Court Opinion

ID: 4628535
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:33.153652+00
Date Added: 2024-06-11T07:57:13.779189
License: Public Domain

CLARA O. BEERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  FRANK T. BEERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Beers v. CommissionerDocket Nos. 67873, 67874.United States Board of Tax Appeals34 B.T.A. 754; 1936 BTA LEXIS 651; July 3, 1936, Promulgated *651  Where certain stock was held by a corporation with which one of the petitioners, a member of a marital community, had a margin trading account and of which he was stockholder and director, and where it became necessary for the corporation to obtain funds, and it was agreed that the stock was to be contributed to the corporation for its own use and the corporation thereafter used the stock as collateral in its own account and later sold the stock and used the proceeds for its own purposes, held upon all the evidence, that the transaction constituted a capital contribution to the surplus of the corporation and not a sale resulting in a profit to the marital community.  Reuben C. Carlson, Esq., and George J. Busch, C.P.A., for the petitioners.  P. A. Bayer, Esq., for the respondent.  MCMAHON *754  These proceedings, duly consolidated, are for the redetermination of deficiencies in income tax for the year 1930 for the amount of $7,118.79 in Docket No. 67873 and $7,295.64 in Docket No. 67874.  The only issue involved is whether the transactions involving 1,000 shares of Dupont stock and 1,100 shares of Security Shares, Inc., constituted a*652  sale in 1930 resulting in taxable gain to petitioners as a marital community.  *755  FINDINGS OF FACT.  Frank T. Beers and Clara O. Beers are, and were in 1930, husband and wife, residing in Tacoma, Washington, and filed separate returns for 1930.  Clara O. Beers is not an active business woman.  Frank T. Beers acted for himself and in her behalf in the transactions herein involved and he is hereinafter referred to as the petitioner.  The petitioner, in 1930, was manager of the plant of E. I. du Pont de Nemours & Co. located just outside of Tacoma.  Through the solicitation of Frank Townsend he became interested in February 1929 in Townsend & Co., which was a Washington corporation engaged in the stock brokerage business, with branch offices at Seattle, San Francisco, Portland, Spokane, and Bellingham.  It was not a member of the New York Stock Exchange, but it dealt in listed securities.  The petitioner purchased 2,000 shares of its preferred stock at par, for which he paid the amount of $200,000, and 200 shares of its common stock, for which he paid $20,000.  He later acquired 600 shares of the common stock as a stock dividend.  Approximately at the time he purchased the*653  stock he became one of the five trustees or directors of the company.  In April 1930 the petitioner was the largest single stockholder.  The petitioner did not take any active part in the affairs of the company other than attending directors' meetings.  The petitioner carried with the company a very active margin trading account.  About two years prior to the time he became a director of Townsend & Co. the petitioner was approached to participate in Security Shares, Inc., hereinafter referred to as Shares, Inc., which was being incorporated under the laws of Washington.  This company was sponsored and managed by Townsend & Co.  The petitioner paid $25,000 for 500 shares of its stock.  Later he purchased 600 additional shares thereof.  In April 1930 he had 1,100 shares.  The petitioner was also a trustee or director of Shares, Inc.  Originally it was not intended to sell stock of Shares, Inc., in small numbers, but later the company had some two or three thousand stockholders, the purchase of the stock having been recommended to them by Townsend & Co.  The market value of the stock of Shares, Inc., depreciated due to the general depression, and in the early part of 1930 was considerably*654  less than the price paid for it by most of the stockholders.  In the early part of 1930 it was estimated to be worth about $30 per share.  In April 1930, a number of stockholders of Shares, Inc., became dissatisfied and retained an attorney, who brought a civil suit against the corporation.  Criminal as well as civil liability was involved.  The attorney employed a certified public accountant of Tacoma to make an audit of the books of Shares, Inc., to ascertain if there had been any irregular transactions, but *756  before he had completed the audit he was informed, on April 24, 1930, to discontinue his work as an agreement of settlement had been made.  The directors of Townsend & Co. feared that if the action of the dissatisfied stockholders became generally known it would seriously reflect upon its prestige.  Informal meetings of the directors of both corporations were held, at which counsel were present, and it was suggested that Townsend & Co. purchase the stock of Shares, Inc., at $50 per share.  This required some $200,000.  The financial condition of Townsend & Co. at that time was quite involved, as it had a large amount of frozen assets and, although it had adequate*655  funds to continue operations, it was unable to purchase the stock.  To carry out the suggestion made, it was necessary and it was agreed that Frank Townsend, a director and stockholder, whose place of business was in San Francisco, should contribute $85,000 in cash to Townsend & Co. for the purpose of enabling it to purchase the stock of Shares, Inc., that the petitioner should contribute 1,000 shares of Dupont common stock and 1,100 shares of Shares, Inc., stock, and that John W. Woodruff, a stockholder, should contribute his 1,100 shares of Shares, Inc., stock.  Pursuant to that agreement the petitioner made his contribution, consisting of the 1,000 shares of Dupont common, about April 20, 1930.  No written agreement pertaining to this transaction was entered into.  The petitioner received in exchange for his stock no note or security of any kind and he had no enforceable obligation in written form of any kind against the company.  About April 30, 1930, Townsend & Co. began to purchase the stock of Shares, Inc., and purchased the outstanding stock of Shares, Inc., except the 1,100 shares of John W. Woodruff and 1,100 shares of the petitioner.  In addition to the contribution of those*656  shares the petitioner made other contributions to Townsend & Co. at various times.  The 1,000 shares of Dupont common in April 1930 were in the possession of Townsend & Co. and held by it to the credit of the petitioner's account, together with about 2,000 shares of the same stock.  After about April 20, 1930, the 1,000 shares were deposited by the company as a part of its holdings with Otis & Co., its New York broker, and held by the broker as collateral for the account of the company for at least six weeks or until the early part of June 1930, when it was sold at approximately $1,000 more than $110,000, the amount entered on its books as the value of the stock contributed by the petitioner.  The account of the company with Otis & Co. was not adequately margined and it had to liquidate securities in order to withdraw amounts of cash every day to complete the purchase of the outstanding shares of Shares, Inc.  The 1,100 shares of Shares, Inc., were not sold.  The transaction with the petitioner was entered *757  on the books of account of the company as of June 30, 1930, so that the surplus of the company reflected credit in the amount of $143,000, representing the value of*657  the 1,000 shares of Dupont common in the amount of $110,000, and the value of the 1,100 shares of Shares, Inc., in the amount of $33,000, and so that no credit remained in petitioner's account for those items or amounts.  It was not the intention of the petitioner to make a sale and he did not sell the stock to Townsend & Co.; it was not his intention and he did not authorize that company to sell the 1,000 shares of Dupont stock for his account; but he intended to and did contribute the 1,000 shares of Dupont stock and the 1,100 shares of Shares, Inc., to Townsend & Co. to place the company in a financial position that would enable it to purchase the stock held by dissatisfied stockholders of Shares, Inc., the financial position of which had become critical, and to avoid impairment of the good will theretofore established by Townsend & Co.  Townsend & Co. was adjudicated a bankrupt in August 1931.  The petitioner reported his income on his income tax returns on the cash receipts and disbursements basis.  OPINION.  MCMAHON; The respondent contends that the petitioner and his wife as a marital community derived taxable income from the sale in 1930 of the 1,000 shares of Dupont*658  common and the 1,100 shares of Shares, Inc.  Apparently the amount of the gain determined by the respondent resulting in the deficiencies herein involved is not in dispute.  However, both of the petitioners claim that the transactions involved herein did not constitute a sale resulting in taxable income, but constituted a capital contribution to Townsend & Co.  Whether the transaction involved was a sale is among other things dependent upon the intention of the parties, a governing factor, to be gathered from all the attending facts and circumstances.  ; . Frank T. Beers testified that, at the time a number of stockholders started an investigation of Shares, Inc., informal meetings of some of the directors of both corporations were held; that he felt considerable responsibility as the stock of Shares, Inc., had been more widely distributed than was anticipated when he invested therein and that unless something was done to clean up the situation Townsend & Co. would suffer very severely; that he inquired as to how much money it would take to call*659  in the stock of Shares, Inc., at $50 per share; that it was decided that it would take $200,000; that Townsend & Co. was in no position to put up $200,000; that it was in *758  a pretty shaky condition; that Frank Townsend stated he would raise $100,000, but later was not able to raise $100,000 and turned in $85,000; that he, petitioner, stated that he did not have $100,000 in money, but that he would contribute 1,000 shares of Dupont common and 1,100 shares of Shares, Inc.; that he turned the shares over to Townsend & Co. about April 20, 1930; that he received no evidence of indebtedness in the form of a note or otherwise from the company; that his interest in cleaning the situation up was such that he was willing to contribute that much; that he turned over his stock as an outright contribution to the company; and that subsequent thereto there never was any money made avaiable to him by the company as a result of turning over the stock.  This testimony of the petitioner was corroborated by Wells J. Huntley, secretarytreasurer of Townsend & Co., who attended some of the informal meetings above referred to and in particular the meeting at which the agreement as to the contributions*660  was made, and by Frank C. Neal, who also attended such meetings as the attorney for the corporations.  The respondent's determination is presumed to be correct, but that presumption is rebuttable, , and in our opinion it has been successfully overcome. The respondent contends that the Board may discredit the testimony of witnesses where the balance of the record justifies such action, citing . That case does not support such a contention.  It holds that the Board may reject the uncontradicted testimony of a witness, who was the taxpayer's president and sole stockholder, respecting the value of taxpayer's property, the court stating that "of all things value is most uncertain.  Opinions about it are prophecies, whose truth can not ordinarily be verified save where the property is fungibles, and there is a concourse of buyers and sellers." Cf. . However, we are not concerned herein with mere opinion evidence, but with the testimony of an unimpeached witness as to facts, *661  whose testimony was substantially and essentially corroborated by other unimpeached witnesses.  "And the Board may not arbitrarily discredit the testimony of an unimpeached taxpayer so far as he testifies to facts." . In , cited by the respondent, although the court stated that the Board is not bound by the opinions of witnesses as to the fact of value, it also stated that the testimony of several witnesses to the effect that the bonds in question had no value overcame the presumption arising from the determination of the Commissioner that the bonds had a value of $11,000; that "The burden then shifted to the Commissioner to support his determination *759  by evidence, and this he did not do nor attempt to do, and accordingly his determination can not stand. "; and that the disregard of such positive and affirmative evidence by the Board is ground for the reversal of its determinations approving the determination of the Commissioner. *662  To similar effect is . The only evidence presented by the respondent consisted of copies of the two proposed agreements which were attached to the amended petition of petitioners.  He contends that such writings prepared at about the time of the transaction are entitled to greater weight than the oral testimony of witnesses submitted years after the transaction occurred.  The evidence shows that these proposed agreements were not prepared until the end of June 1930, while the agreement pertaining to the contributions was reached during April 1930; that the petitioner, although he signed the proposed agreements, took no part in bringing about the drafting of such agreements; that they were prepared at the suggestion of Frank Townsend; that the purpose of the agreements was disclosed to the attorney by the secretarytreasurer of the company; and that the purpose of the agreements as stated therein was that the contributions were "not to be a liability of Townsend & Company" but merely a liability in the sense that the contributions be paid, upon the consent of the preferred and common stockholders, only out of future dividends*663  if and when declared, and were not to be preferred above the general creditors of the company.  This plan was suggested by Frank Townsend because he felt that the contributors ought to be reimbursed in the event the company was able, as a result of such contributions, to work out of its difficulties.  Under that plan the stockholders were to deliver their stock to the Tacoma Branch of the Bank of California as trustee.  However, the agreements never became effective, they were never signed by all the parties or performed, and the trustee named therein refused to accept the trust.  The purpose of the proposed agreements was not to reflect the transactions in April 1930, but rather a new and different arrangement.  Such agreements tend rather to corroborate the testimony of the petitioner and to sustain his contention that the stock involved was a contribution, and they tend to negative a sale.  The agreements indicate an attempt on the part of the contributors at most to have the other stockholders recognize the contributions only to the extent of a preference over stockholdings if and when dividends were available.  But the stockholders refused to do so even to that extent.  The*664  respondent further contends that Townsend & Co. sold the 1,000 shares of Dupont common for the petitioner as his agent and that receipt by an agent is equivalent to receipt by the principal. *760  The evidence however does not permit such a construction of what occurred.  The testimony shows that the sale was not made through the petitioner's account or upon his order; that the company treated the stock as its own; that the company sold the stock as its own and received about a thousand dollars more for it than the value entered on its books, of which the petitioner was not informed.  As stated in , "The test as to constructive receipt is whether the debtor has funds standing to the credit of the taxpayer which the debtor is able to pay and which are available and subject to the taxpayer's demand." The testimony discloses that the transaction was not entered on the books of the company as an ordinary sale by the company for a client or as a loan; that at no time was there a credit for the amount of $143,000 or the proceeds of the stock in the petitioner's account on the books of the company, subject to his demand; that no entries*665  were made until at the end of June 1930 to reflect the entire transaction; that when the entry was made of the transaction the result was that the surplus account was credited with the amounts of $110,000 and $33,000 reflecting the contribution of the 1,000 shares of Dupont common and the 1,100 shares of Shares, Inc., respectively.  It appears that no funds received for this stock were available to petitioner in any event, since the company could not have paid the petitioner for the stock, as prior to the sale it used the stock as collateral and drew against it for the purchase of shares of Shares, Inc.  The petitioner agreed to contribute the Dupont stock in question.  This stock was then in the possession of Townsend & Co; the company used the stock as its own and as it saw fit and exercised control and dominion thereover.  There is no evidence showing that the petitioner received any consideration, either in the form of cash, a credit on the books of Townsend & Co., or a promise to pay.  That the petitioner entertained a hope at the time he made the contribution that the company would, if it ever again became prosperous, make some provision to return the contribution or its equivalent*666  to him, did not create an obligation or liability on the part of the company.  He testified that at that time no arrangement to that effect was made.  The respondent on brief cites the case of . It appears in that case in the report of the Board on a rehearing thereof, , that the taxpayer "was unwilling to make an outright donation of any more stock to the comapny"; that such taxpayer authorized the company in writing to sell certain of his stock, and to retain 20 percent as commission on such sales and 80 percent thereof as a loan to the company.  Furthermore, no claim was made by the taxpayer therein that he had made a contribution to the company of the stock sold by the company.  That case is distinguishable on the facts and is not controlling herein.  *761  The evidence shows that the petitioner filed a claim against Townsend & Co. in the bankruptcy proceedings covering his open account, in which there was a considerable credit.  There is no evidence showing what items were included in such claim and whether such claim was allowed in whole or in part.  *667  The respondent argues further that the failure of the petitioner to produce the records of Townsend & Co. and his monthly statements received from that company reises a presumption that, if produced, they would not be favorable to the petitioner's contention.  In , the United States Supreme Court stated as follows: * * * The rule even in criminal cases is that if a party has it peculiarly within his power to produce witnesses who testimony would elucidate the transaction, the fact that he does not do it creates the presumption that the testimony, if produced, would be unfavorable.  * * * But this presumption does not apply to every fact in the case which it may be in the power of the defendant to prove.  He is not bound to anticipate every fact which the government may wish to shew [show] in the course of the trial, and produce evidence of that fact. * * * [Emphasis supplied.] While these records were not produced by petitioner, there is considerable testimony as to the contents of these records pertaining to the transaction here involved, which was received without objection and was, to a large extent, elicited*668  by the respondent upon cross-examination.  This testimony shows in substance that the transaction was not treated in such records as a sale through the petitioner's account; that after the entries covering the entire transaction had been made no credit for the stock remained on the books in petitioner's account; and that surplus was increased by the contribution made by the petitioner.  It also appears that the records of the company were in the possession of the trustee in bankruptcy, and hence equally available to the respondent.  As heretofore stated the petitioner met his burden of proof, the burden then shifted, and the respondent "was required to come forward with evidence to refute the evidence of the petitioner.  * * * The Board cannot draw inferences and conclusions from facts or suppositions outside the record." To similar effect is . We conclude that the petitioners herein contributed the 1,000 shares of Dupont common and 1,100 shares of Shares, Inc., as capital surplus to Townsend & Co., and the determination of the respondent that the transaction constituted a sale*669  is therefore disapproved.  Decision will be entered for the petitioners.