Court Opinion

ID: 4011897
Source: CourtListenerOpinion
Date Created: 2016-07-06 11:15:49.099273+00
Date Added: 2024-06-11T07:44:46.537175
License: Public Domain

* Motion for rehearing denied, with $25 costs, on April 12, 1949. *Page 221 
On July 18, 1945, Margaret D. Harvey, Frank E. Harvey, Richard D. Harvey, and Albert J. Harvey, Jr., filed amended income-tax returns for the fiscal year ended July 31, 1944, claiming overpayment of income taxes.  The assessor of incomes for Milwaukee county denied the claims.  The petitioners severally appealed to the board of tax appeals which affirmed the action of the assessor.  Separate appeals were then taken to the circuit court for Milwaukee county.  Judgments in favor of the Department of Taxation were entered on May 20, 1948.  Petitioners appeal.
The following facts were found by the board of tax appeals:
"Prior to 1925 A. J. Harvey, Sr., owned 6,487 shares of first preferred, 475 shares of second preferred, and 2,915 shares of common stock in a Wisconsin corporation known as Plankinton Building Properties, Inc., (formerly called Plankinton Arcade Company).  On October 29, 1925, a judgment for $720,000 was entered in the courts of the state of New York against A. J. Harvey, Sr., by one Bondy.  Between that date and the commencement of proceedings to domesticate that judgment, A. J. Harvey, Sr., made transfers of substantial blocks of shares of Plankinton Building Properties, Inc., stock, retaining some control over that stock, to members of his family, which consisted of his wife, Clara V. Harvey, and *Page 222 
sons, Richard D., Albert J., Jr., and Frank E. Harvey, three of the petitioners herein.
"Plankinton Building Properties, Inc., filed a petition for reorganization under the Federal Bankruptcy Act.  In 1936 a reorganized company was formed, known as the Plankinton Building Company, with an entirely new capital structure. At the time of that reorganization the Harvey family owned all of the capital stock of Plankinton Building Properties, Inc., except a block of shares which were owned by the Plankinton Trust.
"The federal district court plan provided that there be distributed to `present stockholders all (being 11,397 shares) of the Class A common stock on a basis so that the stockholders will receive at the rate of 55/100 of a share of Class A common stock of the new corporation for each share of the present stock of the debtor, whether the same be first preferred, second preferred, or common stock.' Certificates in the new company, `Plankinton Building Company,' were issued for shares of Class A common stock as follows:
"No. 2 — 6,192 shares to Clara V. Harvey
"No. 3 — 1,550 shares to Richard D. Harvey
"No. 4 — 1,550 shares to Albert J. Harvey, Jr.
"No. 5 — 1,550 shares to Frank E. Harvey
"Certificate number 4, for 1,550 shares of stock, was assigned by Albert J. Harvey, Jr., to petitioner Margaret D. Harvey, in August, 1936.  Clara V. Harvey made assignments of blocks of 2,000 shares of Class A stock, in June, 1941, to each of her three sons, Albert J., Jr., Frank E., and Richard D. Harvey.
"Petitioners acquired the Class A stock through the reorganization of Plankinton Building Properties, Inc.  To establish the donors' cost basis of the Class A stock, a copy of the decision of the former tax commission (entered on May 14, 1932) was introduced and received as evidence.  The cost basis to A. J. Harvey, Sr., of certain shares of first preferred stock of Plankinton Building Properties, Inc., was one of the several issues which were involved in an appeal by A. J. Harvey, Sr., from an assessment levied by the assessor.
"When transferred in 1936 to petitioners herein, none of the shares of Class A stock had any clear market value; furthermore, the Class A stock had no clear market value at any time subsequent to the transfer.  Likewise those shares of *Page 223 
Class A stock transferred by Clara V. Harvey to each of her three sons in 1941 had no clear market value in 1941 or at any time thereafter."
In 1944, Plankinton Building Company went through a plan of reorganization under the district court for the Eastern district of Wisconsin.  By that plan Class A common stock was awarded no interest in the company.  Because their stock was worthless Margaret D. Harvey, Frank E. Harvey, Richard D. Harvey, and Albert J. Harvey, Jr., on July 18, 1945, filed claims for refund of income taxes paid for the fiscal year ended July 31, 1944, in the following amounts:

        Albert J. Harvey, Jr.          $  765.23
        Frank E. Harvey                   763.35
        Margaret D. Harvey              1,694.29
        Richard D. Harvey                 622.91

This claim was denied by the assessor of incomes for Milwaukee county on June 20, 1946.  The petitioners appealed to the board' of tax appeals which found that none of the shares of Class A stock had any clear market value either at the time of transfer or thereafter and therefore the petitioners sustained no loss for income-tax purposes in the reorganization of 1944.
In its opinion the board ruled that the transfer of the Class A stock was not a gift under the gift-tax statutes and therefore the provisions of sec. 71.02 (2) (d), Stats. 1943, relating to the donor's cost basis could not be applied in determining whether losses were sustained by petitioners.
An appeal was taken to the circuit court for Milwaukee county which in a judgment entered May 20, 1948, affirmed the action of the board of tax appeals on these grounds:
(1) That no loss was deductible under sec. 71.02 (2) (d), Stats., relating to losses sustained upon gifts of property where the stock transferred had been of no ascertainable value.
(2) That the burden of proof had not been met to establish the identity of the gifts. *Page 224 
(3) That there was no "sale" or "sale or other disposition" within the meaning of sec. 71.02 (2) (d), Stats., by which the amount of the loss, if any, is to be determined.  Applying the rule of ejusdem generis, the court found that the class or family of "sale" would include only exchanges or other transfers for some value and not a cancellation of stock like that involved in the present case.
Petitioners appeal.
The statute involved is sec. 71.02 (2) (d), Stats. 1943, which provides in part:
"All profits derived from the transaction of business or from the sale or other disposition of real estate or other capital assets; provided, that for the purpose of ascertaining the gain or loss resulting from the sale or other disposition of property, real or personal, acquired prior to January 1, 1911, the fair market value of such property as of January 1, 1911, shall be the basis for determining the amount of such gain or loss; and, provided, further, that the basis for computing the profit or loss on the sale of property acquired by gift after 1922 but prior to July 31, 1943, shall be the same as it would have been had the sale been made by the last preceding owner who did not acquire it by gift; and in case the taxing officers are unable to ascertain the cost of the property to such prior owner, if acquired after January 1, 1911, then the basis shall be the value thereof at or about the time it was acquired by him, and such value shall be determined from the best information obtainable. However, with respect to all gifts made after July 31, 1943, the basis for computing gain or loss resulting from the sale or other disposition of said property acquired by gift shall be the fair market value of said property at the time of the said gift or the valuation on which a gift tax has been paid or is payable . . . ."
The taxpayers' claims must stand or fall on the statute. The legislature is the authority in tax matters.  Its enactment *Page 225 
must be read with the principle in mind that when it has a reasonable basis it is not invalid.  A particular method of fixing a gain or loss on property during a prescribed period of time is not necessarily unreasonable simply because it may differ from a method used in another and different period.
The appellants will have to come under that provision of the statute reading, —
". . . the basis for computing the profit or loss on the sale of property acquired by gift after 1922 but prior to July 31, 1943, shall be the same as it would have been had the sale been made by the last preceding owner who did not acquire it by gift; and in case the taxing officers are unable to ascertain the cost of the property to such prior owner, if acquired after January 1, 1911, then the basis shall be the value thereof at or about the time it was acquired by him, and such value shall be determined from the best information obtainable."
The provision being considered is not strange or contradictory when read with other portions of the same section.  It provides a basis on which a loss or gain can be given due consideration in fixing a tax.  Radical differences are not required in classifying taxes or methods to have a valid law.
The contention of the taxpayers that the words "or other disposition" must be carried into this provision because they appear in other parts of the statute cannot prevail.  They are there used in relation to adjustments in other periods and are connected with different circumstances.  We do not find it necessary to consider or interpret the meaning of those words in this case for the provision applying to the claims of the taxpayers confines the determination of the basis of loss to a sale. What was to be accomplished by using this method for property acquired by gift within the period fixed was for the legislature to consider.  The economic conditions existing at the time of the enactment were among the proper matters for legislative consideration.  The legislature has a broad discretion in such matters.
A deduction where there has been no sale by the donee as here cannot be allowed because, as suggested by the attorney *Page 226 
general:  "In the absence of such special provision a taxpayer claiming a loss must compute his loss by using his own income-tax cost as a base."  This leaves the taxpayers with no more and no less of value or worth between their holdings in 1936 and 1944.
The literal reading of the provision has a sufficient meaning as held by the appeal board and the circuit court.  It is the one most nearly approximating legislative objectives, when read in the light of a view consistent with an adjustment of the statute to the purpose of taxing justly by allowing only losses actually sustained by a taxpayer.  One who has something of value and sustains a loss because that value has vanished while in his hands may be said to be entitled to a deduction for that loss; but the loss must be ascertainable.  One who between January 1, 1923, and July 31, 1943, acquired certificates of stock having no market value at the time has no basis on which to place a claim of loss.  This provides against an undue exaction by way of tax on gain in case of sale by making the cost to the donor the base of comparison, while by the same provision it prevents a donee from accomplishing an unfair advantage by claiming a loss on nonsalable and worthless property that has never increased the worth of his holdings. In other words it keeps him from benefiting by a fictitious and nonexisting value.  Had he made a sale (bona fide)
there would be occasion for comparing the results of his sale with the cost of the property to the last owner not acquiring it by gift as against comparing the returns on the sale with the value of the stock when acquired by the donee.  It is no answer to point to a different method of appraising the gain or loss on property differently acquired or acquired during a different period.  It may well be that this particular method was devised to prevent a possible imposition on other taxpayers. It does require a sale by the donee as the starting point.  Here there was no sale by the donee.
By the Court. — Judgments affirmed in each case. *Page 227