Court Opinion

ID: 4590378
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:03:30.943698+00
Date Added: 2024-06-11T07:50:27.893651
License: Public Domain

THE ROGERS RECREATION COMPANY OF CONNECTICUT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rogers Recreation Co. v. CommissionerDocket No. 83233.United States Board of Tax Appeals37 B.T.A. 545; 1938 BTA LEXIS 1018; March 29, 1938, Promulgated *1018  1.  Held, that transactions in the taxable year purporting to be an acquisition and a sale of stock shown to have little or no value, were not bona fide, and did not result in a deductible loss of $44,000.  2.  Held, that petitioner's return for 1931 was false and fradulent with intent to evade tax.  Dennis P. O'Connor, Esq., and A. F. Hall, C.P.A., for the petitioner.   F. L. Van Haaften, Esq., L. H. Rushbrook, Esq., and George H. Mitchell, Esq., for the respondent.  TYSON *546  The respondent has determined a deficiency in income tax for the calendar year 1931 in the amount of $2,380.93, to which he has added 50 percent, or $1,190.47, for the filing of a false and fraudulent return.  Petitioner assigns error in the respondent's disallowance of a claimed deduction of $44,000 as a loss sustained in 1931 upon an alleged sale of certain shares of stock.  Further, petitioner pleads the statute of limitations in bar of the assessment and collection of any additional tax for the year 1931.  The respondent affirmatively alleges that petitioner is liable for the 50 percent addition to the deficiency prescribed by section 293(b) of*1019  the Revenue Act of 1928, and, further, he affirmatively alleges numerous facts upon which he relies, which, briefly, are that the petitioner, with intent to evade tax, filed, on or about March 1, 1932, an income tax return for 1931, known by petitioner to be false and fraudulent in that the return reported a net loss of $27,407.81, whereas, in fact, petitioner had a net income for that year of $22,841.05; that the return fraudulently reported a loss of $44,000 as having been sustained from a sale of Rogers Recreation Co. of St. Louis stock which cost $45,000 in 1924 for a consideration of $1,000 in 1931, whereas, the transaction was a nominal transfer from petitioner to its president, was not a bona fide sale, and did not result in a legally deductible loss in any amount; that the directors of petitioner alone, or in connivance with George C. Rogers, president of petitioner, engaged in fraudulent acts and deceptive gestures and the petitioner created ostensible and fictitious considerations designed to clothe the transaction with the appearance of a bona fide sale; that the respondent without knowledge of the falsity of petitioner's return relied thereon; and that the deficiency and*1020  the addition thereto is due as a result of the false representations on petitioner's return for 1931.  In its reply, petitioner admits filing, on or about March 1, 1932, its tax return for the year 1931, reporting a net loss of $27,407.81 and claiming a loss deduction of $44,000 based on a statement in its return that stock of the Rogers Recreation Co. of St. Louis had cost $45,000 in 1924 and had been sold for $1,000 in 1931, but denies that such return was false and fraudulent with intent to evade tax and specifically denies the affirmative allegations of fact upon which respondent relies as establishing fraud.  FINDINGS OF FACT.  The petitioner is a Connecticut corporation, with its principal place of business at New Britain, Connecticut, and is engaged in the business of operating bowling alleys and billiard tables.  It was organized in 1922 by George C. Rogers, who had been engaged in the same character of business since 1908, and he and his wife have since owned the majority of its stock.  During 1931 and prior thereto, Rogers, his *547  wife, and W. S. Brennecke were the directors of petitioner and Rogers was its president and treasurer.  Hereinafter the petitioner*1021  will be referred to as the Connecticut Co.  In 1924 George C. Rogers and certain other interested parties organized the Rogers Recreation Co. of St. Louis (hereinafter referred to as the St. Louis Co.), to engage in the business of operating bowling alleys and billiard tables in St. louis, Missouri.  The St. Louis Co. originally had a paid in capital of $106,000, represented by $26,000 of preferred stock and $80,000 of common stock.  In 1924 the Connecticut Co. paid $45,000 in cash for 450 shares of the capital stock of the St. Louis Co.  Also, Rogers personally acquired $5,000 par value of such stock in 1924 and additional shares subsequently.  George C. Rogers was an officer of the St. Louis Co. from its organization until February 1931, at which time he resigned because of ill health.  The St. Louis Co. conducted its bowling alley and billiard table business in St. Louis, Missouri, in a large building which it leased from the Tutt estate and the Luray Realty Co. for an annual rental of $50,000 or $55,000, which George C. Rogers guaranteed personally.  The St. Louis Co. was never as successful as its promoters had hoped it would be.  During the first three years of its existence*1022 the St. Louis Co. paid 4 percent dividends on its 8 percent preferred stock, but thereafter it paid no dividends and it steadily lost business, due to the competition of a multitude of neighborhood bowling alleys put in operation throughout the city of St. Louis.  In about 1928 the St. Louis Co. purchased about $7,000 or more par value of its outstanding preferred stock at 50 cents on the dollar.  In or about 1928 Rogers and the other directors of petitioner considered selling the latter's stock holdings and also Rogers' personal stock holdings in the St. Louis Co. to certain persons in St. Louis, but no sale was consummated.  On October 31, 1929, the stockholders of the Connecticut Co. adopted the following resolution: At a special meeting of stockholders held this day at which ninety-five per cent of the stock issued was present, it was voted to sell George C. Rogers the four hundred and fifty shares owned by this Company in the Rogers Recreation Company of St. Louis, Mo., with an adjusted book value of seventy dollars per share, taking in exchange five hundred shares of this Company at a book value of sixty three dollars per share, and to retire the said five hundred shares*1023  of this companys stock.  The petitioner transferred its 450 shares of St. Louis Co. stock having a par value of $45,000 to Rogers in exchange for 500 shares of its own capital stock which had a par value of $25,000 and had been issued to Rogers in May 1927.  These 500 shares of its own capital stock were canceled and retired by petitioner on November 1, 1929.  *548  On its 1929 income tax return the petitioner claimed a deduction of $20,000 as a loss sustained on the above described transaction, which was reported in a schedule attached to the return as "Loss St. Louis Investment, Cost in 1924, $45,000 - Received in 1929, $25,000 - Loss $20,000." In his deficiency notice, mailed on November 17, 1931, for the year 1929, the respondent determined a deficiency in income tax based partly upon his disallowance of such claimed loss deduction on the ground that the Connecticut Co. sustained no deductible loss on the purchase and retirement of its own capital stock.  The Connecticut Co. took no appeal from that determination and paid the asserted deficiency for 1929.  During the period from November 1, 1929, to about November 24, 1931, Rogers owned the above mentioned $45,000 par*1024  value stock of the St. Louis Co. and during that period that company's business declined.  At some time during 1931 the St. Louis Co. became entirely unable to pay the rent due on its leased premises and at some time during November or December of 1931 the Tutt estate called on Rogers as the guarantor of such rentals.  On November 24, 1931, the stockholders of the Connecticut Co. adopted the following resolution: At a special meeting of the stockholders of this company held this date, at which all the stockholders were present, it was unanimously voted that $25,000.00 par value of this companies [sic] stock retired be re-issued to George C. Rogers in exchange for $45,000.00 par value stock of the Rogers Recreation Company of Missouri.  Pursuant to that resolution 500 shares of petitioner's capital stock, having a par value of $25,000, were issued on November 25, 1931, to George C. Rogers in exchange for his transfer of $45,000 par value of St. Louis Co. stock to petitioner.  In the latter part of 1931 Rogers desired to be relieved of his obligation as guarantor of the St. Louis Co.'s rentals and the Tutt estate desired to secure control of the St. Louis Co. through the*1025  ownership of the latter's stock so as to avoid foreclosure proceedings.  During@ December 1931 and prior to the 30th day of that month, Rogers agreed to, and thereafter did, transfer to the Tutt estate and the Luray Realty Co., lessors, the $45,000 par value stock of the St. Louis Co. (the subject matter of the above quoted resolution of November 24, 1931), the shares of St. Louis Co. stock personally owned by Rogers, the sum of $3,000 in cash, and all of Rogers' back salary owed him by the St. Louis Co., in consideration for which on December 28, 1931, the Tutt estate and the Luray Realty Co. executed a full release of Rogers from every obligation arising from Rogers' guarantee of the obligations of the St. Louis Co.*549  On December 30, 1931, the stockholders of the Connecticut Co. adopted the following resolution: At a special meeting of the stockholders of this company held this day at which all stockholders were present, the following proposition was submitted: Mr. George C. Rogers, who has already pledged his personal fortune to guarantee a lease dated June third, nineteen hundred and twenty four, for an annual amount of $55000.00 (Fifty five thousand dollars), *1026  plus taxes, water and maintenance [sic], which lease terminates October thirty first, nineteen hundred and forty two, given by the Tutt Estate and the Luray Realty Company of Missouri for the building located at the south east corner of Washington Avenue and Tenth Street, St. LouisMissouri, made an offer of one thousand dollars ($1000.00), for the forty five thousand dollars ($45000.00) par value stock of the Rogers Recreation Company of St. Louis, Missouri, now owned by this company.  Since the Rogers Recreation Company of Missouri shows a very considerable loss for the years nineteen hundred and thirty and nineteen hundred and thirty one, it was unanimously voted to accept the said offer and the Secretary is hereby directed to have the forty five thousand dollars ($45000.00) par value stock of the Rogers Recreating Company of Missouri transferred to Mr. George C. Rogers.  We, all the directors of the Rogers Recreation Company, present, do hereby waive all right to, and agree to dispense with, any further notice of this meeting.  Pursuant to that resolution the $45,000 par value of St. Louis Co. stock was transferred by petitioner to Rogers and the amount of $1,000 was charged*1027  to Rogers' personal account on the petitioner's books.  At that time Rogers and his wife "were satisfied it [the St. Louis Co. stock] was not worth hardly anything." The 500 shares of petitioner's capital stock having a par value of $25,000 which were issued to George C. Rogers on November 25, 1931, were canceled on May 28, 1932.  The petitioner's accountant recommended the transfer of the $45,000 par value St. Louis Co. stock by Rogers to petitioner in exchange for $25,000 par value of the latter's own capital stock in November 1931 and, also, the petitioner's transfer of said St. Louis Co. stock to Rogers for $1,000 in December 1931, for the purpose of securing a loss deduction in the amount of $44,000, because the claimed loss of $20,000 on that stock for 1929 had been disallowed in the respondent's deficiency notice dated November 17, 1931.  In its income tax return for 1931 petitioner took a deduction of $44,000 as a loss sustained on the sale of stock of the St. Louis Co., and as to that claimed loss reported "Rogers Recreation Co. of St. Louis, Cost 1924, $45,000 - Received 1931, $1,000 - Loss $44,000." As a result of that claimed deduction the petitioner's return reported*1028  a net loss for the year 31.  The November 1931 transaction involving the transfer of $45,000 par value St. Louis Co. stock by Rogers to petitioner in exchange for $25,000 par value of petitioner's capital stock and the December *550  1931 transaction involving the retransfer of said St. Louis Co. stock by petitioner to Rogers for $1,000 did not constitute bona fide transactions.  In reporting a loss of $44,000 as set forth in the next preceding paragraph, the petitioner's income tax return for 1931 contained a misrepresentation of the facts.  The petitioner filed a false and fraudulent return for the year 1931, with intent to evade tax.  The deficiency in tax, or part of it, is due to fraud with the intent to evade tax.  OPINION.  TYSON: Whiel the record in this proceeding does not establish definitely the financial condition of the St. Louis Co. at any time, it is clear that it was a losing venture, particularly after the first three years of its existence.  It is evident that in 1929 the St. Louis Co.'s capital stock was worth a great deal less than par and in that year the petitioner disposed of the 450 shares of such stock, which had cost it $45,000 in 1924, in exchange*1029  for 500 shares of its own capital stock, having a total par value of $25,000, which were canceled and retired.  That constituted a closed transaction, and whether it resulted in a realized and deductible loss in 1929 is not an issue in this proceeding.  The petitioner did claim a deduction of $20,000 on its 1929 return on account of that transaction and the respondent disallowed that deduction in his deficiency notice dated November 17, 1931.  The petitioner acquiesced in that determination and paid the additional tax for 1929.  On November 24, 1931, and in pursuance of a plan designed to enable the petitioner to secure a deduction of $44,000 as a loss sustained in 1931, the $45,000 par value stock of the St. Louis Co. was transferred to petitioner by Rogers (who with his wife owned the majority of petitioner's capital stock) in exchange for $25,000 par value of petitioner's stock.  In further pursuance of that plan, said St. Louis Co. stock was transferred by petitioner to Rogers for $1,000 in December 1931.  The purpose of the plan was to eliminate the effect of the closed transaction of 1929 and thereby restore to petitioner a cost basis of $45,000, as of 1924, for determining*1030  a loss of $44,000 upon a disposition of the St. Louis Co. stock in December 1931.  However, that purpose was not effectuated, for the 1929 transaction was completed and became a closed transaction in that year for income tax purposes.  If the petitioner's acquisition of the St. Louis Co. stock in November 1931 and its disposition thereof in December 1931 had been bona fide transactions the cost of such stock to petitioner in November 1931 would have been the basis for determining the amount of the loss sustained upon the disposition thereof in December 1931.  The petitioner does not prove that the 450 shares of St. Louis Co. stock cost it anything in November 1931, for the reason *551  that there is no evidence as to the value of that time of petitioner's capital stock which was given in exchange for the 450 shares of St. Louis Co. stock.  In December 1931 the stock of the St. Louis Co. "was not worth hardly anything." There is no proof that it was any more valuable in the preceding month of November 1931, or that there was any material change in the affairs of the St. Louis Co. between those dates.  From this record it is clear that the stock of the St. Louis Co. had little, *1031  if any, value in November as well as in December of 1931.  Thus it is clear that, in fact, the transactions in November and December of 1931 involving the 450 shares of St. Louis Co. stock which had little, if any, value in either month, were merely transfers in form and lacked substance and were not bona fide transactions resulting in any deductible loss.  The respondent's disallowance of the claimed deduction of $44,000 as a loss is approved.  Cf. ; ; ; ; affd., ; certiorari denied, . The petitioner's tax return for 1931 failed to disclose the transfer of November 1931, which should have been reported as the date of acquisition for the purpose of claiming the amount, if any, of a loss on the St. Louis Co. stock in 1931, thus concealing the true facts from the respondent, and, further, the return falsely reported that this stock had been acquired in 1924 at a cost of $45,000, leaving the necessary inference that*1032  it had been owned by petitioner continuously thereafter until the purported sale to Rogers for $1,000 in December 1931.  The return was false and fraudulent and made with intent to evade tax, and we have so found as a fact.  Cf. ; ; ; affirmed in part, ; ; ; Chas. F. Long, 12 % b.t.a./ 488.  The deficiency in controversy being due, at least in part, to fraud with intent to evade tax, the respondent's determination of the 50 percent addition to the deficiency, pursuant to section 293(b) of the Revenue Act of 1928, is approved and, consequently, under section 276(a) of the Revenue Act of 1928, the assessment and collection of the deficiency is not barred by the statute of limitations.  Reviewed by the Board.  Decision will be entered for the respondent.MURDOCK MURDOCK, dissenting: I do not think that the evidence of a fraudulent intent is clear and convincing.  MELLOTT agrees with the above.