanged from 1939 to 1945, the year of sale. This has been found as a fact, and is fatal to petitioner's case.
Reviewed by the Court.
Decision will be entered for the respondent.
BLACK, J., concurs in the result.
KERN, C. J., concurring: While the majority opinion points out several facts in the instant case which differ from those present in B. F. Edwards, 39 B.T.A. 735, I am not wholly satisfied that a valid distinction in principle may be made between this case and the ratio decidendi in the Edwards case, which is to the effect that the book value of corporate assets ‘is some evidence of their actual value sufficient to shift the burden of going forward to the respondent‘ upon the issue whether corporate stock sold by a stockholder for a nominal consideration in the taxable year was actually worthless in a prior year, and that the sale of the stock for a nominal consideration in the taxable year when the book values of the corporate assets would indicate a substantial value of the stock would not be a circumstance constituting a ‘different showing‘ such as to negative any probative effect which the corporate books would have upon the questions of true asset value or fair market value of the corporate stock. It is my opinion that we were in error when we held in effect in the 745 Edwards case that the book values of corporate assets were evidence of actual values of such assets, and consequently of the corporate stock, sufficient to shift the burden of going forward in that case when the record also disclosed a bona fide sale of the corporate stock for a nominal consideration in the taxable year which would indicate that the book values, which would have pointed to a substantial value of the stock, were not in accord with economic realities. Therefore, even though I am in doubt as to the validity of the distinction between this case and the Edwards case, I concur in the result reached herein.