Shepard Co. v. Commissioner

THE SHEPARD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Shepard Co. v. Commissioner Docket No. 39137. United States Board of Tax Appeals 22 B.T.A. 1368; 1931 BTA LEXIS 1955; April 29, 1931, Promulgated *1955 1. Transaction here involved held to have been a bona fide purchase of stock by petitioner and the subsequent sale at a lower price resulted in deductible loss. 2. Amount of deductible loss determined under the rule in Riggs National Bank,17 B.T.A. 615. J. A. Boyer, Esq., for the petitioner. Miles J. O'Connor, Esq., for the respondent. ARUNDELL *1368 The respondent determined deficiencies in income tax in the amounts of $8,202.25 and $7,571.39 for the fiscal years ended January 31, 1925, and January 31, 1926, respectively. Three issues were raised by the pleadings but a stipulation disposed of one, and one was abandoned. The one remaining is whether petitioner is entitled to a loss deduction on account of the sale of stock in the year ended January 31, 1926. FINDINGS OF FACT. Petitioner, a corporation with its principal place of business at Providence, R.I., is engaged in the department store business. Its capital stock, in the years here involved, was owned entirely by John Shepard, Jr., who was its president and treasurer. In 1912 Shepard acquired all the capital stock of the Consolidated Car Fender Company, *1956 hereinafter called the Fender Company, and in that year gave it to his wife, Alice Maud Shepard, as a Christmas gift. She continued to hold the stock until December, 1923, when it was disposed of as hereinafter related. It was the practice of petitioner to pay the bills of both Shepard and his wife covering their personal expenses. Payments made on behalf of Shepard were charged to his salary account on petitioner's books. Payments made for Mrs. Shepard were charged to a personal account in her name on the books of petitioner. In December of 1923 Mrs. Shepard's account showed a debit balance of $39,559.59. In that month petitioner purchased from Mrs. Shepard all of the stock of the Fender Company for $66,835.50 and recorded the transaction in its journal as follows: Dr. Cr. The Shepard Company investment, the Consolidated Car Fender Co $66,835.50 Alice Maud Shepard $66,835.50 To record purchase of 250 shares of the Consolidated Car Fender Company stock from Alice Maud Shepard under date of December, 1923. *1369 The credit of $66,835.50 to Mrs. Shepard's account resulted in a credit balance of $27,275.91. Thereafter charges were made to*1957 her account each month from January to August, 1924, inclusive, aggregating $27,639.37, and a credit of $3.27 was entered in June, 1924, with the result that in August of that year the account showed a debit balance of $360.19. The Fender Company was the owner of patents, patterns, and dies for the manufacture of car fenders. It owned no buildings, equipment, or other physical assets. The fenders were manufactured and sold by the Narragansett Machine Company under contract whereby the Fender Company received royalties or commissions. The petitioner and the Narragansett Machine Company were not connected in any way. About April, 1925, the Narragansett Machine Company refused to continue under its contract with the Fender Company. Thereupon negotiations were opened between petitioner and the Narragansett Company for the sale of the Fender Company stock to the Narragansett Company. On May 9, 1925, petitioner sold all of the stock to the Narragansett Machine Company for $13,750. The average annual dividends paid by the Fender Company on its stock for the five years prior to the purchase by the petitioner amounted to $11,000. For the fiscal year ended January 31, 1925, the*1958 Fender Company had a net income of $3,624.47, as adjusted by respondent, which was included in the consolidated net income of petitioner and its affiliated companies. For the period February 1, 1925, to May 8, 1925, the Fender Company sustained a loss of $126.19, which is reflected in the consolidated net income of petitioner and its affiliated companies for the fiscal year ended January 31, 1926. In its return for the latter year petitioner claimed a loss deduction in the amount of $53,085.50, this being the difference between the cost of the Fender Company stock, $66,835.50 and the sale price of $13,750. The respondent disallowed the claimed deduction. On November 14, 1927, John Shepard, Jr., as president of petitioner, executed an affidavit which was filed with the respondent, protesting against the disallowance of the claimed loss. The affidavit contains the following statements: It is submitted that though made in the name of The Shepard Company a corporation - the purchase was in behalf of an individual - Mr. John Shepard, Jr. the sole owner of the Corporation. It was not made for any associate purposes in forming an alliance for business benefits. Rather was the purchase*1959 a personal one and none but the individual could benefit or suffer from the transaction. Because Mr. Shepard owns all of the capital stock of the Shepard Comany and directs its affairs, he chooses to have his corporation do his investing for him. Hence, The Shepard Company, as agent for Mr. Shepard, buys and sells *1370 securities and the loss by the agent is a loss to the principal. The net worth of Mr. Shepard has, in fact, been reduced by $53,085.50 and it is of no moment whether that loss is reflected in his personal accounts or on the books of a corporation entirely owned by him and under his immediate direction. OPINION. ARUNDELL: At the hearing of this proceeding counsel stipulated as follows: That for each of the fiscal years ended January 31, 1925, and January 31, 1926, the Shepard Company sustained depreciation on leases in the amount of $3,355.02, and that the Shepard-Norwell Company sustained depreciation of a lease in the amount of $372.18, and that said companies are entitled to deduct said amounts from gross income for the fiscal years ended January 31, 1925. and January 31, 1926. These adjustments dispose of one issue and the parties are directed*1960 to give effect to them in the recomputation under Rule 50. The issue as to allocation of income to petitioner and its several affiliated companies for the fiscal year ended January 31, 1925, has been abandoned by petitioner. The remaining question is whether petitioner is entitled to a loss deduction on account of its sale of the Consolidated Car Fender Company stock at less than the amount entered on its books as cost. It appears that the respondent disallowed the claimed deduction in the first instance on the ground, as held in , that the sale by a corporation of all the stock of an affiliated company results in neither taxable gain nor deductible loss. The same holding in a companion case, , was reversed, , and we have since recognized that such transactions may result in a gain or loss. See ; ; *1961 . Presumably these later cases were the cause of respondent's receding from his first position. His contention now is that because John Shepard, Jr., and Alice Maud Shepard were husband and wife and because Shepard owned all the stock of petitioner, the amount entered on petitioner's books as cost of the stock did not represent bona fide cost, but was in effect a gift or dividend. Respondent further relies on the quoted parts of Shepard's affidavit, which he construes as statements of fact that the transaction was personal, rather than corporate, and that the corporation was acting as his agent. While the parts of Shepard's affidavit that are set out in the findings may be susceptible of the construction placed on them by the respondent, a reading of the entire affidavit does not support that view. The affidavit in its entirety was directed to showing that the *1371 loss sustained by the petitioner corporation should not be disallowed under the Baker-Vawter decision, supra, merely because of the technical affiliation of petitioner and the Fender Company. Considered as a whole, the statements of fact in the affidavit*1962 support the view urged here by the petitioner rather than the position of the respondent, which is based on two paragraphs lifted out of six pages. The petitioner's evidence produced at the hearing establishes to our satisfaction that the petitioner purchased the Fender Company stock from Mrs. Shepard. When Mrs. Shepard turned the stock in to petitioner it was in satisfaction of a debt owing to petitioner and not to her husband. The credit which accrued to her on the petitioner's books from this transaction she used up by having bills paid by the petitioner. As far as the record shows, none of these items was ever transferred or entered into Shepard's account. Respondent's argument, that the transaction was a personal one and grew out of the husband's responsibility for the ordinary and necessary expenses of his wife in accordance with her station in life, does not harmonize with the fact that she gave up her stock, which for the previous five years had paid average dividends of $11,000. On the evidence we hold that petitioner purchased the Fender Company stock at a cost of $66,835.50. The deductible loss sustained, however, is not the difference between cost and selling*1963 price, but must be reduced by $126.19, the amount of the loss sustained by the Fender Company in the period February 1 to May 8, 1925, and which was reflected in consolidated income. Decision will be entered under Rule 50.