Edward Sec. Corp. v. Commissioner

30 B.T.A. 918, 1934 BTA LEXIS 1248

• Court: United States Board of Tax Appeals
• Decided: June 14, 1934
• Docket: Docket No. 71208.
• Status: Published

Opinions

OPINION.

McMahon :

The only issue to be considered in this proceeding is whether the respondent erred in disallowing a deduction in the sum of $15,100 representing a loss resulting from the sale in 1930 by the petitioner of 50 shares of the stock of the Sheridan Trust & Savings Bank.

The position of the respondent is, first, that the sale was not a bona fide sale, and secondly, if it were a bona fide sale, the stock was sold to an individual who was not only in control of the corporation, but owned all except two qualifying directorship shares out of a total of 9,982 outstanding shares, and, therefore, it would be contrary to the intent of Congress and public policy to allow such a deduction.

The respondent not only concedes that the sale was made, but the parties stipulated that the petitioner on December 26, 1930, “ sold ” the 50 shares of bank stock to E. N. DAncona at the then market value of such shares, or $750. Both contentions of the respondent are based primarily upon the fact that the petitioner sold the stock to its stockholder, who owned practically all of its stock, the respondent conceding that if the petitioner had sold the stock “ to some stranger, it would be different.” This fact by itself is not sufficient to sustain the contentions of the respondent. As stated in Commissioner v. Van Vorst, 59 Fed. (2d) 667; affirming George W. Van Vorst, Executor, 22 B.T.A. 632:

In the absence of other showing,, the mere fact that the purchaser is a stockholder of the vending corporation does not change the character of the transaction. Appeal of McMichael, 4 B.T.A. 266, 269; Fruit Belt Co. v. Commissioner, 22 B.T.A. 440; Taplin v. Commissioner, (C.C.A.) 41 F. (2d) 454; Trust Co. v. Rose (C.C.A.) 28 F. (2d) 767.

In that case a stockholder who held 46,397 of the 50,000 outstanding shares of stock of a corporation purchased certain real estate from the corporation for the sum of $54,559.60, which real estate had a fair market value at the time of $143,559.60. The Board in its opinion in that case stated:

* * * In our opinion the stipulated facts, including the stipulation that the decedent “ purchased ” the property, made a prima facie case for the petitioner and it was then incumbent upon the respondent to show that although this was in form a sale, nevertheless it occurred under circumstances which indicate that in fact it was a distribution of earnings or profits accumulated since February 28, 1913. In this connection we see no reason to infer that the stockholders ever agreed to an unequal distribution. This majority stockholder undoubtedly purchased at a bargain price and there were stockholders who did not share in the bargain. Rut bargain purchases do not ipso faoto require an explanation by the purchaser to avoid tax. Proof of a prima facie case does not require the elimination of all unfavorable possibilities. The purpose of the rule of evidence is to avoid just such difficulties.

While the above case involves an increase or addition to the taxable income of the purchaser and the instant proceeding involves a deduction from the income of the seller, both involve dealings between corporation and stockholder. The principle in the above case, in our view, is therefore applicable here.

In Fruit Belt Telephone Co., 22 B.T.A. 440, the Commissioner contended that the corporation really sold its assets to the Southern Bell Telephone Co., or in any event did not in good faith sell them to Evans and James, who owned all but one share of petitioner’s stock. The Board stated:

On this question, we think the evidence is perfectly clear that the assets were sold to Evans and James and that they sold them to the Southern Bell Telephone Company. So long as neither creditor nor stockholder has any objection to the sale of assets by a corporation, clearly, a corporation is not prohibited by law from selling to its stockholders even at a price less than the value of the assets and there is nothing to prevent a corporation from distributing its assets to its stockholders in liquidation if it desires to do so regardless of the value of the assets distributed. A corporation may clearly do what it has a legal right to do, even for the sole purpose of reducing its tax liability. It is not required to pursue a course which gives rise to a greater tax liability if another course is open to it which will give rise to a less tax liability.

See also David Stewart, 17 B.T.A. 604; Corrado & Galiardi, Inc., 22 B.T.A. 841; and Budd v. Commissioner, 43 Fed. (2d) 509. In the first case just cited, we said:

Ordinarily, where an individual sells securities to a corporation at less than the cost of the securities, the sale establishes the amount of the individual’s loss for income-tax purposes. It has been shown in this case that the petitioner sold his securities to a corporation for less than those securities cost him. Why then should he not have a deduction for a loss? * * * The petitioner admitted that he did what he did in order to take a loss on his income-tax return, but of course it is not reprehensible to take lawful steps which will entitle one to a loss on one’s income-tax return. It! may well be that the petitioner was in a position, due to his control of the corporation, to commit a fraud on the Government in order to take an unsustained loss on securities, but there is no evidence to indicate that any of his acts lack genuineness. * * *

As heretofore set forth, the sale involved in the instant proceeding was at the market price.

So far as the record discloses, the position of the respondent that the sale was not bona fide was first stated at the hearing. In Corrado & Galiardi, Inc., supra, the Board said: “The respondent’s brief states that the sole question is whether or not there was a bona fide sale. Bona fide means, with good-faith; without fraud or deceit: Fraud is not to be presumed.” That case also involved a sale of stock, without clear proof of its market value, by a corporate taxpayer to two of its stockholders, who, with their families, owned all the stock of the taxpayer.

In Budd v. Commissioner, supra, the court stated:

* * * It is a general principle tliat fraud is never to be presumed, and lie who avers it, takes upon himself the burden of proving it. * * * The determination of the Commissioner being presumptively correct, in appealing from the additional assessment, Mr. Budd was required to prove a sale; transfer of title, a valuable consideration, and the other positive elements upon which he relied. This he did, and this must stand unless the sale was a pretense and a fraud.’ * * * The Commissioner made no attempt to prove fraud, but relied upon Mr. Budd to negative the charge of fraud. But fraud cannot be inferred by the court or jury from acts, legal to themselves and consistent with an honest purpose. * * *

The burden was, therefore, on the Commissioner to bear the burden of proving his charge of fraud that the sale was not bona; fide.

Nor can. the separate identity of the petitioner and its stockholder purchaser, under the circumstances of this proceeding, be disregarded. Under the general rule for tax purposes a corporation is an entity distinct from its stockholders. Dalton v. Bowers, 287 U.S. 404.

This principle is stated by the United States Supreme Court in Burnet v. Clark, 287 U.S. 410, as follows:

A corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances — not present here — can the difference be disregarded.

The mere fact that the stock of the petitioner was owned by the purchaser is not such an unusual circumstance as to require disregard of its corporate form in the transaction involved herein. In Burnet v. Commonwealth Improvement Co., 287 U.S. 415, the taxpayer had deducted a loss on its 1920 income tax return resulting from the transfer of certain shares to the Widener Estate, its sole stockholder. The Commissioner changed the basis thereof, thereby establishing a profit and á deficiency in tax. It was thereupon contended by the taxpayer that the transaction resulted in no gain or loss, since, practically considered, the taxpayer and the Widener Estate were the same entity. The Court, in disposing of that contention, stated:

While unusual cases may require disregard of corporate form, we think the record here fails to disclose any circumstances sufficient to support the petitioner’s [taxpayer’s] claim. Certainly, the Improvement Company and the Estate were separate and distinct entities; the former avowedly utilized to bring about a change in ownership beneficial to the latter. For years they were recognized and treated as different things and taxed accordingly upon separate returns. The situation is not materially different from the not infrequent one where a corporation is controlled by a single stockholder. See Eisner v. Macomber, 252 U.S. 189, 208, 209; Lynch v. Hornby, 247 U.S. 339, 341; United States v. Phellis, 257 U.S. 156, 172, 173.

The result reached in the instant proceeding is adequately supported by Jones v. Commissioner, 71 Fed. (2d) 214. See that case for the discussion and authorities cited, which are persuasive. See also New Colonial Ice Co. v. Helvering, 292 U.S. 435, and Joseph Cavedon, 30 B.T.A. 364.

In support of his contention that the corporate form of the petitioner should be disregarded, the respondent cities as leading authorities Southern Pacific Co. v. Lowe, 247 U.S. 330, and Gulf Oil Corp. v. Lewellyn, 248 U.S. 71. The United States Supreme Court, in Burnet v. Commonwealth Improvement Co., supra, with respect to these two cases, stated as follows:

Southern Pacific Co. v. Lowe, supra, and Gulf Oil Corp. v. Lewellyn, supra (the latter covered in principal by the first), cannot be regarded as laying down any general rule authorizing disregard of corporate entity in respect of taxation. These cases presented peculiar situations and were determined upon consideration of them. In the former this court said: “ The case turns upon its very peculiar facts, and is distinguishable from others in which the question of the identity of a controlling stockholder with his corporation has been raised. Pullman Car Co. v. Missouri Pacific Ry. Co., 115 U.S. 587; Peterson v. Chicago, Rock, Island & Pacific Ry. Co., 205 U.S. 364, 391. * * • *” [Emphasis supplied.]

We have not overlooked Helvering v. Gregory, 69 Fed. (2d) 809, which reverses Evelyn F. Gregory, 27 B.T.A. 223, on another ground, or Sydney M. Shoenberg, 30 B.T.A. 659. There is nothing in any of the reports of these cases which suggests a departure from the applicable doctrine of the decisions of the Supreme Court of the United States upon which we rely here; and if there were we could not agree with its application to the facts presented in the instant proceeding. The principal issue decided by the court in Helvering v. Gregory, supra, was whether under the facts in that case there was a “ reorganization ” within section 112 (i) (1) (B) of the Revenue Act of 1928, bringing the taxpayer within section 112 (g) of the same act so that her gain could not be “ recognized ” because certain corporate shares were “ distributed in pursuance of a plan of reorganization.” No such issue is presented in the instant proceeding. Furthermore, while the court reversed the Board upon this issue, it approved the Board’s holding that the separate entity of the corporation should not be disregarded, and in doing so stated:

* * * we cannot treat as inoperative the transfer of the' Monitor shares by the United Mortgage Corporation, the issue by the Averill Corporation of its own shares to the taxpayer, and her acquisition of the Monitor shares by winding up that company. The Averill Corporation had a juristic •personality, whatever the purpose of its organization; the transfer passed title to the Monitor shares and the taxpayer became a shareholder in the transferee. All these steps were real, and their only defect was that they were not what the statute means by a “ reorganization ”, * * * [Emphasis supplied.]

In Sydney M. Shoenberg, supra, the Board held that “ the forms and ceremonies which taxpayer employed lacked the spark of vitality essential to a bona fide sale; that there was a persisting intention to hold title; and that in the mind of the taxpayer he never really parted with dominion over the stock.” The Board further held that, if the steps taken were sufficient to constitute a bona fide sale, the taxpayer, during all the time he was out of possession, held an option to buy back from the corporation, which was exercised immediately on the expiration of 30 days after the sale, thus bringing the transaction within the “ wash sales ” provisions of section 118 of the Revenue Act of 1928. That case is distinguishable from the instant proceeding on both grounds.

This proceeding is controlled and governed by the Revenue Act of 1928. That act deals with (1) individuals and (2) corporations, which are in many respects dealt with separately. Sections 11 and 12 fix the rates of normal tax and surtax on the taxable income of individuals; section 13 fixes the rate of tax on corporations. In section 23, dealing with “ Deductions from Gross Income ”, subsection (e) enumerates losses deductible by individuals and subsection (f) those deductible by corporations. Section 25 deals with “ Credits of Individual Against Net Income ” and section 26 deals with “ Credits of Corporation Against Net Income.” Section 51 deals with “ Individual Returns ” and section 52 with “ Corporation Returns.” The act throughout evidences a plan and purpose on the part of Congress to recognize corporate entity. This is not only true of the 1928 act, but it is also true of previous revenue acts. In Eisner v. Macomber, 252 U.S. 189, the United States Supreme Court, in a case which arose under the Revenue Act of 1916, recognized the purpose and plan of that revenue act in the following language:

* * * But, looking through the form, we cannot disregard the essential truth disclosed, ignore the substantial difference between corporation and stockholder, treat the entire organization as unreal, look upon stockholders as partners, when they are not such, treat them as having in equity a right to a partition of the corporate assets, when they have none, and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received nor realized. We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact but because it is only by recognizing such separateness that any dividend- — even one paid in money or property — can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be regarded as receiving anything from it, any more than if one’s money were to be removed from one pocket to another. [Emphasis supplied.]

Hence, to ignore or disregard the corporate entity is in effect to ignore and disregard the purpose and plan of Congress clearly expressed in valid legislation enacted pursuant to the Sixteenth Amendment to the Federal Constitution.

There is no express provision in the act prohibiting any corporation from dealing with its own stockholders, nor does it in any way restrict the actions of any corporation in dealing with its own stockholders. Section 23 (f) of the 1928 Act provides that a corporation may deduct from gross income “ losses sustained during the taxable year and not compensated for by insurance or otherwise.” If Congress had intended not to allow the deduction by a corporation of losses arising from transactions between it and its stockholders it could readily have so stated. Until it does this, we are bound by the statutes that it has enacted, as pointed out in Jones v. Commissioner, supra.

In the construction and application of the Federal tax statutes with which we are here concerned it is not necessary to resort to other statutes, Federal or state, or to the precedents in which they have been construed or applied, for the reason that these Federal tax statutes and the precedents under them upon which we rely in this proceeding are sufficiently comprehensive and plain for our purposes. Furthermore, other statutes, Federal and state, and the precedents under them, are so different in their scope and language that it is doubtful if resort to them would be helpful. No such other statutes or precedents which are helpful have been brought to our attention.

An exception to section 23 (f), supra, is contained in section 118 of the same act, generally referred to as the “ wash sales ” provision. This section is applicable to all sales of shares of stock or securities made under the conditions stated in that section. Had Congress intended also to exclude all losses arising from the sale of stock by a corporation to its stockholder from the losses deductible under section 23 (f), it could as readily have so provided as it did provide in section 118 for the disallowance of so-called “ wash sales ” losses. Furthermore, there are no facts presented in this proceeding which bring it within the exception which is contained in section 118. The parties have stipulated that the securities in question were “ sold ” by the corporation to the petitioner, that delivery thereof was made and the purchase price, based on the market, was paid. As heretofore indicated, section 118 is not applicable to the facts of this proceeding.

In our opinion, therefore, the respondent erred in disallowing the deduction in the sum of $15,100.

The parties stipulated that the amounts of $40,052 and $5,000, respectively, also deducted by the petitioner in its income tax return for the year 1980 and disallowed by respondent, shall be disallowed as losses of the petitioner for the calendar year 1930. Effect will be given to this stipulation in the recomputation.

Eeviewed by the Board.

Decision will be entered imder Bule 50.