Bohn v. Commissioner

CHARLES B. BOHN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bohn v. Commissioner Docket No. 95953. United States Board of Tax Appeals 43 B.T.A. 953; 1941 BTA LEXIS 1425; March 14, 1941, Promulgated *1425 1. Section 24(a)(6) of the Revenue Act of 1934 does not prevent a grantor of a trust for the benefit of his daughter taking a deduction for a loss on a bona fide sale of stock by him to the trust. 2. Difference between unrecovered cost of land contracts and bonds taken in settlement of vendees' liability thereon is deductible as a bad debt. James R. Stewart,39 B.T.A. 87, followed. H. A. Mihills, C.P.A., for the petitioner. Philip M. Clark, Esq., for the respondent. LEECH *953 This is a proceeding to redetermine a deficiency in income tax of $19,872.09 for the calendar year 1935. In respect of such part of the deficiency as is in controversy, the issues are whether petitioner is barred by the provisions of section 24(a)(6) of the Revenue Act of 1934 from taking a deduction for loss on a sale of stock to a trust created by him for his daughter, and whether the difference between the unrecovered cost of certain land contracts and the value of Home Owners Loan Corporation bonds and cash received by petitioner in settlement of his rights under the contracts, is fully deductible as a bad debt or is limited by the provisions*1426 of section 117 of the Revenue Act of 1934. A third issue is stipulated and will be given effect under Rule 50. FINDINGS OF FACT. On December 3, 1929, petitioner created a trust, the corpus of which consisted of $500,000 in municipal bonds, in favor of his daughter, Edna Nellie Bohn, whose married name is Mrs. George Endicott. The trustee was the Fidelity Trust Co. of Detroit, Michigan. The trust was irrevocable. During its term, the trustee was to pay the net income to Edna Nellie Bohn. Twenty years after the date of its creation, the corpus was to be delivered to Edna Nellie Bohn and the trust was to terminate. If she should die before that time, leaving surviving issue, then the corpus was to be delivered to such issue, or held in trust until such issue should reach the age of 21 years, at which time such child or children would receive its proportionate share of the corpus. The interim income was to be accumulated for the child or discretionarily applied by the trustee to the child's maintenance and support. If the issue died before reaching 21, its share went to other surviving issue of Edna Nellie Bohn, or if there were none, to petitioner if he should then be*1427 living. If Edna Nellie Bohn died without surviving issue prior to the time at which she was to receive the corpus, then the corpus was to be transferred *954 to petitioner if he were then living, or to the trustee of his estate if he were dead. The trustee was given full powers of management and control over the trust property. The only right retained by petitioner was to have the trustee give him a statement of the administration and condition of the trust property upon request. A son was born to Edna Nellie (Bohn) Endicott on June 19, 1934, and was living in 1935. On July 3, 1935, Edna Nellie (Bohn) Endicott petitioned for and received from the Circuit Court of Wayne County, Michigan, an order appointing the Detroit Trust Co. as successor trustee to the Fidelity Trust Co. In 1935 petitioner owned 2,175 shares of the preferred stock of Hiram Walker-Gooderham & Worts, Ltd. (hereinafter referred to as Hiram Walker). He also owned a large block of Hiram Walker common stock. S. D. Den Uyl, secretary of the Bohn Aluminum & Brass Corporation, of which petitioner was president, kept petitioner's personal books and frequently discussed with petitioner the latter's investments. *1428 In 1935 Den Uyl recommended that petitioner dispose of part of his holdings of Hiram Walker stock because of his large investment therein. When the Detroit Trust Co. became successor trustee of petitioner's trust, the corpus still consisted exclusively of municipal bonds. Upon reviewing these, the trustee found that some issues were second-rate and that the value of the corpus as a whole was depressed. The trustee recommended elimination of the poorer bonds and reinvestment of their proceeds in better securities in order to restore the corpus to its original value. Among the items the trustee considered as desirable investments was Hiram Walker preferred stock. Accordingly, on November 7, 1935, petitioner sold 1,000 shares of Hiram Walker preferred stock to the trustee at the market price of $17 per share, less transfer taxes and commissions, or at a net price of $16.93 per share. The aggregate selling price of $16,930 was paid to petitioner in cash from the proceeds of the trustee's sale of various On December 5 and 6, 1935, petitioner sold his remaining 1,175 shares gain or loss on the 1,000 shares thus sold by petitioner is $68,625. On December 5 and 6, 1935, petitioner*1429 sold his remaining 1,175 share of Hiram Walker preferred stock on the open market for an average net price of $16.91 per share, after deducting commissions and transfer taxes. In determining to sell the stock to the trust, petitioner considered the matter from all angles, including the tax angle. He has never reacquired the stock from the trust, nor has he ever had any agreement or option to do so. The 1,000 shares of Hiram Walker preferred stock are still held in the trust. *955 The stock sold by petitioner to the trust was acquired by him in 1928. The excess of its adjusted basis over the selling price was $51,695. In computing his deduction for loss by reason of the sale, petitioner took into account 40 percent of the above amount, or $20,678. Respondent disallowed this deduction, but allowed petitioner to deduct the loss sustained upon the sale of the 1,175 shares of Hiram Walker preferred stock in the open market. The trust filed its own tax return. In 1925 petitioner purchased the vendor's interest in the following land contracts receivable, covering properties located in Detroit, Michigan: J. Chaflin, vendee of property located at 2662-4 Richton Avenue*1430 - acquired May 18, 1925. J. Selman, vendee of property located at 2922 Leslie Avenue - acquired June 1, 1925. B. Federman, vendee of property located at 2981 Cortland Avenue - acquired December 14, 1925. In 1935 payments on the contracts were delinquent and petitioner was on the point of instituting foreclosure proceedings. The vendees, however, applied to the Home Owners Loan Corporation, hereinafter referred to as H.O.L.C., for a refinancing of their obligations. After considerable correspondence between all concerned, petitioner agreed to take H.O.L.C. bonds in satisfaction of the amounts owing under the contracts. To consummate the transactions, he signed documents drawn by H.O.L.C., entitled "Vendor's Consent to Take Bonds", which expressly stated that he agreed to take H.O.L.C. bonds of a certain face amount "in full settlement of the indebtedness" in question and "thereupon to discharge all claims of the undersigned against such property." Upon receipt of H.O.L.C. bonds and cash, deeds to the properties were given by petitioner to the purchasers. The unrecovered cost to petitioner of the three land contracts at the date of settlement, and the total amount of H. *1431 O.L.C. bonds and cash received by petitioner, are shown by the following table: Cost Amount recovered Chaflin contract $13,904.92 $9,869.41 Selman contract 12,471.34 6,942.66 Federman contract 10,805.88 7,258.11 As a result of the settlement the excess of the basis of the contracts to petitioner over the amounts realized by him was as follows: Chaflin contract $4,035.51 Selman contract 5,528.68 Federman contract 3,547.77 Total 13,111.96 *956 Den Uyl, who, as has been stated, was in charge of petitioner's personal books of account, ascertained the above figure of $13,111.96 to be the loss on the land contract obligations, informed petitioner of the loss and wrote the item off on petitioner's books as a bad debt. It was taken as a bad debt deduction on petitioner's income tax return, which was duly sworn to and signed by petitioner. Respondent treated the excess of the basis of the land contracts to petitioner over the amounts realized as capital losses and took them into account at various percentages. OPINION. LEECH: There is no ground for disallowing the loss upon the sale by petitioner of 1,000 shares of Hiram*1432 Walker preferred stock to the trust on the ground that the sale was not bona fide. It was made at the market price; petitioner has never had any agreement or option to reacquire the stock, and has never done so. ; affd., ; affd., ; ; . Respondent, however, disallowed the deduction of any loss upon the sale upon the ground that such a deduction is barred by section 24(a)(6) of the Revenue Act of 1934, which reads as follows: (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 * * *. For the purpose of this paragraph - * * * the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. It will be noted that the statute does not expressly mention sales between the settlor and the fiduciary of a trust. Our inquiry is whether*1433 an intent to cover the transaction now at issue may be spelled out of the words "directly or indirectly", and we are entitled, in the face of such ambiguity or doubtfulness of meaning, to consider the legislative history of the section. ; . We have already held this statutory provision to be ambiguous, and that the legislative history of the section here pertinent is not helpful. . It is there stated merely that the general purpose of the section is to disallow losses on sales between members of a family because sales of that type have frequently been used to avoid income taxes. Light is cast on the problem, however, by considering the provisions and history of section 301(a) of the Revenue Act of 1937, which amended section 24(a)(6) by adding thereto a sentence forbidding the deduction of losses *957 on sales between the settlor and fiduciary of a trust. The Report of the Ways and Means Committee (75th Cong., 1st sess., H. Rept. 1546), after referring to section 24(a)(6) of the 1934 Act, *1434 reads in part as follows: * * * This provision of existing law is not exclusive and the Government may still deny losses in the case of sales and exchanges not specifically covered thereby (for instance, between uncle and nephew) if such sales or exchanges are not bona fide. However, because the evidence necessary to establish the fact that a sale or exchange was not made in good faith is almost wholly within the knowledge of the person claiming the deduction, the Government has encountered considerable difficulty in sustaining the disallowance of the deduction in a great many cases. Moreover, the specific provisions of section 24(a)(6) of existing law have proved inadequate to meet many situations of this type. Accordingly, your committee proposes the amendment of this section to provide certain additional restrictions on deductions of this character. * * * Section 301 adds to existing law provisions which specifically deny losses between - * * * (3) An individual and a fiduciary of any trust of which the individual is a grantor; * * * It seems to us that the reasonable inference to be drawn from the amendment of the section and the above statement is that transactions*1435 of the type at bar were not covered by the 1934 Act. The sale here was not between father and daughter, but between father and trustee for daughter. The daughter would not come into full legal possession of the stock until the termination of the trust, and even then her estate might be defeated by her prior decease. No powers over the trust corpus were retained by petitioner, hence rendering inapposite . To hold that the transaction falls within section 24(a)(6) is to read something into an ambiguous statute which is not there, in an attempted clarification ad hoc. Respondent, citing , urges that section 301 of the 1937 Act only clarified and extended the existing rule. This statement is, of course, refuted by the above quoted committee report, which remarks that new restrictions are being added to inadequate existing law. We hold that petitioner is entitled to the deduction claimed. The second issue is whether petitioner is entitled to deduct as a bad debt the difference between the unrecovered cost of land contracts and the amounts received by him in settlement*1436 of the vendees' obligations. The ascertainment of worthlessness was sufficiently made by petitioner's signing the consent to take H.O.L.C. bonds, which required him to discharge the balance of the indebtedness, and by Den Uyl's specific determination of the loss as petitioner's agent. that being the case, the question is wholly controlled by , *958 which allowed a similar deduction on like facts, and held that a bad debt, rather than a capital loss deduction, was proper. See also , and . We hold, therefore, that petitioner is entitled to the second contested deduction in full. Decision will be entered under Rule 50.