Barber Sec. Corp. v. Commissioner

BARBER SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Barber Sec. Corp. v. Commissioner Docket No. 100844. United States Board of Tax Appeals 45 B.T.A. 521; 1941 BTA LEXIS 1112; October 28, 1941, Promulgated *1112 During 1930 petitioner acquired as a unit an equal number of shares of stock of a bank and a securities corporation. Prior to 1934 the shares were not separately transferable. During that year they were separated. The book values of the shares of both corporations were based on the original cost of the underlying assets, acquired prior to 1930, unadjusted to reflect either depreciation or appreciation. During the taxable year 1936 the shares of stock of the securities corporation were disposed of and petitioner computed their cost to it by assigning to each stock an amount proportionate to the book values of the shares so determined. Held, there is no factual basis upon which an apportionment can be made. Herman Goldman, Esq., and Milton J. Levitt, Esq., for the petitioner. Dean P. Kimball, Esq., for the respondent. VAN FOSSAN *521 Respondent determined a deficiency of $32,982.52 in petitioner's income and excess profits taxes for the calendar year 1936. Petitioner alleges that respondent erred in determining that deductible losses were not sustained in connection with the sale by petitioner of 800 shares of the stock of the Amerex*1113 Holding Corporation and the liquidation of 1,000 shares of stock of the Commercial National Corporation. Petitioner further alleges that it has overpaid its tax in the amount of $341.40 by reason of the failure of respondent to eliminate from income interest in the amount of $2,231 received from the Interborough Rapid Transit Co. on its 7 percent 10-year convertible gold notes due September 1, 1932. Respondent concedes petitioner's claim regarding the erroneous inclusion of interest. FINDINGS OF FACT. The facts were stipulated and as so stipulated are hereby adopted as our findings of fact. In so far as they are material to the issue involved they are as follows: Petitioner is a Delaware corporation having its principal place of business at 17 Battery Place, New York, New York. It filed its income and excess profits tax return for the year 1936 with the collector of internal revenue for the fifth district of New Jersey. The Chase National Bank of the City of New York, hereinafter referred to as Chase Bank, was organized under the National Banking Act in 1877. In 1917, pursuant to an agreement entered into on March 21, 1937, between certain depositing stockholders of*1114 the *522 Chase Bank, the Chase Securities Corporation, hereinafter called Chase Securities, was organized. A special dividend of $2,500,000 was declared by the Chase Bank and the money was used for the purchase of all of the capital stock of Chase Securities. Under the agreement of March 21, 1917, the stockholders of the Chase Bank deposited their shares of stock of the bank and of Chase Securities with the Bankers Trust Co. and received in exchange therefor a depositary receipt which covered the same number of shares of Chase Securities as of Chase Bank. On January 15, 1930, the agreement of March 21, 1917, was modified so that the stockholders of Chase Bank and of Chase Securities received certificates of stock of the respective corporations, the certificate of stock of Chase Securities being printed on the reverse side of the certificate of stock of Chase Bank. Under the original agreement and the modified agreement the shares of one corporation could not be sold or otherwise transferred except in conjunction with the sale or transfer of an equal number of shares of the other corporation. Under both agreements full holding rights with respect to the shares of both*1115 corporation were vested in the stockholders and all dividends were payable directly to the stockholders, except that stock dividends should be subject to the agreement. The original agreement was subject to modification by the vote or written consent of 75 percent of the stockholders. The requirement for modification was later reduced to a vote or written consent of two-thirds of the shareholders of each corporation. On May 31, 1930, petitioner owned 10,000 shares of the capital stock of the Equitable Trust Co. of New York, hereinafter called Equitable, having a par value of $20 per share, which shares had a cost basis to petitioner of $635,919.25. At that time Equitable merged with Chase Bank. Pursuant to the plan or agreement of merger, petitioner exchanged its 10,000 shares of capital stock of Equitable for certificates representing 8,000 shares of stock of the Chase Bank and 8,000 shares of capital stock of Chase Securities. The cost basis to petitioner of the 8,000 shares of stock of Chase Bank and of 8,000 shares of stock of Chase Securities amounted to $635,919.25. On May 31, 1930, the date of acquisition by petitioner of the stock of Chase Bank and Chase Securities, *1116 the books of the respective corporations showed a net asset value of their capital stock as follows: Chase Bank $370,291,699.00 Chase Securities 128,639,329.02 Total 498,931,028.02 *523 The foregoing reflects the books of the respective corporations and does not reflect appreciation or depreciation in market values above or below cost of the underlying assets. Based on the figures set forth, the book value of the capital stock of the Chase Bank was, on May 31, 1930, $50.04 per share and on the same date the book value of the capital stock of Chase Securities was $17.38 per share. Petitioner allocated it cost basis of $635,919.25 on the basis of the book figures set out above as follows: Cost allocated to stock of Chase Bank: 50.04/67.42 X 635,919.25 = $471,987.53 Cost allocated to Chase Securities: 17.38/67.42 X $635,919.25 = $163,931.72 The dividends paid by Chase Bank and Chase Securities during each year commencing with the year 1918 and ending in 1934 were as follows: Year Chase Bank Chase Securities [1918] $1,600,000.00 [1919] 1,600,000.00 [1920] 2,400,000.00 [1921] 2,600,000.00 $750,000 [1922] 3,200,000.00 800,000 [1923] 3,200,000.00 800,000 [1924] 3,200,000.00 800,000 [1925] 3,200,000.00 800,000 [1926] 5,000,000.00 1,200,000 [1927] $5,600,000.00 $1,600,000 [1928] 7,700,000.00 2,000,000 [1929] 12,145,000.00 3,132,500 [1930] 20,587,500.00 6,325,000 [1931] 27,750,000.00 3,700,000 [1932] 16,650,000.00 [1933] 11,470,000.00 [1934] 6,857,845.88 [0] *1117 All of the foregoing dividends were in cash. Balance sheets of Chase Bank and of Chase Securities were at all times kept separate and apart and the annual reports to stockholders of said corporations were likewise separate. On May 16, 1933, the name of Chase Securities Corporation was changed to Chase Corporation. On June 14, 1934, in order to conform with the requirements of the Banking Act of 1933, all provisions for joint transferability of the stock of Chase Corporation and Chase Bank were terminated. At the same time the name of Chase Corporation was changed to Amerex Holding Corporation, hereinafter referred to as Amerex, and the par value of the stock of said corporation was increased from $1 to $10 per share. Petitioner, on June 14, 1934, exchanged its certificates representing 8,000 shares of the capital stock of the Chase Bank and 8,000 shares of the capital stock of the Chase Corporation for 8,000 shares of the capital stock of the Chase Bank and 800 shares of the capital stock of Amerex. The new certificates representing the shares of Chase Bank stock were separated from the certificates representing the *524 shares of Amerex, and the new certificates*1118 of one were transferable separately and apart from the new certificates of the other. The exchange by petitioner was pursuant to a recapitalization and nontaxable reorganization. On April 16, 1936, petitioner sold its 800 shares of capital stock of Amerex and received net proceeds therefor in the sum of $19,325. Prior to the close of the taxable year in question petitioner did not dispose of its 8,000 shares of the capital stock of the Chase Bank. The Commercial National Corporation, hereinafter called the Commercial Corporation, was organized under the laws of the State of New York on November 1, 1928. The Commercial National Bank & Trust Co. of New York, hereinafter called the Commercial Bank, was chartered under the National Banking Act on the following day. Under an agreement dated November 2, 1928, each stockholder of the Commercial Bank was given the right to subscribe to a number of shares of stock of the Commercial Corporation equal to the number of shares of stock of the Commercial Bank owned by him. The agreement provided that stock of the Commercial Corporation should be deposited with the Commercial Bank as depositary. Receipts evidencing ownership of the*1119 Commercial Corporation's stock were endorsed on the reverse side of the certificate of stock of the Commercial Bank. The deposit agreement and endorsement provided that shares of the Commercial Corporation and of the Commercial Bank should not be transferable separately and that every sale of Commercial Bank stock carrying the endorsement should include the beneficial interest in the Commercial Corporation stock. At various times during the year 1930 petitioner purchased certificates representing 1,000 shares of the capital stock of the Commercial Bank and 1,000 shares of capital stock of the Commercial Corporation at an aggregate cost of $377,387. The dates of acquisition, the number of shares of stock of each corporation purchased on each date, the cost on each date of a unit consisting of one share of stock of each corporation, the asset value per share of stock of the Commercial Bank stated on its books on each date of purchase, the asset value per share of stock of the Commercial Corporation stated on its books on each date of purchase, the combined asset value per unit of one share of stock of each corporation thus stated on the respective dates of acquisition on the books*1120 of the corporations, the percentage of the asset value of the Commercial Corporation to the combined asset value as stated on the books on the dates of acquisition, and the amount of petitioner's cost per unit apportioned by it to the shares of the Commercial Corporation are set forth in detail in the stipulation and need not be repeated here. The book figures given *525 do not reflect appreciation or depreciation in market values above or below the cost of the underlying assets. The dividends paid by the Commercial Bank and the Commercial Corporation, respectively, during the years 1929 to 1934 were as follows: Year Commercial Bank Commerical Corporation [1931] $700,000 [1932] $560,000 [1933] 560,000 [1934] 560,000 [0] The foregoing dividends were paid in cash. The balance sheets of the Commercial Bank and of the Commercial Corporation were at all times kept separate and apart and the annual reports to stockholders of said corporations were likewise kept separate. The deposit agreement with respect to the shares of the Commercial Corporation was terminated on January 11, 1934, and thereafter shares of the Commercial*1121 Bank and the Commercial Corporation were transferable separately and were so dealt in. The Commercial Corporation was dissolved at the same time. Pursuant to such dissolution it commenced to liquidate and distributed liquidating dividends in stock of the Commercial Bank on the basis of one share of bank stock with respect to every ten shares of Commercial Corporation stock. On March 2, 1934, petitioner surrendered its certificates evidencing ownership of 1,000 shares of stock of the Commercial Bank and 1,000 shares of stock of the Commercial Corporation and received certificates evidencing 1,100 shares of stock of the Commercial Bank, including 100 shares received as a liquidating dividend and having a fair market value of $12,300, and certificates representing 1,000 shares of the Commercial Corporation. The new certificates representing shares of stock of the Commercial Bank were separate from new certificates representing shares of the Commercial Corporation. On January 3, 1936, petitioner received as a further liquidating dividend the sum of $5,000 in cash, and on August 28, 1936, petitioner received a final liquidating dividend from the Commercial Corporation in the sum*1122 of $1,350 in cash. The total amount received by petitioner in liquidation of the Commercial Corporation was $18,650, including $12,300 fair market value of Commercial Bank stock and $6,350 cash. *526 On the above facts the Board concludes that no apportionment of cost was practicable in either of the two situations above described. OPINION. VAN FOSSAN: The questions raised for decision are two: Whether it is practicable to apportion a part of the cost to petitioner of the units of the Chase Bank and Amerex stock to the Amerex stock sold by petitioner during the taxable year; and similarly, whether it is practicable to apportion a part of the cost to petitioner of the units of Commercial Bank and Commercial Corporation stock to the Commercial Corporation stock which was liquidated during the taxable year. The problems with respect to the practicability of apportionment are identical in the case of both pairs of corporations. Petitioner cites article 22(a)-8 of Regulations 94. 1 The respondent suggests that if apportionment is practicable, article 1567 of Regulations 62 (1921) 2 is the nearest approach to the rule. He contends, however, that the facts do not permit*1123 an apportionment. *1124 It will be at once observed that article 22(a)-8 of Regulations 94 does not purport on its face to deal with a situation such as we have before us. In fact, neither the Revenue Act of 1936 nor the regulations promulgated thereunder specifically cover the instant case. However, in H. A. Green,33 B.T.A. 824, addressing itself to the question of apportionment in a case arising under the 1928 Act, the Board observed: There is no provision in the statute (Revenue Act of 1928) directing either an apportionment of cost between two or more kinds of property received in a nontaxable exchange, nor is there any statutory authorization for deferring the reporting of a profit where an apportionment is impracticable. However, for a number of years the respondent's regulations have provided for apportionment of cost under various circumstances and for the deferment of recognition of gain until full cost is recovered where apportionment is impracticable. See art. 39, *527 Regulations 45; arts. 39, 1567, Regulations 62; art. 39, Regulations 65 and 69. The validity of these regulations has been recognized. See *1125 Salvage v. Commissioner, 76 Fed.(2d) 112, and cases there cited. Article 1567 of Regulations 62, interpreting the Revenue Act of 1921, provided in part as follows: * * * the proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange. * * * [Italics supplied.] Regulations issued under subsequent revenue acts do not contain the exact language that appears in the foregoing quotation. It has been held, however, that the quoted provision lays down a principle that is equally applicable in determining gain or loss under subsequent revenue acts. See I.T. 2335, C.B. VI-1, p. 18, so holding with respect to the Revenue Act of 1926, which we approved in Glenn H. Curtiss,21 B.T.A. 629; affd., 57 Fed.(2d) 847, a case arising under the Revenue Act of 1924; Sallie Strickland Tricou,25 B.T.A. 713, involving the Revenue Act of 1926. Cf. *1126 Edwin D. Axton,32 B.T.A. 613, a case under the Revenue Act of 1928. There is thus ample authority for an apportionment if the same be practicable. See Stanley Hagerman,34 B.T.A. 1158; affd., 102 Fed.(2d) 281. The parties have stipulated the book values as of the date of acquisition by petitioner of the stock of the Chase Bank and Chase Securities and similarly as to the Commercial Bank and the Commercial Corporation. They further stipulate, however, that the book figures do not reflect appreciation or depreciation in market value above or below cost of the underlying assets. Proof of market value as of the date of the acquisition of the stocks is essential to our inquiry. We believe this lack of proof to be a fatal bar to petitioner's contention. We do not know when the underlying assets were acquired, but, considering the history of the times before and after 1930, of which we take judicial notice, we can not assume that the book values represent true market values. Hence, the book figures can not be accepted as showing the true value of the shares of the separate corporations. *1127 There is no opinion evidence of values nor any record of separate earnings of the securities companies. Accordingly, there is no factual basis upon which we can apportion petitioner's cost. Edwin D. Axton,32 B.T.A. 613. Cf. De Coppet v. Helvering, 108 Fed.(2d) 787; also Stanley Hagerman, supra, where the Board was furnished with opinions of market value, the separate earnings of the Security Co., and other forms of evidence not presented here. The above result follows whether the basic date be considered to be the year 1930, as contended by petitioner, or 1934, as contended by respondent. The respondent is sustained. Decision will be entered under Rule 50. Footnotes 1. ART. 22(a)-8. Sale of stock and rights.↩ - * * * If common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost. 2. ART. 1567. Gain or loss from subsequent sale.↩ - (a) Where property is exchanged for other property and no gain or loss is recognized under articles 1564 or 1566 the property received shall for the purpose of determining gain or loss from its subsequent sale be treated as taking the place of the property exchanged therefor. But see article 1568. For exchange of property acquired prior to March 1, 1913, see article 1561. If property is exchanged for two kinds of property and no gain or loss is recognized under articles 1564 or 1566 the cost of the original property should be apportioned, if possible, between the two kinds of property received in exchange for the purpose of determining gain or loss upon subsequent sale. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the property received in exchange is realized until out of the proceeds of sale shall have been recovered the entire cost of the original property. * * *