Little v. Commissioner

C. D. LITTLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Little v. Commissioner Docket No. 26035. United States Board of Tax Appeals 20 B.T.A. 1042; 1930 BTA LEXIS 1979; September 29, 1930, Promulgated *1979 Held that the petitioner was merely a nominal or "dummy" stockholder in the Memphis Chero Cola Bottling Corporation and that he sustained no loss in 1923, 1924 or 1925, by reason of his transfer of certain shares of stock issued in his name, or by reason of receivership and liquidation of the corporation. Morris D. Kopple, Esq., and Herbert D. Cohen, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent. LOVE *1043 This is a proceeding for the redetermination of deficiencies in income tax for the years 1923 to 1925, inclusive. The deficiency letter also indicates an overassessment for the year 1922. The amounts of the deficiencies and the overassessment are shown as follows: Year Overassessment Deficiency [1922] $2,961.23 [1923] $799.69 [1924] 1,560.75 [1925] 1,818.30 Total 2,961.23 4,178.74 By order of the Board dated September 30, 1927, the appeal was dismissed as to the year 1922, for lack of jurisdiction. As set forth in an amended petition, the sole alleged error of the respondent is that he refused to allow petitioner "as a deduction from income for the year 1924 or 1925, the*1980 sum of $19,000.01 loss on investment in the stock of the Memphis Chero Cola Bottling Co." Upon hearing, the respondent, without objection from the petitioner, was permitted to file an amended answer to the amended petition, the effect being that the respondent now denies all material allegations of the amended petition except those relating to formal jurisdictional facts. The respondent also moved the Board to dismiss the appeal as to the year 1923, contending that the allegation of error in the amended petition related only to the years 1924 and 1925. The respondent's motion was denied and upon motion of petitioner, the pleadings were amended so as to make the allegations of the amended petition relating to the years 1924 and 1925 applicable to the year 1923 also. FINDINGS OF FACT. Petitioner is a resident of Chattanooga, Tenn. For some time prior to September, 1920, a concern known as the Chero Cola Bottling Co. of Memphis, Inc., hereafter referred to as The Theiler Co. and designated (1), was engaged in business at Memphis, Tenn. In 1920 the Theiler Co. was heavily indebted, its principal creditor being the Chero Cola Co. of Columbus, Ga., hereafter termed the Georgia*1981 Co. The Georgia Co. was interested in the continuation of a Chero Cola business at Memphis in order to maintain a trade outlet for a product manufactured by it and known as Chero Cola Syrup. When the Theiler Co. (1) became involved in financial difficulties, as above mentioned, the Georgia Co., through H. C. Hatcher, president, *1044 took charge of its affairs. Hatcher organized a new company to operate at Memphis, known as the Memphis Chero Cola Bottling Co., hereafter termed the Memphis Co. and designated (2). Upon the solicitation of Hatcher, petitioner agreed to invest $25,000 in the Memphis Co. (2), provided that two other men named Dupree and Freeman should jointly invest a like amount. In accordance with this agreement petitioner made investments in the Memphis Co. (2) in amounts as follows: September 8, 1920 $10,000 September 24, 1920 10,000 October 4, 1920 5,000 Each of these sums was paid into the Memphis Co. in cash. Dupree and Freeman, who were supposed to invest the other $25,000, were able to furnish only $19,000, and accordingly petitioner drew out $6,000 of his investment, as follows: December 6, 1920 $1,000 December 14, 1920 5,000 *1982 When the Memphis Co. (2) was organized by Hatcher, it assumed certain obligations to the Theiler Co. (1), including debts owing to the Georgia Co., and certain debts owing to one Theiler and his associates, who had conducted the Theiler Co. (1). The Memphis Co. (2) was not successful, and in 1922 petitioner, having declined to increase his investment in it, turned the business back to the Georgia Co. Hatcher thereupon interested other parties in the business and sometime in 1922 he organized a successor corporation known as the Memphis Chero Cola Bottling Corporation, hereafter termed the Memphis Corporation and designated (3). When petitioner withdrew from the Memphis Co. (2) in 1922, he considered his $19,000 investment to be a total loss. In his income-tax return for 1922, filed March 15, 1923, petitioner claimed a deduction of $19,000, as a loss on this investment, his claim reading as follows: Kind of property Date acquired Amount received Cost Net profit Memphis Chero Cola Bottling Co [1920] None. $19,000 * $19,000 This company reorganized in June 1922, the new stockholders taking over the assets and assuming*1983 the liabilities. The old stockholders received nothing for their stock. C. D. Little is not a stockholder in the new company. Hatcher managed the organization of the Memphis Corporation (3) at his office in Columbus, Ga., petitioner having no part in the *1045 proceedings and not being advised of the details. The corporation had an authorized capital of $50,000 of preferred stock and $50,000 of common stock. Records of the corporation indicate that $25,000 of the preferred stock was issued to the Chero Cola Bottling Co. of Memphis (1), in consideration of certain notes due from the Memphis Co. (2). The corporation's books indicate that upon organization, it acquired assets of the value of $118,089.45, and assumed certain liabilities, among them bills (or notes) payable to the Theiler Co. (1) in the amount of $61,670.17; and certain liabilities to the Chero Cola Co. (Georgia Co.) and the Chattanooga Chero Cola Co., in the amounts of $16,756.20 and $371.06, respectively. It does not appear whether or not other obligations were assumed by the corporation. All the liabilities mentioned were charged to the purchase price of the assets. The Memphis Corporation's (3) *1984 books also indicate two charges of $15,000 each to the Georgia Co., one being for liquidation of accounts payable, and the other for bills payable. Corresponding credits to the extent of $15,000 were made to the stock subscription account as follows: C. A. Hatcher $5,000 W. K. Hatcher 5,000 C. W. Calhoun 5,000 Hoke V. Smith 2,000 There is also a $10,000 credit to the stock subscription account of petitioner. The stock subscription ledger sheet of the Memphis Corporation (3) shows under date of June 1, 1922, debits and credits for stock subscriptions in amounts as follows: Debits Amount Credits Amount J. G. Johnson $ 22,500 C. A. Hatcher $ 5,000 Jesse Johnson 2,500 C. W. Calhoun 3,000 W. K. Hatcher 5,000 W. K. Hatcher 5,000 C. W. Calhoun 3,000 C. D. Little 10,000 Hoke V. Smith 2,000 Hoke V. Smith 2,000 C. A. Hatcher 5,000 J. Gregory Johnson 19,000 C. D. Little 10,000 Bills receivable 6,000 Total 50,000 Total 50,000 On November 21, 1923, a Mr. Mott came to petitioner's office in Chattanooga and delivered to petitioner two letters from C. A. Hatcher. From these letters and from his conversation with*1985 Mott, petitioner learned for the first time that his name appeared on the records of the Memphis Corporation (3) as a stockholder and that certificates for 100 shares of the common stock of the corporation had *1046 been prepared in his name. Petitioner had never subscribed for this stock and, so far as he knew, no subscription had been made for him by any other person. Mott explained that Hatcher had used petitioner's name for convenience and that the stock involved was just "dummy stock." He asked petitioner to sign a "release" of the stock. Petitioner had confidence in Hatcher and accordingly executed the following quoted instrument: CHATTANOOGA, TENN., November, 21, 1923. Mr. JESSE JOHNSTON, Secretary, Memphis Chero Cola Bottling Co., Memphis, Tenn., DEAR SIR: In connection with my application for 100 shares of capital stock in your company as a part of the incorporation proceedings, in which my name appeared as an incorporator, you are advised that this subscription was originally made in behalf of C. A. Hatcher, and the responsibility and obligation in connection therewith is to attach to him and is assumed by him. If as a part of your records*1986 made, entered, or to any extent handled, these records are to be rehandled, re-entered, and transferred to the extent of this subscription of 100 shares to C. A. Hatcher, who assumes subscription and settlement responsibility in lieu of my original subscription for these 100 shares of stock; or if your records show the certificates issued or drawn in my name, this is for your convenience and proper corporate authority, to be accepted as my indorsement to said certificates for transfer, and your authority if items of issue require transfer or reissue, of the same 100 shares of Memphis Chero Cola Bottling Company stock to C. A. Hatcher. Yours very truly, (Signed) C. D. LITTLE. The common stock certificate book of the Memphis Corporation (3) contains five certificates made out to petitioner, signed by J. Gregory Johnston, as president, and S. J. Johnston, Jr., as secretary, and further described as follows: Certificate Number of shares Date Amount of canceled revenue stamps on stub No. 12 [50] Aug. 23, 1922 $2.50 No. 13 [20] do 1.00 No. 14 [10] do .50 No. 15 [10] do .50 No. 16 [10] do .50 The word "void" is written across the face and in the*1987 upper left-hand corner of each of these certificates. The certificates have been detached from and pasted back to their respective stubs. The back of each contains an unfilled and unexecuted form of transfer. Each stub indicates that its certificate was part of an original issue of stock by the corporation. Petitioner never saw these certificates until the time of hearing of this proceeding. *1047 Sometime in 1924 or 1925, petitioner was advised that respondent had disallowed $10,000 of the $19,000 deduction claimed on his 1922 return as a loss sustained by reason of his investment in the Memphis Co. (2). This disallowance was made upon the theory that petitioner had received $10,000 in stock of the Memphis Corporation (3) as a consideration for his interest in its predecessor, the Memphis Co. (2). The Memphis Corporation (3) became involved in financial difficulties and Charles H. Nash, Jr., was appointed receiver in equity for the business. The corporation's property was sold by the Clerk and Master of the Shelby County Chancery Court on June 25, 1925. The proceeds of the sale were not sufficient to pay the corporation's debts and only the court costs and preferred*1988 creditors were paid. The stockholders received nothing upon liquidation. Petitioner never received anything from the Memphis Corporation (3), either by way of dividends, salaries, fees, or otherwise. Petitioner's returns for the years 1923, 1924, and 1925 contain no claim for a deduction by reason of his transfer of the stock or by reason of the said stock becoming worthless in any of these years. OPINION. LOVE: Determination of this proceeding turns upon the ownership of the 100 shares of common stock of the Memphis Corporation (3) issued in the name of petitioner under date of August 23, 1922. Petitioner now contends that the stock was in fact his property and that he was induced by subterfuge to execute the instrument of November 21, 1923, transferring it to Hatcher. Respondent takes the position that petitioner was a mere "dummy" stockholder, a nominee of Hatcher, and that the stock was never petitioner's property. When petitioner decided to abandon the Memphis Co. (2) in 1922, he considered his $19,000 investment in that concern a total loss. He claimed a deduction for such a loss on his return for that year, filed in March, 1923. In November, 1923, petitioner*1989 learned, for the first time, from Mott that certain stock of the Memphis Corporation (3) had been issued in his name. Petitioner had confidence in Hatcher and when Mott informed him that Hatcher desired a transfer of such stock, petitioner executed one. He testified that he would not have executed such a transfer if he had not believed Mott's statement that the stock really relonged to Hatcher and that his (petitioner's) name had been used only for convenience. Upon audit and field examination of petitioner's 1922 return, respondent learned that 100 shares of stock of the Memphis Corporation *1048 (3), with a par value of $10,000, had been issued in petitioner's name on August 23, 1922. Accordingly, petitioner's claim for a deduction of $19,000 as a loss upon his investment in the Memphis Co. (2) was disallowed to the extent of $10,000. Petitioner at that time denied that the 100 shares of stock involved had been issued to him, in fact. These were the positions of the parties when the deficiency letter was mailed to petitioner and an appeal was filed with the Board. The deficiency letter revealed an overassessment for the year 1922, due to adjustments not material*1990 herein, and, therefore, by order of September 20, 1927, upon motion of respondent, the appeal was dismissed as to the year 1922 for lack of jurisdiction. . On July 14, 1928, petitioner moved for and was granted leave to file an amended petition. In the amended petition, petitioner adopted respondent's theory that the 100 shares of stock of the Memphis Corporation (3) issues in his name on August 23, 1922, were in fact, his property and were issued to him in consideration for his interest in the Memphis Co. (2). The amended petition further contends that petitioner is entitled to a deduction for a loss upon this stock in the Memphis Corporation (3), either (a) in 1923, when he contends he was induced by subterfuge to transfer it to Hatcher, (b) in 1924, when it is alleged the corporation went into receivership, or (c) in 1925, when the corporation's assets were liquidated and proved insufficient to afford the stockholders any recoupment of their investments. Respondent filed an answer to the amended petition, admitting many of the material allegations pleaded to, and especially that petitioner had actually acquired in 1922*1991 the Memphis Corporation's stock issued in his name. It appeared at this point that the parties had definitely agreed upon the ownership of the stock involved and that the only issue related to the occurrence of a loss upon this stock in 1924 or 1925. But the respondent, casting about for more and better defenses, and perhaps considering petitioner's adoption of his theory as too generous a gesture to be unreturned, conceived the idea that the petitioner had been right, originally. Accordingly, bu an amended answer to the amended petition, filed upon hearing, respondent revealed that he had at last seen the light - he now recognized that petitioner never had had an interest in or ownership of the stock of the Memphis Corporation (3) issued in his name in 1922. Petitioner, it appeared, was a mere "dummy" stockholder, a nominee of Hatcher. It follows that petitioner actually sustained has entire loss of $19,000 in the year 1922, as he then claimed, rather than the $9,000 loss which respondent permitted him to deduct. *1049 It is clear that he has lost the $19,000 he invested in the Memphis Co. (2), and that he has been permitted to take a deduction of only $9,000 for*1992 that loss. But the Board has no equitable jurisdiction; we must follow the mandates of statute, and this, in our opinion, means that we must deny petitioner the relief he now seeks. A loss can only be claimed in the year in which it occurs. And this is so even though the taxpayer may not be aware of his loss until succeeding years. ; ; . We think the position taken by the respondent upon hearing is the correct one and that petitioner never in fact owned the stock of the Memphis Corporation issued in his name, or in other words, that he was a mere "dummy" stockholder, used as a nominee of Hatcher for purposes not revealed by the record. This being so, petitioner could not have sutained a loss upon such stock, either by the transfer of November 21, 1923, the alleged receivership in 1924, or the liquidation in 1925. Judgment will be entered for the respondent. Footnotes *. Indicates a loss. ↩