Davidson v. Commissioner

J. EDGAR DAVIDSON, EXECUTOR, AND MARY E. DAVIDSON, EXECUTRIX, OF THE ESTATE OF R. J. DAVIDSON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Davidson v. Commissioner Docket No. 41174. United States Board of Tax Appeals 26 B.T.A. 754; 1932 BTA LEXIS 1254; July 29, 1932, Promulgated *1254 The value of certain securities transferred by the taxpayer to his son to be pledged with a broker as security for the son's stock-trading account, which were sold by the broker and the proceeds applied on the son's indebtedness, leaving the latter hopelessly insolvent, held, on the record, not to represent a worthless debt deductible by the taxpayer under section 214(a)(7) of the Revenue Act of 1926. Montgomery B. Angell, Esq., Otis T. Bradley, Esq., and Marvin Lyons, Esq., for the petitioners. George R. Sheriff, Esq., for the respondent. LEECH *754 This proceeding seeks the redetermination of a deficiency of $4,812.05 determined by respondent for the calendar year 1926. The only error assigned is the action of respondent in disallowing a deduction of $119,755 from gross income alleged to represent a debt ascertained by the taxpayer to be worthless and charged off in the taxable year in question. FINDINGS OF FACT. Petitioners are the executors of the estate of R. J. Davidson, deceased, the taxpayer in respect of whom the deficiency here involved was determined. The taxpayer died on April 3, 1930, while his appeal herein was*1255 pending, and by proper order these petitioners were substituted in his stead. During the year 1925 and the first part of 1926 the taxpayer's son, Robert J. Davidson, Jr., was associated with three other individuals in the operation of a joint "pool account," trading on margin in certain stocks on the New York market. Robert had no property except his interest in this pool account and his salary of $6,000 per year as assistant to the president of the Ramapo Ajax Company. He was married and had a family dependent upon him, and his personal and family expenses were in excess of the amount of his salary. In January, 1926, the pool account referred to showed an equity of approximately $7,000,000, of which about $2,000,000 represented Robert's interest. Early in February the market became unsteady and the stocks held by the pool suffered sharp declines. On February 16 Robert wired his father, who with another son, J. Edgar Davidson, was in Florida, advising that the market was unsteady, *755 that he needed at least $100,000 and asking if his father and Edgar could arrange it. Later on the same day he wired his father that conditions were improved, but he would like a credit*1256 on which he could draw later in case of need. These telegrams were received by the taxpayer on the following night and he directed Edgar to telephone Robert and ascertain how matters stood. This was done and as a result the taxpayer on the following day wired Robert, authorizing him to withdraw from his bank box at Suffern, New York, certain of the taxpayer's bonds and use them for deposit with the brokers as additional collateral on the pool account. Acting under this authority Robert obtained the bonds in question which had a par value of $117,000 and a basis of $95,662.71 in the hands of the taxpayers for computing gain or loss on sale. These bonds he deposited with his brokers as additional security. Following this the market in the pooled stocks suffered further drastic declines, leaving a large deficit in the margin account. On March 1, 1926, the brokers sold nearly all of the securities deposited as collateral, including the bonds of the taxpayer referred to above, and applied the proceeds toward such deficit. The taxpayer's bonds on sale by the brokers brought the sum of $119,755. By August, 1926, all securities of the pool account had been sold by the brokers, *1257 leaving Robert indebted to the extent of $410,000. This indebtedness was one due by Robert jointly with two other members of the pool, but an arrangement was made under which a separation of the indebtedness was effected, leaving Robert indebted for something in excess of $300,000 at the close of the year of 1926. No payment was made by Robert to his father on account of the $119,755 in securities transferred to him. In 1928 he borrowed $30,000, which he paid to the brokers in consideration of full releases from them of his indebtedness due. The taxpayer on his return from Florida in April, 1926, inquired of Robert as to his financial condition and ascertained that he owed the brokers several hundred thousand dollars and had no assets with which to pay these debts. In making his return for the calendar year 1926 the taxpayer deducted the sum of $119,755 as a debt ascertained to be worthless and charged off in that year. Following the taxpayer's death in 1930 no claim was asserted by his estate against Robert in respect to the alleged indebtedness of $119,755. OPINION. LEECH: Whether the transaction detailed in the findings of fact created an indebtedness to the taxpayer*1258 on the part of his son depends upon the intention of the taxpayer in the transfer of the securities. *756 . If taxpayer's intention was that his son be permitted to use the securities as a pledge and return them when no longer needed and also to pay him their value in case of sale by the pledgee, the transaction would leave the son indebted as claimed by petitioners. However, if the intent was that the son return the securities when no longer needed by him, but that in the case of their sale by the pledgee, his son would not be indebted to him for their value, no indebtedness would arise. . The evidence from which we must draw our conclusion is meager. It is well settled that a transfer of money or other property by a father to a son is presumed to be a gift or advance rather than a loan. . However, such presumption is not conclusive, but may be rebutted by a sufficient showing of intent to the contrary. *1259 ; ; . The record shows that the transfer of these securities was made by the taxpayer upon a request by his son to establish a credit upon which he might draw to protect his equity in a stock-trading account. We think the evidence of his discussion of the matter with another son before making the transfer and his final agreement thereto after that son expressed the belief that the need for the securities was only temporary, is sufficient to show that it was the taxpayer's intention that these securities be returned to him if not sold to satisfy the indebtedness of the pool account. However, in the face of the contrary presumption and without additional evidence, may we conclude that it was the taxpayer's intention that his son pay him or remain indebted to him for the value of these securities in case they were sold by the broker? There was no specific agreement between petitioner and his son and we have no evidence indicating that after the securities were sold by the brokers petitioner considered*1260 an indebtedness as existing. The taxpayer died in 1930 and it does not appear that the son and daughter, who are the executors of his estate and who, it is assumed, realize what his intention was in respect to this matter, have listed any indebtedness of R. J. Davidson, Jr., as an asset of the estate or charged against him in the settlement of the estate any indebtedness owing to the decedent. We do not think that the transfer of property by a father to a son with the understanding that it be returned if not lost by him is sufficient basis for a presumption of intention that the value of the property be paid by the son in case of its loss. It appears that such is the situation here. However, even in the event that petitioners' contention with respect to the intent of the taxpayer in the transfer *757 of these securities could be sustained and an indebtedness held to have been created on the part of the son, such indebtedness would not be subject to a charge-off by the taxpayer as a worthless debt. It is shown that the transfer of these securities by the taxpayer was with the knowledge that the use to which they were to be put was a most hazardous one and that their sale*1261 by the pledgee would only be under conditions leaving his son utterly unable to pay an indebtedness of this amount. It appears, further, that the securities were in no sense sold by the taxpayer to his son, but that he permitted their use merely as security. It is clear that they remained the property of the taxpayer, subject to the right of the pledge to sell them if necessary. Any increase in their value while held by the pledgee was to the benefit of the taxpayer, and if the transaction did give rise to an indebtedness on the part of the son, such indebtedness arose only upon the contingency of the sale of the securities by the pledgee. . The happening of such contingency would necessarily leave the son bankrupt, the debt would be wholly worthless and uncollectible when it came into existence, and there would consequently be no value represented by it to be charged off by the taxpayer. . We have noted carefully the recent opinion of the Circuit Court of Appeals for the Second Circuit in *1262 , reversing a decision of the Board which denied a bad debt deduction growing out of a guarantee by the taxpayer of certain brokerage accounts of his brother-in-law. In that case a substantially different situation was presented. Here, we have a case of a transfer by a father to his son with knowledge of the critical condition of the latter's affairs, in which the father had no interest other than that arising from his paternal interest in his son's welfare. In the Shiman case there was a guarantee of broker-age accounts of a brother-in-law at a time when the latter was known to be solvent and in certain of these accounts the taxpayer himself owned a part interest. Our conclusion is that as a result of the transaction in question the taxpayer had no indebtedness due him, on account of these securities transferred to his son, for which he was entitled to take credit as a debt ascertained to be worthless and charged off in the taxable year. Petitioners assert no claim to this deduction as a loss and manifestly it does not represent a deductible loss as the transaction was neither in the course of a trade or business*1263 nor entered into for profit. Judgment will be entered for the respondent.