Court Opinion

ID: 4592294
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:38.292647+00
Date Added: 2024-06-11T07:50:50.542802
License: Public Domain

DAVID BERG INDUSTRIAL ALCOHOL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.David Berg Industrial Alcohol Co. v. CommissionerDocket No. 13102.United States Board of Tax Appeals13 B.T.A. 1349; 1928 BTA LEXIS 3058; November 1, 1928, Promulgated *3058  The transaction involved herein held to be a sale made in good faith on which the petitioner sustained a loss which it is entitled to deduct from gross income for 1921.  A. E. James, Esq., Cecil Page, Esq., Howard H. Yocum, Esq., and George R. Beneman, Esq., for the petitioner.  Shelby S. Faulkner, Esq., and Clark T. Brown, Esq., for the respondent.  MARQUETTE *1349  This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1921 in the amount of $58,727.15.  So much of the deficiency is in controversy as arises from the disallowance by the respondent of a deduction of $189,257.53 taken by the petitioner in its return for 1921 on account of a loss alleged to have been sustained on the sale of its interest in the tank steamer Philip Publicker.  FINDINGS OF FACT.  The petitioner is a Pennsylvania corporation with its principal office and place of business at Philadelphia, and it is and was during the years 1920 and 1921 engaged in manufacturing alcohol for industrial use.  On April 19, 1920, the petitioner entered into a written contract with the McDougall-Duluth*3059  Shipbuilding Co. of Duluth, Minn., for the construction of a tank steamer designed to carry molasses, which is the principal ingredient used in the manufacture of commercial *1350  alcohol, from Cuba to the petitioner's plant.  About that time, or shortly thereafter, the officers of the Publicker Commercial Alcohol Co. expressed a desire to acquire for their company a one-half interest in the tank steamer for which the petitioner had contracted, and an agreement was entered into between the petitioner and the Publicker Commercial Alcohol Co. that the latter company should pay one-half of the cost of said tank steamer for a half interest therein.  The said tank steamer, which was known as the Philip Publicker, was completed and delivered in September, 1920.  For convenience and for the purpose of limiting the liability of the petitioner and the Publicker Commercial Alcohol Co. in the event of marine accidents, the legal title to the steamer was taken by the Publicker Shipping Co., which the petitioner had caused to be organized for that purpose, but the equitable title was at all times in the petitioner and the Publicker Commercial Alcohol Co.  At the time the Philip Publicker*3060  was delivered the petitioner had paid to the McDougall-Duluth Shipbuilding Co. $248,080.40 on the purchase price thereof, and on or about the date of delivery it executed and delivered to the McDougall-Duluth Shipbuilding Co. twelve promissory notes in the total amount of $400,864.92, the balance of the purchase price, secured by a mortgage on the steamer.  The payments on the steamer, including payment of said notes, were made by petitioner and it was never reimbursed therefor by the Publicker Shipbuilding Co., which held the legal title to the steamer.  The total cost of the steamer Philip Publicker was $638,945.32.  The Publicker Commercial Alcohol Co. from time to time paid to the petitioner its proportion of said notes in the total amount of $323,432.30, so that the cost to the petitioner of its interest in the steamer was $315,513.03.  The fair market value of the Philip Publicker at the date of delivery was $650,000.  By the end of the year 1921 the value of ships had greatly declined and the petitioner and the Publicker Commercial Alcohol Co. being then able to secure reasonable rates for the transportation of molasses, decided to sell the Philip Publicker and avoid further*3061  loss.  Therefore, on December 29, 1921, they caused the legal title of the Philip Publicker to be transferred to them by the Publicker Shipping Co., and on December 31, 1921, they sold the Philip Publicker to a corporation known as the Water Front Service Co. for $250,000, of which $10,000 was paid in cash and $240,000 by twelve promissory notes of $20,000 each dated December 31, 1921, the first maturing on January 31, 1922, the second on February 28, 1922, and one note maturing on the 30th day of each succeeding month.  The notes were secured by a mortgage on the Philip Publicker.  The fair market value of the Philip Publicker on December 31, 1921, was not to *1351  exceed $250,000.  The petitioner had no interest in the Water Front Service Co.The Water Front Service Co. was unable to meet the payments on the notes mentioned, and in August, 1922, the petitioner and the Publicker Commercial Alcohol Co. foreclosed their mortgage and on August 31, 1922, the Philip Publicker was sold at public auction under foreclosure proceedings and was bid in for $110,000 by the Adelphia Steamship Co., a corporation which was organized for that purpose by the petitioner and the Publicker*3062  Commercial Alcohol Co.The Water Front Service Co., had some assets other than the Philip Publicker and they were taken over by the petitioner and the Publicker Commercial Alcohol Co.  The fair market value of the Philip Publicker on August 31, 1922, was not to exceed $110,000.  In its income and profits-tax return for 1921 the petitioner deducted from gross income the amount of $189,257.53 as a loss sustained on the sale of its one-half interest in the Philip Publicker.  The respondent disallowed the deduction.  OPINION.  MARQUETTE: There is no dispute between the parties to this proceeding as to the greater part of the facts relative thereto.  They are in accord that the petitioner was the owner of a one-half interest in the Philip Publicker which cost it $315,513.03, and that it sold that interest in 1921 for a stated consideration of $125,000.  The respondent, however, questions the bona fides of the sale and contends that the petitioner did not in fact sustain any loss therefrom.  If the sale was an arm's-length transaction made in good faith the petitioner sustained a loss of $190,513.03, which should be deducted in computing its net income for 1921; if the sale was only*3063  a pretense made for the purpose of indicating a loss that has no basis in fact, then the petitioner's claim must be denied.  We see no reason for holding that the petitioner did not make the sale in question in good faith.  On the other hand we find ample and convincing evidence to establish that it was a bona fide sale made by parties dealing at arm's length and for a fair consideration in money or money's worth.  The evidence is clear that although the Philip Publicker cost more than $635,000 in 1920, and was worth that amount at that time, its fair market value in December, 1921, had declined to a figure under $250,000, due to the fact that the World War had ended and a great volume of shipping had been dumped on the market.  Furthermore, the necessity for the petitioner's ownership of a tank steamer had ceased with the end of the war, and its officers considered it good business to dispose of the Philip Publicker and avoid further loss if possible.  It was thereupon sold to the Water Front Service Co., a corporation with which *1352  the petitioner had no connection.  The sale was without any restrictions or reservations except that the deferred payments were secured by*3064  a mortgage on the ship, and the Service Company was free to do as it pleased with the steamer, subject only to those restrictions.  Charles Kurz, owner of the greater part of the stock of the Water Front Service Co., testified that the purchase of the steamer was made in good faith and that he expected to sell it at a profit, but that because of a further decline in the value of shipping, he was unable to do so and was therefore unable to meet the payments on the notes.  The respondent lays great stress on the fact that at the foreclosure sale the Philip Publicker was bid in by the Adelphia Steamship Co., the stock of which was owned by the petitioner and the Publicker Commercial Alcohol Co.  We, however, are unable to perceive that, in the light of all the other circumstances surrounding the sale, that fact is sufficient to show fraud or lack of good faith.  Looking at all of the evidence, it appears that in the face of a declining market the petitioner tried to dispose of the Philip Publicker and minimize its losses; that due to a further decline in the market the purchaser was unable to complete its payments, and that the petitioner and the other owner of the steamer, acting through*3065  a new corporation which they formed for that purpose, bid the steamer in for an amount which appears to be its fair market value at that time.  We are of opinion that the transaction in question was an actual sale made in good faith by the petitioner and that it resulted in a loss to the petitioner of $190,513.03, which should be deducted in computing its net income for 1921.  Judgment will be entered under Rule 50.