Bleser v. Commissioner

ESTATE OF DANIEL C. BLESER, DECEASED, DANIEL B. BLESER AND MYRTLE S. BLESER, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bleser v. Commissioner Docket No. 96062. United States Board of Tax Appeals 41 B.T.A. 643; 1940 BTA LEXIS 1161; March 21, 1940, Promulgated *1161 The "investment company", of which petitioners' decedent was virtually sole stockholder, having indicated upon its income tax return, executed by decedent, that the alternative provided by the Revenue Act of 1932, section 104(d), of having the stockholders report their share of the corporation's income, was being availed of, held, decedent was bound thereby in spite of petitioners' present position that such reference was a clerical error; held further, the corporation was formed and availed of for the purpose described in section 104; held further, petitioners are taxable on decedent's entire distributive share of the corporation's net income computed under that section, even though considerably in excess of the amount reported by him. Zaida Clay,40 B.T.A. 562. A. L. Nash, Esq., and A. F. Rankin, Esq., for the petitioners. Jonas M. Smith, Esq., and F. R. Shearer, Esq., for the respondent. OPPER *643 This proceeding was brought for a redetermination of a deficiency in income tax of petitioners' decedent in the sum of $104,247.66 for the taxable year 1934. *644 There are two primary issues involved, *1162 i.e., (1) whether respondent erred in including in gross income of petitioners' decedent his entire distributive share of the net income of an investment company under the provisions of section 104(d) of the Revenue Act of 1932; and (2) whether respondent erred in disallowing as a loss deduction stock of the State Bank of Manitowoc, claimed as worthless in the taxable year in question. After the hearing and submission of this case, the petitioner, Daniel C. Bleser, died. The present petitioners, the executors of his estate, were duly substituted as parties. Daniel C. Bleser will be hereinafter referred to as decedent. FINDINGS OF FACT. Decedent, an individual, on June 22, 1933, caused to be incorporated and organized, under the name of Bleser Investment Co., a Delaware corporation (hereinafter called the corporation), which engaged in the holding of securities and the collection of income therefrom. At the time of its organization and until the close of the year 1934 the corporation had stock outstanding in the total amount of $100,000, represented by 20,000 shares of the par value of $5 each. The sole stockholders of the corporation and its only directors at all times*1163 up until the close of the year 1934 were decedent, his wife, and his son-in-law, who held 19,990, 5, and 5 shares, respectively. The corporation was a mere holding and investment company, and was formed and availed of for the purpose of preventing the imposition of surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. The corporation has at all times since its organization reported its income on the basis of a fiscal year ending June 30. Decedent at all times reported his income on a calendar year and cash basis. During the fiscal year ended June 30, 1934, the corporation sold 31,900 shares of Kingsbury Breweries Co. stock which it had acquired from decedent, who had acquired it prior to 1918. The corporation received $8.25 per share, and reported a taxable profit of $151,519.43 on its Federal income tax return for that year. A subsequent adjustment by respondent increased this profit to $220,230.03 by including in the purchase price an escrow bank deposit as having been constructively received. This is not contested. The corporation invested the proceeds of the sale in $150,000 of Liberty*1164 bonds and approximately $50,000 of miscellaneous industrial stocks, and thereafter its holdings consisted of these securities, 50,000 shares of Manitowoc Products Co., a liquidating corporation, and approximately 18,000 shares of the Kingsbury Breweries Co. stock. *645 During its fiscal year ended June 30, 1934, the corporation received dividend income of $44,649.51, being dividends on the Kingsbury Breweries Co. stock and the other miscellaneous industrial stocks held by it. On line 16 of schedule L of the income tax return for the corporation for its fiscal year ended June 30, 1934, filed September 17, 1934, appeared the following quotation: "Distribution in accordance with Section 104(d). See return for 1934 of D. C. Bleser … $44,725.47." The adjusted net income of the corporation for its fiscal year ended June 30, 1934, as originally reported, was in excess of $200,000, and decedent's entire pro rata share of such adjusted net income would have amounted to a sum in excess of $195,000. Decedent personally reported for 1934 $44,501.84 as dividends received from the corporation. He did not included in his gross income for that year his entire distributive share*1165 of the corporation's "net income." Prior to 1933 and during 1933 and 1934 decedent was the owner of 105 shares of the capital stock of the State Bank of Manitowoc, a bank organized and operating under Wisconsin banking laws, for which he had paid $120 a share, or a total of $12,600. During the latter part of 1933 a plan for reorganizing the State Bank of Manitowoc into a national bank had been submitted and approved by a large majority of the stockholders. Under this plan the state bank was to cease operation at the end of 1933 and the national bank take over on January 2, 1934. The national bank was organized and in existence under the name of the Manitowoc National Bank in December of 1933. The national bank made a contract on December 30, 1933, with the state bank wherein it was recited that the total liabilities of the state bank ot its depositors and creditors (not including its liability to its stockholders as such) was the sum of $1,070,699.71. The state bank agreed that it would execute and deliver its demand promissory note, bearing 6 percent interest, payable to the national bank in the above stated sum; that it would transfer and pledge all of its assets to the*1166 national bank as collateral security for the note; that the national bank should "take over absolute, and not as pledge, all of the State Bank's cash and the State Bank's banking house and banking fixtures and equipment", for which a credit for the cash and $65,000 was to be made on the promissory note. The national bank agreed that on the delivery of the promissory note and the collateral it would assume the above mentioned liabilities of the state bank. It was also provided that the collateral would be kept as segregated assets, on account of which would be credited first to interest and then *646 principal all sums realized from sale, collection or liquidation of such assets. The contract also provided that "If at the expiration of eithteen months next following the date hereof [December 30, 1933] the assets pledged by the State Bank to the National Bank * * * shall have produced, * * * a sum insufficient to pay the principal of and all accrued interest on the State Bank's promissory note of $1,070,699.71 the National Bank shall be required to call upon the guarantors (more particularly described and identified in paragraph 20 below) for payment of all, or such part*1167 as may be necessary, of their guaranty bond in the aggregate sum of $170,000. All the amounts collected by the National Bank on said guaranty bond shall be credited on said note of the State Bank, first against interest and then against principal." It was then provided that, if within 30 days after the 18-month period the total realization from the segregated assets and the collection from the guarantors was still insufficient to pay the principal and interest on the promissory note, the national bank would "be entitled by its own action or that of any its officers, * * * to cause to become due and payable the so-called double liability of the stockholders of the State Bank, under the provisions of * * * the Wisconsin Statutes * * *." On the full payment of the promissory note any remaining segregated assets were to be turned over to the guarantors and used to the extent necessary to repay them on any payments made under their guaranty agreement, after which they were to hold these assets in trust for the stockholders. The guaranty agreement above referred to was a provision of the contract providing for a guaranty bond signed by five or more guarantors to protect the national*1168 bank against any loss not in excess of $170,000 by reason of its inability to realize within eighteen months a sufficient amount out of the "pledged assets" to pay the promissory note and interest. The contract concluded with an agreement on the part of the state bank to go into voluntary liquidation under the provisions of the Wisconsin statute. The state bank had paid no dividends to its stockholders in 1932 or 1933. The state bank remained open for the transaction of business through December 30, 1933. It failed to open for business on January 2, 1934, the national bank opening at that time. On January 15, 1934, the state bank posted notice on its front door that its affairs were under the control of the Banking Commission, and notified the Banking Commission of this action. *647 On February 7, 1934, W. J. Clark of Manitowoc was appointed Special Deputy Commissioner of Banking by the Banking Commission of Wisconsin to assist in the duty of liquidating and distributing the assets of the state bank. The Banking Commission actually took possession of the assets of the state bank on February 15, 1934. The bank was still in process of liquidaiton at the date*1169 of hearing, June 26, 1939, at which time it appeared that the stockholders of the state bank would not recover any part of their investment and there would be an assessment against them in an amount between 50 and 60 percent of the face value of their stock. At the time the state bank ceased to carry on its banking business its assets could not have been liquidated for a sum sufficient to pay its liabilities. The Federal Desposit Insurance Corporation refused to insure the bank because it was insolvent. The bank was insolvent in 1933. The stock of the state bank became worthless in 1933. OPINION. OPPER: This proceeding presents two questions. The first is a somewhat complicated variation of the problem dealt with in . Here the decedent, controlling stockholder of an :investment" corporation, included in his return an item reporting a dividend of that corporation. Upon examination of the corporation's return, respondent concluded that this item was not actually received by decedent; that it represented an attempt under the Revenue Act of 1932, section 104(d) 1, to report a "distributive share" of the corporation's income, even*1170 though not distributed, thus exonerating the corporation under that section; and that decedent was accordingly chargeable, regardless of receipt, with his entire distributive share. This was considerably in excess of what he had reported and the proposed deficiency resulted. A preliminary issue is whether the corporation was formed or availed of for the purpose described in that section. *1171 . We have found that it was. *648 The circumstances of its formation the year before and its use in the present year are insufficient to overcome the presumptive existence of that purpose resulting from its admitted character as a mere investment company. Only decedent's general statement that he did not intend to escape Federal taxes tends in the opposite direction. 2 And the absence of supporting evidence and of other convincing motives which exclude such an intent, as well as the unspecific nature of that testimony, deprive it of sufficient weight to overcome the presumption. See ; affd., (C.C.A., 5th Cir.); certiorari denied, . Similarly, the conduct of the corporation in the present year is not so unequivocal as to disturb the presumption 3. True, it claims to have distributed all of its dividend income, and to that extent the individual surtax was not avoided. But the corporate return discloses that an item of tax-exempt interest was not distributed. If that was exempt only from normal tax, *1172 and the record does not indicate otherwise, then the corporation was also availed of in the present year, at least in that respect, to relieve its stockholders of surtax. *1173 That being so, respondent's conclusion is warranted if there was an election of the alternative proffered by section 104(d). The difficulty is that petitioners deny that decedent intended to elect, and contend that the distributions in question were actually made by the corporation and received by decedent in cash as dividends. In this aspect the situation is not so clear as it was in the Clay proceeding, where the original intention to elect was uncontested. On this controversial question of fact, however, we have made no determination since, in our view, no finding as to decedent's undisclosed intent *649 could alter the effect of his explicit statement, which was of such a nature as by itself to demonstrate an exercise of the election. The corporation return referred to a "distribution" in the proper amount but carried it not on the line marked "dividends", but as "other debits to surplus." Nevertheless, it appeared that it was not debited to surplus. The return expressly referred to section 104(d). 4 It called attention, presumably as confirmation, to decedent's individual return, where the item is included in his gross income*1174 as a dividend without any explanatory matter. Thus, the necessary inference from a specific reference to that portion of the act granting the right of election was nowhere contradicted or in fact seriously questioned. These circumstances seem to us to supply the requirements of an "election." There was "a manifestation of choice"; exercise of the option was "shown by an overt act." See ; ; ; . The decision to elect was communicated to respondent, as it must have been intended that it should be, as a part of the respective income tax returns. 5 And the fact that the assertion upon which respondent's position is founded appeared originally in the corporation's return rather than in decedent's need not be significant in the view that decedent dominated the corporation, and in fact*1175 executed its return as its president. See Higgins v. Smith, 308 Y.S. 473. The advantage which the corporation derived from the statements in its return in avoiding the possibility of application of the penalty tax makes it all the more necessary that there should be no double benefit where these statements can be attributed, as they can here, to the alternative taxpayer. . *1176 While this Board may be without power to treat the equities as decisive, it need not refrain from noting that petitioners have not been harmed by respondent's action. On the contrary, if respondent had declined to treat the two returns as an election, which petitioners now contend he should have done, and had assessed the section 104 tax against the corporation, the combined taxes of decedent *650 and the corporation would have been greater than they will be, even including the entire amount of the present deficiency. 6 And it was decedent who would have borne the economic burden of the corporation's tax since he was to all intents and purposes its sole stockholder. This corporation being subject to section 104, the tax was clearly payable by corporation or stockholder. Certainly the latter is not the victim of inequity if his total burden is less than if his action had been construed as petitioners now contend it should have been. *1177 It is, of course, inescapable, that if we sustain petitioners' contention here they will be materially benefited. But that is only because the statute has since run against resort to the corporation. That should be an added reason, if one were needed, for holding petitioners to the position decedent originally assumed. No attempt has ever been made to correct the asserted error by way of amended returns, and it is clearly too late now for such action to be considered timely. See . To place upon respondent in such circumstances the responsibility of discovering at the peril of the revenue whether a return means what it fairly appears to say seems to us to create an unbearable administrative burden. See (C.C.A., 5th Cir.); (C.C.A., 1st Cir.); We are accordingly of the opinion that decedent must be held to have exercised an election the consequences of which his personal representatives can not now be permitted to avoid. The second issue relates to a claimed loss*1178 by reason of the worthlessness of certain bank stock. Clark, one of petitioners' witnesses, who fortuitously is also a member of the law firm representing petitioners, testified in effect that it was apparent in 1933 that an assessment upon stockholders would have to be levied. He went further and explained his statement by pointing out that the superficial solvency of the bank indicated on its books was overcome by a report made by the Federal Deposit Insurance Corporation showing that book values were excessive. No other contrary evidence is to be found. Petitioners contend that the failure of the bank to reopen on January 2, 1934, is the identifiable event demonstrating worthlessness, and that 1934 is therefore the proper year. But if a single identifiable event is necessary it seems evident that it is furnished, *651 not by the failure to reopen, but by the closing of the bank's doors on the last day of 1933, which, by prearrangement, was to be the end of the bank's operation. If the stock was worthless on that day, as it clearly was, this termination of the bank's business life put an end to all possibility of improvement in the future. The evidence is susceptible*1179 of only one interpretation, and that is that the stock became worthless in the year 1933 and not in 1934. Reviewed by the Board. Decision will be entered for the respondent. BLACK BLACK, dissenting: I dissent from the majority opinion because I do not think the facts in the instant case show that the stockholders of the Bleser Investment Corporation elected to return the net income of the corporation on their own individual income tax returns and thus comply with section 104(d) of the Revenue Act of 1932 and thereby relieve the corporation from the imposition of the 50 percent surtax imposed by section 104(a). There were three stockholders of the corporation, Daniel C. Bleser, his wife, and his son-in-law. The latter two shareholders only owned five shares each. The facts do not show that they made any attempt whatever to comply with section 104(d). Whether it be assumed that the small amount of shares which each of these two owned were qualifying shares and were in reality beneficially owned by decedent, or whether it be assumed that the wife and son-in-law, in their own right, did own five shares each of the corporation's stock but that their interest*1180 may be disregarded under the maxim, de minimis non curat lex, I still don't think the facts show an attempt at compliance with section 104(d). In , cited in the majority opinion in support of the conclusion reached, there was a conceded intent to comply with this particular section of the statute and we properly held that the deficiency was chargeable to the taxpayer in that case. Here we have no such clear intent to comply with section 104(d), but on the contrary the facts which are in evidence when viewed as a whole seem to me to negative any such intention. Therefore, in my judgment, if there is a deficiency because of the application of the 50 percent surtax to the corporation's income under section 104(a), it exists against the corporation and not against the petitioners. Also, it seems to me that there are no facts which would estop petitioners from making the defense which is now sought to be made. The Commissioner had the income tax returns of both the corporation and the decedent before him and he was bound to have seen that decedent returned only $44,501.84 as income received from the corporation, whereas, the findings*1181 of fact show that "The adjusted net income of *652 the corporation for its fiscal year ended June 30, 1934, as originally reported, was in excess of $200,000, and decedent's entire pro rata share of such adjusted net income would have amounted to a sum in excess of $195,000." Under such circumstances, I am unable to see where there is anything kin to estoppel in this case. Cf. . ARUNDELL, MURDOCK, LEECH, and TYSON agree with this dissent. Footnotes 1. SEC. 104. ACCUMULATION OF SURPLUS TO EVADE SURTAXES. * * * (d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of the earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his distributive share, be exempt from tax in the amount of the share so included. ↩ 2. Decedent's testimony as to his purposes in forming the corporation was as follows: "Well, I heard of these family corporations and I thought that it was a wise thing to do, to incorporate under Delaware, - under the laws of Delaware, it would be a whole lot easier to divide the stock of the corporation and the stock, the other holdings that I held with the Bleser Investment Company. * * * "* * * the publicity of the income tax returns in Wisconsin, I didn't like that, and then, of course, there was the Kingsbury Breweries Company deal on at the time, I anticipated a profit, which I didn't feel as though I wanted to pay the Wisconsin tax on it." If there were other purposes, decedent did not recall them. ↩ 3. It is impossible to draw satisfactory inferences as to the corporation's operations and condition. The only evidence is the corporation's tax returns, concerning which decedent's tax consulant testified: "* * * I will have to ask your indulgence on the balance sheet. * * * I might state as a fact that probably none of the items on the balance sheet are correct. * * * "Q. Why is that? "A. Well, it is a tentative balance sheet submitted because the regulations require one, and as a matter of fact it would be impossible to furnish a correct balance sheet. "Q. Why it that? "A. I didn't have enough information to get up a balance sheet." ↩ 4. Decedent's tax consultant testified that this was the result of mistake, that the reference intended was to section 104(c), and that the error was one of transcription. ↩ 5. Petitioner urges that the respondent should not have relied on these returns, pointing out that a protest against the proposed deficiency was filed with the respondent in October, 1936, which "discussed in detail all matters here involved"; and that the statute of limitations still permitted recourse against the corporation. If such an attempt to avoid the result of an election could ever be successful, a point we need not decide, it must fail here because the fact is that the statute of limitations had already run in favor of the corporation. Its return covered a fiscal year beginning prior to January 1, 1934, and was thus governed not by the Revenue Act of 1934 (see section 1) but that of 1932. The two-year statute of limitations there provided (section 275(a)) expired in September 1936, the return having been filed in September 1934. ↩ 6. The corporation's section 104 income was $235,054.53. Fifty percent tax thereon would be about $117,500. The total deficiency determined against petitioners is $104,247.66 and the total surtax paid by decedent as a result of his original return was $10,317.66, or an aggregate amount of tax of $114,565.32, which of course is demonstrably less than the section 104 tax above noted. Neither the deficiency nor the original surtax was confened to Bleser Investment Co. items, but no adjustment downward on that account has been made since even without any adjustment the result is clear. ↩