Court Opinion

ID: 4594447
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:12:59.48626+00
Date Added: 2024-06-11T07:51:15.333042
License: Public Domain

WALTER S. MACK, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mack v. CommissionerDocket No. 102833.United States Board of Tax Appeals45 B.T.A. 602; 1941 BTA LEXIS 1098; November 6, 1941, Promulgated *1098  In 1937 petitioner transferred, without consideration, 416 shares of preferred stock to the president of a corporation, individually, of which petitioner was a director and formerly had been treasurer and vice president.  The stock cost petitioner $41,600, and was all of the stock of that corporation owned by him.  The corporation had valuable assets, and was a going concern.  At the time of the transfer of the preferred stock, which then had a substantial value, petitioner expressed the hope that the president of the corporation would be able to use the stock to secure additional capital or to obtain services from others who could help him.  Held, the transfer of the stock constituted a gift, and petitioner is not entitled to a loss deduction of any part of the cost thereof.  Francis D. Higson, Esq., for the petitioner.  James C. Maddox, Esq., for the respondent.  HILL *602  This proceeding is for the redetermination of a deficiency in income tax for the year 1937 in the amount of $13,321.21.  The issue for decision is whether petitioner is entitled to a deduction in the sum of $41,600 in respect of the disposition by him of 416 shares of*1099  preferred stock of William B. Nichols & Co.  The pleadings raised an additional issue involving the partial disallowance by respondent of a deduction claimed by petitioner for depreciation, but this issue was withdrawn by petitioner at the hearing.  The facts were stipulated by the parties, which stipulation we adopt as our findings of fact and set out below the material portions thereof.  FINDINGS OF FACT.  Petitioner is an individual, with his principal office at 44 Wall Street, New York, New York, and for the taxable year 1937 filed his income tax return with the collector of internal revenue for the second district of New York.  William B. Nichols & Co. was organized April 25, 1928, under the laws of the State of New York and it is still operating.  Its office is *603  in New York, New York.  It engages in the business of management engineering and industrial engineering and the reorganization of industrial concerns.  Its income is derived principally from fees for such services.  When the corporation was organized its certificate of incorporation authorized it to issue 1,500 shares of stock without par value, consisting of 1,000 shares of class A stock and 500 shares*1100  of class B stock.  On February 28, 1930, the certificate of incorporation was amended so as to provide that the authorized stock of the corporation should be 6,000 shares without par value, consisting of 5,000 shares of preferred and 1,000 shares of common.  At the time of the transaction hereinafter described, consummated on December 1, 1937, and involving the turning over by petitioner to William B. Nichols of all of petitioner's preferred stock, the corporation had issued and outstanding 2,547 shares of preferred stock and 1,000 shares of common stock.  On November 30, 1937, petitioner was the owner and holder of 416 shares of preferred stock of William B. Nichols & Co., which had been issued and sold to him by the corporation for $100 per share from time to time during the period commencing June 18, 1930, and ending February 3, 1937.  On or about December 1, 1937, petitioner turned over to William B. Nichols, individually, who at that time was the president, a director, and a stockholder of William B. Nichols & Co., all of his preferred stock in the corporation, consisting of 416 shares.  Under date of November 16, 1937, William B. Nichols wrote a letter to petitioner reading*1101  in material part as follows: Dear Walter: With reference to our discussions over the last several months, at Directors' meetings and otherwise, of William B. Nichols & Co.'s losses during the current year, you have asked me for a more detailed and up to date statement of these losses and for a calculation of the consequent fair liquidating value of the Company's preferred stock and an estimate of the Company's position and prospects at this time.  I enclose herewith an itemized balance sheet of the Company as of November 1st with explanatory notes on the individual items.  From this you will see that at present the Company is low in cash; that a substantial part of its assets are "frozen", and that a number of its receivables are uncertain.  These circumstances combine to make it very difficult at present to calculate, with any assurance of accuracy, a fair liquidating value for the preferred stock.  The Company's present situation has resulted primarily from two causes: (1) a departure last year from the theretofore established policy of not investing the Company's funds in any businesses under management, and (2) the Company's inability, owing to the recent weakness of the*1102  securities markets, to collect fees on several substantial jobs (not included on the enclosed balance sheet) on which our payment was contingent upon the completion of financing.  Under the first of the above headings, the Company's investment of approximately $17,000 in Nectar Syrup Corporation is badly frozen and any recovery made will of necessity be slow; Penn Yan Boats, Incorporated has operated at a *604  profit for the current year but is also frozen for lack of adequate working capital, and the recovery to be expected on the Company's investment of about $43,500 depends largely upon whether Penn Yan Boats is successful in obtaining additional working capital: a matter which has been made more difficult of accomplishment by the recent widespread loss of confidence in business.  Under the second heading, if the securities markets improve sufficiently within the next few months to make the sale of new stock issues possible, it is reasonable to expect that the financing of one or more of the projects referred to may be completed with resulting payment to us for our services.  I shall appreciate any suggestions you may have to offer.  Under date of November 30, 1937, petitioner*1103  addressed a letter to William B. Nichols, reading in material part as follows: Dear Bill: I have been giving careful thought and consideration to your letter of November 16, 1937, in conjunction with the statement of William B. Nichols & Co., Inc., which you enclosed.  In analyzing this statement, i have taken into consideration the facts set forth in the statement and those obtained from the various discussions we have had at our board meetings during the past months.  Among the assets under "Accounts Receivable" is "Allied Stores - Polsky, $16,500," noted as item 3.  I am on the Allied Stores Board and I know something about this situation.  Their claim is that this is covered by your contract and although you ought to get something for the extra work, you are not entitled to the full amount.  Their contention is based upon a written opinion from Sullivan & Cromwell, their lawyers.  In my opinion, if you don't accept some settlement and the matter goes to litigation, you may get nothing.  You have already incurred lawyers' expenses in connection with this matter and it is my understanding that Mr. Jennings, who is the head of your real estate department, has a 40% interest*1104  in anything you collect on this amount, so no matter what the settlement is, if one is made, after deducting your legal expenses and commissions the corporation of William B. Nichols & Co., Inc. will only receive 60% of such net amount.  On item 5, marked "Goodwin System $3,700.", I understand that this is contingent upon raising a total of $25,000.  Therefore, it seems to me very doubtful, under present conditions, whether they will be able to raise this amount inasmuch as this matter has been pending for some time and they have only been able to raise $13,000 to date.  Under "Marketable Securities", I note you have the total down for $14,834, with the note that the market value of these securities is only $12,105.  This market value is evidently computed as of October 31, the date of the balance sheet, because their value at this date is substantially less.  With reference to the Nectar Syrup Corporation, this amount as I understand it, is stated in your assets at the actual cost to the corporation.  According to my understanding, as explained at a directors' meeting, you have sold this on the basis where you get a royalty on sales.  The reyalty for the month of October (which*1105  should be a very good month for this type of business) amounted to $100., and if each month was as good as October, it would aggregate $1,200 for the year.  In other words, it would take you about 15 years at this rate to realize your $18,000.  As a matter of fact, the people who took over this company from William B. Nichols & Co., Inc. have very little at stake and are trying to operate the company on William B. Nichols & Company's capital.  I understand they are losing money.  At the present rate of sales it seems *605  quite evident that unless they are able to substantially increase the business in the near future, they will abandon the proposition.  As a matter of fact, what you have done is to turn this property over to someone else on a contingent basis.  In other words, the William B. Nichols & Co., Inc. will get back their investment only in the event the people who took over this business are able to operate it at a profit.  Therefore, in my opinion, this asset at best is a contingent one.  With reference to the Penn Yan Boats, Inc. which we are carrying in our assets in the amount of $42,323.74, as you state in your letter, this is in a frozen state.  Additional*1106  working capital is needed in order to be able to carry on the business.  According to my recollection, the business will show a volume of about $200,000 for the year, which after very careful operation on your part in keeping down the expenses, you may break even.  There is a first mortgage on the property and a bank loan before the preferred and comm0n stock, which is what William B. Nichols & Co. Inc. own.  The balance sheet of Penn Yan Boats, Inc. shows that practically the only assets it has, after deducting all liabilities, are in the form of inventories and it seems quite evident to me that unless it gets additional capital, this inventory will be almost a complete loss.  I am not at all optimistic about being able to reise the working capital, particularly, since this is a boat company which to a great extent is in the luxury class, and has not a successful record of earnings.  I regret exceedingly that I cannot place any more capital in the company at this time, and, furthermore, my time is so taken up that it will be impossible for me to give much time to William B. Nichols & Co., Inc.  I feel very strongly my obligations as a director and as a friend.  I know that my name*1107  has been associated with your company for quite a number of years, and I only wish there was something I could do to help the corporation at this time.  After giving this matter considerable thought, I have come to the conclusion that the only thing I can do to help the situation is this.  I am willing to surrender all of the preferred stock that I own of William B. Nichols & Co., Inc., to you, individually, with the hope that you may be able to use this preferred stock, either to secure additional capital or to obtain services from others who may be able to help you.  Therefore, i enclose herewith 416 shares of the preferred stock of William B. Nichols & Co., Inc., properly endorsed.  In view of the fact that this is the only investment that I have in the corporation, I feel that I should resign as director of the company, which action I take with considerable regret.  However, I request that my resignation be accepted, to take effect as of this date.  My good wishes will be always with you and I do hope that you will be able to work the situation out.  Penn-Yan Boats, Inc., some of the capital of which was owned by William B. Nichols & Co. on November 1, 1937, was during the*1108  year 1937, and subsequently up to the present time has been, engaged in business as a going concern.  Petitioner, besides being a stockholder of William B. Nichols & Co., was also connected with this corporation in the following capacities during the periods indicated: (1) a director, from June 24, 1930, to November 30, 1937; (2) the treasurer, from August 7, 1930, to February 16, 1931; (3) a vice president, from February 16, 1931, to May 20, 1936.  *606  William B. Nichols & Co. purchased 350 shares of its preferred stock for the sum of $5 per share, 50 shares being purchased from J. M. Faulkner on December 24, 1937, and 300 shares being purchased from M. B. Metcalfe at some time in December 1938.  William B. Nichols & Co. paid two dividends in 1936, one of $15,987 in April and another of $9,488 in December.  Petitioner received dividends in 1936 in respect of his preferred stock in the amount of $3,614.  OPINION.  HILL: The issue presented for decision in this case is whether petitioner is entitled to a deduction of $41,600 as an ordinary loss resulting from his transfer in 1937 to William B. Nichols of 416 shares of preferred stock of William B. Nichols & Co. under*1109  the circumstances set out above.  The amount stated represents the undisputed cost of the stock to petitioner.  Petitioner contends in substance that the fundamental principle governing the case at bar is "abandonment, relinquishment or surrender of an asset the value of which has been impaired." In support of his contention, petitioner cites, among other cases, ; ; ; ; ; affd., ; ; . Petitioner further urges that the present case is similar to numerous decisions of the Board in which it has been held that an owner of real property, subject to a mortgage on which he is not personally liable, sustains an ordinary loss deductible in full upon surrender of the property to the mortgagee, citing *1110 ;;; , and others.  Finally, petitioner argues that the same principle should be applied in this case as was applied by the Board in certain decisions wherein it was held that the stockholder of a corporation who surrendered a part of his stock to be used as compensation for services to be rendered to the corporation sustained an ordinary loss deductible in full.  See ; modified, ; ; ; affd., . Respondent takes the position that the transfer of stock here in question constituted a gift, and hence did not result in a loss allowable as a deduction.  We shall not attempt a detailed discussion of the many cases cited by petitioner; we think none is controlling here.  In respect of petitioner's *607  contention last above referred to and the citations thereunder, it is sufficient*1111  to point out that petitioner did not surrender a part of his stock for the benefit of the corporation, in order ultimately to increase the value of his remaining stock, as in the cases cited.  He transferred all of his stock and completely severed all connection with the corporation.  Likewise, petitioner's other and principal contention that he suffered a deductible loss as the result of abandonment of property can not, in our opinion, be sustained.  The facts do not indicate that petitioner had any intention of abandoning his property, or that he did abandon it.  Such term denotes an absolute giving up; forsaking or renouncing utterly.  We think petitioner did not forsake or renounce ownership of the preferred stock; he simply transferred it without consideration to Nichols for a certain specific purpose, to which further reference will be made.  Such transfer does not indicate abandonment.  Ordinarily, a person does not abandon property having substantial value, and a transfer of valuable property, without consideration, would in the absence of explanation indicate a gift rather than abandonment.  Thus, in all the cases cited above in which a loss deduction was*1112  allowed on account of abandonment of property, it appears that such property had lost its useful or economic value, or that the taxpayers thought the property was without substantial value.  See especially In , one of the decisions heavily relied upon by petitioner, we said: The substance of the transaction shown in our findings, we think, was an abandonment by petitioner of what he, and all who were familiar with it, thought was a worthless asset.  While a transfer, without consideration, of a worthless asset may evidence abandonment and constitute the identifiable event which fixes the incidence of loss, as in the cited cases, it is equally obvious on the other hand that such a transfer would not constitute a gift.  A gift can be made only of property having value.  This is made plain in our opinion in , another decision particularly relied upon by petitioner, where we held that the execution and delivery of an order directing the issuance to another of trust certificates representing the taxpayer's equity interest in certain lands constituted an abandonment by*1113  the taxpayer of his equity in the land, and was not a gift.  The record in the instant case clearly establishes that the shares of preferred stock transferred by petitioner to Nichols had a very substantial value, although it is not shown precisely what the value was.  The corporation was a going concern, apparently able to pay its current operating expenses and possessed of valuable assets.  The letters set out in our findings above were devoted to a discussion of certain assets of the corporation, as they affected the liquidating value *608  of the stock.  It is not indicated that the corporation was particularly in financial difficulties, but rather that some of its assets were frozen.  We think the evidence justifies the conclusion that petitioner's preferred stock at the time of the transfer had not only a substantial liquidating value but probably a much higher potential value.  As was said in , gifts usually proceed from the generosity of the giver and, where there is any doubt as to the nature of the transaction, the absence of such a motive is a pertinent circumstance for consideration.  Petitioner argues that*1114  the transfer here in controversy was not actuated by any motive of generosity and he had no intention of making a gift; therefore, it was not a gift.  We can not agree.  In the letter of November 30, 1937, to Nichols, petitioner expressed regret that he could not invest more capital in the corporation or give much time to its affairs, and referred to the fact that his name had been associated with the company for quite a number of years.  (As previously stated, besides being a stockholder of the corporation, petitioner had been a director for more than seven years; he had also at one time been treasurer and a vice president of the corporation.) Petitioner further stated in his letter that he was willing to surrender all of the preferred stock owned by him in the corporation to Nichols individually, with the hope that he, Nichols, might be able to use the stock either to secure additional capital or to obtain services from others who could help him.  He endorsed the certificates in blank and enclosed them in his letter.  These statements, in our opinion, sufficiently indicate the motive which actuated petitioner in transferring the stock to Nichols without material consideration. *1115  Surely it was an act of generosity on the part of petitioner so to assist an old friend in the only practical way available to him.  It appears that petitioner was also connected with several other corporations in an executive capacity, and it may well be that petitioner felt that if William B. Nichols & Co., a corporation with which his name had been associated for many years, got into financial difficulties it would reflect on his reputation as a businessman and corporate executive.  Whether or not this was true, we are persuaded from all the evidence before us that petitioner intended to and did make a gift of his preferred stock to Nichols, and he is therefore not entitled to deduct any part of the cost of the stock as a loss resulting from such transfer.  The deficiency determined by respondent is approved.  Decision will be entered for respondent.