Tirrell v. Commissioner

PHILIP F. TIRRELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tirrell v. Commissioner Docket No. 16951. United States Board of Tax Appeals 14 B.T.A. 1399; 1929 BTA LEXIS 2951; January 17, 1929, Promulgated *2951 Held, under the facts presented, the petitioner's sale of stock was not an involuntary conversion thereof within the meaning of section 214(a) 12 of the Revenue Act of 1921. H. H. Shelton, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. TRAMMELL *1399 This proceeding is for the redetermination of a deficiency in income tax for 1923 in the amount of $19,165.39. The deficiency arises on account of the action of the Commissioner in holding that the property disposed of was not an involuntary conversion of property and a reinvestment of the proceeds thereof in similar property within the meaning of section 214(a) 12 of the Revenue Act of 1921. FINDINGS OF FACT. The petitioner is an individual residing at Phillipsburg, N.J. In October, 1913, he was a silk worker and with the aid of his parents' endorsement borrowed $6,600 and purchased one-half of the capital stock of Reynolds & Tirrell Silk Co., which was then organized to operate a silk manufacturing business at Phillipsburg. The other half of the capital stock was simultaneously purchased by John M. Reynolds. *1400 The business of the corporation prospered*2952 under the management of Reynolds and Tirrell, petitioner being president and manager and Reynolds secretary and treasurer. A second plant was established at Milford, N.J., being located in a property owned by the Milford Silk Co. During the nine years of active operation under the management of the two individuals, profits realized were put back in the business, added to surplus, against which stock dividends were declared from time to time. About January 1, 1923, accountants audited the company's books and found a shortage of funds chargeable to Reynolds. Reynolds thereafter returned the shortage, absented himself from the business and refused to further cooperate with the petitioner. Reynolds returned in two or three months thereafter, filed a bill against the corporation, the petitioner and his wife, and had a receiver appointed who took possession of the company's property, business, etc. The receivership resulted in impairment of credit, loss of business and depreciation of property. The company had a line of credit of about $500,000 and it was in debt to that amount. Creditors became disturbed and held meetings. A committee of creditors was sent to Reynolds and*2953 Tirrell with the ultimatum that unless one or the other of them took over the business by the next day, a general receivership would be asked for in New York where the company had offices and sales rooms and the business would be wound up as insolvent. Thereupon Reynolds, who had not spoken to Tirrell since refunding the shortage with which he was charged, made Tirrell a "give or take" offer for his stock in the company and refused to deal on any other basis. Tirrell was not financially able to buy Reynolds' stock and in order to prevent a material loss on his investment in the business he sold his stock to Reynolds for $200,000. Reynolds and Tirrell had two plants, one at Phillipsburg and the other at Milford. Of the $200,000 to be paid to the petitioner, $30,000 was paid by Reynolds by turning over to petitioner the Milford plant and business. The remainder was paid in cash over a period of months. The petitioner continued in the business. He almost immediately proceeded to turn over the merchandise and equipment in the Milford plant to the Milford Silk Co., owner of the leased premises, for stock in that corporation and made additional purchases of stock, the total being*2954 about $41,800. The name of the Milford Silk Co. was then changed to Tirrell Brothers Silk Co. These first purchases of stock were made by the petitioner, within about a week after the sale of his stock to Reynolds on April 11, 1923. Tirrell Brothers Silk *1401 Co. rapidly enlarged its plant and installed additional equipment, new stock being issued which the petitioner purchased as he collected his money from Reynolds. In April, 1923, the petitioner invested $73,187.14; in May, $56,812.86; in June, $15,000; in August, $5,000; in October, $28,000; a total of $178,000. On January 11, 1924, nine months from the date he sold out to Reynolds, he loaned Tirrell Brothers Silk Co. $34,000, thus making his investment in and loan to that company $212,000. Another plant was erected at Phillipsburg by the Tirrell Brothers Silk Co. in which business the petitioner owns one-half of the capital stock of $356,000. The sale of the petitioner's stock was not an involuntary conversion of assets. OPINION. TRAMMELL: It is the contention of the petitioner that the sale of the stock in the Reynolds & Tirrell Co. to Reynolds and the subsequent reinvestment of the $200,000 received*2955 therefrom in the Tirrell Brothers Silk Co. amounted to an involuntary conversion of assets under section 214(a)(12) of the Revenue Act of 1921, and that the capital gain of $193,400 realized from said sale to Reynolds is therefore nontaxable. There is no controversy over the fact that the petitioner acquired this stock for $6,600 in October, 1913, and sold it in 1923 for $200,000, the only controversy being as to whether the transaction amounted to an involuntary conversion as above stated. Section 214(a)(12) of the Revenue Act of 1921, in so far as it is pertinent here, is as follows: (a) That in computing net income there shall be allowed deductions: * * * (12) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (a) its destruction in whole or in part, (b) theft or seizure, or (c) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in*2956 service or use to the property so converted, or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits, and excess-profits tax acts. *1402 The above-quoted section of the statute provides for three specific instances under which its benefits may be claimed by and allowed to a taxpayer when property is involuntarily converted and the proceeds invested in other property of a similar character or related in use to the property converted. The first provision is the destruction in whole or in part of the property and the second is theft or seizure. The third is the taking of the property by the exercise of the power*2957 of requisition or condemnation or the threat or imminence thereof. It is this latter provision which the petitioner here contends is applicable. No element of condemnation or the power of requisition or the threat or imminence threof is present in this case. The petitioner contends that the threats of the creditors and the necessity of either buying or selling his stock resulted in his acceptance of Reynolds' offer to buy. In our opinion, from the evidence, the sale of the petitioner's stock was not an involuntary conversion within the meaning of the statute. In , one of the questions presented was whether or not the sale of property at the request and insistence of the local Chamber of Commerce was an involuntary conversion. The property was desired for location of a large business which would be very beneficial to the community. The petitioner in that case feared that refusal to comply with the request of the Chamber of Commerce would result in the loss of good will and trade and, therefore, sold the property. The proceeds were invested in other property on which a new plant was erected by the company. In discussing the case we*2958 said: No doubt the appeal made by the local body was a most earnest and urgent one. Sufficient pressure was brought to bear to lead petitioner to the conclusion that it must comply or suffer the diminution of the good will it had built up in the community. The petitioner knew that it could not be coerced by legal means into making the sale, as the power of requisition or condemnation did not exist. However, the exercise of such power, or the imminence thereof, is essential to an involuntary conversion, due to the cause under discussion. The sale was made because it was deemed to be good business policy. See also . The expression "power of requisition or condemnation or the threat or imminence thereof" has no relation to the facts presented in this case. We accordingly approve the determination of the respondent. Judgment will be entered for the respondent.