Court Opinion

ID: 4628712
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:54.883353+00
Date Added: 2024-06-11T07:59:21.249142
License: Public Domain

WISHON-WATSON COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wishon-Watson Co. v. CommissionerDocket No. 38727.United States Board of Tax Appeals25 B.T.A. 321; 1932 BTA LEXIS 1539; January 22, 1932, Promulgated 1932 BTA LEXIS 1539">*1539  Respondent's action in disallowing as a deduction from gross income for 1924 a loss alleged to have been incurred in that year is sustained.  A. Calder Mackay, Esq., for the petitioner.  Philip M. Clark, Esq., for the respondent.  TRAMMELL 25 B.T.A. 321">*321  This proceeding is for the redetermination of a deficiency in income tax of $10,849.09 for 1925.  The matters put in issue by the petition are the correctness of the respondent's action (1) in disallowing a deduction of $53,959.28 taken by the petitioner in its return as a loss sustained on the sale of certain corporate stock and other assets, (2) in increasing the petitioner's net income by $3,976 representing an alleged gain on the receipt of certain corporate stock, and (3) in disallowing as a deduction the amount of $20,570.78 representing statutory net loss for 1924.  At the hearing the petitioner abandoned issues Nos. 2 and 3, leaving for our determination only issue No. 1.  FINDINGS OF FACT.  The petitioner is a California corporation, with its principal office at Fresno.  On December 26, 1925, the petitioner was the owner 25 B.T.A. 321">*322  of certain assets referred to in the following extract from1932 BTA LEXIS 1539">*1540  the minutes of a special meeting of its board of directors of that date: A special meeting of the Board of Directors of the Wishon-Watson Company was called and held pursuant to the unanimous consent obtained in writing of all the directors of the corporation to the holding thereof in room 904 San Joaquin Power Building, in the City of Fresno, county of Fresno, State of California, on the 26th day of December, 1925, at the hour of 2:00 o'clock P.M.  The following persons were present: Director A. Emory Wishon Director R. W. Watson Director A. G. Wishon Secretary E. P. Smith being all of the members of said Board of Directors.  President A. Emory Wishon, being present, presided as the chairman of the meeting.  * * * Mr. A. G. Wishon then presented the proposition of an offer made to the corporation by A. E. Wishon and R. W. Watson, who are also Directors of this company, to buy for the price of Six Thousand Dollars ($6,000.00) the following assets of the corporation: 1000 shares Swan Oil Company 1000 shares Andy Fitz Mining and Milling Company 439.30 share of La Hacienda Company Three-fourths interest in San Joaquin Marble Quarry Placer Mining claim.  One-half1932 BTA LEXIS 1539">*1541  interest in land known as Black Mountain Oil Land.  Thereupon a discussion followed concerning the original cost of such assets and probable value thereof, and the possibilities of future income and sale thereof.  Upon motion duly made and seconded, it was unanimously Resolved, that, it appearing to be the best interest of the corporation, the corporation accept the offer made by A. E. Wishon and R. W. Watson and sell to them for the price of Six Thousand Dollars ($6,000.00) the following particularly described assets: 1000 shares Swan Oil Company stock, par value $1.00 per share 1000 shares Andy Fitz Mining and Milling Company Common stock, par value $1.00 per share 439.30 shares of the capital stock of the La Hacienda Company par value $100.00 per share Three-fourths interest in the San Joaquin Marble Quarry Placer Mining Claim described as follows: S 1/2 of the NE 1/4 of the NW 1/4 and the NE 1/4 of the SW 1/4 of Section 36, T. 8, S.R. 24 E., M.D.B. & M., containing 164 acres, more or less, and being all those certain lands heretofre located as a placer mining claim and designated Emory Marble Quarry Placer Mining Claim One-half interest in lands known as Black1932 BTA LEXIS 1539">*1542  Mountain Oil land described as follows: NW 1/4 of the NW 1/4 of Section 34, T. 23, S.R. 17 E., M.D.B. & M., containing 40 acres and RESOLVED, further that the officers of this corporation be, and they are hereby, authorized and directed to prepare and execute for and on behalf and 25 B.T.A. 321">*323  in the name of this corporation proper assignments and conveyances of the above assets to A. E. Wishon and R. W. Watson, upon receiving payment of the amount named above.  Thereafter, in 1925, and pursuant to the foregoing resolutions, the petitioner transferred the assets referred to therein to A. Emory Wishon and R. W. Watson, receiving therefor in that year the promissory note of each of these parties for $3,000.  At the time of the adoption of the foregoing resolutions authorizing the transfer of the assets it was orally agreed between A. Emory Wishon and R. W. Watson, on the one hand, and petitioner's directors, on the other hand, that, in event an assessment should be made on the stock of La Hacienda Company, the petitioner would cancel the notes and not require the payment thereof.  Subsequently an assessment of $10 per share was made on the stock of La Hacienda Company.  Pursuant1932 BTA LEXIS 1539">*1543  to the above mentioned oral agreement, the petitioner waived payment of the notes, canceled them, and returned them to the makers, who destroyed them.  The total of the two notes, or $6,000, was deducted as a bad debt by the petitioner in its income-tax return for 1926.  Upon the transfer of the above described assets, A. Emory Wishon and R. W. Watson each received one-half thereof.  When R. W. Watson received notice of the assessment on the stock of the La Hacienda Company he informed A. Emory Wishon that he did not intend to pay it and that if he, Wishon, cared to pay it, he could have his, Watson's, stock.  Wishon paid the assessment and Watson gave his stock to him.  With this exception and the exception of the San Joaquin Marble Quarry Placer Mining Claim, each of the parties still owns the assets transferred to him by the petitioner and is not obligated in any way to turn them back to the petitioner or to share with it any of the proceeds from them.  Prior to the transfers by the petitioner in 1925 of the stock of La Hacienda Company, six assessments had been made on it, five of them were assessments of 10 per cent, or $4,393 each, and one was an assessment of 5 per cent, 1932 BTA LEXIS 1539">*1544  or $2,196.50.  Since 1925 three further assessments have been made on this stock and these have been paid by A. Emory Wishon.  At the time the petitioner transferred the stock of La Hacienda Company that company's only assets consisted of 17,000 acres of ranch land, with the usual houses, barns and fences and about 12 water wells.  At that time the land had mortgages against it amounting to from $250,000 to $300,000.  While the La Hacienda Company is still in business, it has never paid any dividends.  Prior to 1925 there had been numerous assessments on the other stocks transferred by the petitioner.  As to the stock of the Swan Oil Company, there had been an assessment of $15 or $20 a year.  As to 25 B.T.A. 321">*324  the stock of the Andy Fitz Mining and Milling Company, the assessments varied from $5 to $20 a year.  No dividends have ever been paid on either of these stocks.  The San Joaquin Marble Quarry Placer Mining Claim was a mining location and there was a requirement made by the Government that in order to hold the claim $100 worth of work had to be done each year.  This property has been reacquired by the Government.  Neither the petitioner nor anyone else has ever reimbursed1932 BTA LEXIS 1539">*1545  A. Emory Wishon or R. W. Watson for the amounts expended in connection with the assets acquired by them from the petitioner.  Nor was there any agreement on the part of the petitioner to reimburse them for any expenditures they might have incurred in connection with such assets subsequent to the time they acquired them from the petitioner.  After 1925 petitioner never paid any assessment on any of the assets nor has it ever asserted any claim to them subsequent to their transfer in that year.  Dur to the fact that over a number of years numerous assessments had been made against the assets, the petitioner's directors considered the assets to be more of a liability and consequently decided "to create a sale for them somewhere" and get rid of them.  A value of $6,000 was determined upon for the reason that, in the opinion of the directors, the assets were not worth any more than that amount.  The stockholders of the petitioner and the holdings of each at the time of the transfer of the assets to A. Emory Wishon and R. W. Watson were as follows: A. G. Wishon, 250 shares; Henriette E. Wishon, 250 shares; A. Emory Wishon, 250 shares; Jennie Wishon Watson, 240 shares; R. W. Watson, 101932 BTA LEXIS 1539">*1546  shares.  A. G. Wishon and Henriette E. Wishon were husband and wife.  A. Emory Wishon was their son.  Jennie Wishon Watson was their daughter and the wife of R. W. Watson.  At the time of the transfer the board of directors consisted of A. G. Wishon, A. Emory Wishon and R. W. Watson.  In its income-tax return for 1925 the petitioner took a deduction as a loss sustained on the transfer of the assets in the amount of $53,959.28 representing the difference between the cost of such assets, $59,959.28, and the amount of the two notes, or $6,000.  In determining the deficiency here involved the respondent disallowed the deduction taken by the petitioner.  OPINION.  TRAMMELL: The only matter now in controversy is whether the respondent erred in disallowing the deduction taken by the petitioner as a loss sustained on the transaction in December, 1925, whereby it 25 B.T.A. 321">*325  transferred to two of its directors certain of its assets under the circumstances set out in our findings of fact.  The petitioner contends that, having sold in 1925 for $6,000 assets which had cost it $59,959.28, it sustained a loss of $53,959.28, which it is entitled to deduct.  The respondent contends that the1932 BTA LEXIS 1539">*1547  deduction is not allowable and urges that the transaction was a mere "book write-off of assets," since the notes given therefor were never paid but were charged off by the petitioner and deducted as bad debts in its income-tax return for the following year.  In support of his contention the respondent points out that the petitioner was practically a one-family corporation; that A. Emory Wishon and R. W. Watson, to whom the assets were transferred, constituted a majority of the petitioner's directors, and that they could have established an apparent loss to the petitioner in any amount they chose by accepting as payment for the assets an amount necessary to produce the desired loss.  He urges that the transaction in 1925 alone and apart from what later occurred was not the result of dealings at arm's length between the parties and was not such a transaction as would permit the petitioner to take a deductible loss in that year.  In , we said: This transaction was a patent evasion.  It can not be too much emphasized that alleged sales of property for the purpose of establishing losses must be real, valid transactions, definitely1932 BTA LEXIS 1539">*1548  placing the legal and equitable ownership of the property alleged to have been sold out of the hands and out of the control of the seller.  In the case of corporations sales to stockholders in all cases are subject to special scrutiny and their good faith must be unquestioned.  The principle of corporate entity can not be used to cloak a transaction which is essentially a fraud upon the public revenue.  There can be no question in this case but that the assets were actually and validly transferred by the corporation to two of its directors, but the actual transfer of assets is not sufficient to authorize a taxpayer to take a deduction with respect thereto.  In order to take a deduction before assets have become worthless, and it is not claimed in this case that they were worthless in the taxable year, it must be shown that there was a sale or other disposition thereof.  It is contended in this case that there was a sale for a valuable consideration.  The burden of proof is upon the petitioner to show this.  Even considering for the sake of argument that a corporation may sell its assets to its directors at a price much less than the market value and much less than what it could get1932 BTA LEXIS 1539">*1549  from others for the same assets at the same time and realize a deductible loss on account thereof, we are faced with the question here as to whether the parties to the transaction contemplated the payment of a valuable consideration 25 B.T.A. 321">*326  for the assets transferred or whether a valuable consideration was paid which would warrant us in holding that there was in fact and substance a real sale of the assets, or if the transaction amounted to a mere gift or transfer without consideration to its directors and stockholders.  It is to be noted that the notes aggregating $6,000 given by those who received the assets were not to be paid, but were to be canceled and surrendered in the event there was an assessment of any size or character against the stock of the La Hacienda Company.  Assessments had been made in the past against this stock and it might well have been assumed by all parties that such an assessment would be made in some amount after the transfer of the assets.  The corporation owned 439.30 shares of the capital stock of that company of the par value of $100 per share.  If the assessment had been $1 per share, it would have amounted to $439.30, and yet on account of that1932 BTA LEXIS 1539">*1550  assessment the total of the $6,000 notes would be canceled, or, according to the terms of the agreement, even if a 10 cent assessment had been levied, amounting to $43.93 total, the entire amount of $6,000 represented by notes would not have to be paid.  Just why the agreement provided that, if the assessment should be made upon the stock of the La Hacienda Company, the notes would not be payable, does not appear of record.  The corporation owned a half interest in the lands known as the Black Mountain Oil Land, consisting of 40 acres, and owned other property which was included in the transfer.  The record does not disclose the assets and liabilities of the Swan Oil Company and the Andy Fitz Mining & Milling Company.  The only evidence as to the actual value of the assets transferred is the testimony of one of the individuals who received the assets to the effect that the directors did not consider them to be worth more than $6,000.  Even if they were not worth any more than $6,000, we do not know how much of that value or what part of it was attributable to other assets than the La Hacienda Company stock.  There is nothing to indicate that all of the assets would have been worthless1932 BTA LEXIS 1539">*1551  if some assessment, however small, were made against that particular stock.  When we consider the relationship of the parties, the fact that they were all members of the Wishon family, except Watson, who was a son-in-law, and that all of them together owned all the stock of the petitioner, it may well be, so far as the record discloses, that the corporation intended to transfer the assets without any expectation of any consideration in money or money's worth being paid.  Considering that the two notes for $3,000 were surrounded with the conditions of cancellation, and the past record of the La Hacienda Company, and the reasonable probability that an assessment would 25 B.T.A. 321">*327  be made against that stock in some amount, it might fairly be gathered from all the circumstances that the parties did not intend to pay any money whatever for the assets received from the petitioner and that the petitioner did not intend or expect to receive any.  The notes were not negotiable with these uncertainties and conditions attached to them.  They simply amounted to a promise to pay if and in the event that certain circumstances would not occur when it might reasonably have been anticipated at the1932 BTA LEXIS 1539">*1552  time that they would occur.  Under the circumstances of this case we do not think that the petitioner has shown that an actual bona fide sale of its assets was made.  The element of valuable consideration, which distinguishes a sale from a gift or other transfer without consideration, is not sufficiently shown.  Accordingly, in our opinion the petitioner is not entitled to the deduction claimed as a loss resulting from a sale of assets in the taxable year.  Judgment will be entered under Rule 50.