Behlow Estate Co. v. Commissioner

BEHLOW ESTATE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Behlow Estate Co. v. Commissioner Docket No. 12670. United States Board of Tax Appeals 12 B.T.A. 1365; 1928 BTA LEXIS 3356; July 16, 1928, Promulgated *3356 Loss. - As a part of purchase price of its own capital stock petitioner sold stock and bonds of other corporations for less than cost. Held, this was not a capital transaction which gave rise to neither gain nor loss. D. L. Beard, Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. MILLIKEN *1365 This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1921 in the amount of $988.95. Error is assigned in that the respondent denied a loss claimed. FINDINGS OF FACT. 1. Petitioner is a corporation organized under the laws of the State of California, with its principal office and place of business at San Francisco. 2. On November 8, 1921, petitioner was the owner of certain stocks and bonds as follows: 25 shares Wickwire Spencer Steel 8% preferred. 100 shares Zellerbach Paper Co. 7% preferred. 25 shares Packard Motor Co. 7% preferred. 25 shares Motor Wheel Corporation 8% preferred. 5 $1,000 B. F. Goodrich Tire Co. 7% Gold Notes. 66 shares preferred and 33 shares common Goodyear Tire & Rubber Co. 10 $1,000 8% bonds Portland Flour Mills. *3357 3. The stocks and bonds enumerated in Finding 2 were purchased by petitioner subsequent to March 1, 1913, at a total cost of $42,100.50. 4. At a meeting of the board of directors of petitioner held on November 8, the following action was taken: H. F. Behlow offered to sell his ten hundred fifteen and seven tenths (1015.7) shares of the capital stock of the corporation for the cancellation of all indebtedness due by him to the Corporation and the payment of Sixty Thousand ($60,000.00) Dollars. It appearing that the Corporation did not have sufficient cash on hand to make such arrangement, it was suggested that such arrange ment could be effected provided H. F. Behlow would take in part payment of such balance due, the holdings of this company in B. F. Goodrich Tire Co., Wickwire Spencer Steel Corporation, Packard Motor Co., and Motor Wheel Corporation for $11,000.00 plus accrued interest. The holdings in Zellerbach Paper Co. at market plus accrued interest, the holdings in Goodrich Tire Co. at market plus accrued interest, the holdings in the Portland Flouring Mills at market plus accrued interest, $10,000.00 in money and the balance in a note of the *1366 corporation*3358 at six (6) per cent, payable January 1st, 1922 or earlier at its option. After discussion, H. F. Behlow suggested the sum of Sixty-Thousand ($60,000.00) Dollars be made Sixty-Three Thousand Five Hundred ($63,500.00) Dollars and that the note of Nealis & Behlow be left outside of the transaction and collected in the ordinary course of business. It appearing to be for the best interests of the corporation that the purchase of the shares of H. F. Behlow be effected in the manner suggested and that there was sufficient surplus out of which such stock might be purchased without impairing the capital of the Corporation and that it was advantageous for the Corporation to so purchase, it was on motion of D. I. Beard seconded by Robert Behlow, H. F. Behlow not participating. Resolved that it is for the best interests of the Behlow Estate Company to purchase the Ten hundred fifteen and seven-tenths (1015.7) shares of the capital stock of this corporation held by H. F. Behlow in the following manner: First: Cancel all claims of whatsoever nature of the Corporation against said H. F. Behlow individually whether in notes or on open account and the sum of Sixty Three Thousand Five Hundred*3359 ($63,500.00) Dollars payable as follows: The company's shares of stock and notes of B. F. Goodrich Tire Company, Wickwire Spencer Steel Corporation, Packard Motor Company and Motor Wheel Corporation for Eleven Thousand ($11,000.00) Dollars plus accrued interest, Goodyear Tire & Rubber Company at Market plus accrued interest, Portland Flouring Mills at Market, plus accrued interest, cash Ten Thousand ($10,000.00) Dollars and the balance by note of this corporation, payable January 1st, 1922, at Six (6) per cent per annum. 5. The stocks and bonds enumerated in Finding 2 were sold to H. F. Behlow for the sum of $32,211. 6. The difference between the cost and the selling price of the stocks and bonds listed in Finding 2 was $9,889.50. OPINION. MILLIKEN: A stockholder of petitioner was desirous of selling his capital stock and petitioner, after consideration, decided to purchase the same upon the terms and conditions set forth in the findings of fact. The petitioner was to cancel the indebtedness of the seller, transfer to him certain stocks and bonds owned by it, pay $10,000 in cash, and give a promissory note for the balance due. The stock and bonds that figured in*3360 the transaction had been purchased by petitioner subsequent to March 1, 1913, at a cost of $42,100.50 and were sold to H. F. Behlow for a consideration of $32,211. The difference of $9,889.50 the petitioner seeks to deduct as a loss, resulting from the sale. Counsel for respondent contends that this case is governed by the proposition that a corporation can realize neither gain nor loss in the purchase of its own capital stock and relies in support thereof on the decision in the appeals of Simmons & Hammond Manufacturing Co.,1 B.T.A. 803; Farmers & Merchants State Bank,2 B.T.A. 130; Farmers Deposit National Bank,5 B.T.A. 520; H. S.*1367 Crocker Co.,5 B.T.A. 537; and A.R.R. 693, Cumulative Bulletin No. 5, p. 207. The cases relied upon are not authority for the position taken. This is not a case of a gain or loss realized or sustained by a corporation in the purchase of its own capital stock or gain or loss resulting from the purchase by or within an affiliated group of corporations. Petitioner seeks to take a loss represented by the difference between the cost of the stocks and bonds in question*3361 and the sale price thereof. The stock of petitioner is not in question nor a gain or loss resulting from the purchase thereof. In the appeal of Simmons & Hammond Manufacturing Co., supra, the petitioner had purchased its own capital stock and endeavored to take a loss on the subsequent sale of the same. We held that to be a capital transaction that did not result in a realized loss. Here the petitioner is not seeking such a loss but rather one that resulted from the sale to Behlow of stocks and bonds of other corporations for less than cost. The fact that the stocks and bonds were to be applied to the extent of their then value in payment of the purchase price of its own stock does not make the same a capital transaction from which neither gain nor loss may result. Cf. Callanan Road Improvement Co.,12 B.T.A. 1109. The good faith of the transaction is not involved, nor do we have the question of a transaction having to do with a partial or complete liquidation or dissolution. What we would do if such questions were involved need not be here decided. Petitioner is entitled to the loss as claimed. Judgment will be entered under Rule*3362 50.