Court Opinion

ID: 4603387
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:50.986849+00
Date Added: 2024-06-11T07:52:50.543438
License: Public Domain

ROBERT H. MUNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Munson v. CommissionerDocket No. 88949.United States Board of Tax Appeals39 B.T.A. 72; 1939 BTA LEXIS 1077; January 10, 1939, Promulgated *1077  A corporation had a credit balance in a brokerage account equivalent to the debit balance in the account of its sole shareholder, which it guaranteed.  The broker was given a contractual lien on the corporation's account to support the guaranty.  The corporation instructed the broker to transfer its account to the account of the shareholder, who was and remained insolvent.  Held, the corporation distributed no assets in liquidation and the shareholder realized no taxable gain.  James D. Dow, Jr., Esq., for the petitioner.  Philip M. Clark, Esq., for the respondent.  STERNHAGEN *72  The Commissioner determined a deficiency of $580,324.16 in petitioner's income tax for 1932.  He disallowed a loss deduction of $85,000 and determined a gain of $971,985.24 in the liquidation of a corporation.  *73  FINDINGS OF FACT.  Petitioner, a resident of York Harbor, Maine, was president, manager, and owner of all the stock of the Rock Corporation, which he had acquired at a cost of $85,000.  He and the corporation each maintained a trading account with Wrenn Brothers & Co., stock brokers.  By an instrument executed August 26, 1931, the corporation*1078  agreed with the broker: * * * to guarantee and hold you harmless from and to promptly pay you on demand any debit balance now or hereafter due * * * and any and all losses now existing * * * or hereafter arising * * * on petitioner's account.  Demand and notice of default were waived; the corporation further agreed with the broker: * * * that you shall have a lien on and may hold as collateral security for said account or accounts any and all securities and equities you may hold or have in any account or accounts for us at any time * * *.  * * * that any demand that we perform this guaranty or any action or proceeding brought to enforce the same or our liability hereunder shall not release or otherwise affect said lien, and * * * you shall at all times have both of said remedies to protect and compensate you against any loss or debit balance due on said account or accounts.  We also agree that this guaranty is a continuing one and shall cover the period of existence of said account or accounts * * *.  On the same date petitioner executed a similar instrument guaranteeing the corporation's account.  On December 2, 1932, Wrenn Brothers & Co. transferred the accounts of*1079  petitioner and the corporation to Percy G. Crocker & Co., stock brokers, and at the same time assigned to that firm the corporation's guaranty of petitioner's account with the corporation's assent.  At that time petitioner's account was debited with $1,585,451.74 and credited with 1,300 shares of Mathieson Alkali Co., 16,400 shares of United States Pipe & Foundry Co., and 36,618 shares of Commercial Solvents Co., having an aggregate value of about $513,780.76.  The net debit balance of $1,071.670.99 was secured only by the corporation's guaranty agreement.  At the same time the corporation's account, its sole asset, was credited with $1,585,451.74 and debited with 1,300 shares of Mathieson Alkali Co., 16,400 shares of United States Pipe & Foundry Co., and 36,618 shares of Commercial Solvents Co., which it had sold short.  Besides the corporation's stock, petitioner owned only a few unmarketable assets, consisting of stocks and encumbered real estate, the value of which was less than his indebtedness to others than the broker.  On December 2, 1932, the corporation's board of directors resolved to distribute its assets in liquidation upon the stockholders' assumption of its obligations*1080  and to dissolve.  This action was approved on the same date by the stockholders.  On December 3, 1932, the corporation *74  sold to petitioner for one dollar all of its assets, subject to its liabilities and more specifically to its guaranty of the brokerage account.  On the same date petitioner executed a declaration, reciting that the corporation had declared a liquidating dividend of all its assets subject to all of its liabilities, and: * * * in order to evidence the assumption of the debts, obligations, and liabilities of said Rock Corporation by said Robert H. Munson, he hereby records that he has assumed all * * * and, without limiting the generality hereof, has agreed and does hereby agree to assume the obligation of that certain guarantee * * * by the corporation of his brokerage account.  On the same date the corporation instructed the broker to transfer its account into petitioner's account.  The broker did so, offsetting one against the other on its books.  OPINION.  STERNHAGEN: In determining petitioner's income tax for 1932, the Commissioner determined that a gain of $971,985.24 was realized from the liquidation of the corporation.  The petitioner assails*1081  this determination, and insists that he realized no gain.  It would be ironic indeed if a gain of almost a million dollars could be recognized with a resulting tax liability of over half a million dollars when at the same time the petitioner was and has ever since been insolvent, as stated by both parties.  But this does not dispose of the merits of the question.  The determination must be reversed because it is apparent that petitioner had no gain.  He and his corporation went through motions which wholly lack substance.  In reality the corporation did not distribute anything in liquidation.  Bound as it was by its contract with the broker giving the broker a lien on its account to support Munson's individual account which it had guaranteed, it could not transfer the asset of this account in liquidation to Munson without the broker's consent.  It did not attempt to do so, but had the broker transfer its account to petitioner's to discharge its guaranty at a time when Munson's assets made the guaranty a substantial, unmistakable, and imminent obligation.  It was done on the same day as the simulation of a transfer in liquidation to petitioner, but this contemporaneous conduct must*1082  be taken as in the sequence which fits the corporation's obligation.  Cf. ; . As in that case, the nominal liquidation and ostensible transfer to the shareholder were ineffectual.  The forms adopted can not serve to establish as actual a liquidation to petitioner which was only apparent and which did not and legally could not transfer anything to him.  Decision will be entered under Rule 50.