Case Name: McCoy-Garten Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1928-12-20
Citations: 14 B.T.A. 853
Docket Number: Docket No. 13675
Parties: McCoy-Garten Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 14
Pages: 853–862

Head Matter:
McCoy-Garten Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 13675.
Promulgated December 20, 1928.
Albert H. Winter, G. P. A., for tbe petitioner.
James A. O'GaMaghan, Esq., for the respondent.

Opinion:
OPINION.
SiefkiN :
The first question for consideration is whether the amounts paid to holders of the preferred stock were, in fact, dividends or Avere interest on borroAved money. This requires a consideration of all of the circumstances surrounding the transaction. What the parties called the instruments is persuasive but not conclusive. See Arthur R. Jones Syndicate v. Commissioner of Internal Revenue, 28 Fed. (2d) 833; Leasehold Realty Co., 3 B. T. A. 1129; Bolinger-Franklin Lumber Co., 7 B. T. A. 402. The petitioner, in support of its contention that the payments made constituted interest and in support of its position that it should be alloAved certain deductions for amortization of bonded account, calls attention to the fact that by the terms of the contract of May 14, 1920, between McCoy and Garten as indmduals, on the one hand, and the financial agents, on the other, the so-called dividends Avere paid irrespective of earnings. It is also pointed out that the corporation agreed not to encumber its property or incur indebtedness over $2,000; that the stock provides specific dividends on specific dates, and also provides specific dates for retirement of the principal; that the corporation pledged its assets toward the payment of the preferred stock and that McCoy and Garten further personally guaranteed payment. It is also said that the common stockholders knew that the earnings' of the company would not be sufficient to meet the dividends and retirement of the preferred stock before the company was organized.
On the other hand, the respondent points to the certificates of preferred stock themselves and to the contract of May 14, 1920, as evidencing the .intent of the parties to issue stock rather than make a loan.
In our opinion there is nothing in the written instruments evidencing the acts of the parties inconsistent with the holding that preferred stock was issued and that the holders of such preferred stock had claims against the assets of the corporation which were subordinate to those of creditors. The provision of the contract prohibiting encumbrances of the property above $2,000 is more easily interpreted as protection to preferred stockholders than, as suggested by the petitioner, as showing that the preferred stockholders Avere, in fact, creditors. As we view the transaction, the individuals, McCoy and Garten, wanted to raise the money for a building. They did not care how it was raised, but left it to the financial agents. The plan, as adopted, raised the money by the issuance of preferred stock calling for dividends on and retirement of such stock, performance being guaranteed by McCoy and Garten as individuals. The provisions of the contract, in our opinion, are not inconsistent with the holding that the relation of the parties was what they said it was in their written instruments.
We believe the situation is materially different from that considered in Arthur R. Jones Syndicate v. Commissioner, supra., in which the Circuit Court of Appeals for the Seventh Circuit held that the relationship of debtor and creditor existed under so-called preferred stock certificates. In that case it was evident that, the taxpayer was compelled to execute a document incorrectly describing the relationship of the parties in order to avoid the Illinois usury law. That fact is not present in this proceeding.
What we have said as to the nature of the obligation of the petitioner to the holders of the preferred stock compels a holding that the respondent correctly refused to permit the discount on the sale of the preferred stock to be amortized. This would be so even if the stock had a definite life which it has not because of the option given to retire the stock before December 1, 1926. See William Cluff Co., 7 B. T. A. 662; Emerson Electric Manufacturing Co., 3 B. T. A. 932; Corning Glass Works, 9 B. T. A. 771.
Judgment will he entered for the respondent.