John M. Burdine Realty Co. v. Commissioner

JOHN M. BURDINE REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. John M. Burdine Realty Co. v. Commissioner Docket No. 33071. United States Board of Tax Appeals 20 B.T.A. 54; 1930 BTA LEXIS 2208; June 13, 1930, Promulgated *2208 1. LOSSES. - Where the petitioner corporation acquired for a consideration of $3,600 certain corporate stock from its president and majority stockholder and it sold for a consideration of $1 a few days after acquisition all of the same stock to an individual who was closely affiliated with the previous seller, and there is no explanation of the relatively enormous drop in value and no showing of the relevant circumstances, held, a proper basis is not established for a claim for a deductible loss. 2. BAD DEBTS. - Loans by the petitioner to a corporation were duly charged upon the books when made and later, concurrently with the dissolution of said corporation leaving the indebtedness uncollectible, the debt was determined by the petitioner to be bad and was charged off to profit and loss. Held, the claimed deduction should be allowed. Jesse I. Miller, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. TRUSSELL *54 This is a proceeding for the redetermination of deficiencies in income taxes determined by the respondent as follows: for 1922, $449.88; for 1923, $2,363.49; for 1924, $1,760.72. The petitioner alleges*2209 error in that: (1) a loss in the amount of $3,599 on the sale of shares of capital stock of the Tucker Shoe Co. in 1922 has not been allowed as a deduction from income; (2) a loss in the amount of $33,166.66 in 1923 on the notes and the open account of the Tucker Shoe Co. has not been allowed as a deduction from income; (3) a net loss of the petitioner for 1923 has not been forwarded and allowed as a deduction from net income in 1924. *55 FINDINGS OF FACT. The petitioner is a Florida corporation with its principal place of business at Miami, and is engaged in the real estate business. John M. Burdine, hereinafter referred to as Burdine, is a resident of Miami, and was the president of the petitioner during the taxable years, having served in that capacity since the organization of the petitioner in 1916 or 1917. Burdine was the principal stockholder of the petitioner. Burdine was also the senior member of a partnership known as Burdine and Quarterman, Burdine owning practically all of that business. Burdine was also in 1922 the secretary of the Tucker Shoe Co., a corporation. P. L. Tucker was a resident of Miami and was president of the Tucker Shoe Co. during*2210 the entire existence of that corporation. On August 9, 1922, the outstanding capital stock of the Tucker Shoe Co., consisting of 250 shares, par value $100 per share, was recorded in the following holders: John M. Burdine, 151 shares; P. L. Tucker, 98 shares; E. B. Romph, 1 share. On or about August 10, 1922, Burdine transferred to the petitioner the 151 shares of the Tucker Shoe Co. stock which he held, and he was credited upon the books with an amount of $3,600 as consideration due to him for the transfer of the stock. However, the cost of the stock was set up on the books in an amount of $8,600. On or about August 20, 1922, the same 151 shares of stock were disposed of by the petitioner to P. L. Tucker for an agreed consideration of $1, which was paid to the petitioner in cash. However, the asset account was credited with an amount of $5,001. In the transfer the new stock certificates were issued as follows: to Rosalie Tucker (wife of P. L. Tucker), 1 share; to P. L. Tucker, 150 shares. At the end of the year 1922 an amount of $3,599 was charged off to profit and loss on the books as a loss on the transactions described. At the end of 1922 indebtedness of the Tucker*2211 Shoe Co. to petitioner amounted to at least $18,000 and was evidenced by a promissory note of the Tucker Shoe Co. payable to the petitioner. This indebtedness of $18,000 had been incurred as follows: July 12, 1921, loan from the petitioner, $10,000 less payments on account in February and April, 1922, $7,000; leaving balance unpaid, $3,000; October 16, 1922, liability of the Tucker Shoe Co. assumed by the petitioner, for money borrowed by the Tucker Shoe Co. upon the security of notes of the partnership, Burdine & Quarterman, said notes having been loaned to the Tucker Shoe Co. for that purpose, $15,000. The indebtedness of the Tucker Shoe Co. was increased in 1923 as follows: June 15, cash paid by petitioner to the Miami Bank & *56 Trust Co. to take up note endorsed by the petitioner, $10,000; December 31, interest entered upon the books by journal entry crediting Mrs. E. P. Quarterman, $166.66; December 31, note of petitioner given to Mrs. E. P. Quarterman in exchange for a note of the Tucker Shoe Co. dated January 30, 1923, and endorsed by the petitioner, $5,000. In the aggregate, the indebtedness of the Tucker Shoe Co. to the petitioner at the end of 1923 stood upon*2212 the books at $33,166.66, evidenced in part by notes of the Tucker Shoe Co., and the remainder standing as an open account receivable. The Tucker Shoe Co. was a going concern at the end of 1922, with a stock in trade on hand and with prospects of doing a profitable retail business during the then approaching winter rush season. At the end of 1923, however, the Tucker Shoe Co. had disposed of its stock in trade at retail and had gone out of business and dissolved. A few small liabilities owing to mercantile houses were left unpaid in addition to the liability as stated above to the petitioner, which was the chief creditor of the Tucker Shoe Co. The indebtedness of the Tucker Shoe Co. to the petitioner has never been paid or otherwise discharged. It was charged off to profit and loss by the petitioner in 1923. In determining the deficiencies the respondent has computed revised net incomes, amounting as follows: for 1922, $13,300.47; for 1923, $20,907.91, for 1924, $25,895.61. OPINION. TRUSSELL: In the first issue the petitioner claims the right to a deduction from income in 1922 of a loss upon an alleged purchase and sale of certain shares of stock in another corporation, *2213 the Tucker Shoe Co. The evidence shows that the petitioner acquired the stock for a consideration of $3,600 from its president and majority stockholder, Burdine, who was also secretary and majority stockholder of the Tucker Shoe Co. The purchase and resale of the stock occurred in the month of August, 1922. Within the short space of probably 10 days after acquisition the petitioner sold all of the same stock to the president and second largest stockholder of the Tucker Shoe Co. for a consideration of $1, which was actually paid in cash. The book entries reflect a cost for the stock of $8,600 and proceeds of the sale amounting to $5,001, but this is contrary to the testimony of the interested parties and we attach no importance to the discrepancy, which is entirely unexplained and is, furthermore, of no net effect on the amount of the loss claimed. We think it is too elementary to require discussion, that because of the relations of Burdine to the petitioner as officer, director and *57 majority stockholder, his dealings with the petitioner should properly be carefully scrutinized and the burden is upon him to make a full disclosure of all of the relevant facts and circumstances. *2214 Notwithstanding this, there is nothing in the record to account for the gross disparity in the considerations in evidence in the transactions of purchase and sale by the petitioner. Burdine, the first seller, and P. L. Tucker, the ultimate purchaser of the stock, both took the stand to testify in behalf of the petitioner, and they had full opportunity to explain the transactions, yet they failed to do so. In response to direct questions no explanation was offered or even attempted. We are entirely in the dark in the matter, and feel that upon the record as it lies before us we may not accept a presumption of fairness in both transactions. We are not even prepared to say which, if either, of the transactions may be regarded as the more probable reflection of the actual fair market value of the Tucker Shoe Co. stock in August, 1922, nor does it appear necessary to the petitioner's case for us to make such a choice, for, obviously, if both transactions are not clearly shown to have been fair, then the basis for a claim for a loss vanishes. We, therefore, conclude that we must leave the matter as we find it, with the claimed deduction of a loss of $3,599 in 1922 disallowed by the*2215 respondent. The second issue relates to the following year 1923. In the return filed by the petitioner for that year a deduction was claimed from net income of a bad debt in the amount of $33,166.66. We find a very different situation here. The evidence shows that the indebtedness of the Tucker Shoe Co. to the petitioner was all duly entered upon the books of the petitioner and was attributable to loans by the petitioner, or to liabilities of the Tucker Shoe Co. assumed by the petitioner in consequence of having endorsed notes of the Tucker Shoe Co. The indebtedness was charged off to profit and loss by the petitioner in 1923. The testimony was to the effect that the Tucker Shoe Co. was a going concern at the end of 1922 with a stock in trade on hand ready for sale at a profit to the retail trade which was reasonably to be expected during the then approaching usual winter rush season. At the end of 1923, however, operations had resulted in the disposal of all the assets of the Tucker Shoe Co., and its dissolution, leaving unpaid its indebtedness as stated to the petitioner, its principal creditor, together with a few small debts to mercantile concerns. We see no reason to*2216 doubt the transactions under consideration with relation to this issue, and are satisfied of the amount of the indebtedness as claimed. Furthermore, it appears that at the end of the prior year hope was still entertained of profitable operation. We believe there has been a *58 genuine loss here, and are satisfied of the propriety of accepting the determination of the petitioner concurrently made and reflected on the books that the indebtedness was bad in 1923, consequently we are of the opinion that the deduction of $33,166.66 claimed by the petitioner should be allowed in 1923. This conclusion disposes of the third issue, which was entirely dependent upon the fact determination relative to the loss in 1923. It is not in dispute that if the petitioner did in fact suffer a net loss for 1923, it may be carried forward and deducted from net income in 1924. The net loss should be computed for 1923 and so carried forward. Judgment will be rendered pursuant to Rule 50.