Milton v. Commissioner

JOHN MILTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Milton v. Commissioner Docket No. 68344. United States Board of Tax Appeals 33 B.T.A. 4; 1935 BTA LEXIS 816; September 10, 1935, Promulgated *816 Petitioner claimed and was allowed a loss resulting from liquidation of a corporation in 1929. In this proceeding he claims the liquidation occurred and the loss was sustained in 1930. Held that the evidence is insufficient to show that liquidation did not occur in 1929. Thomas McNulty, Esq., for the petitioner. Harry F. Morton, Esq., and Frank M. Thompson, Esq., for the respondent. ARUNDELL *5 The respondent has determined a deficiency in income tax for the year 1930 in the amount of $41,214.93. The deficiency results from three adjustments made by respondent which petitioner says were erroneous: (1) Increase of amount of interest received; (2) determination of a profit on sales of securities, petitioner having reported a loss; (3) increase of amount of dividends received. In addition to claiming error in the above adjustments, petitioner alleges that in the taxable year, 1930, he sustained a loss on the liquidation of the Margan Securities Co. in excess of the income determined by the respondent and asks for findings that dissolution and liquidation occurred in that year rather than 1929, as determined by the respondent. By amended*817 answer, counsel for respondent denies error in the respects alleged, and further claims that, in view of representations made by the petitioner over a period of years as to the dissolution of the Margan Securities Co., the petitioner is now estopped from claiming dissolution and loss on liquidation in 1930. A stipulation of facts was filed and oral and documentary evidence were presented at the hearing. FINDINGS OF FACT. Petitioner is an individual. On January 2, 1929, the Margan Securities Co. (hereinafter called Margan) was organized under the laws of New Jersey as a holding company, for the purpose of acquiring and holding securities and assets of the petitioner. The stock of Margan was no par stock. At the time of organization, 6,054 shares were issued to petitioner, 333 shares to his wife, and two shares to each of two office associates of petitioner. A notation was made on Margan's journal that "The above stock was issued for $300 per share." The total amount was entered as $1,917,300. Petitioner turned in to Margan a group of securities listed in the total amount of $2,134,057. During 1929 Margan bought and sold securities. Between September 10, 1929, and November 26, 1929, it*818 bought and sold through its own brokerage account. Prior thereto and thereafter it bought and sold through accounts of the petitioner and the proceeds were either deposited in Margan's bank account or entered in petitioner's account on Margan's books. On December 28, 1929, Margan filed with the Secretary of State of New Jersey a certificate of dissolution dated December 26, 1929. At the time of filing the certificate of dissolution Margan owed $272,248.50 to the First National Bank of Jersey City, New Jersey, on a collateral loan secured by stocks of nine corporations, which stocks were then owned by Margan and were in possession of the bank. At December 28, 1929, Margan owned securities consisting largely of stocks, but also a few mortgages and accounts, of thirty-one corporations, *6 including the nine pledged as collateral, the entire group having a market value of $1,353,607.75. The nine blocks on deposit as collateral had a market value of $387,157. Only two blocks of stock were registered in the name of Margan; the others were in the name of the petitioner. The bank account in the name of Margan with the First National Bank of Jersey City was maintained on the*819 records of the bank up to and including October 3, 1930. During the period January 1 to October 3, 1930, payments of principal and interest on the loan made by the bank were made from the account; during the same period there was deposited in the account interest, dividends, and payments on principal of securities in the possession of the petitioner as well as those pledged as collateral with the bank. The account was closed out on October 3, 1930, by issuance of a check for the balance therein of $31,083.14 to petitioner. The securities pledged as collateral for the loan were either sold and the proceeds applied to the loan or were delivered to petitioner between January 1 and October 3, 1930. Margan's books contain no entries for the period January 1 to October 3, 1930. The only records of the company in which any entries appear for that period are its check book and bank passbook. On June 5, 1930, petitioner filed his income tax return for 1929. In that return he claimed a loss of $593,215.64, said to have been sustained on the sale of various securities in 1929. Included among the losses so claimed was a loss claimed to have been sustained on the complete liquidation*820 of Margan in the sum of $593,180.54. On the same date, June 5, 1930, the income tax return of Margan for 1929 was filed. That return was signed and sworn to by petitioner's counsel in this proceeding as president, and by petitioner as treasurer of the corporation. That return contains the statement that the corporation was dissolved December 28, 1929. No income tax return for any subsequent year was filed by or on behalf of Margan. On April 27, 1932, petitioner executed an affidavit which was filed with the respondent on May 3, 1932, wherein he stated: "The Margan corporation was liquidated on December 31, 1929, and there was distributed to the taxpayer certain marketable securities in return for the Margan Corporation stock which was cancelled." The petitioner continued to claim and contended in connection with his tax liability that Margan was completely liquidated on or about December 28, 1929, until after the statute of limitations for assessment for 1929 had expired. The respondent accepted petitioner's return for 1929 and allowed the claimed deduction for a loss of $593,180.54 in 1929 as having been sustained on the liquidation of Margan, and allowed as a *7 *821 net loss for that year the amount of $403,291.89 as shown by petitioner's return. If no loss resulting from the claimed complete liquidation of Margan in 1929 had been claimed or allowed for that year the petitioner would have had a taxable net income for that year in excess of $170,000. In his income tax return for 1930 petitioner claimed a loss of $163,276.66 on the sale of five blocks of stock. Two of the five blocks were acquired for cash and there is no issue as to gain or loss on those. The other three blocks, consisting of 3,000 shares Fox Theatre, 4,300 shares of Simms Petroleum, and 2,000 shares Sinclair Oil, were acquired from Margan upon its liquidation. In computing a loss upon the sale of those three blocks petitioner used as a basis the cost of the stocks to Margan. The respondent corrected the basis, using market value of the stocks at December 28, 1929, and thereby determined a profit on the sales in 1930 of $2,668.70. In October 1932 after the respondent's notice of deficiency for 1930 had been issued, and after petitioner's then counsel had prepared a petition to the Board for redetermination, petitioner called in the accountant who had opened Margan's books*822 and had prepared petitioner's 1929 and 1930 income tax returns and requested him to review the entire matter. The accountant concluded that Margan had been liquidated in 1930 instead of in 1929 as previously reported, and so advised petitioner. Thereafter, on November 3, 1932, the petition for redetermination was filed with the Board. OPINION. ARUNDELL: We confess to considerable difficulty in ascertaining what we are to decide in this case. The petition filed alleges three errors on the part of the respondent. The first deals with interest, the second with profit on the sale of securities, and the third with dividends. These alleged errors are denied and thereby the issues are framed. But neither side offered any evidence directly on these issues and they are not mentioned in the briefs. In the facts alleged in the petition it is set forth that petitioner commenced the dissolution of the Margan corporation on or about December 28, 1929, but he is now advised and believes that the dissolution was not effective until some time in 1930. These facts are denied in respondent's answer. By amended answer the respondent sets forth representations made by the petitioner concerning*823 the dissolution of Margan and avers that the petitioner is now estopped from denying that Margan was in fact dissolved on December 28, 1929. To this petitioner replied, in substance, that the respondent's agents had examined petitioner's records prior to the running of the statute of limitations and that respondent was in possession of all *8 the facts; that respondent did not rely on petitioner's representations; and that petitioner was under the erroneous belief that Margan was dissolved in 1929 until after October 8, 1932. The evidence was directed for the most part to the question of estoppel and that is the principal matter argued in the briefs. Counsel for the respondent questioned witnesses as to the cost to petitioner of the securities turned in to Margan and he argues the matter on brief. Clearly the pleadings frame no issue concerning petitioner's cost. In view of the failure of the parties to offer evidence on the matters alleged in the petition to be erroneous, and their disregard of those matters in the briefs, we take it that those matters are abandoned. We will not decide them, but affirm the respondent's determination in respect to them for lack of evidence*824 to show error. The question of estoppel is treated by both parties as the principal question at issue. In our view of the case, the facts are against the petitioner as to the time of liquidation, and we pass the question of estoppel for the time being. The petitioner originally claimed that the Margan Co. was dissolved and completely liquidated within the year 1929. His claim in that respect was examined by respondent's agents, was approved, and the tax liability of petitioner and the corporation settled on that basis. The respondent is now adhering to the facts so represented to him and further found to be true upon his investigation. The petitioner has the burden of showing the facts to be otherwise. Margan filed its certificate of dissolution in 1929. Its stock was turned in in that year and canceled. Both petitioner and Margan reported dissolution and liquidation in that year. Thereafter Margan kept no books and filed no tax returns, despite the requirement of the taxing statute that every corporation shall file a return. All of these facts, and petitioner's subsequent representations in respect thereto, point to liquidation in 1929. None of these facts are now*825 disputed by petitioner. Liquidation is a question of fact. . It has been repeatedly held that the nature of a distribution will not be determined by what it was called when made, but by the facts and circumstances in the case. In the Guild case, supra, we said: Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business. See to the same effect, ; affd., ; ; ; . If, as the *9 cited cases hold, the ultimate fact is not to be determined solely on the basis of concurrent statements, much less is it to be decided on the subsequent self-serving statements of a stockholder. In the face of the several facts indicating liquidation in 1929, petitioner maintains that it*826 occurred in 1930, basing his claim on the facts that a bank held some of Margan's securities in the latter year as collateral for a loan and that a bank account was maintained in the name of Margan until in October 1930. But there is no showing that the securities held by the bank were not distributed to petitioner in 1929 subject to the loan. Most of the securities being in petitioner's name, and petitioner being in control of Margan, that could readily be accomplished with very little formality. In fact, it appears more than likely that that is what occurred. It is stipulated that the securities pledged were either sold and the proceeds applied to the loan or were delivered to petitioner in 1930. There is no evidence of any formal distribution of any of the securities to petitioner in 1930 as would be the case if they were the property of the corporation. The bank account, although maintained in the name of Margan, appears to have been used by the petitioner fully as much as by the corporation. There are numerous deposits from sources other than the securities held by the bank as collateral for Margan's loans. Such other deposits were derived from securities which the evidence*827 shows were held by Margan on December 28, 1929, and which presumably were received by petitioner in the liquidation in 1929. Petitioner failed to bring in the minute book of the corporation, or to account for his failure, although counsel for the respondent specifically inquired concerning it. We may assume that it would show the steps authorized to be taken towards winding up the corporation, and what was actually distributed. No evidence was offered to show the actual condition of the corporation at the end of the year 1929. We accordingly hold that petitioner has failed to establish that Margan was not liquidated in 1929. Consequently his loss, if any, on liquidation was sustained in that year and not in 1930 as he now claims. Having decided that in every practical sense the liquidation took place in 1929, it becomes unnecessary to pass on the question of estoppel. In a case of this character, however, it is not amiss to note the persuasive force of respondent's argument that petitioner is estopped to deny that the liquidation took place in 1929. The outstanding facts are that petitioner represented that liquidation occurred in 1929, that he persisted in that view until*828 after the statute of limitations ran against the year 1929, that as a result thereof he obtained the benefit of a loss deduction and thereby escaped tax *10 on income in excess of $170,000, and that he now seeks to change position and get the benefit of the same loss in 1930. Under similar circumstances the courts have held estoppel would apply. See ; ; . Decision will be entered for the respondent.