Court Opinion

ID: 4628876
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:04:13.752435+00
Date Added: 2024-06-11T07:57:17.079163
License: Public Domain

CHICAGO TITLE & TRUST COMPANY, AS EXECUTOR OF THE ESTATE OF RHEA LOGAN MUNROE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chicago Title & Trust Co. v. CommissionerDocket No. 73455.United States Board of Tax Appeals32 B.T.A. 249; 1935 BTA LEXIS 974; March 20, 1935, Promulgated *974  Transfer by decedent in 1930 of securities to a corporation in which her husband owned all the stock for a note of the corporation, followed by reacquisition of the same securities in 1931 from another corporation controlled by the husband, held, under the circumstances here, not a bona fide sale and respondent's disallowance of a claimed loss for 1930 is sustained.  of a claimed loss for 1930 is sustained.  Harry J. Rudick, Esq., for the petitioner.  James K. Polk, Esq., for the respondent.  ARUNDELL*250  The respondent has determined a deficiency in decedent's income tax for the year 1930 in the amount of $9,283.05.  The deficiency arises largely out of respondent's disallowance of a claimed loss on the sale of stocks by decedent, the respondent holding that the transaction was not a bona fide sale.  The disallowance of the claimed loss is the only matter in issue, other adjustment made by the respondent not being questioned by petitioner.  FINDINGS OF FACT.  Petitioner is the executor of the estate of Rhea Logan Munroe (Mrs. Charles A. Munroe), who died on February 22, 1933.  On December 16, 1930, Mrs. Munroe owned 7,751 shares of*975  stock in 10 corporations, listed in the following table, which she had owned less than two years and which had cost her $375,954.48.  StockSharesTexas Gulf Sulphur2,100Westinghouse Air Brake700Mathieson Alkali600Petroleum Corporation200Consumers Co.100Commonwealth Edison Co.300United Corporation common2,335United Corporation preferred416Pure Oil common500U.S. Gypsum common500The market price of these stocks in December 1930 was less than Mrs. Munroe had paid for them.  She had received income in 1930 which, as matters then stood, would be subject to income tax.  She desired to offset this income by the shrinkage in value of securitis, and to accomplish this, on December 16, 1930, she offered the securities to the Inverness Corporation, Ltd., at the then market prices, which aggregated $275,032.  The Inverness Corporation, Ltd. (hereinafter called Inverness), accepted and gave Mrs. Munroe its interestbearing note for Pound 56,416.10, which at the then rate of exchange was the equivalent of $275,032.  Delivery of the stock certificates was made on December 18, 1930, to Charles A. Munroe and William A. Blind, the latter being*976  secretary of Inverness, and on the same date they were turned over to Harriman Brothers & Co., who held them for the account of Inverness.  Inverness was a Bahama Islands corporation in which decedent's husband, Charles A. Munroe, owned all the stock and of which he was president.  Munroe also owned or controlled all the stock of another Bahama Islands corporation, Manistee Corporation, Ltd., hereinafter called Manistee.  Inverness had been organized by Munroe for the purpose of engaging in operations outside the United States and thus avoiding income taxes.  At the time Inverness gave its note to Mrs. Munroe it did not have sufficient cash to purchase the securties, and at December 31, 1930, it had no cash.  In its balance sheet of the latter date it listed securities at a value of $3,309,448.67, including *251  those acquired from Mrs. Munroe, and a paid-in surplus of $2,416,336.67.  Its assets would readily have supported a loan sufficient to cover the amount of its note to Mrs. Munroe.  In January 1931 Mrs. Munroe expressed a desire to reacquire the securities she had transferred to Inverness, but she did not obtain possession of them until in March, as hereinafter related. *977  By February 9, 1931, the market value of the securities had increased some $29,000, and on that date Inverness executed a bill of sale of the stocks to Manistee.  The bill of sale was executed in Nassau, Bahama Islands.  It set forth the price of each block of stock, the total amounting to Pound 62,379.8.20, which was the equivalent of $304,099.88, the then market value of the stocks.  Manistee did not pay cash for the securities, but, as recited in the bill, "pays for said securities by assuming and agreeing to pay" the note of Inverness to Mrs. Munroe and by delivering to Inverness its (Manistee's) note for Pound 5,962.12.10 (about $29,000) without interest.  The bill of sale from Inverness to Manistee was executed in the Bahama Islands for the purpose of enabling Inverness to report the profit as one realized outside the United States, and for the further purpose of giving Manistee an increased basis for the securities.  On the same date, February 9, 1931, Manistee executed a bill of sale of the same stocks to Mrs. Munroe for a recited consideration of "cash in the amount of Pound 56,866.14.1 and her note payable in one year, without interest, in the amount of Pound 5,432.7.5." *978  On March 3, 1931, Manistee received from Mrs. Munroe a draft on Brown Brothers Harriman & Co. (successor to Harriman Brothers & co.) for $277,225.19 and her promissory note, dated February 9, 1931, for Pound 5,432.7.5.  Manistee thereupon issued its draft on Brown Brothers Harriman & Co. in favor of Inverness for $277,653.07.  Inverness in turn issued its draft dated March 3, 1931, on Brown Brothers Harriman & Co. to Mrs. Munroe for a like amount, $277,653.07, representing the amount of its note to Mrs. Munroe with interest thereon from December 16, 1930, to February 9, 1931.  On March 3, 1931, Brown Brothers Harriman & Co. credited Mrs. Munroe's account on their books with $277,653.07 and charged it with $277,225.10, leaving a credit balance of $427.88, for which amount Mrs. Munroe drew a draft on the same date, which she deposited to her account at the Chase National Bank.  Federal and state transfer taxes were paid on the transfer of the stock certificates from Mrs. Munroe to Inverness in December 1930.  After receiving the certificates on December 18, 1930, Harriman Brothers & Co. continued to hold them for the account of Inverness until March 3, 1931.  Dividends on the stocks*979  between those two dates were credited to the account of Inverness.  On March 3, 1931, Inverness directed that the certificates be delivered to a representative *252  of Mrs. Munroe in the trust department of the Chase National Bank, which was done, and the bank subsequently had the certificates transferred in the name of Mrs. Munroe.  Shortly after Manistee received Mrs. Munroe's promissory note for Pound 5,432.7.5, Charles A. Munroe destroyed it.  In her income tax return for 1930 Mrs. Munroe claimed a loss deduction of $100,922.48 as having been sustained on the transfer of securities to Inverness.  The claimed deduction was disallowed by the respondent.  OPINION.  ARUNDELL: The statement of the fact here in somewhat complicated by reason of using English terms in some places and American terms in others to describe sums of money.  The facts themselves, though, are simple.  Mrs. Munroe owned securities which in 1930 were worth less than they had cost her.  Faced with an income tax which she wanted to reduce by reflecting in her return shrinkage in value of securities, she transferred the securities to a corporation in which her husband owned all the stock, taking the*980  corporation's note for the current value of the securities, which was $100,922.48 less than cost.  That corporation, in February 1931, transferred them to another in which Munroe owned or controlled all the stock, at the then market price, which was about $29,000 (Pound 5,962.12.10) higher than the price at December 16, 1930.  The second corporation paid no cash for the securities, but assumed the first corporation's note to Mrs. Munroe and gave its note for the increase in market price.  Mrs. Munroe then got the securities back from the second corporation, agreeing to pay therefor an amount of cash $2,193.19 in excess of the amount of the first corporation's note, and giving her note for Pound 5,432.7.5, about $26,000.  At or about the time of delivery of the securities to Mrs. Munroe on March 3, 1931, the several accounts were cleared up by exchange of checks in which the only one who profited was Mrs. Munroe.  She received $427.88, and the note that she gave to the second corporation was destroyed.  The question presented here is whether Mrs. Munroe suffered a deductible loss in 1930 upon the transfer of her securities to the Inverness Corporation.  The answer to this question*981  turns upon whether that transfer was a bona fide sale in which Mrs. Munroe intended "absolutely getting rid of the stock", , or whether it was merely an "accommodation" transaction. ;. The community of interest that existed among several parties to the transactions described in the findings requires that their activities be closely scrutinized to see that their transactions were actually what they purported to be and not merely formal acts which, though complying with statutory words, were outside the intent of the *253  statute.  Cf. . The statute is "concerned only with realized losses", , and claimed losses, in order to be allowable, must "usually be evidenced by closed and completed transactions." . A bona fide sale is, of course, a closed and completed transaction within the intent of the statute. *982  Petitioner here claims that it has established such a sale, pointing to various bits of evidence - the delivery and transfer of the stock certificates, the delivery of the note of Inverness to Mrs. Munroe, and the financial responsibility of Inverness.  None of these matters are in dispute.  They do not, however, reach the question we have here.  Delivery and transfer of certificates, while establishing change of title, do not necessarily prove bona fides, . Surrounding circumstances, including subsequent acts of the taxpayer, often establish intent more clearly than the words of the participants.  Cf. . Putting aside for the moment the details of the various transactions and looking at the result, it does not on its face support the claim of a sustained loss.  Within three months after Mrs. Munroe made the transfer to Inverness she was again in possession of the same securities, and she also profited on the deal by $427.88, despite the fact that the securities had appreciated some $29,000 in value in the meantime.  It is difficult to see in this where any*983  realized loss was sustained.  Taking up the details of the transactions, it is equally hard to find in them support for petitioner's claim.  The securities were marketable and had Mrs. Munroe desired to divest herself entirely of ownership she could have sold on the stock exchange.  The testimony of Charles A. Munroe is that the reason for not selling on the exchange was to avoid broker's fees.  He also testified that Inverness did not have the cash to pay for the securities when it acquired them.  But he further testified that the company had "abundant stock exchange collateral" to finance the acquisition, and his testimony in this respect is supported by the balance sheet in evidence.  And so, even though Mrs. Munroe could have received cash for her stock, which is the most logical way of effecting an outright sale, she chose the more indirect way of taking a note.  The execution of a bill of sale from Inverness to Manistee was another step in the scheme to avoid taxes.  While there is no evidence that Mrs. Munroe had anything to do with that transaction, it must be remembered that these companies were dominated by Munroe, and he was the advisor in the several transactions.  By*984  reason of the increase in market value of the stocks Inverness was in a position to reap a profit on them.  Munroe caused a bill of sale to be executed in the Bahama *254  Islands so as to make the profit appear to have been realized outside the United States, but retaining the securities in the name of Inverness and having them remain in the custody of the agent of Inverness in New York.  At the same time he hoped to give Manistee an increased basis for the securities so that there would be no taxable gain on the retransfer to Mrs. Munroe.  The bills of sale from Inverness to Manistee and from Manistee to Mrs. Munroe bear the same date, February 9, 1931.  Throughout these transactions the guiding hand of Charles A. Munroe is apparent, every move carefully planned to escape taxes, no payment of money involved, and the securities not allowed to get beyond the possibility of ready reacquisition.  Finally, Munroe's destruction of Mrs. Munroe's note for Pound 5,432.7.5 (something over $26,000) is not consonant with a bona fide business transaction.  It is suggested that this was in substance a gift from Munroe to his wife.  But the note did not run to him; it was drawn in favor of*985  a corporation, Manistee.  If he and his corporations are to be treated as one, it emphasizes the lack of bona fides in the several transactions to which the corporations were parties.  Munroe's explanation of the reason for the destruction of the note is, "I did not want to profit, nor want any company that I owned to profit from a transaction with Mrs. Munroe." This does not square with his other testimony that he insisted upon Mrs. Munroe paying the market price when she expressed a desire to reacquire the securities.  Upon a consideration of all the evidence we are unable to conclude that the transfer of the securities to Inverness in December 1930 was a bona fide sale and we accordingly sustain the respondent's disallowance of the claimed loss.  Decision will be entered for the respondent.