Court Opinion

ID: 4606118
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:37:48.16616+00
Date Added: 2024-06-11T07:53:19.022428
License: Public Domain

EZRA GOULD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  MERCHANTS BANK & TRUST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gould v. CommissionerDocket Nos. 21727, 21728.United States Board of Tax Appeals21 B.T.A. 824; 1930 BTA LEXIS 1785; December 19, 1930, Promulgated *1785  1.  Petitioner, Ezra Gould, held to have acted merely as agent in the transactions which culminated in the liquidation of the taxpayer and, having received no assets of the taxpayer, is not liable as a transferee.  2.  Petitioner, Merchants Bank & Trust Co., having received assets of the taxpayer in liquidation, is held to be liable as a transferee.  3.  Transfer of a bank building by the taxpayer in liquidation did not give rise to gain.  4.  Respondent's disallowance of claimed deduction for depreciation sustained for lack of evidence.  Evert L. Bono, Esq., for the petitioners.  J. A. Lyons, Esq., for the respondent.  ARUNDELL*825  The respondent determined liabilities of each of the petitioners in the amount of $9,039.97 as transferees of property of the Dupont National Bank.  The deficiency determined against the Dupont National Bank is for the period January 1, 1922, to April 1, 1922, and arises out of the action of the respondent in increasing income by $61,000 as profit on bank building and his disallowance of $9,319.79 claimed as depreciation on bonds.  Petitioners allege that they are not transferees of the Dupont National*1786  Bank; that section 280 of the Revenue Act of 1926 is unconstitutional; and that the respondent erred in adding the amounts of $61,000 and $9,319.79 to the income of the bank.  FINDINGS OF FACT.  On and prior to March 7, 1922, W. B. Hibbs and W. W. Spaid, trading as W. B. Hibbs & Co., of Washington, D.C., were the owners of 1,423 of the 2,000 shares issued and outstanding stock of the Dupont National Bank in Washington, hereinafter called the Dupont Bank.  On that date petitioner Ezra Gould, then vice president of petitioner, the Merchants Bank & Trust Co., purchased from Hibbs and Spaid their 1,423 shares of Dupont Bank stock at $180 per share, or a total of $256,140, paying $50,000 in cash and giving his 90-day note for the balance of $206,140.  The purchase was made under a written contract of sale, pursuant to which 20 shares were delivered to Gould and the remainder, 1,403 shares, were held by the vendors as collateral security for the note.  In the contract Hibbs and Spaid consented that Gould or his nominee might vote the collateral stock in favor of the sale of the Dupont Bank to, or its consolidation with the Merchants Bank & Trust Co. (hereinafter called the Merchants*1787  Bank), on a basis to yield to the stockholders $180 per share payable at the option of the stockholders either in cash or in stock of the Merchants Bank at $125 per share.  For the purpose of so voting, Hibbs and Spaid agreed to deliver the necessary proxies to Gould or his nominee.  In entering into the above contract Gould was acting as agent for the Merchants Bank, and the $50,000 paid by Gould represented funds of that bank.  It was the intention of the Merchants Bank to acquire all of the stock of the Dupont Bank either for cash or in exchange for its own stock.  On March 7, 1922, Gould by written instrument assigned to the Merchants Bank his contract of that date with Hibbs and Spaid, the assignee assuming Gould's obligation under the contract.  After the execution of the above agreements, the Merchants Bank was advised that it could not legally acquire the stock of the Dupont Bank.  Thereupon a meeting of the stockholders of the Dupont *826  Bank was called and was held on March 31, 1922, at which resolutions were adopted providing that the bank be placed in voluntary liquidation at the close of business on April 1, 1922; that petitioner Gould be appointed liquidating*1788  agent, with authority to enter into a contract for the sale of the Dupont Bank's assets to the Merchants Bank for $360,000; that the Merchants Bank assume the liabilities of the Dupont Bank, except the liability for its circulation; and that the cashier be authorized to execute the necessary instruments to transfer title.  On April 13, 1922, the board of directors of the Dupont Bank at a special meeting adopted similar resolutions.  The stockholders' and directors' resolutions were adopted in order to comply with the law and the regulations of the Comptroller of Currency in respect to the liquidation and consolidation of National banks.  Early in April, 1922, the Merchants Bank placed on its books a credit to Gould, as liquidating agent of the Dupont Bank, in the amount of $362,658.92.  Gould thereupon, out of this fund, reimbursed the Merchants Bank for the $50,000 previously advanced and paid to Hibbs and Spaid.  Gould also paid out of this fund the principal due, plus interest in the amount of $858.92, on his note for $206,140 held by Hibbs and Spaid.  The balance of the fund was used by Gould to take up the remaining stock of the Dupont Bank at $180 per share.  Some of the stock*1789  was purchased directly by Gould and some was turned in to and paid for by the Merchants Bank, which was then reimbursed by Gould out of the liquidating fund.  The Merchants Bank took over the operation of the Dupont Bank during the month of April, 1922.  The building occupied by the Dupont Bank had been carried on its books at either $100,000 or $110,000.  The building was taken over by the Merchants Bank at the same figure, but was later increased on its books by the sum of $50,000, the increase being made with permission of the Treasury Department.  The respondent determined that the Dupont Bank realized a gain of $61,000 on the sale of its bank building on the basis of cost of $100,000, depreciation of $11,000, and sales price of $150,000.  Respondent disallowed a claimed deduction of $9,319.79 as representing depreciation on bonds.  These adjustments resulted in an alleged deficiency of $9,039.97, which the respondent assessed on July 10, 1926, against the Dupont Bank for the period January 1, 1922, to April 1, 1922.  The amount assessed is unpaid.  Notices to petitioners asserting liability as transferees of the Dupont Bank were mailed October 5, 1926.  *827  OPINION. *1790 ARUNDELL: The question of the constitutionality of section 280 of the Revenue Act of 1926 has heretofore been urged in a number of cases and we have held, ever since the decision in Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269, that a person against whom a transferee liability is asserted and who appeals to this Board may not question the validity of the statute.  We will consider first the question of whether the petitioners are liable as transferees of property of the Dupont Bank.  The burden of proving such liability is placed on the respondent by section 912 of the Revenue Act of 1926, which was added by section 602 of the Revenue Act of 1928.  The evidence fails entirely to establish that petitioner Ezra Gould is liable as a transferee of the Dupont Bank.  Throughout the negotiations which culminated in the consolidation of the two banks he acted solely as an agent.  The stock book of the Dupont Bank shows 10 shares standing in Gould's name on March 22, 1922, and indicates that it was redeemed by him as liquidating agent between that date and April 6, 1922.  However, Gould's testimony is clear and uncontradicted that at that time he did not own any stock in his own*1791  right and any stock that might have been in his name was not owned by him.  Moreover, the complete list of checks drawn by him as liquidating agent fails to disclose any amount paid to himself.  We are satisfied that Gould did not own any stock at the time of liquidation and that he received nothing as a stockholder.  The fund that was placed to his credit on the books of the Merchants Bank was disbursed by him, as agent, in buying up the stock of the Dupont Bank and no part of it was retained by him.  As far as the record shows he received nothing in his own right from either bank.  As to the Merchants Bank the situation is different.  At the beginning of the negotiations it was the intention of the Merchants Bank to effect the consolidation by purchase of the stock of the Dupont Bank.  After acquiring by assignment the contract of purchase of the 1,423 shares owned by Hibbs and Spaid and assuming the liability for payment of the balance due on the purchase, it was advised that it could not legally acquire the stock.  It has not been pointed out what provision of law is involved, but we presume that it is section 620 of District of Columbia Code, which provides that "It shall not*1792  be lawful for any company to use any of their funds in the purchase of any stock in any other corporation." Neither party claims and we will not assume that under this provision the stock purchase by the Merchants Bank was void.  Such statutes are usually construed as rendering the transactions voidable at the instance of a party in interest or the state.  Cf. Cortez Oil Co.,20 B.T.A. 462">20 B.T.A. 462; *828 Ambler v. Archer,1 App.D.C. 94; Barron v. McKinnon,196 Fed. 933. In the absence of any showing that such was the case, we are unwilling to say that the purchase was void in this case, in view of the fact that after the Merchants Bank was advised of the illegality of the transaction it completed it by having Gould pay off the balance of the note given to cover the purchase price.  Moreover, counsel for both parties insist that the Merchants Bank actually purchased the 1,423 Dupont shares from Hibbs and Spaid.  Their contentions in this respect are amply supported not only by the documentary evidence, but also by the oral testimony of the witnesses in the case.  The adoption of resolutions for the voluntary liquidation of the*1793  Dupont Bank and the sale of its assets were merely formalities for the purpose of complying with requirements governing the consolidation of National banks with other banks.  As Gould, the liquidating agent, put it: "* * * what I was required to do by the Treasury Department was just a matter of procedure and law.  There were certain ways that it had to be done, and we did it just as directed by the Treasury Department.  * * * Now, just how I did it, I do not know. only we would go down to the Treasury Department and they would tell us how to do it." The evidence is also clear that the resolutions authorizing a sale of the assets of the Dupont Bank were never carried out to the extent of consummating a formal sale.  No formal conveyance of its assets was executed by the Dupont Bank, except possibly a deed to the real estate as to which the record is not clear.  What actually occurred is that the Merchants Bank, owning more than two-thirds of the Dupont Bank stock (a two-thirds vote being necessary to place a National bank in voluntary liquidation, sec. 5220 R.S.; § 181, Title 12 U.S.C.A.) placed the Dupont Bank in liquidation and took over its assets and assumed its liabilities. *1794  Such stock as the Merchants Bank did not own at the time of the vote for liquidation it acquired by purchase out of the fund placed to Gould's credit.  In this view of the case it is clear that the Merchants Bank is liable as a transferee of the assets of the Dupont Bank, for when it took over the Dupont Bank's assets that bank was left without means of satisfying its creditors.  As indicated above, we regard the adoption of the stockholders' and directors' resolutions as mere matters of form, but even if they can be considered as reflecting the substance of the transaction, we would still reach the same conclusion.  If we regard the $360,000 odd placed to Gould's credit on the books of the Merchants Bank as a payment pursuant to the resolutions, we must also take into consideration that Gould used over $206,000 of that amount to pay off the indebtedness of the Merchants Bank on the Hibbs and Spaid *829  note and to that extent the Merchants Bank profited by the transaction and left that much less for creditors.  We come to consider the amount of tax for which the Merchants Bank is liable as transferee.  The amount assessed against the Dupont Bank as a deficiency arises*1795  out of increasing income by $61,000 as profit realized on the sale of the bank building and from the disallowance of claimed depreciation on bonds.  The testimony as to the bank building shows that it was carried on the books of the Dupont Bank at either $100,000 or $110,000 and was increased on the books of the Merchants Bank, with the approval of the Treasury Department, by $50,000.  This increase, with adjustment for depreciation, is said by the respondent to represent taxable gain to the Dupont Bank.  As pointed out in the discussion on the transferee liability, the evidence shows that there was no actual sale of assets by the Dupont Bank to the Merchants Bank, but the assets were transferred in liquidation of the Dupont Bank stock.  Such being the case, the Dupont Bank realized no gain when it transferred its bank building.  The only explanation we have of the other item giving rise to the deficiency is the statement in the notices to petitioners describing it as "depreciation on market value of securities charged off the books in prior years and claimed as a deduction in the final return." No evidence was offered by petitioners as to this item and we must accordingly affirm*1796  so much of the deficiency as is attributable to it.  Decision of no deficiency will be entered in the case of Ezra Gould, Docket No. 21727.  Decision will be entered under Rule 50 in the case of Merchants Bank & Trust Co., Docket No. 21728.