Court Opinion

ID: 4628700
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:53.567863+00
Date Added: 2024-06-11T07:57:15.273302
License: Public Domain

GROVER C. LIGON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ligon v. CommissionerDocket No. 84765.United States Board of Tax Appeals37 B.T.A. 763; 1938 BTA LEXIS 989; April 26, 1938, Promulgated 1938 BTA LEXIS 989">*989  Stock pledged as collateral to secure petitioner's loan at a bank was sold for cash, subject to the lien of the bank, at a private sale for less than cost.  At the time the collateral was under marginal requirements and the bank would not deliver the stock to the purchaser unless the amount for which the stock was sold was paid on petitioner's indebtedness or marginal requirements otherwise satisfied.  Release of the stock was not a condition of the sale.  The stock was released to purchaser at his request in a subsequent year.  The amount received for the stock was not paid and credited on the loan.  Held, under the facts and circumstances the sale was a completed transaction in the taxable year and petitioner is entitled to the loss deduction.  Joshua W. Miles, Esq., for the petitioner.  Carroll Walker, Esq., for the respondent.  ARNOLD 37 B.T.A. 763">*763  This proceeding involves a tax deficiency of $1,268.62 in income tax for the calendar year 1933.  Petitioner assigns the following errors: (a) Disallowance of a loss on the sale of 300 shares of Union Trust Co. of Maryland stock in the amount of $17,572.50, and (b) disallowance of other expenses in the1938 BTA LEXIS 989">*990  amount of $327.88, which item represents expenses incurred in business.  The question involved in the first assignment of error is whether there was a completed transaction in 1933 whereby petitioner sustained a deductible loss in that year.  No evidence was submitted on the second assignment of error.  The case was submitted on oral testimony and exhibits.  FINDINGS OF FACT.  Petitioner is an individual, residing at 3310 Ridgewood Avenue, Baltimore, Maryland.  During the period from February 10, 1928, to April 21, 1931, inclusive, he purchased 300 shares of Union Trust Co. of Maryland stock at a total cost of $17,722.50.  On or prior to November 15, 1933, this stock, together with other securities owned by the petitioner, was held as collateral by the Union Trust Co. to secure a loan to the petitioner.  The amount of petitioner's loan at the bank varied from time to time, ranging from $132,000 down to $60,000.  On November 15, 1933, petitioner sold 400 shares of Union Trust Co. of Maryland stock for $200 cash, or 50 cents a share.  The aforesaid 300 shares of stock were a part of the 400 shares sold, all of which was held as collateral by the Union Trust Co.  The purchaser 1938 BTA LEXIS 989">*991 37 B.T.A. 763">*764  of the stock was John Frank Mallonee, who was manager of the Arlington branch office of the Union Trust Co.At the time Mallonee purchased the stock he knew that the Union Trust Co. was unwilling to release it as collateral because petitioner's indebtedness was insufficiently secured.  Before making the purchase Mallonee communicated with the treasurer of the Union Trust Co., who advised him that the bank would release the 400 shares if the purchase price of the stock was paid on petitioner's loan.  Despite this information, Mallonee purchased the stock, subject to the bank's lien, being content to let the stock stand as collateral for petitioner's loan.  Mallonee thought the stock had value, expected to make a good profit from his purchase, and expected a release of the stock when he desired the delivery thereof.  Payment of the purchase price to the bank was not made a condition of the sale.  Following the sale the petitioner advised the Union Trust Co. that he had sold the stock and that delivery thereof should be made to Mallonee.  At some time undisclosed by the record the Union Trust Co. had gone through some form of reorganization and its stock was exchanged1938 BTA LEXIS 989">*992  share for share for City Certificates Corporation stock, a holding company for Union Trust Co. stock.  On or about February 23, 1934, the manager of the loan department of the Union Trust Co. wrote the petitioner as follows: After you left the office today, I took up with our Committee your request for releasing the 400 shares of City Certificates Corporation stock, which is included in the collateral we hold on your loan, and their answer is that in view of the fact that your loan is still under our marginal requirements, we feel that any money you are to receive from the sale of this stock should be paid to us, as a credit on your loan.  The 400 shares of City Certificates Corporation stock represent essentially the same property as petitioner sold to Mallonee on November 15, 1933.  Shortly prior to October 25, 1935, Mallonee requested the bank to deliver to him the 400 shares of stock purchased from petitioner.  On or about October 25, 1935, the bank delivered to Mallonee the stock purchased in the form of 400 shares of City Certificates Corporation stock.  Between the date of purchase and the date of delivery Mallonee had given very little attention to the stock purchased, 1938 BTA LEXIS 989">*993  as he knew he could secure its release and delivery at any time the requirements of the bank were met.  Mallonee owned other Union Trust Co. stock, having a total of 1,000 shares at one time.  He signed voting proxies each year but did not remember whether the proxies included the 400 shares purchased from petitioner.  Neither the petitioner nor Mallonee paid the bank the $200 to release the stock.  37 B.T.A. 763">*765  The petitioner's sale of the stock on November 15, 1933, divested him of all interest in the 400 shares of stock sold and was a closed and completed transaction within the taxable year 1933.  On his return for 1933 the petitioner claimed a loss only with respect to 300 of the 400 shares sold.  The total cost of the 300 shares being $17,722.50 and the sale price therefor being $150, petitioner deducted the difference, or $17,572.50, as a loss.  The respondent disallowed the claimed deduction because it "is based on a transaction which the Bureau can not recognize as giving rise to a loss deductible for income tax purposes." OPINION.  ARNOLD: The sole issue for our determination is whether petitioner sustained a deductible loss in the tax year from the sale of the stock1938 BTA LEXIS 989">*994  under the circumstances set forth in our findings of fact.  That the sale was made and the purchase price paid November 15, 1933, is not in dispute.  Neither is the amount of the loss in dispute.  The respondent filed no brief, but, as we understand his position, from the statements made at the hearing and from the course of his cross-examination, he relies solely on the fact that, as the stock was up for collateral to secure an indebtedness of petitioner and was not delivered to the purchaser by the bank until October 25, 1935, the loss was not sustained in 1933.  The petitioner claims that he completely divested himself of all interest in or title to the stock by the transaction of November 15, 1933, thereby sustaining the loss in question.  His interest in the stock pledged was that of a pledgor, who retains the general property or title in the thing pledged until it is sold under foreclosure by the pledgee.  The pledgee acquires only a special interest or property in the stock during the continuance of the pledge, ; 1938 BTA LEXIS 989">*995 ; . (See note at .) The interest retained by the pledgor in his pledged stock can be assigned and transferred the same as any other property right, and the pledgor's assignee, at least where the pledgee has notice of the transfer, succeeds to all the rights in the property possessed by the pledgor.  ; ; ; ; ; and . At the time petitioner sold the stock to Mallonee he made a complete disclosure of the pledge of the stock and the lien which the bank had.  Mallonee was not only advised of this fact, but he testified that he made an independent investigation with respect thereto 37 B.T.A. 763">*766  before he purchased the stock.  Mallonee was advised by the bank, and knew from the treasurer of the bank, that petitioner's loan was undersecured and that delivery1938 BTA LEXIS 989">*996  of the pledged stock would not be made unless the $200 was paid on the loan, the loan reduced, the collateral increased in value, or additional collateral posted.  Nevertheless, Mallonee, with full knowledge of these facts, paid petitioner cash for the latter's interest in the stock pledged.  The intention of the parties to transfer ownership of the stock subject to the lien of the bank is fully demonstrated by the notice that petitioner gave the bank advising them of the sale of the 400 shares of stock and that delivery thereof should be made to Mallonee.  Mallonee in no way conditioned his purchase of the stock in question upon delivery thereof, but bought petitioner's interest and title subject to the lien of the bank.  Under these circumstances we agree with the petitioner that he had divested himself of all ownership in the stock in question November 15, 1933, when he received the purchase price.  Deductions under the income tax statutes, however, depend not so much upon refinements of title as they do upon meeting the requirements therein stated for deductions.  A loss, to be deductible from gross income, must have been sustained in the taxable year, sec. 23(e), Revenue Act1938 BTA LEXIS 989">*997  of 1932; and must usually be evidenced by closed and completed transactions, art. 171, Regulations 77; . The year of deductibility of a loss is determined by a practical test, ; and the intention of the parties to the transaction is one of the controlling elements in determining whether the transaction was closed and completed in the taxable year.  ; , reversing ; , reversing . In , the court, after stating that it was primarily concerned with whether or not the loss evidenced by the sale was realized within the meaning of that term as applied to income taxation, stated as follows: * * * But when the evidence of realization is a sale of personal property [stock], it is not always necessary to deliver the property before there may be a deduction1938 BTA LEXIS 989">*998  of a loss.  It is enough that the obligation to deliver is so fixed that the loss is reasonably certain in fact and ascertainable in amount. , * * * Here the transaction was so far advanced in December that the petitioner was bound to deliver the stock to the broker at a price which was then determined by the sale the broker made.  That sufficed to make the loss certain and established the amount.  Moreover, the intention of the petitioner and the broker being that the particular shares then owned by the petitioner should be delivered to the broker, it follows that title to them passed to the broker in December.  (C.C.A. 2).  The loss was accordingly all realized in 1928, and so was deductible in that year.  37 B.T.A. 763">*767  In , the court, in reversing the Board as to the year in which a loss was sustained from the sale of stock, said: * * * The ground upon which it [Board] rested the conclusion that title did not pass on July 9th when the certificates were indorsed and delivered to the attorney was that he was1938 BTA LEXIS 989">*999  to hold possession of them until Dorman should perform his part of the bargain.  But the law is well settled that nondelivery of possession would not preclude title to the stock passing forthwith to Dorman if such was the intention of the parties.  ;  (C.C.A. 2);  (C.C.A. 3);  (C.C.A. 3); ; ; . Not only did the seller, the buyer and the party with whom the certificates were deposited testify that the sale was intended to be consummated on July 9th, but statements and conduct of the parties at that time and thereafter were entirely consistent with such intention.  The loss on the sale was sustained in 1926.  The record in this proceeding convinces us that petitioner intended to divest himself of all interest in the stock at the time1938 BTA LEXIS 989">*1000  he received the purchase price and that it was the intention of the purchaser to buy the stock subject to the claim of the bank, deferring actual delivery of possession of the certificates to some time in the future.  Under the facts and circumstances herein, the failure to deliver the certificates does not prevent the transaction of November 15, 1933, from being a closed and completed transaction.  In view of the foregoing, petitioner is entitled to deduct the loss realized upon the sale of his stock on November 15, 1933.  For failure of proof on the second assignment of error we sustain the Commissioner on that issue.  Decision will be entered under Rule 50.