Dana v. Commissioner

Charles A. Dana, Petitioner, v. Commissioner of Internal Revenue, Respondent Dana v. Commissioner Docket No. 5909 United States Tax Court 6 T.C. 177; 1946 U.S. Tax Ct. LEXIS 302; February 5, 1946, Promulgated *302 Decision will be entered for the petitioner. On the facts, held, petitioner sustained a capital loss on December 29, 1941, when, in accordance with a plan of complete liquidation, he surrendered his stock for cancellation and received therefor 65 cents per share. Benjamin Mahler, Esq., and Max Rolnik, C. P. A., for the petitioner. Carl A. Stutsman, Jr., Esq., for the respondent. Leech, Judge. LEECH *177 This controversy involves a deficiency in income tax for the calendar year 1941 in the amount of $ 27,258. The sole issue is whether petitioner sustained*303 a deductible loss in the taxable year on account of his investment in the capital stock of the Indian Territory Illuminating Oil Co. The issue results from the respondent's denial of petitioner's claim for a long term capital loss on the ground that the final distribution on such capital stock was not received in the taxable year. FINDINGS OF FACT. Petitioner is an individual residing at Wilton, Connecticut. He files his income tax returns on a calendar year and cash basis. His return for the taxable year was filed with the collector for the district of Connecticut. Throughout the taxable year and for about 30 years prior thereto he was president of Spicer Manufacturing Co., a corporation whose stock is listed on the New York Stock Exchange. He is a wealthy man and is and has been for a number of years an active director in a number of industries in and about New York City, as well as the Manufacturers Trust Co., one of the largest banks in that city. During the years 1930 and 1932 petitioner purchased 4,600 shares of class A stock of Indian Territory Illuminating Oil Co. (hereinafter called Indian), at a cost of $ 184,710. Indian was a domestic corporation, organized under the*304 laws of the State of New Jersey. It had outstanding during the calendar year 1941, and until liquidation, 1,304,600 shares of nonvoting class A stock and 7,090,036 4/7 shares of class B stock. In 1941 and up to the date of dissolution, Cities Service Oil Co. (hereinafter called Cities Service) owned 1,208,197 shares of class A stock and 7,025,100.6187 shares of class B stock of Indian. On July 23, 1941 Indian, upon the written consent of Cities Service, adopted, pursuant to section 14:3-5 of the New Jersey Revised Statutes of 1937, a plan of liquidation as follows: Indian Territory Illuminating Oil Company, a New Jersey corporation (hereinafter called "Indian"), will transfer, assign, set over and convey all of its *178 property and assets of every kind, nature and description, including good will, now owned or which may hereafter be acquired, to Cities Service Oil Company, a Delaware corporation (hereinafter called the "Oil Company"), subject to all liabilities of Indian, in exchange for and in consideration of: The surrender by the Oil Company for cancellation and retirement of all of its holdings of Indian stock, consisting of 1,208,197 shares of class A stock and 7,025,100.6187*305 shares of class B stock of Indian; and The payment by the Oil Company on behalf of Indian to shareholders of Indian, other than the Oil Company, in full liquidation of their pro rata interest in the assets of Indian, represented by the class A and class B shares held by such shareholders, at the rate of sixty-five cents (65c) per share for each share of class A and class B stock held by such shareholders, or, in the case of shareholders of Indian entitled to statutory appraisal, the payment by the Oil Company to such shareholders on behalf of Indian of the appraisal value finally determined for their shares and the payment by the Oil Company of the costs of such determination for which Indian would otherwise be liable. Said surrender by the Oil Company of its holdings of class A and class B shares shall take place upon consummation of the transfer of all the property and assets of Indian and the dissolution of Indian. The payment of 65c per share to be made to shareholders of Indian, other than the Oil Company, shall be made upon surrender for cancellation and retirement by each such shareholder of his certificate or certificates of class A or class B stock of Indian, properly *306 endorsed, to the Oil Company at its office at Bartlesville, Oklahoma, or, until November 1, 1941, to the Hudson County National Bank, Montgomery and Washington Streets, Jersey City, New Jersey. Thereupon and on August 1, 1941, Indian sent a notice to all stockholders advising of the liquidation of Indian and enclosing a copy of the plan of liquidation. The stockholders were advised that in the opinion of the directors the price of 65 cents per share provided in the plan represented the full share value, but called attention to the provisions of section 14:3-5 of the New Jersey law which entitled objecting stockholders to an appraisal of their stock. A transmittal form accompanied the notice. Throughout the period involved herein, Indian stock was listed on the New York Curb Exchange and was also traded in over the counter. After the plan of liquidation was promulgated and during the period August 1941 to December 1941, such stock continued to be quoted and traded in, 800 shares of stock being sold in December 1941. There was little or no variation in the bid and ask quotation of the stock before and after the adoption of the plan of liquidation. The bid price during December 1941*307 varied between 9/16 and 5/8. The asking price during that month was 3/4. After February 1942 the stock was not quoted. Petitioner knew that the New Jersey laws gave him the right to ask for an appraisal, but he neither desired nor asked for one. On July 31, 1941, all of the property and assets of Indian were conveyed to Cities Service, which then assumed the liabilities of Indian. On December 29, 1941, petitioner endorsed his certificates of stock *179 of Indian and attached them to the transmittal letter which he had received with the notice of August 1, 1941. He made no reservations in the transmittal letter that he had received. He delivered the stock certificates and transmittal letter in person to the Hudson County Bank in Jersey City, representing Cities Service, and received a check in payment of his stock at the rate of 65 cents per share. The stock had little market value and petitioner did not request an appraisal because he would not attempt to litigate a small claim, as he thought this would be at most. Petitioner was entirely satisfied that the 65-cent price was a fair one and understood that payment to be in complete liquidation of his stock. Some of the Indian*308 stockholders dissented to the plan of liquidation, and Indian made application to the New Jersey Circuit Court, Hudson County, for an appraisal of the Indian stock as of July 23, 1941. On October 2, 1941, the court appointed three appraisers. Taking into consideration all sales of Indian stock on the New York Curb from 1938 to July 23, 1941, which sales had been made as low as 37 1/2 cents per share and as high as 75 cents per share, the appraisers fixed the full market value of the shares at 75 cents each, after also taking into consideration an arm's length transaction between the representatives of H. V. Foster, a former president of Indian, and Indian, whereby the H. V. Foster interests had, in June 1940, sold 1,900,000 shares of Indian stock at 37 3/4 cents per share. On March 23, 1942, the report of the appraisers was confirmed by the Hudson County Court, and a copy of the court order confirming the appraisal was, on March 28, 1942, mailed by Indian to stockholders. Petitioner did not know that an appraisal of the Indian stock had been requested by anyone. None of the nondissenting stockholders had any notice of the application for appraisal or allowance by the court until*309 either March 28, 1942, or possibly April 7, 1942. Neither petitioner nor any of the nondissenting stockholders requested or made any demand for the additional 10 cents per share. The first time petitioner learned of the dissent, appraisal, and outcome thereof was when he received a check enclosed with a letter explaining the reason for the distribution. The notice petitioner so received had been mailed by Indian on April 7, 1942, to those stockholders who, like petitioner, had previously surrendered their stock. The notice stated that "in order to pay to all stockholders the same amount, whether or not the stock was previously deposited, we are enclosing a check of the Hudson County National Bank on the basis of 10 cents a share for each share heretofore surrendered by you, making a total of 75 cents paid to you for each share so surrendered." This payment to the nondissenting stockholders was made as a result of a conference held in Philadelphia in 1942, attended by representatives *180 of the S. E. C. The latter recommended to Cities Service that it give the nondissenting stockholders the same treatment as was received by those who had dissented, by paying the nondissenting*310 stockholders an additional 10 cents per share. The company consented, as it was felt that, in all fairness to the consenting stockholders, the additional 10 cents per share should be paid to them. In 1939 Bella Gallup, a stockholder of Indian, brought a stockholder's derivative action in the United States District Court in Wilmington, Delaware, against Cities Service, two affiliated companies, certain of their directors, and certain directors of Indian, alleging improper domination of Indian by the parent company, but more particularly that an excessive interest charge and an improper service charge was made by Cities Service against Indian on account of the latter's indebtedness to Cities Service. Thereafter, similar actions were started by other stockholders in Chicago, New York, and New Jersey. The allegations in these latter complaints were identical to those in the Gallup complaint. The suits dragged on until 1942. Up to that time a motion to dismiss the Gallup complaint as being vague and indefinite had not yet been passed on. In the latter part of 1942 negotiations looking to a settlement of the suits were entered into. These negotiations occurred in New York City, New York, *311 and Philadelphia, Pennsylvania, in the chambers of the United States District Court before Judge Jones, then a member of the Third Circuit Court of Appeals, who was considering the matter under special assignment. In order that he might be able to pass on the reasonableness of the offer of settlement, Judge Jones heard testimony relative to the merits of the allegations, at the conclusion of which he promulgated an opinion which stated in part: After testimony taken the Court finds that nothing has been produced to show that the interest charges made by Cities Service Company against the Indian Territory Illuminating Oil Company were exorbitant or more than were rightly chargeable under the circumstances obtaining, particularly with respect to the extent of Indian Territory Illuminating Oil Company's indebtedness and slight prospect of being able to liquidate such indebtedness in full. There is further no evidence from which the Court could find that the service charge is either exorbitant or unreasonable. Judge Jones further found that the offer of settlement provided "a better price than could be obtained therefor if the litigation were carried on adversarily to completion." On*312 December 28, 1942, Judge Jones approved the settlement offer as being fair and reasonable and on or about June 18, 1943, petitioner received on account of such settlement an additional $ 1.99 per share for each of his 4,600 shares. Petitioner had no knowledge of the stockholder suits, at least until *181 after he had surrendered his stock for cancellation and retirement and received the payment therefor. These derivative stockholder suits had no substantial merit and the amount paid in settlement of them by Cities Service was paid to eliminate them as a nuisance and the amount was fixed not by reference to their alleged merits, but because it would have cost Cities Service more in money and inconvenience to complete the litigation to its conclusion than to pay $ 2.25 per share on the 160,000 shares in the hands of the public. In his returns for 1942 and 1943 petitioner properly returned as income the 10 cents per share he received in 1942 and the $ 1.99 per share he received in 1943. The stock of petitioner in Indian had a fair market value on December 29, 1941, not in excess of 65 cents per share. The surrender by petitioner on December 29, 1941, of his stock in Indian for cancellation*313 and his receipt in exchange therefor of the sum of 65 cents per share constituted a closed and completed transaction. OPINION. This is another case presenting fundamentally the difficult question of when an admitted capital loss was sustained under section 23 (e), Internal Revenue Code. Petitioner argues that the loss occurred in 1941, when, in accordance with a plan to completely liquidate Indian, he surrendered his shares in that company for cancellation in exchange for 65 cents per share. Respondent argues that the liquidation was not then completed, 1 and that, therefore, such "transaction * * * was not closed and completed during the year 1941" so as to support a loss in that year. He relies particularly on Regulations 103, section 19.23 (e)-1, and Dresser v. United States, 74 Ct. Cls. 55; 55 Fed. (2d) 499; certiorari denied, 287 U.S. 635. He bases his position on the facts that petitioner in later years received an additional 10 cents per share as the result of an independent appraisal proceeding instituted under sections 14:3-5 and 14:12-6 of the New Jersey Revised Statutes (1937) by*314 dissenting stockholders, of whom petitioner was not one, to have the value of their shares appraised; and because, as the result of settlement of stockholders' derivative suits, to which petitioner was not a party, petitioner received an additional $ 1.99 per share in 1943. The decision of the issue ultimately turns, we think, on whether the rule of Dresser v. United States, supra, is applicable, or that announced *182 in Beekman Winthrop, 36 B. T. A. 314; affd., 98 Fed. (2d) 74. In both of those cases losses of the same nature as that here were involved. In both cases the year in which the deduction was allowable turned upon the answer to the question of when a transaction was closed, as to the taxpayer, fixing his loss. The transaction was a corporate distribution in liquidation. In the Dresser case the corporation had tangible assets which had not been converted into cash and intangible*315 assets the value of which had not been determined, when the liquidating distribution in question occurred. The Court of Claims held that such distribution was not a closed transaction as to the taxpayer. In the Winthrop case petitioner surrendered his stock in a corporation in the taxable year and then received a distribution in liquidation consisting of bonds of a definite market value and a liquidation certificate entitling him to a proportionate share in the final liquidating distribution. It was estimated that about 20 cents per share would be the amount of the final distribution. In a later year that amount was paid as a final distribution. We held that the earlier distribution in 1932 constituted a closed transaction as to the taxpayer, since, as to him, the liquidation of the corporation was, for practical purposes, complete. Respondent concedes that the fact that dissenting stockholders proceeded under the New Jersey law for an independent appraisal of the value of their Indian stock and the payment of that value to them did not give the petitioner, who did not dissent and join in such proceedings, any possible interest therein. Though technically a liquidation, *316 the 1941 transaction had many of the aspects of a sale. Sec. 14:3-5, New Jersey Revised Statutes of 1937. Petitioner, in effect, was tendered two offers for the surrender of his Indian stock. The first was a fixed amount, 65 cents per share -- which was, as we have found, its fair market value. The second was that, upon refusing the first, he could assume the responsibility of proceeding for an independent appraisal of the stock and then receive either the 65 cents or such value in excess of that amount as the board of appraisal fixed. Petitioner accepted the first offer. Under the plan, Cities Service then paid to petitioner, on December 29, 1941, as a nondissenting shareholder, and he received for the surrender of his stock all that was contemplated or intended. That Cities Service, influenced as it was by the request of the Securities & Exchange Commission, should have paid the petitioner an additional 10 cents per share, does not change the situation. Petitioner, as a nondissenting shareholder, had no legal right to compel the payment of that amount. Nor did Indian. Nothing was added to the assets of Indian by the statutory right granted to dissenting stockholders of *317 Indian by the New Jersey statute or the *183 action thereunder of dissenting shareholders. Cf. Farnsworth v. Wood, 91 N. Y. 308; Runner v. Dwiggins, 147 Ind. 238; 46 N. E. 580. Respondent, however, argues that the shareholders derivative actions were an asset, although the only one, which Indian retained until their settlement in 1943. This may be true. Boehm v. Commissioner, 326 U.S. 287. But in that case the Supreme Court, in affirming this Court, again approved the application of the "practical test" in determining when losses are sustained, and held that the existence of such suits did not postpone the fact of worthlessness of stock until the settlement of those suits. Here Indian had sold all of its assets, except possibly the stockholders' suits, to Cities Service for cash and the assumption of Indian's liabilities. On December 29, 1941, petitioner received for the surrender of his Indian stock, his full share of that cash as provided in the plan of complete liquidation. The only Indian assets remaining were the stockholders' suits. Their*318 asset value, at most, was comparable to that of the same kind of suits in the Boehm case, supra. Those suits are entitled to no different treatment here. Their existence did not, we think, postpone, as to petitioner, the completeness of the liquidation of Indian as a closed transaction. The Beekman Winthrop case, supra, and not Dresser v. United States, supra, is thus applicable. That transaction -- in so far as it concerned petitioner -- was closed and completed on December 29, 1941, when he surrendered his Indian stock for cancellation and received in exchange therefor 65 cents per share. We have so found. It follows that loss of petitioner was sustained at that time. Sec. 22 (e), I. R. C. Decision will be entered for the petitioner. Footnotes 1. Sec. 115 (c), I. R. C.↩