ZIMMERMANN v. COMMISSIONER

JOHN E. ZIMMERMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SARAH A. F. ZIMMERMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ZIMMERMANN v. COMMISSIONER Docket Nos. 82491, 82488. United States Board of Tax Appeals 36 B.T.A. 279; 1937 BTA LEXIS 735; July 13, 1937, Promulgated *735 Where a husband sold securities through a broker at the market price to his sife, and she sold other securities through the same broker at the market price to her husband; each spouse having ample funds in his own name to pay for the securities so purchased; each spouse having a separate account with the broker; each spouse maintaining separate books of account and the sales in each case being conducted in the usual manner; there being no agreement for return of purchase price, for repurchase or reacquisition, and there being actually no reacquisition of any such securities by either purchaser, the sales were bona fide and losses resulting therefrom were properly deductible. Henry S. Drinker, Jr., Esq., and Frederick E. S. Morrison, Esq., for the petitioners. Hartford Allen, Esq., and Walter W. Kerr, Esq., for the respondent. MILLER *280 These two cases were consolidated for hearing and decision. Both involve claimed deficiencies in income tax for the year 1932 as follows: John E. Zimmermann $33,396.12 Sarah A. F. Zimmermann 6,006.19 Each involves the question whether sales made by each of the petitioners to the*736 other of certain stocks and securities were bena fide so as to allow the deduction of losses so sustained. The respondent also determined an additional tax of 50 percent of the amount of the deficiencies of each petitioner on grounds of fraudulent intent to evade the tax. FINDINGS OF FACT. The facts were stipulated in part as follows: Petitioners, John E. Zimmermann and Sarah A. F. Zimmermann, during the year 1932 were and ever since then have been husband and wife. The amounts of the securities (other than the $40,000, bonds of Pioche Mines, Consolidated) acquired by the petitioner, John E. Zimmermann, the names of the Corporations, and the costs or other bases of such securities to the said petitioner specified in paragraph V (a) of the petition of John E. Zimmermann, were as therein stated, and such securities were in each case owned and held by the said John E. Zimmermann continuously until December 28, 1932. The amounts of the securities acquired by the petitioner, Sarah A. F. Zimmermann, the names of the corporations, and the costs or other bases of such securities to the said petitioner, specified in paragraph V (a) of the petition of Sarah A. F. Zimmermann, were*737 as therein stated, and such securities were in each case owned and held by the said Sarah A. F. Zimmermann continuously until December 28, 1932. The prices specified in paragraph V (c) of the respective petitions were the fair narket values of the securities (other than the $40,000, bonds of Pioche Mines, Consolidated) named therein on December 28, 1932, less commissions and taxes. Such securities are the identical securities referred to in paragraphs 2 and 3 hereof. This paragraph, or anything contained in this stipulation, shall not be taken as an admission on the part of the respondent, or as a conclusion, that any of the securities named in said paragraph V (c) were sold on said date. This stipulation in no way covers or applies to the $40,000 b0nds of Pioche Mines, Consolidated. The named paragraphs of the respective petitions are incorporated herein by reference. It is unnecessary to set out in detail the stocks and bonds in question. The petitioner, John E. Zimmermann, claimed a capital loss on sales of $276,659.30, of which the Commissioner disallowed $257,358.27 as sales to his wife. Sarah A. F. Zimmermann claimed a capital loss on sales of $55,377.49, of which*738 the Commissioner disallowed $51,159.16 as sales to her husband. *281 Petitioners both have independent property, substantial in amount. John E. Zimmermann was formerly president of Day & Zimmermann, Engineers, and since 1929 has been president of United Gas Improvement Co., a large Philadelphia company. Sarah A. F. Zimmermann inherited from her father, W. W. Frazier, Sr., in 1921, an estate of over $250,000, in value; and about 1922 her husband gave her common stock in his firm of Day & Zimmermann, exchanged in 1927 for United Gas Improvement Co. stock, of which she owned about 11,665 shares on December 28, 1932, having a value then of $20 a share, or $223,300. In the year 1932 Sarah Zimmermann's ordinary net income returned was $55,610.61; and her interest received was $5,300. John E. Zimmermann managed his wife's business affairs from the beginning of their married life in 1900. She never took any active part therein. Zimmermann acted without any written power of attorney. One Rundle, who acted as secretary for Zimmermann and his wife, kept separate books on their stock and security holdings, computed their income from them, and prepared their income tax returns. *739 In 1932 and 1933 Zimmermann and his wife maintained three separate individual and joint bank accounts, including accounts in the Pennsylvania Co. for Insurance on Lives and Granting Annuities, and Drexel & Co. In each of these accounts the books showed the source of all deposits as well as withdrawals, whether by John Zimmermann or Sarah Zimmermann. Early in December 1932 Zimmermann conferred with one Drinker, of Drinker, Biddle & Reed, his counsel, concerning the depreciation in market value of various stocks and bonds held by Zimmermann and his wife, and on what method might lawfully be adopted by the two petitioners to realize losses for tax purposes on this depreciation. On December 13, 1932, Zimmermann conferred further with one Morrison, a tax consultant of the same firm. Zimmermann was anxious to keep within the law. Both Drinker and Morrison advised him that to do so the sales between husband and wife must be absolute, irrevocable, with no strings attached in the form of understandings or agreements to repurchase from each other, and at fair market value, and that each spouse must have sufficient independent resources to make the necessary purchases. Morrison looked*740 over the securities of John Zimmermann and Sarah Zimmermann; Zimmermann prepared a list of them and spoke to his wife about the matter. He told her he thought it desirable to sell some of the securities that had shrunk very greatly in value, so as to obtain losses that could be properly and legally deductible; that he was doing the same thing with his securities and that the whole matter was being done and *282 conducted under the advice of counsel, Drinker and Morrison. Otherwise Zimmermann acted throughout the transaction in his wife's behalf, as he had done in all business transactions affecting her since their marriage in 1900. About December 18 Zimmermann called Morrison on the telephone and told him to go ahead with the sales, and also informed his stockbroker, William H. Newbold's Son & Co., with whom he carried a security account, that Morrison would make the sales for himself and his wife. Morrison had a list of securities which Zimmermann had instructed him to sell. With this he went to Newbold's and directed F. E. Newbold, a partner therein, to sell certain stocks and bonds of John Zimmermann and to enter purchase orders for Sarah Zimmermann; and also to sell*741 certain stocks and bonds for Sarah Zimmermann and to enter purchase orders for John Zimmermann. The instructions in each instance were to purchase like stocks and securities in the amounts sold by the other spouse, whether or not they were actually the same stocks and securities. The sales, in every instance, were made at market value, the price being ascertained by an average of the day's market quotations, if listed, or if not listed, then by adopting a price halfway between bid and asked prices, secured from brokers dealing in the particular security. No question arises on this point except as to the fair market value of certain bonds of the Pioche Mines Co., the facts on this security being set out hereinafter. Zimmermann sold all these stocks and bonds to his wife instead of outsiders because as these securities were selling at extremely low prices he thought they would increase in value and prove a good investment. His motive was to take advantage of a shrinkage in prices to establish proper and legal deductions for tax purposes. On the next day after the sales, December 29, 1932, Zimmermann went to his safe deposit box at the Prnnsylvania Co. for Insurances on Lives and*742 Granting Annuities, which was held jointly with his wife, and to which she also had access, and withdrew all the stocks and securities sold by himself and by his wife (except certain securities then held by Newbold's to secure his debit balance), which were delivered to his secretary, Rundle. Rundle and Morrison delivered them in turn to Newbold's, and by Morrison's instructions confirmations of the sales were duly mailed to Zimmermann at his office in Arch Street, Philadelphia, and to Sarah Zimmermann at her house. Brokers' commissions were charged to seller and buyer on all sales and the seller was charged with the transfer tax due on the sale. New certificates were issued to the respective buyers in all instances save two, in which the stocks were left in the broker's name. Certain of the bonds were bearer bonds, passing on delivery. In filling *283 the orders of sale Newbold's used, as customarily, two tickets for all listed stocks and securities, but in "over the counter" sales of nonlisted securities used a single slip for the sale order, endorsing the purchase on the back. On January 6, 1933, as evidenced by receipts signed on behalf of both petitioners by Rundle, *743 their secretary, on that day, all the stocks and bonds, respectively, bought by the two petitioners, were delivered by the brokers to the buyers, except the Philadelphia & Reading Coal Co. bonds, the United States Industrial Alcohol Co. stock, and the Pennsylvania Salt Manufacturing Co. stock, all of which was retained by the brokers to secure Sarah Zimmermann's debit balance with them, which was then $36,985.71. John Zimmermann's debit balance at the same time was $30,689.04, against which Newbold's held adequate collateral. There were no understandings between petitioners on repurchasing any of the stocks or securities sold by the one to the other, and none of them were ever sold back to the seller; but the securities then bought were either retained by the buyer (to the date of the hearing) or else sold to outsiders. Beyond this fact, the later history of particular stocks and securities, set out in full in the testimony, need not be set out. All dividends from stocks bought, interest from bonds bought, and other gains derived therefrom were received by the buyer, Zimmermann, or his wife, as the case might be, and were returned as income by the buyer for tax purposes. The*744 same rule was followed as to losses. Zimmermann had maintained an active securities account with his broker, Newbold's, since 1917. Sarah Zimmermann had made substantial stock purchases, around $200,000, through the same brokers in 1925, but these were not her first purchases. Her account between that time and 1932 was almost inactive, there being occasional purchases and sales in the interval, but none in 1931. Her account was closed, that is to say, balanced, on July 12, 1933, and not reopened until June 1934. On the sale of the stocks and bonds by Zimmermann and his wife on December 28, 1932, the brokers charged those bought to their respective accounts, retaining sufficient stock as collateral to secure the debit balance in each instance, and liquidated this debit by applying to it dividends and interest and the proceeds of later sales. In Sarah Zimmermann's account, however, the sum of $17,000 was credited to her on May 17, 1933, as "check John E. Zimmermann." This check, numbered 349, was drawn by Zimmermann on May 17, 1933, to W. H. Newbold's Son & Co. on an individual and joint account of his and Sarah Zimmermann's at the Pennsylvania Co. A check for the same amount, *745 numbered 348, had been drawn and signed by Sarah Zimmermann on the same account on the preceding *284 day, May 16, 1933. Zimmermann had taken this check home for his wife to sign, but Zimmermann, not finding his wife's check at hand on the 17th of May, when he wished to make the payment, drew the second check and signed it himself. Later Sarah Zimmermann's check was brought in and Rundle, their secretary, canceled it. The balance in this joint account on May 15, 1933, was $3,270.01. On May 16 there was deposited in this account $16,804.20 by a check drawn by Zimmermann to Newbold's for that amount on May 15. The withdrawal of $17,000 was debited to this joint account on May 18. The $17,000 was charged to Sarah Zimmermann's account by Rundle. Sarah Zimmermann's account at Newbold's was finally balanced by the credit of proceeds from the sale of certain stock in June 1933, and the credit balance was paid to her by check on July 12, 1933. Zimmermann directed Newbold's to sell on December 28, 1932, $40,000 of Pioche Mines, Consolidated, bonds. Sarah Zimmermann bought these bonds for $4,100, and Zimmermann received a credit on the broker's books of $3,884. Zimmermann*746 had bought at par value $30,000 of the bonds of the Pioche Mines, Consolidated, at Pioche, Nevada, in the summer of 1929, and, in the summer of 1930, $5,000 more of the bonds at par. With the first $5,000 lot of bonds bought he received a stock bonus of 500 shares. This stock then had a fair market value of $1 a share. Later in 1930 and before December 29, 1930, Zimmermann subscribed for a second $5,000 lot of these bonds but did not receive them until he paid for them, half on December 29, 1930, and half on January 1, 1931. He received no stock bonus on the second $5,000 lot of bonds subscribed. The bonds were sold by Zimmermann "over the counter", and the fair market value at that time was ascertained by Zimmermann's broker consulting with other brokers who dealt in the securities. The Pioche Mines Co. has never been in receivership, although suffering some loss from a fire in 1930, and at the time of the hearing was beginning to mine and ship ore. The bonds were sold by Zimmermann to Sarah Zimmermann on December 28, 1932, at their fair market value. Neither Zimmermann nor his wife had any fraudulent intent to evade the payment of income tax in making the sales of stock*747 and securities set out above, but they had the intent to avoid the payment of income taxes by legal methods. OPINION. MILLER: These cases present for our consideration a familiar device for tax avoidance, now prohibited by section 24(a)(6) of *285 the Revenue Act of 1934, 1 namely, the transfer of securities by one spouse to the other, to establish capital losses for deduction from income. *748 As the transactions involved in each of the two cases occurred prior to the enactment of the 1934 Act, our decision turns upon the question whether these transfers constituted bona fide sales. That question turns upon the further question whether the seller, in each case, parted finally with all title and right of every kind in and to the securities transferred or whether he remained in a position of control thereof. Commissioner v. Behan, 90 Fed.(2d) 609. Although it has been said in a number of cases that transfers between members of the same family should be subjected to searching scrutiny, the object of the scrutiny is to determine whether the actual formalities of a sale have been observed, and this Board and the courts have recognized the validity of husband-and-wife sales made to realize tax losses in numerous cases. Andrew J. Peters,28 B.T.A. 976; appeal dismissed, 69 Fed.(2d) 999; Benjamin T. Burton,28 B.T.A. 1242; Joseph E. Uihlein,30 B.T.A. 399; affd., *749 82 Fed.(2d) 944; Charles F. Fawsett,31 B.T.A. 139; Frank M. Arguimbau,31 B.T.A. 604; Edmund S. Twining,32 B.T.A. 600; affd., 83 Fed.(2d) 954, certiorari denied, 299 U.S. 578; Thomas W. Behan,32 B.T.A. 1088; affd., Commissioner v. Behan, supra;Du Bois Young,34 B.T.A. 648. In the instant cases the petitioners, husband and wife, acted pursuant to the advice of counsel throughout. The record reveals a scrupulous compliance with the law as stated in the decisions of the Board, and of the courts. Cf. Charles E. Mitchell,32 B.T.A. 1093, at p. 1130. The sales were made in all cases at the fair market price, through a broker. Commissioner v. Behan, supra;Du Bois Young, supra;Edmund S. Twining, supra.Commissions were charged to the seller and the buyer and the tax was charged to the seller. Commissioner v. Behan, supra;*750 Edmund S. Twining, supra.The petitioners maintained separate brokerage accounts, and upon the execution of each *286 order their separate accounts were charged and the usual broker's memorandum was sent to each. Charles F. Fawsett, supra.The transactions were treated as sales and purchases in each case upon the individual books of account of both seller and buyer. Joseph E. Uihlein, supra. Each petitioner was financially able to buy and pay for all purchases made. Commissioner v. Behan, supra;Du Bois Young, supra;Charles F. Fawsett, supra;Edmund S. Twining, supra;Andrew J. Peters, supra. There was no agreement or understanding between the petitioners that the purchaser would hold the transferred securities for the other, or that the purchase price would be returned to the purchaser; or that the purchaser would repurchase or reacquire the securities sold. Du Bois Young, supra;*751 Edmund S. Twining, supra;Joseph E. Uihlein, supra. There was, in fact, no reacquisition of any of the securities sold, by either purchaser, but instead such securities were, in each instance, retained as a part of the separate estate of the purchaser or sold to strangers. Du Bois Young, supra;Joseph E. Uihlein, supra;Edmund S. Twining, supra. Dividends and interest received by the respective petitioners upon securities so purchased and held were returned in their income tax returns for subsequent years. Thomas W. Behan, supra. The fact that there were simultaneous sales - husband to wife and wife to husband - each selling different securities to the other, but all in the same transaction, arranged by counsel for petitioners and consummated by the joint action of petitioners, petitioners' secretary, petitioners' counsel and petitioners' broker, did not cause the sales to be any the less bona fide. The question is whether "the seller each time followed a usual procedure in making absolute bona fide sales of such property which would serve to fix any losses so that they*752 would be realized and so deductible from gross income under section 23 of the Revenue Act of 1928, subdivision (e)(1), (2) * * *." Commissioner v. Behan, supra. In both the Behan case and the Fawsett case similar situations existed, and in each case the sales were held to be bona fide. Respondent contends that the sales were not bona fide because the purchase price of the securities purchased by Sarah Zimmermann was paid, in part at least, by John Zimmermann from funds realized by him from the sale of the same securities. This contention is based, apparently, upon the fact that on May 15, 1933, Zimmermann deposited in an individual and joint account of himself and his wife the sum of $16,804.20, following which, on May 17, 1933, he drew against the same account a check in the amount of $17,000, which was credited to Sarah Zimmermann's *287 brokerage account. These transactions took place nearly five months after the sales of securities under consideration. The evidence shows that Sarah Zimmermann's credit with her brokers was good at all times; that her dealings were protected by adequate collateral, and, as a matter of fact, her debit balance*753 with her brokers was wiped out shortly after by sales of securities and a credit balance of approximately $20,000 was paid over to her by them. Moreover, Sarah Zimmermann had actually drawn a check in the amount of $17,000 on the same account and for the same purpose, but for some reason it was not available at her husband's office when he was ready to send it to the broker's office, so he drew another in the same amount. The amount of $17,000 was, comparatively, only a small part of the total price of the securities purchased by Sarah Zimmermann. Even if we treat the $17,000 as John Zimmermann's, throughout the transaction, the result is the same, for the Board has sustained sales in which the wife's purchase money was the gift of the husband. Cf. Commissioner v. Behan, supra; Arguimbau v. Commissioner, supra. But under all the circumstances of separate accounts here present, we need not go so far. The Board has also upheld as bona fide sales made and purchases effected with funds kept in a joint account of husband and wife. *754 Carl P. Dennett,30 B. T.A. 49. The situation in this case comes clearly within the test applied by the court in Commissioner v. Behan, supra, where it said: What makes weight in favor of the Commissioner's contention that gifts were the only results of the transactions are such inferences as might be drawn from the fact that the respondents were married and because of that relationship and the fact that each helped the other finance purchases the financial well being of one might inure to the benefit of the other. Yet it was shown that each was financially able to buy and pay for all purchases made leaving their mutual financial assistance but a convenience; not a necessity without which the purchases were impossible. * * * The Commissioner points out also that Zimmermann carried out the sales on his wife's behalf as well as his own, but we can find nothing objectionable in such an agency. Sarah Zimmermann was informed of his intentions, and, it appears, generally left such matters to him. The fact that a husband wholly manages and controls his wife's property as her agent does not alter the ownership of the property itself. Cf. *755 Poe v. Seaborn,282 U.S. 101. Under the laws of Pennsylvania a wife may hold a separate estate, make contracts, and buy and well property of the character here involved. Purdon's Pennsylvania Statutes Annotated, title 48, Marriage §§ 31, 32; Penn. Laws, 1893, p. 344 (Act of June 8, 1893, § 1, 2); Dig. Penn. Law (1921) §§ 14569, 14570, 14574. She can also act through an agent and her husband can act as her agent. See Goedecke v. Mock,174 Atl. 607; Fitzgerald v. Kwaterski,174 Atl. 596; reversed on *288 another point, 178 Atl. 385. See also Commissioner v. Behan, supra, citing Commissioner v. Hale, 67 Fed.(2d) 561. In both Charles F. Fawsett,31 B.T.A. 139, and Edmund S. Twining,32 B.T.A. 600, the Board upheld, as bona fide, sales made by husband to wife and wife to husband, where the husband acted both for himself and his wife. The important consideration is that the sales in each case were made in such manner as to divest the seller of title and control, according to the tests which have been laid down in the decisions. *756 We conclude, therefore, that the sales of the various stocks and bonds by Zimmermann and by his wife were bona fide and the resulting losses should, accordingly, be recognized for tax purposes. At the conclusion of the hearing of this case the presiding Board Member, after a full consideration of all the evidence presented, held that neither petitioner made the sales here in question with an intention to defraud the Government of income tax properly due. After a full review of the evidence, we are of the same opinion. Respondent abandoned this issue in his brief. In any event, as we have found that the sales were bona fide, the finding necessarily follows that there was no fraud. Du Bois Young, supra;Thomas W. Behan, supra; and the penalties assessed will be abated. We have found on uncontradicted testimony of Zimmermann the cost of the Pioche Mines, Consolidated, bonds and their fair market value at date of sale. They were bought at par and sold at market. With the first $5,000 lot bought in 1930 Zimmermann received a stock bonus of 500 shares. These 500 shares had then a fair market value of $1 each; and this value should be considered*757 in determining the cost of this lot of bonds to Zimmermann. With respect to the second $5,000 lot of bonds of the Pioche Mines, Consolidated, petitioner, John E. Zimmermann, failed to show that he sustained a capital loss. He subscribed for the last $5,000 block of these bonds before December 29, 1930; paid for half of them on December 29, 1930, and for the other half in January 1931. The statute, section 101(c)(8), Revenue Act of 1932, defines capital assets as property held by the taxpayer for more than two years. According to the evidence, Zimmermann may have acquired these bonds (by subscription of the whole of the $5,000 lot, and by actual delivery of one-half of this lot) as late as December 28, 1930, and since the sale was made on December 28, 1932, he would not have held any of the last $5,000 lot more than two years. The sale and transfer of title took place on December 28, 1932, although the bonds were not actually delivered until the next day. We held in Harriet M. Hooper,26 B.T.A. 758, that the day of purchase is to be excluded (which we have assumed to be December 28, 1930, since the testimony does not permit us to assume the date to be*758 earlier) and the day of *289 sale to be included (here December 28, 1932) in reckoning the period, and unless it covers one day more than two years, the requirement of the statute has not been met. Here, it will be seen, the period December 29, 1930, to December 28, 1932, is precisely two years, and hence, under the rule of that case, the last $5,000 block of Pioche Mine bonds was not a capital asset and any loss on their sale is therefore subject to the limitations of section 23(r)(1). The capital net loss will be reckoned without them. Judgment will be entered in each case under Rule 50. Footnotes 1. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) GENERAL RULE. - In computing net income no deduction shall in any case be allowed in respect of - * * * (6) Loss from sales or exchanges of property, directly or indirectly, (a) between members of a family, or (b) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph - (c) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (d) the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants. ↩