Roberts v. Commissioner

E. A. ROBERTS AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roberts v. Commissioner Docket No. 80697. United States Board of Tax Appeals 36 B.T.A. 549; 1937 BTA LEXIS 694; September 22, 1937, Promulgated *694 1. Sale of stock in taxable year held to be bona fide and loss thereon deductible in the taxable year. 2. Where an endorser paid a note in installments in the years 1930, 1931, and the taxable year of 1932, an indebtedness of the principal to such endorser arose at the times of the various payments and constituted a bad debt in each instance, deductible only from the gross income of the respective years in which such payments were made. George E. H. Goodner, Esq., for the petitioners. E. A. Tonjes, Esq., for the respondent. TYSON *549 This is a proceeding for the redetermination of a deficiency in income tax of the petitioners for the calendar year 1932 in the amount of $1,817.02, plus a fraud penalty in the amount of $908.51. The petitioners allege that the respondent erred (1) in asserting a tax and penalty for 1032 after the statute of limitations had barred assessment of any tax; (2) in disallowing a capital net loss of $8,910; (3) in disallowing a loss or bad debt deduction in the amount of $1,060; and (4) in asserting a 50 percent penalty under section 293(b) of the Revenue Act of 1032. The first assignment of error was withdrawn*695 by the petitioners at the hearing. The respondent affirmatively alleged fraud with intent to evade income tax on the part of the petitioners, in deducting the item of $8,910, which was denied by the petitioners. FINDINGS OF FACT. E. A. Roberts, hereinafter referred to as the petitioner, and wife, reside in Mobile, Alabama. They filed a joint Federal income tax return for the year 1932. The petitioner had been the executive vice president of the Waterman Steamship Corporation for approximately eleven years immediately preceding the hearing. In 1932 he was the owner of 90 *550 shares of the common stock of the par value of $100 per share of the Mobile, Miami & Gulf Steamship Co., hereinafter referred to as the Steamship Co., which he had purchased at various times during 1925 to 1927, inclusive, at a cost of $9,000. He was one of the original organizers of the Steamship Co. and during the period when he purchased the stock was its vice president and knew its general condition, as he also did in 1932. At the end of the year 1932 the petitioner, for the purpose of taking a loss deduction on his 1932 income tax return, approached J. F. McRae and stated to him that*696 he would sell, if McRae would buy, the above mentioned 90 shares of stock. McRae offered $1 per share for the stock, which was accepted by the petitioner, who took into consideration the amount he would be entitled to deduct from his income. McRae thereupon paid petitioner $90 as the purchase price of such stock by cashier's check, dated December 31, 1932, on the Merchants National Bank of Mobile, and the proceeds of the check were deposited by the petitioner in his bank account. The petitioner delivered the certificates for the stock to McRae and thereafter they were transferred on the records of the Steamship Co. and a new certificate in lieu thereof was issued to McRae. McRae was, at all times thereafter, the owner of such stock and the certificate therefor was in his possession. The petitioner offered no inducements, other than the transfer of the stock, to McRae to make such purchase. He made no promise to McRae to repurchase the stock or to reimburse him in any way for the price paid therefor and never made such reimbursement. McRae was a resident of Mobile, Alabama. He was, at the time of the hearing, and had been for 21 years immediately prior thereto, an employee*697 of the Merchants National Bank of Mobile, Alabama, and for the latter 10 years of that period had been vice president thereof. There existed close personal and business relations between the petitioner and McRae, "as they had grown up together." McRae had borrowed money from the petitioner on many occasions prior and subsequent to the time of the transaction here involved, and at the time of the purchase by McRae of the Steamship Co. stock he owed the petitioner about $3,600 on loans which were fully protected by collateral. On January 17, 1933, McRae borrowed an additional $100 from the petitioner and the note given therefor has never been paid. This latter transaction had no relation to or bearing upon the sale of the Steamship Co. stock. At the end of its fiscal year ended September 30, 1932, the Steamship Co. had a deficit and its common stock had only a speculative value at most. The assets of the company were sold in July 1934. On September 30, 1934, an intention to liquidate the affairs of the company was filed, and the company, at the time of the hearing, was *551 in the process of liquidation. Its first preferred stock was retired dollar for dollar and its*698 second preferred stock was preferred over the common stock in the distribution of assets in liquidation and the holders thereof have received liquidating dividends of "something less than 50 percent of the value." Its assets remaining for distrribution amount to only a few hundred dollars. In 1930 the petitioner endorsed a note in the principal amount of $1,500 to enable his brother-in-law, J. R. McGavock, to obtain funds from a bank with which to acquire a lease for the operation of a hotel. The "set up" as to the operation of the hotel then "looked" to petitioner "as though McGavock would come out all right" although he had no money. However, the operation of the hotel by McGavock over a period of three to four months proved unsuccessful because he made no money therefrom and the hotel was turned over to its owner. McGavock made some payments on the note and upon his failure to make further payments when they were due the petitioner, having been called upon by the bank to pay the note, made payments of principal and interest thereon as follows: In the year 1930, $200; 1931, $860; and 1932, $175; or a total of $1,235. After abandoning the hotel business McGavock endeavored*699 to secure employment, but was not able to do so until shortly prior to the hearing. At the time of abandoning the hotel business he had no money or property of any kind and had not acquired any since that time, and this financial condition of McGavock was known to petitioner during all this time. McGavock has never been able to pay anything to the petitioner as reimbursement for the payments made by petitioner on such note. A judgment obtained against him in 1932 would have been uncollectible, since at that time he was insolvent. The petitioner in his 1932 income tax return deducted the entire amount of $1,235 as a bad debt deduction. The respondent allowed as a deduction only that part of the payments to the extent of $175 paid by the petitioner in 1932 and disallowed the remainder paid prior to 1932 in the total amount of $1,060. The accounts and income tax returns of the petitioners were kept and made on the cash receipts and disbursements basis. The income tax return of petitioner for the year 1932 was not false or fraudulent with intent to evade tax. OPINION. TYSON: The respondent contends that the transfer of the 90 shares of Steamship Co. stock was not a bona*700 fide sale made in an arm's length transaction in good faith, but was instead a mere manipulation of property entered into for the sole purpose of reducing tax liability and to defeat the collection of taxes legally due. *552 It has been stated that "while a sale for tax purposes is not to be disregarded because of its motive, on the other hand a mere gesture, without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one." ; affd., ; certiorari denied, . However, where there is an absolute sale, such sale is not invalid merely because made, as was the sale of the 90 shares of Steamship Co. stock here involved, with the purpose of reducing Federal income taxes. ; affd., ; ; ; and *701 ; affd., . After carefully scrutinizing all the evidence, as we should because of the close personal and business relations of the parties to the sale of stock, , and cases cited; ; affd., ; , and cases cited, we have found as facts that the Steamship Co. stock was sold by petitioner for the consideration of $90; that no inducement other than the transfer of the stock itself for that consideration was offered by petitioner to McRae, the purchaser of the stock; that no reimbursement was promised to be made or was ever made to McRae by petitioner; and that the loan of $100 made to McRae by petitioner had no relation to or bearing upon the sale of the stock. From such established facts we conclude that the sale of the Steamship Co. stock by petitioner to McRae was an actual sale made in good faith and that petitioner is entitled to the deduction of his loss thereon. The disallowance of the deduction of*702 $8,910 as a capital net loss is therefore disapproved and as a necessary consequence the imposition of the fraud penalty by respondent is also disapproved. The next question to be determined is whether the petitioners are entitled to a deduction in 1932 of the entire amount, principal and interest, paid in 1930 to 1932, inclusive, by the petitioner as endorser on his brother-in-law's note, or only so much thereof as was actually paid in 1932, the taxable year here involved. The respondent disallowed the deduction of $1,060 paid in 1930 and 1931 on such note and allowed only $175, the amount actually paid in 1932, as a deduction, upon the ground that, the return being made upon a cash receipts and disbursements basis, the amount actually paid in 1932 is deductible only in 1932. It is contended by petitioners, in substance, that the payments made on the note by the petitioner as endorser constituted an obligation of the principal, McGavock, to the petitioner in the nature of a running account and that until the last payment of $175 in 1932 there *553 was no deductible had debt because until such last payment, which discharged the entire indebtedness, was made by petitioner*703 there existed no right of action on his part against the principal. In our opinion there is no merit in this contention. The note was not introduced into evidence and it does not otherwise appear whether it was payable in installments or in one entire and indivisible amount, although it is indicated that it may have been payable in installments by the following question asked the petitioner and his response thereto: "Q. When were you first called upon to make any payments?" "A. When he failed to make a payment that was due." If the note was payable in installments, as so indicated, petitioner, as endorser, was entitled under the statute laws of Alabama to commence an action against McGavock, the principal, immediately upon the payment by petitioner of any and each of the installments in 1930 and 1931 without waiting until the balance of the note had become due and been paid in 1932. Secs. 5721 and 9547, Code of Alabama, 1923. 1 *704 If, on the other hand, the note was not payable in installments the petitioner, as endorser, was nevertheless also entitled under the common law to commence an action against McGavock, the principal, immediately upon the payment by petitioner of any and each of the amounts paid by him in 1930 and 1931 without waiting until the entire amount of the note had been paid in 1932. Cf. ; Bullock v. Campbell, 9 Gill (Md.), 182; ; ; . It was expressly provided in section 9545, 2 Code of Alabama, 1923, that the remedy of a surety prescribed by section 9547, supra, was not exclusive of other remedies existing at common law but was merely cumulative and additional thereto.2 So, whether the note in*705 question was payable in installments or in one entire indivisible amount, a right of action against the principal, McGavock, by petitioner as endorser arose immediately upon the payments by petitioner on the note in the years 1930 and 1931, respectively, and each payment therefore constituted a debt of the *554 principal to petitioner as endorser on the date it was made by petitioner as endorser. The evidence shows that McGavock was financially involved at the time the note was endorsed and he took over the hotel lease; that he made no money during the three or four months in which he operated the hotel; that at the time he discontinued the operation of the hotel he had no money or property of any kind and no employment; that thereafter he did not acquire any money or property, nor did he obtain any employment until very recently prior to the hearing; that he has never been able to reimburse the petitioner; that petitioner knew the financial condition of McGavock as disclosed by these facts and for that reason never made any effort to collect from McGavock, and that petitioner knew prior to 1932 that the debts of McGavock to him created by his payments, as endorser on the notes*706 in 1930 and 1931, the amounts involved here, were worthless. It follows that the action of the respondent in allowing, as a deduction, only the amount paid by petitioner in 1932 must be approved. Cf. . Decision will be entered under Rule 50. Footnotes 1. SECTION 5721. Suits for breach of contracts. - If a contract be entire, but one suit can be maintained for breach thereof; but if it be severable, or if the breaches occur at successive periods in an entire contract (as where money is to be paid by installments), an action will lie for each breach; but all the breaches occurring up to the commencement of the action must be included therein. SECTION 9547. For money paid. - Payment by a surety or indorser of a debt past due, entitles him to proceed immediately against his principal for the sum paid, with interest thereon, and all legal costs to which he may have been subjected by the default of the principal. ↩ 2. SECTION 9545. Remedies not exclusive. - The remedies given sureties and cosureties in this chapter are not exclusive of other remedies conferred by statute or existing at common law but are cumulative and additional. ↩