Cowan v. Commissioner

GRACE A. COWAN, EXECUTRIX, ESTATE OF GLEN P. COWAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cowan v. Commissioner Docket No. 67228. United States Board of Tax Appeals 30 B.T.A. 296; 1934 BTA LEXIS 1353; April 3, 1934, Promulgated *1353 Petitioner's decedent sold two large blocks of corporate stocks to different individuals, one of whom had been a business associate, the other being a relative, at one dollar for each block, for the admitted purpose of reducing his income tax. The evidence shows the stocks had a value greatly in excess of the one dollar paid. Held, the respondent's denial of the alleged loss should be approved. H. A. Mihills, C.P.A., for the petitioner. James K. Polk, Jr., Esq., and H. B. Hunt, Esq., for the respondent. MARQUETTE *296 The respondent has determined a deficiency in income tax for the year 1929 of $27,049.17. The errors asserted are that the respondent has disallowed two deductions arising from losses on the sale of stocks, one in the amount of $130,880.74, and the other in the amount of $60,047. FINDINGS OF FACT. The petitioner is the executrix of the estate of Glen P. Cowan, who died October 16, 1931, and who was a man of means. His business was the purchase and sale of corporate businesses. This he did by securing the capital stock of a corporation and disposing of it, in some instances retaining in it a large investment. *1354 For several years before his death, he had in his employ one Bender, who was his general adviser and auditor. Bender continued in his employ up to the time of decedent's death and in the employ of his estate until November 1, 1932. It was decedent's custom near the end of each year to go over his securities and, with the assistance of Bender, to determine which of them might be charged off as worthless or sold for the purpose of taking losses to reduce income tax. In December 1929 he and Bender held a consultation and they then proposed to dispose of part of his holdings in the Byers Machine Co. to A. F. Stephens, a man of means, who had known decedent for about 13 years, had been on very friendly terms with him, was one of his business associates, and had desk room in his office. On December 23, 1929, the decedent approached Stephens, who had not owned stock in the Byers Machine Co., and who was in his office, and asked him to take over some of his Byers Co. stock at a price of one dollar, to which Stephens assented. The decedent thereupon delivered to Stephens, together with a bill of sale, certificates for 2,480 shares of class A stock and certificates of deposit for 3,424*1355 1/2 shares of class B stock of the Byers Machine Co., both endorsed to *297 Stephens, who gave him a one dollar bill. Nothing was said about a retransfer. The certificates were deposited in Stephens' safe-deposit box by Bender, who kept his books of account. None of the certificates was transferred on the books of the corporation and all were in the early part of 1932 delivered by Stephens to Bender, who paid to Stephens one dollar. Bender had expressed his desire to become a director of the corporation. The certificates for 1,497 shares of the 2,480 shares of class A stock transferred to Stephens were canceled by the corporation February 10, 1932. The class A stock was preferred as to dividends and, in the event of liquidation, as to assets. This stock was offered to the public for sale in March 1927 at $34 per share. Both classes were no par stock. In the early part of 1927, and when it was acquired by the decedent, the Byers Machine Co. had an old and established reputation. The decedent, in conjunction with a brokerage firm, proceeded to refinance it. He was a director. By reason of bad management the company suffered a very substantial loss in 1927. A new*1356 manager was installed and, while his management was effective, the company constantly lost and is still losing money. Its balance sheet for December 31, 1928, showed assets and liabilities in the amount of $2,131,440.35. Among the liabilities was a note due the decedent for $45,000, which still remains unpaid. The liabilities included declared capital of $250,000 and surplus of $661,378.31. Its balance sheet for November 30, 1929, disclosed assets and liabilities in the amount of $1,928,938.20. The liabilities included declared capital of $250,000 and surplus of $338,084.08. Class A stock was listed on the Cleveland Stock Exchange. Class B stock was not listed. The quotations on that exchange for Class A stock were: Year High Low [1928] $40.00 $15.00 [1929] 20.00 3.75 [1930] 7.00 .50 [1931] $2.50 $1.00 [1932] .50 .25 The sales month by month for 1929 were: Month Shares January 2,902 February 5,325 March 2,160 April 1,674 May [515] June [170] July [989] August [95] September [330] October [185] November [272] December 2,618 In January 1930, 117 shares were sold. In the month of December 1929 the quotations were $3.75, *1357 $4, $4.50, and $4.25 per share. The dates on which stock sold for $3.75 were December 21 and 27. *298 Among the securities which the decedent and Bender determined to sell for tax purposes were all of the decedent's holdings in the Detroit Properties Corporation. These consisted of 600 shares of 6 percent preferred stock and 1,800 shares of no par common stock. On the evening of December 30, 1929, the decedent was dining with his brother-in-law, Berggren, who had previously owned no stock in this company, and while there proposed to sell to Berggren the above stock for one dollar. To this Berggren agreed and thereupon executed his check for one dollar to the decedent. The next day the certificates endorsed to Berggren were delivered to him, and he thereupon placed them in his safe-deposit box, where they remained until the hearing of this proceeding. The Properties Corporation was engaged in developing Bagley Avenue. It was also a holding company. Among its enterprises were a theatre, a hotel, an artists' building, and a clubhouse. The clubhouse is still uncompleted. The corporation has never made money. Its balance sheet as of December 31, 1928, discloses assets*1358 and liabilities in the amounts of $13,750,143.83. The liabilities include: NOMINAL CAPITAL STOCK PRIOR PREFERENCE - 8% Cumulative Authorized and Issued $1,000,000.00 PREFERRED - 6% Cumulative Authorized and Issued 2,500,000.00 PREFERRED - 7% Cumulative $275,000.00 - Issued 198,000.00 3,698,000.00 NON-PAR VALUE STOCK AND SURPLUS Authorized 250,000 shares Issued and outstanding 117,906 Shares $30,000.00 Surplus 199,676.18 229,676.18 3,927,676.18 Upon liquidation, voluntary or involuntary, the prior preferred stock was entitled to a first preference in the sum of $105 per share, and no more. The preferred stock was then entitled to be paid in the sum of $105 per share and no more. In the fall of 1929 the Properties Corporation was greatly in need of working capital. Upon a survey made, it was estimated that after taking into consideration all earnings and carrying charges, including payments falling due, there were needed over $264,000 to meet charges coming due in 1929, over $690,000 to meet charges coming due in 1930, over $866,000 to meet charges coming due in 1931, and over $2,700,000 to meet charges coming due in 1932. *1359 *299 By reason of the stock panic occurring in the fall of 1929, it was impossible to raise the necessary amounts. In view of this situation and in order to conserve their stockholdings, the stockholders of the corporation applied for and obtained in February 1930 the appointment of a receiver, who is still in charge of the affairs of the corporation. OPINION. MARQUETTE: On December 23, 1929, the decedent disposed of one block of stock to an old friend and business associate and on the 30th day of the same month he made a disposition of other stock to his brother-in-law, and each of them paid him the same amount, one dollar. It is conceded that each transaction was consummated for the sole purpose of producing a deductible loss, and in this way the reduction of decedent's income tax. In such case the transactions should be closely scrutinized (), and clear proof is required that the transactions were bona fide and not a subterfuge, and that fair value was paid. . If a taxpayer meets these requirements, he succeeds in his purpose (*1360 ); otherwise, he does not. The first transaction was a transfer to Stephens of class A stock and class B stock of the Byers Machine Co. Prior to December 1929 Stephens had no interest in that company. Before he came to the office of the decedent, the latter and Bender had determined to endeavor to sell the stock to him. The scene is thus described by Stephens: Q Under what circumstances was that purchase made? You just relate what occurred. A Well, I think one day I was talking to Mr. Bender and Mr. Cowan came in and says, I want to take - he said to me, "I want you to take some of my Byers stock over." So in another week or so Mr. Bender had the dope ready and I took it. Q Did Mr. Cowan make any actual offer to sell stock to you? A Well, he said he had a certain amount he would have to get some way off of his books, as I understood it, and he offered it to me for one dollar. * * * Q Was that the only discussion which you had with Mr. Cowan as to the supposed sale of the Byers Machine Company stock to you? A I think so. I don't think there was much talk about it. I just know I had heard from time to time*1361 that it wasn't going so good; I wasn't so hot about it. Q You mean the Byers Machine Company? A Yes. Q Mr. Stephens, did Mr. Cowan make any explanation to you at the time in connection with his proposed sale of the Byers stock for one dollar? A You mean - Q *300 My question is as to whether or not there was any further discussion, any comment made by Mr. Cowan in regard to the supposed sale? A No, I don't know as there was, only just to get it off his books. Q Did he make an actual sale to you? A Oh, yes. Q What consideration was paid by you, and in what form? A I gave the one dollar bill to Mr. Bender. Stephens further testified that, while the decedent did not so tell him, he understood that the sale was made for tax purposes. It thus appears that Stephens did not desire the stock for any purpose and we can not assume that he would have paid a price commensurate with the value of the stock as disclosed by the record. He took over the stock solely as an accommodation to his old friend and business associate. Both the decedent and Stephens were men of means, and the consideration of a dime or a cent would have been just as onerous to the one*1362 as beneficial to the other. In our opinion the passing of the dollar bill gave no additional virtue to the transaction. The delivery of the dollar was a mere formality. Especially is this true when we consider the value of class A stock. On this point the petitioner introduced evidence in an effort to show that it was worthless. If so, the loss had been suffered prior to the transaction with Stephens. But this thought does not seem at that time to have occurred to the decedent or to any other stockholder, and the evidence fails to disclose any identifiable event which would indicate that the stock was worthless. On the other hand, the balance sheet of the corporation and the quotations of the Cleveland Stock Exchange clearly indicate a value far in excess of one dollar. It may be the market might not have been able to sustain the weight of a sale of all the decedent's stock made at one time, but such a sale was not necessary. If decedent desired bona fide sales they could have been made over a period of time and in small blocks. Perhaps. though the point is by no means clear, some of the sales made in December were supported by procured purchasers. The fact remains that*1363 in 1930 this stock was sold as high as $7 per share. We are convinced that one dollar was by no means commensurate with the value of the class A stock purported to have been sold. If a consideration of one dollar in a transaction between individuals of means, who are old friends and business associates, can convert into a sale what in fact was a gift, then any lesser consideration would have the same effect. We can not assent to such a proposition, especially where the sole purpose of the transaction was to avoid income tax. Although there is testimony that Stephens was under no obligation to return the stock, he states that in the early part of 1932 he sold the stock for one dollar to Bender, who appears at that time to have been in the employ of the decedent's estate, *301 and at no time did Stephens attempt to ascertain what value the stock possessed. While Stephens testified that Bender had expressed a desire to become a director of the corporation, it is pertinent to point out that when Bender testified he made no reference to this later transaction, nor was he called upon to testify concerning it. We think the respondent properly denied the claimed loss. *1364 ; affd., ; ;; ; ; ; ; . No evidence was introduced as to the value in December 1929 of the decedent's stock in the Detroit Properties Corporation. The balance sheet for December 31, 1928, discloses that the corporation had a small surplus. It was testified that the corporation was then solvent. It is clear that its assets had become frozen, and that, by reason of the panic in the fall of 1929, additional money could not be raised to supply the necessary working capital. On the other hand, it appears that the stockholders and not the creditors of the corporation secured the appointment of a receiver in 1930, and that this was done for the purpose of protecting their interests as stockholders. This is evidence that the stock had value. How much we do not know. This sale of the stock was made by the*1365 decedent to his brother-in-law without any prior negotiations. The proposition was made at a social gathering and on the 30th day of December. The brother-in-law testified that when asked to buy the stock for one dollar he stated he would buy anything at that price. We are of opinion that much of what we have said relative to the transaction with Stephens applies equally here, and we do not think the evidence is sufficient to overcome the respondent's determination. Reviewed by the Board. Judgment will be entered for the respondent.