Wilmot v. Commissioner

ROBERT W. WILMOT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CAROLINE STANTON WILMOT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. R. S. HECHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LYNNE WATKINS HECHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Wilmot v. Commissioner Docket Nos. 105169, 105170, 105171, 105172. United States Board of Tax Appeals 44 B.T.A. 1155; 1941 BTA LEXIS 1227; July 31, 1941, Promulgated *1227 DEDUCTION - LOSS - LIQUIDATION OF A SYNDICATE. - Syndicate was not an association taxable as a corporation and no loss was realized when it was terminated and its assets distributed. Charles M. Trammell, Jr., Esq., for the petitioners. James L. Bankstrom, Esq., for the respondent. MURDOCK *1155 The Commissioner determined deficiencies in income tax for the calendar year 1937 as follows: Petitioner Docket No. Deficiency Robert W. Wilmot 105169 $537.17 Caroline Stanton Wilmot 105170 537.17 R. S. Hecht 105171 1,996.69 Lynne Watkins Hecht 105172 1,996.69 The assignments of error presenting the only issue for decision are as follows: The respondent erred in disallowing, as a deduction from petitioner's gross income, an indemnity or underwriting loss of $13,225.23 [in the Hecht cases and $9,749.84 in the Wilmot cases], sustained in 1937. *1156 FINDINGS OF FACT. The Wilmots are husband and wife and the Hechts are also husband and wife. All reside in New Orleans. They kept books and filed returns on a cash basis. The returns, on the community property basis, were filed with the collector for the*1228 district of Louisiana. Hecht and Wilmot were directors and stockholders of D. H. Holmes Co., Ltd., and of Chas. A. Kaufman Co., Ltd. They and others, who were stockholders and directors of the companies, entered into agreements on February 21, 1929, to provide a ready market for the purchase and sale of the stock of the two companies as a protection for their stock and that of other stockholders. The one agreement was as follows: The undersigned, directors and stockholders of the D. H. Holmes Co. Ltd., believe it is to their interest and the interest of D. H. Holmes Company, Ltd., that a syndicate be formed for the purpose of buying and selling stock of the D. H. Holmes Company, Ltd. Whereas, the present underwriters are holders of a large proportion of the stock of said Company, and in order to stabilize the price of said stock, it is agreed between the undersigned that each hereby binds himself to purchase stock not exceeding fifty shares each, at a price to be fixed by Fred W. Evans, Esq., who is hereby constituted the Syndicate Manager, for the purpose of buying and selling the stock. It is further agreed that said Syndicate Manager is authorized to borrow and pledge*1229 on said stock, and an account shall be opened in the Hibernia Bank & Trust Company with Mr. Robert Lienhard as Trustee for Syndicate Manager on syndicate. This agreement to exist for a period of twelve months from this date. New Orleans, La. February 21, 1929. [Signed] R. W. WILMOT A. J. STALLINGS J. T. GIBBONS, Jr. HUGH E. VINCENT GEO. G. WESTFELDT HARRY B. MCCLOSKEY BERNARD MCCLOSKEY R. S. HECHT F. W. EVANS GEO. J. GLOVER FRANK B. HAYNE The other agreement was identical except that it applied to the Kaufman stock and provided for the purchase of 25 shares per participant. Fred W. Evans was president of D. H. Holmes Co., Ltd. The participants relied entirely upon his judgment in the purchases and sales made under the agreements. They took no part in the activities. *1157 The limitations on the number of shares were changed twice upon requests from Evans to permit the purchase of more shares of each company per participant. The operations were continued beyond the original one year limit by the tacit understanding of the participants. The syndicates were finally terminated in 1937, although no purchases or sales had been made for a*1230 number of years prior thereto. Over 1,500 Holmes shares and over 400 Kaufman shares were purchased, and over 600 Holmes shares and one Kaufman share were sold. The operations of the syndicates resulted in losses in each year except 1937. Evans borrowed money to finance the operations and furnished collateral for the loans. He relied upon the agreement for his protection. A bank account was maintained for the syndicate. Evans kept records but made no reports until the final settlement in 1937. No meetings of participants were held except the two to authorize increased purchases. The participants had some discussions from time to time. Three of the participants died and two became insolvent during the existence of the syndicates. One participant paid the amount due from him in 1930 and received his pro rata share of the stock. Others made some payments thereafter and received stock. Wilmot made a payment in 1933 but received no stock at that time. A final accounting was made in 1937. The losses chargeable to the two insolvents and expenses and deficits were prorated among the other nine, after making allowance for payments and periods of participation. The stock*1231 on hand was then divided among the nine solvent participants. Wilmot paid $10,000 in 1933 and $13,073.45 in 1937. Hecht paid $25,206.59 in 1937. Each received, in 1937, 86 shares of Holmes and 50 shares of Kaufman. The fair market value of a share of Holmes stock in 1937 was $125 and that of a share of Kaufman was $20. The Wilmots claimed a loss of $11,265.68 and the Hechts claimed a bad debt of $11,265.68 as deductions on their returns for 1937, representing the results of their participation in the syndicates. The Commissioner, in determining the deficiencies, disallowed $9,749.84 of the amounts claimed and explained that, since the syndicate was in the nature of a partnership rather than an association, there was no loss upon the liquidation in kind. The portion of the deductions representing amounts paid on account of the insolvents was allowed. The deficiency notices to the Hechts cover 1936, for which an overassessment was determined, and show that they were allowed as deductions a share of the losses of the syndicates for 1936. The stipulated facts are included herein by this reference. *1158 OPINION. MURDOCK: The amount of the deduction in controversy*1232 in each of these cases is not more than one-half of $9,749.84, the amount disallowed by the Commissioner. This is claimed as an "indemnity or underwriting loss" in the assignments of error. The participants in the two syndicates acted for themselves, not as guarantors for others. They agreed to purchase up to a specified number of shares of stock and that is what they did. They did not guarantee or indemnify anyone. The cases cited by the petitioners relating to guarantee and indemnity contracts, where the guarantor has to pay the debt of another, are not at all in point. The above really disposes of the only issue raised by the pleadings. The petitioners also argue in their briefs that these syndicates were associations taxable as corporations and the participants had losses upon dissolution. This could be denied because it was not placed in issue by the pleadings. But it is without merit in any event. The syndicates bore little resemblance to and never professed to be corporations. They had nothing equivalent to stock, held no regular meetings, provided for no transfer of interests, held title to no property as far as the record shows, and did not in fact limit the liability*1233 of the participants to the number of shares each agreed to purchase. Cf. ; , affirming ; ; ; ; ; affd., . The determination of the Commissioner is supported by the statute and decisions. Section 1001(a)(3) of the Revenue Act of 1936 defines "partnership" to include a syndicate, pool, group, and joint venture. This syndicate was like a partnership in many respects. Section 113(a)(13) provides that property distributed in kind to a partner takes as a basis in the hands of the partner an allocable part of the basis for his interest in the partnership. Since this was a complete liquidation of the partnership, the shares would take the entire basis. No gain or loss is recognized under such circumstances until the stock is sold. *1234 ; Regulations 94, art. 113(a)(13)-2. Decision will be entered for the respondent.