Court Opinion

ID: 4627985
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:24.269343+00
Date Added: 2024-06-11T07:57:08.303120
License: Public Domain

JAMES LEE JOHNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Johnson v. CommissionerDocket No. 82263.United States Board of Tax Appeals37 B.T.A. 155; 1938 BTA LEXIS 1081; January 21, 1938, Promulgated *1081  An individual desiring to take a loss for tax purposes on S stock which had declined in value, and who also desired to make his wife a gift, gave his wife $49,900 to purchase stock in a new corporation, he purchased a like amount, and then sold his S stock to the new corporation at its market value.  Held, the sale was genuine and a deductible loss resulted.  Stanley S. Waite, Esq., and Abraham Lowenhaupt, Esq., for the petitioner.  B. H. Neblett, Esq., and H. F. Noneman, Esq., for the respondent.  MURDOCK *155  The Commissioner determined a deficiency of $35,488.16 in the income tax of this petitioner for 1932.  The sole issue is whether or not the petitioner is entitled to a deduction of $380,000 as a loss resulting from the sale of 10,000 shares of International Shoe Co. stock.  FINDINGS OF FACT.  The petitioner is an individual and a resident of Huntleigh Village, Kirkwood, Missouri.  *156  He was the owner of 58,000 shares of stock of the International Shoe Co. (hereinafter called the Shoe Co.).  The market price of the stock in December 1932 was substantially less than the price the petitioner had paid for his shares. *1082  He desired at that time to take a loss on some of his stock for income tax purposes.  He had also considered making a gift to his wife.  He decided upon a plan to accomplish both purposes after consultation with his attorney.  The gift to his wife was to be $49,900, so that no gift tax would be due.  He borrowed $100,000 at a bank and received three cashier's checks for the amount.  One was for $49,900, payable to himself, another for a like amount was payable to his wife, and the third for the balance of $200 was payable to Fielding H. Childress.  These three became the incorporators, directors, and officers of a new corporation called Eleanor Investment Co. (hereinafter called the Investment Co.).  It was organized on December 27, 1932, under the laws of Missouri for the stated purpose, inter alia, of dealing in stocks, bonds, securities, and real estate.  Its capitalization was $100,000, divided into 10,000 equal shares.  The petitioner gave the cashier's checks to his wife and Childress for the purpose of having them use the checks to subscribe to and pay for Investment Co. stock.  They used the checks for that purpose and received stock certificates.  The petitioner's*1083  wife placed her certificate for 4,990 shares in her separate safety deposit box.  Childress was elected president, the petitioner secretary and treasurer, and his wife vice president at the first meeting, December 29, 1932.  There has been no change of officers or directors subsequently.  The new corporation then accepted the petitioner's offer to sell it 10,000 shares of Shoe Co. stock at the then current market price of $24 per share.  Ninety-nine thousand dollars of the purchase price was paid in cash and a note of the new corporation was given for the balance, $141,000.  The Investment Co. delivered the 10,000 shares of Shoe Co. stock to the petitioner to be held as collateral on the note.  The petitioner applied the $99,000, received from the Investment Co., against his bank loan.  The 10,000 shares of Shoe Co. stock sold to the Investment Co. had been purchased by the petitioner on September 23, 1929, for $62 per share, or $620,000.  The dividends from the Shoe Co. stock were deposited in the bank to the account of the Investment Co.  A part thereof was used to pay taxes and expenses.  The remainder was used to pay the interest on the note for $141,000 held by the petitioner*1084  and to reduce the principal.  The note was extended from year to year until December 28, 1935.  It was then extended for 30 days and the interest was reduced from 6 to 3 percent.  The market value of the Shoe Co. stock had increased and the petitioner returned to the Investment Co. 5,000 of the shares held *157  by him as collateral on the note.  The note had been reduced to $114,000.  The petitioner sold the note to the First National Bank of St. Louis before the expiration of the 30-day renewal period, and transferred to it the 5,000 shares of stock held by him as collateral.  The stockholders of the Investment Co. at a meeting on January 30, 1935, ratified the action of the treasurer in purchasing 10 first mortgage 6 percent bonds of the Vicksburg Bridge & Terminal Co. for $4,420.  That is the only transaction shown by the minute books of the corporation, other than those shown above.  The Investment Co. has filed state and Federal income tax returns since its organization and has reported thereon the dividends received.  The petitioner's wife, Eleanor C. Church Johnson, was worth approximately $25,000 at the time of the transactions here in question.  Neither of the*1085  other two stockholders ever opposed the petitioner in regard to the affairs of the corporation.  He voted the Shoe Co. stock as proxy for the Investment Co.  The petitioner would not have sold the Shoe Co. stock to a member of the public at the time he sold it to the Investment Co.  The petitioner, on his income tax return for 1932, claimed a loss of $380,000 from the sale of the 10,000 shares of Shoe Co. stock to the Investment Co.  The Commissioner disallowed the deduction in determining the deficiency.  OPINION.  MURDOCK: The law is well settled that transactions such as this must be closely scrutinized.  But here careful scrutiny fails to reveal any justification for denying the loss.  The Investment Co. was a separate taxpayer from the petitioner, regardless of the extent to which he controlled it.  It actually bought the stock, paid for it, became the owner, and continued to be the owner.  The price was right.  There was no subsequent reacquisition by the petitioner or option or agreement to acquire.  There is nothing to indicate that the wife did not fully benefit from her interest in the corporation acquired with funds given her by her husband.  The natural inference*1086  is the other way.  The petitioner took no undue advantage of his power to control the purchaser.  The fact that he organized or used the corporation to serve his purpose of minimizing his taxes becomes immaterial.  The petitioner, as a taxpayer, made an actual bona fide sale to another taxpayer and sustained a loss which he is entitled to deduct. ; ; ; affd., ; ; . See also the following cases, which hold generally that deductions are allowed on sales to or by *158  closely held corporations where no exceptional circumstances justify disregarding the separateness for tax purposes of the stockholders and their corporations, where the price was fair, and where no plan for reacquisition by the seller appeared, regardless of the fact that the sale may have been for the purpose of minimizing taxes. *1087 ; ; ; ; affd., ; ; . Nor is the gift to the wife fatal to the contention of the petitioner.  ; affd., . The new corporation continued to exist.  It had at least one other transaction.  The wife had a substantial interest in it different from that of her husband.  The steps taken and the reality of the corporation can not be disregarded.  Cf. . Reviewed by the Board.  Decision will be entered under Rule 50.TURNER dissents.  ARNOLDARNOLD, dissenting: I am unable to agree with the majority opinion in this case and think that the cases there cited are distinguishable on their facts and are not controlling here.  While there is no doubt that the Eleanor Investment Co. was incorporated under the Missouri*1088  law as a business corporation and the requisite forms of such a corporation were complied with, the record clearly establishes that it was not organized for the purpose of carrying on a business and in fact did not carry on a business, but was organized and used by petitioner as a device solely for the purpose of establishing a tax loss by transferring to it stock over which he did not intend to relinquish dominion and control and which he would not have sold to outside parties.  Petitioner testified on cross-examination: Q.  Now, is it not a fact, Mr. Johnson, that you had no intention of allowing these stocks to get out of the Johnson family?  A.  Mr. Neblett, at the time the corporation was formed I had no intention of selling those stocks to somebody else, and at the present time nothing has come up and I can't say about the future.  Q.  Is it not a fact that if the corporation had not been set up and vehicle for conveying the stocks to Mrs. Johnson didn't exist, you would not have made sale of those stocks?  A.  That's correct.  These facts bring this case squarely within the principle laid down in *1089 . There, it was earnestly contended by the taxpayer that since every element of organization required *159  by the statute had been complied with a statutory reorganization was effected.  The corporation was organized and utilized solely for the purpose of bringing the transaction within the reorganization provisions of the statutes to evade tax liability.  In its decision the Supreme Court emphasized the fact that if "a reorganization in reality was effected within the meaning" of the statute the purpose to thereby escape taxation would be disregarded; "but the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended." The Court pointed out: When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made "in pursuance of a plan of reorganization" (section 112(g)) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here.  Putting aside, then, the question of motive in respect of taxation altogether, *1090  and fixing the character of the proceeding by what actually occurred, what do we find?  Simply an operation having no business or corporate purpose - a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner.  No doubt, a new and valid corporation was created.  But that corporation was nothing more than a contrivance to the end last described.  It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function.  When that limited function had been exercised, it immediately was put to death.  In these circumstances, the facts speak for themselves and are susceptible of but one interpretation.  The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else.  The rule which excludes from consideration the motive*1091  of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute.  To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.  Here, as in the Gregory case, there was no business or corporate purpose and the sole object sought to be accomplished was not to organize a business corporation, but to transfer a parcel of corporate shares according to a preconceived plan to the corporation so organized in order to effectuate a tax loss.  Here, as there, there was never any intention of creating a corporation to engage in business; the intention was to create a tool to be used by petitioner in establishing a tax loss and the corporation so organized "performed, as it was intended from the beginning it should perform, no other function." Here, as in the Gregory case, the transaction on its face lies outside the plain intent of the statute.  Cf. ; affd., *1092 ; ; ; ; certiorari denied, ; ; . In , the court said: * * * The transactions were not a sham in the sense that a contract made in jest is a sham, creating no obligations whatever.  Here as well we do not doubt that the United Gas Improvement shares actually passed to and out of the Diselin Corporation, a lawfully created corporate person, capable like any other such, of receiving, holding and transferring any kind of property.  But that company, however unassailable its existence and its powers, must have been one which Congress meant to exempt by § 112, and it does not in the least follow that it was, because it was a regularly constituted*1093  juristic person.  The purpose of the section is apparent; it was meant to allow businesses to be reconstructed when the resulting interests were substantially unchanged; but it presupposed that the enterprises were in fact businesses; financial, commercial, industrial and the like.  The avoidance or suspension of taxes is not a business.  * * * If the avoidance or suspension of taxes is not a business and a corporation organized and used for that purpose is not effective to suspend taxes under the reorganization provisions of the statute, for the same reason a corporation so organized should not be effective to establish a loss under the deduction provisions of the statute.  While i is true the Eleanor Investment Co. later purchased 10 first mortgage 6 percent bonds of the Vicksburg Bridge & Terminal Co. for $4,420, this purchase was not made until after September 14, 1934, when it was developed in a deposition given by petitioner that the corporation had done no other business and thereafter the bonds were purchased and the purchase ratified by the board of directors January 20, 1935.  In the same deposition petitioner was asked: Q.  What was the purpose of creating this corporation? *1094  A.  Primarily, to show a tax loss.  To show a loss for tax purposes.  To permit an individual to create a corporation which he controls and use it for the sole purpose of circumventing a statute is To put him in a preferred class not intended by the statute and not justified by any theory of corporate fiction.  While it is not questioned that one in control of a corporation through stock ownership has the right to use such control for the purpose of a bona fide separate administration of the corporation's business, it is not to be supposed that he may so abuse such power in his personal dealings with the corporation as to accomplish by indirection a result contrary to the intendment of the statute.  Cf. Losses to be deductible must be realized.  A mere paper loss based on legal technicalities is not enough *161  and an attempt to evade the payment of income taxes by a purported sale of property which does not result in a realized loss is without both the letter and the spirit of the law.  Cf. *1095 . It is well settled that the mere fact that petitioner wanted to establish a loss for income tax purposes would not prevent the deduction of a loss actually sustained, cf. ; , but the sale must be actual and the taxpayer must intend to part not only with the title to the property but the dominion and control over it and that intention must be consummated.  Cf. ; ;; affd., . Petitioner, through his control of Eleanor Investment Co., could at any time cause it to be dissolved, the assets distributed in kind, and thus repossess all the stock transferred except the shares which his wife received through his gift to her of $49,900 without sustaining any loss whatever.  Taxation is a practical matter and deals in actualities.  To recognize a loss on a transaction when in fact a loss was not realized, *1096  results in an inequitable distribution of the tax burden which was never intended by Congress.  HILL and HARRON agreen with this dissent.