Griswold Co. v. Commissioner

THE GRISWOLD COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Griswold Co. v. Commissioner Docket No. 68628. United States Board of Tax Appeals 33 B.T.A. 537; 1935 BTA LEXIS 739; November 22, 1935, Promulgated *739 1. Stock "control" of this petitioner was in the residuary trustees under the will of Morton F. Plant, deceased, on August 1, 1923, on which date the executors of his estate exchanged certain securities - forming a part of the estate of Plant - with this petitioner for certain of its shares of capital stock, thereby increasing its outstanding capital stock by the said number of shares, and on the following day, to wit, August 2, 1923, the executors apportioned a part of such shares to the residuary trusts, which, together with the shares already held by such trusts, constituted control under section 202 of the Revenue Act of 1921. Held, the foregoing was a nontaxable exchange under paragraph (3), subdivision (c) of section 202 of the Revenue Act of 1921, therefore, the basis for the determination of the loss occasioned by worthlessness of value at the date of the death of Plant, adopting the principle of Rewster v. Gage,280 U.S. 327. of Brewster v. Gage,280 U.S. 327. 2. For lack of evidence we are unable to determine whether a certain transaction by which the petitioner exchanged securities which it held in another corporation for*740 its own stock constituted a taxable transaction, reported by itself as and held to be such by the respondent. E. Sheldon Stewart, Esq., for the petitioner. R. E. Smith, Esq., for the respondent. MORRIS *538 The respondent having determined a deficiency in income tax of $5,811.52 for the calendar year 1930, the petitioner brings this proceeding for the redetermination thereof, alleging the commission of two errors by the respondent - (1) his determination that the loss to petitioner upon 4,125 shares of preferred stock of the West Bay Co., which stock became worthless in 1930, was the value thereof in 1923 when it was transferred to the petitioner by the estate of Morton F. Plant, instead of its value at the death of said Plant in 1918, and (2) his determination that the petitioner realized a taxable gain upon the purchase of its own stock in 1930. FINDINGS OF FACT. The petitioner is a corporation, organized and incorporated under the laws of theState of Connecticut, with its principal place of business at 45 Wall Street, New York City. Morton F. Plant, who died on November 4, 1918, by the sixth paragraph of his will, left all of the*741 rest, residue, and remainder of his estate, intrust, for the benefit of his widow and children. At the time of his death he owned 20,000 shares of capital stock of this petitioner, constituting all of its outstanding stock, except two qualifying shares. On May 24, 1923, the executors of his estate "turned over" to the petitioner 10,400 of his said shares of capital stock and on June 5, 1923, they apportioned the remaining 9,600 shares among the residuary trusts and Henry B. Plant. On August 1, 1923, the petitioner "turned over" to said executors 4,800 shares of its capital stock in exchange for certain securities, among which were 4,000 shares of preferred stock of the West Bay Co., having a fair market value on that date of $50,000, and on August 2, 1923, the said executors apportioned those 4,800 shares, so received, among the residuary trusts and Henry B. Plant. On August 12, 1924, the petitioner received 125 shares of the West Bay Co., preferred stock from the Terminal Realty Co., upon the dissolution of that company. On November 4, 1918, date of the decedent's death, the said 4,000 shares of preferred stock of the West Bay Co., had a fair market value of $100,000, the value*742 at which they were taxed for estate tax purposes. The stock became worthless and was charged off by the petitioner during the year 1930. *539 In addition to the foregoing the parties have stipulated the following: It is further agreed between the parties hereto that if it should be held that the proper basis for determining the loss suffered on the 4,125 shares of preferred stock of the West Bay Company, which stock became worthless during the year 1930, was the value of such stock upon August 1, 1923, and it should be further held that petitioner realized a profit upon the purchase of its own shares of capital stock during the year 1930, petitioner's taxable income should be increased by the sum of $50,000 and petitioner subject to a tax of $5,811.52. If, on the other hand, it should be held that the proper basis for determining the loss suffered upon the 4,125 shares of preferred stock of the West Bay Company, which stock became worthless during the year 1930, was its value on November 4, 1918, the date of the death of Morton F. Plant, then the loss suffered by petitioner was $100,000, petitioner's return for the year 1930 was correct, and petitioner shall not be*743 subject to any deficiency tax. In determining his deficiency the respondent took the position that the proper basis for determining the loss upon 4,125 shares preferred stock of the West Bay Co. which became worthless during the year 1930 was its value on August 1, 1923, when received by petitioner from the estate of Morton F. Plant, rather than its value on November 4, 1918, the date of the decedent's death. Respecting the first question in dispute, that is, the basis for the determination of loss occasioned by the worthless stock of West Bay Co. in 1930, the respondent's deficiency notice, attached to the pleadings, contains the following: The first point at issue is the reduction of $50,000.00 in the loss claimed of $100,000.00 on account of the worthlessness of 4,125 shares of preferred stock of the West Bay Company of Delaware. Information with the case discloses that the value of the stock involved on the books of the corporation at the time of acquisition in 1923 was $50,000.00 and that it was written up by journal entry on December 31, 1930 in the amount of $50,000.00 to bring the value to that shown in the inventory of the estate of Morton F. Plant, your contention*744 being that the basis to be used in determining the gain or loss on securities acquired from the estate is the value at the date of Mr. Plant's death, November 4, 1918, instead of the date of acquisition by the corporation, namely August 1, 1923 for the reason that the transfer to the corporation was a nontaxable transaction. It appears that Mr. Plant at the date of his death owned all the outstanding stock of the corporation, consisting of 20,000 shares. Under date of May 24, 1923, in accordance with the minutes of the corporation, it was voted that the offer of the executors under the will of Mr. Plant to return to the treasury of the corporation 10,400 shares of the capital stock of the corporation be accepted and that the said stock be placed in the treasury to be issued thereafter after for such purposes as might be duly authorized. Accordingly, the capital stock outstanding was reduced to 9,600 shares which were distributed on June 5, 1923 as follows: In trust for H. B. Plant 3,600 shares In trust for Mae C. Hayward 3,200 shares In trust for Philip M. Plant 1,600 shares To H. B. Plant (personally) 1,200 shares Total 9,600 shares *540 Under*745 date of August 1, 1923, the corporation acquired from the executors of the Estate of Morton F. Plant securities valued at $1,152,000.00 in exchange for 4,800 shares of stock of the corporation which stock was transferred by the executors on the following day to the above-mentioned trusts, in similar proportions. The executors of the estate considered the transaction a taxable exchange and computed gain or loss (including a loss of $50,000.00 on the stock in question) on the basis of the difference in values of the securities on the date of the death of Mr. Morton F. Plant, as reported for Federal inheritance tax purposes and the values of the securities on the date turned over to the corporation. On the returns filed by you for the years 1928 and 1929, you used as a basis in determining the gain or loss on the sale of the securities in question the value of the securities on the date acquired by you, or August 1, 1923. In accordance with the above facts, it is evident that on June 5, 1923, the total outstanding stock of the corporation was distributed by the executors of the Estate of Morton F. Plant to the above-mentioned trusts and that the estate did not own or control any*746 of the stock of the corporation at the time that the securities were exchanged for stock on August 1, 1923 and was not in control of the corporation after the exchange within the meaning of section 202(c)(3) of the Revenue Act of 1921. Accordingly, it is held that the gain or loss on the exchange in 1923 was recognizable for income tax purposes, in accordance with section 112 of the Revenue Act of 1928 and the basis used by the revenue agent in determining the loss on the West Bay Company stock, namely, the value of the securities on August 1, 1923, is sustained. * * * On August 1, 1923, petitioner bought from the executors of the estate of Morton F. Plant, deceased, 27,000 shares of Eastern Connecticut Power Co. common stock, par value $100 a share, which stock was carried on its books at $218,156.31. Those shares were exchanged on December 21, 1925, for 29,925 shares of Connecticut Electric Service Co., no par value, which latter shares were, on June 17, 1926, exchanged for an equal number of shares of Connecticut Electric Service Co. common stock voting trust certificates, par value $100 a share, which it carried on its books of account at the same original value, i.e., $218,156.31. *747 On March 11, 1929, the 29,925 shares of Connecticut Electric Service Co. rights were sold for $5.75 each, less $119.70 for stamps, or a net total of $171,949.05. On September 12, 1929, 4,550 Connecticut Electric Service Co. rights were sold for $11 each, or a total of $50,050. A later adjustment was made after the sale of the subscription rights on March 11 and September 12 - which were formerly carried on the books at a value of $7.290102, or a total value of $218,156.31 - by which the book figure was reduced to $6.4106934 or $191,840. Six thousand and seventy-two shares of that stock, that is, the stock carried at $6.4106934, were sold on December 12, 1930, at $65 a share, or $394,680, to the three trusts and to Henry B. Plant, beneficiary of one trust, in definite proportions prescribed by the will of Morton F. Plant, for which shares of the petitioner in the *541 same proportions were surrendered to it. The gain upon that transaction was shown upon the books of the petitioner to be $355,754.27. The petitioner reported a profit of $355,754.27 for the year 1930 on the sale of the aforesaid 6,072 shares of Connecticut Electric Service Co. stock, which the respondent*748 treated as a realized taxable gain. OPINION. MORRIS: Subdivision (c) of section 202 of the Revenue Act of 1921 and paragraph (3) thereunder provide as follows: (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized. * * * (3) When (A) a person transfers any property, real, personal or mixed, to a corporation, and immediately after the transfer is in control of such corporation, or (B) two or more persons transfer any such property to a corporation, and immediately after the transfer are in control of such corporation, and the amounts of stock, securities, or both, received by such persons are in substantially the same proportion as their interests in the property before such transfer. For the purposes of this paragraph, a person is, or two or more persons are, "in control" of a corporation when owning at least 80 per centum of the voting stock and at least 80 per centum of the*749 total number of shares of all other classes of stock of the corporation. When Morton F. Plant died, in 1918, he owned 20,000 shares or all of this petitioner's outstanding capital stock and those shares became a part of his estate. On May 24, 1923, the executors of his estate surrendered 10,400 of those shares to the petitioner and on June 5, 1923, such executors apportioned the remaining 9,600 outstanding shares among the residuary trusts of Plant and Henry B. Plant, 8,400 to the trusts and 1,200 to Plant. Consequently, those trusts, on August 1, 1923, owned 8,400 shares of the petitioner. On that date the said executors exchanged certain securities, among which were the 4,000 shares of preferred stock of the West Bay Co., for 4,800 shares of this petitioner's capital stock and, on the following day, August 2, 1923, the executors apportioned said 4,800 shares among the said residuary trusts and Henry B. Plant. The stipulated fair market value of the West Bay Co. stock having been $100,000 on November 4, 1918, the date of the decedent's death, and only $50,000 on August 2, 1923, the date when the exchange was consummated by apportionment of the shares received by the executors*750 to the residuary trusts, it is contended by the petitioner, on the one hand, that the former value *542 should be used in determining the loss because of the admitted worthlessness within the taxable year, and it is contended by the respondent, on the other, that the latter value should be used because the transaction between the executors and this petitioner on August 1 was not such a transaction as described in subdivision (c)(3) of section 202, supra. The petitioner argues that where property held by an executor as part of the residuary estate is turned over to a corporation in exchange for capital stock in such corporation and when immediately thereafter the said executor and the residuary legatees hold more than 80 percent of such corporation's outstanding stock, the transaction is one upon which no gain or loss is recognized, hence, no change of basis, and, consequently, the value at the time of the death of Morton F. Plant in 1918 should be used for the purpose of determining the claimed deduction. The respondent's sole argument is that the residuary trusts, or trustees, owned 87 1/2 percent of the petitioner's stock on August 1, 1923; that after the exchange*751 on that date the outstanding capital was 14,400 shares - owned, 8,400 shares by the trustees, being 9,600 shares less 1,200 distributed to Henry B. Plant, and 4,800 shares by the executors - and that the two entities are separate and distinct. It is conceded by him that if the separateness of the entities be ignored the "executors-trustees" owned 88 2/3 percent after the transaction in question, begun on August 1, 1923, by the receipt of the petitioner's stock by the executors, for other stock, and ending with the apportionment of that stock, so received, to the residuary trusts on August 2, 1923. We are of the opinion that the solution of this question lies within the principle of . Although the two cases arise under different sections of the revenue acts, they have one vital characteristic in common, namely, the date of acquisition of property. In one we find the question when property was "acquired by bequest, devise, or inheritance", in contemplation of the statute, that is, whether it was acquired upon the death of the testator, or, when physical distribution was made by his estate. *752 In the other we have the question of the date of acquisition of property under an exchange provision of the statute for the purpose of determining control of a corporation, that is, whether the residuary trusts prior to distribution owned the property constituting the residuary estate and were in control of the stock of the corporation after the exchange in question or whether physical distribution is a necessary factor in the determination of that control. In the one the residuary legatee was an individual, while the residuary legatees in the other were trusts, but that distinction is immaterial. . *543 If the property in the estate of Plant was acquired, in legal contemplation, by his residuary trustees, upon his death, then it must necessarily follow that all future acts affecting that property must be viewed in the light of the interests of such residuary trusts, irrespective of the fact that physical consummation of the transaction by which property of the estate was exchanged for other property was accomplished by a legal entity other than those residuary trustees, i.e., executors. *753 , points out the distinguishing characteristics governing the vesting of real and personal property, that is, upon death of the owner title to his realty passes to his heirs or devisees, whereas, in a case of personalty, it does not immediately vest. The Court says, however, speaking of the latter: * * * But immediately upon the death of the owner there vests in each of them the right to his distributive share of so much as shall remain after proper administration and the right to have it delivered upon entry of the decree of distribution. [Citations.] Upon acceptance of the trust there vests in the administrators or executors, as of the date of the death, title to all personal property belonging to the estate; it is taken, not for themselves, but in the right of others for the proper administration of the estate and for distribution of the residue. The decree of distribution confers no new right; it merely identifies the property remaining, evidences right of possession in the heirs or legatees, and requires the administrators or executors to deliver it to them. The legal title so given relates back to the date of the death. * * *754 * When the executors, in the instant case, accepted the properties of the estate, upon the death of Plant, they were vested with all of its personal property "not for themselves", however, "but in the right of others for the proper administration of the estate and for distribution of the residue" thereof. The acts of the executors in the administration of the estate are in behalf of those who derive their rights from the estate, in this instance, the residuary trustees. Therefore, when this stock exchange took place on August 1, 1923, when an exchange of one type of ownership was made for another the executors surrendered for the residuary trustees an interest in one corporation for an interest in another. Whatever "control" was relinquished or acquired by that transaction was in the right of the residuary trustees and not of the executors themselves, who had no property rights per se. We are of the opinion that the exchange in controversy was a nontaxable transaction, that no new base was established thereby and, therefore, that the basis for the determination of the loss in the taxable year under consideration is the value at the date of Plant's death in 1918 and not the*755 value in August 1923. The reasoning in support of the foregoing conclusion must be viewed in the light of the statutory definition, which makes ownership the test of what constitutes "control" and has no bearing upon the actual *544 control over the corporate affairs which a stockholder exercises through his vote. . The loss claimed was on 4,125 shares of preferred stock of the West Bay Co. It is clear from the stipulation, however, that only 4,000 shares were involved in the exchange and that petitioner acquired 125 shares in 1924 upon the dissolution of the Terminal Realty Co. As to the 125 shares, therefore, the basis is the fair market value at the date of acquisition. There is not enough evidence in the record bearing upon the second issue, relating to the exchange of Connecticut Electric Service Co. securities for stock of the petitioner, to warrant dealing with the subject matter at any length. Substantially all that we know is that there was such a transaction, but the purpose for which it was consummated, whether intended as a partial liquidation, as the petitioner argues, or not, we are unable to*756 say. Not even are the resolutions of the petitioner effecting this exchange before us. The petitioner's books of account disclosed a profit upon the transaction of $355,754.27, which amount it reported in its return for 1930. The respondent has found that this amount was correctly reported. There is no evidence to overcome the correctness of the treatment of this transaction as it now stands. The respondent's determination upon this issue must be sustained. See ; certiorari denied, . Judgment will be entered under Rujle 50.