Court Opinion

ID: 4607289
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:40:18.314305+00
Date Added: 2024-06-11T07:53:30.910745
License: Public Domain

MARGARET A. MCBRIDE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McBride v. CommissionerDocket No. 101335.United States Board of Tax Appeals44 B.T.A. 273; 1941 BTA LEXIS 1352; April 24, 1941, Promulgated *1352  Where petitioner, who was heavily interested in a corporation which was in financial difficulties, loaned securities to the corporation, giving it full power to sell and dispose of them for its benefit, under a contractual promise of the corporation to repay the loan in kind on or before a day certain named in the contract, held, that a sale of such securities after they had thus been loaned to the corporation resulted in no taxable gain to the petitioner.  Foremont C. Peck et al., Executors,31 B.T.A. 87">31 B.T.A. 87, followed.  O. Walker Taylor, Esq., for the petitioner.  E. M. Woolf, Esq., for the respondent.  BLACK *273  The Commissioner has determined a deficiency of $1,270.24 in petitioner's income tax for the year 1936.  The deficiency results from three adjustments made by the Commissioner in petitioner's income tax return for the calendar year 1936.  Two of these adjustments the petitioner does not contest.  The adjustment which petitioner does contest is the addition by the *274  Commissioner of $5,566.73 capital gains to petitioner's net income for 1936 as reported on her return.  Petitioner by an appropriate assignment*1353  of error contests the correctness of this action by the Commissioner.  FINDINGS OF FACT.  The petitioner is an individual residing at Waban, Massachusetts.  For the year 1936 she filed her income tax return with the collector for the district of Massachusetts.  On or about May 13, 1935, the petitioner effected a loan with and gave her personal promissory note to the National Shawmut Bank of Boston, sometimes hereinafter referred to as the bank, for the sum of $210,000, the net proceeds of which, after deducting interest and other charges in advance, amounted to $207,316.67.  The petitioner thereupon at the time of the negotiation of the loan directed the bank to use the proceeds of that loan to pay off certain loans and obligations of the Clinton Distilleries Corporation of Massachusetts, of which she was the principal stockholder and for the security of whose loans she had deposited her own personal securities.  The bank complied with these instructions and retained the collateral as security for the petitioner's note for $210,000.  On or about June 11, 1935, the Clinton Distilleries Corporation of Massachusetts, having filed a petition in the District Court of the United*1354  States for the District of Massachusetts, submitted its "Plan of Reorganization" under the provisions of section 77B of chapter VIII of the Acts of Congress relating to bankruptcy, wherein "it was proposed to organize a new corporation under the laws of the State of Delaware to be known as the Clinton Distilleries Corporation." The plan of reorganization contains the following provisions with respect (1) to the manner in which the outstanding capital stock of the Clinton Distilleries Corporation of Massachusetts was then owned and (2) with respect to the manner in which the creditors of that corporation were to be paid: The major part of the Debtor's issued and outstanding Capital Stock is owned by Mrs. James E. McBride of 182 St. Paul Street, Brookline, Massachusetts, who owns 103,347 whares out of a total of 107,870 shares now outstanding.  The remaining outstanding stock is owned by seventeen stockholders owning amounts ranging from three (3) to two thousand (2,000) shares each.  * * * General Unsecured Creditors It is proposed to pay creditors of this class fifteen (15) per cent of their claims as filed and allowed, in cash, upon confirmation of this plan, with the exception*1355  of the unsecured obligations of the Debtor to Mr. and Mrs. James E. McBride, which constitute the larger part of the unsecured claims, on account of whose claims no cash will be paid.  *275  It is proposed to pay the unsecured claims of Mr. and Mrs. McBride in full by issuing to them the necessary shares of the Class A common stock of the new corporation, on the basis of $1.00 per share, being the par value thereof.  * * * The plan of reorganization was accepted by the court and all parties concerned, with the exception that the debtor corporation finally agreed to pay the general unsecured creditors 20 percent instead of 15 percent of their claims and thereupon the attorney for the corporation proposed to the petitioner that she lend to the Clinton Distilleries Corporation of Delaware, sometimes hereinafter referred to as Delaware, the securities which were then held by the bank as collateral security for the loan of $210,000 which was negotiated by the petitioner on May 13, 1935.  The petitioner had paid on account of her $210,000 note with the bank the total sum of $30,000, so that on December 6, 1935, the balance due on the note amounted to $180,000.  On December 6, 1935, the*1356  petitioner entered into a written agreement, under seal, with Delaware, wherein she is described as the "Lender" and the corporation as the "Borrower", which provides in part as follows: 1.  The Lender agrees to and does hereby lend to the Borrower the said 2462 Shares of United Fruit; 565 Shares of American Telephone & Telegraph Co.; 80 Shares of New England Telephone & Telegraph Co.; one $1,000 Southern Railway 6 1/2% A 1956 Bond; and one $1000 Southern Railway 6% A 1956 Bond now held by the National Shawmut Bank of Boston as collateral against ter said loan referred to in preamble of this agreement, with full right and authority vested in the said Borrower to sell and dispose of all of said securities for such price or prices as shall now be available, first paying from the proceeds thereof, the amount now due the National Shawmut Bank of Boston against the payment of which said securities are now held as collateral, and to use and employ any or all of the said proceeds remaining to pay and discharge obligations imposed on the Borrower under the terms of the Plan of Reorganization of Clinton Distilleries Corporation of Massachusetts, above referred to, and for general corporate*1357  purposes and, to enable the Borrower to make use of said securities the Lender agrees to execute and deliver to the said Borrower, or its duly authorized representative, a proper assignment of all her right, title and interest in and to said securities, subject to payment of her obligation to the National Shawmut Bank of Boston above referred to.  2.  The Borrower hereby agrees to and does hereby borrow from the Lender the said securities now held by the National Shawmut Bank of Boston as collateral against the payment of the Lender's obligation to said bank and agrees that it will forthwith sell and dispose of said securities at the market prices for same and that it will use the proceeds therefrom to carry into effect all obligations imposed upon it under the Plan of Reorganization of Clinton Distilleries Corporation, a Massachusetts corporation and that it will, from said proceeds, pay off, in full, and discharge the first mortgage held by Clinton Buildings Corporation on the real estate and properties located in Clinton, Massachusetts, formerly held by the Massachusetts corporation and now held by this company, having been transferred to it under Plan of Reorganization of the*1358 Massachusetts company.  *276  3.  The Borrower covenants and agrees to and with the Lender that on or before June 10, 1936, it will repay the loan of said securities to the said Lender or on her order, by delivering to her within said period certificates for 2462 Shares of United Fruit; 565 Shares of American Telephone & Telegraph Co.; one $1000 Southern Railway 6 1/2% A 1956 Bond; and one $1000 Southern Railway 6% A 1956 Bond, subject to a balance due against said securities of $180,000 and as security for its obligation to deliver to the Lender the securities within the time herein stated, the Borrower agrees to execute and deliver to the Lender a first mortgage on all of its lands, buildings, water, water rights, machinery, equipment and other assets located in the Town of Clinton, Massachusetts, and acquired by it from the Massachusetts corporation of the same name under its Plan of Reorganization subject, however, to any mortgages, conditional bills of sale or other encumbrances outstanding against any of the personal property acquired by it from the said Massachusetts corporation, said mortgage to be in all respects satisfactory to the Lender and her attorney and all*1359  expenses in connection therewith, including recording, to be paid by the Borrower.  On the same day that the foregoing agreement was signed the petitioner signed a letter to the bank which is as follows: December 6, 1935.  National Shawmut Bank of Boston, Boston, MassachusettsAttention: Mr. Hill Gentlemen: This is to advise you that I have transferred all of my right, title and interest in and to 2462 shares of United Fruit; 565 shares of American Telephone & Telegraph Co; 80 shares of New England Telephone & Telegraph Co.; one $1,000 Southern Railway 6 1/2% A 1956 Bond, and one $1000 Southern Railway 6% A 1956 Bond held by your bank as collateral against my loan amounting to $180,000, at the present time, to Clinton Distilleries Corporation, a Delaware corporation, with full authority to sell and dispose of said securities or any part thereof, and to otherwise deal with same or the proceeds thereof, as the officers of this corporation may elect, paying off, in the event of sale, my entire indebtedness to your bank.  You are, therefore, authorized and directed to carry out any orders which Mr. James E. McBride, President of Clinton Distilleries Corporation, may direct, *1360  concerning these securities.  Very truly yours, [Signed] MARGARET A. MCBRIDE.  The petitioner, after signing the foregoing letter, delivered it to Ray Henry, counsel for Delaware, and instructed him to deliver the letter to Benjamin Hill of the bank, which Henry did, and when the letter was delivered to Hill he was shown a copy of the agreement of December 6 between the petitioner and Delaware, but Hill stated as follows: I can's accept these instructions.  While this loan is amply secured, nevertheless it stands in Mrs. McBride's name and in the event the unexpected should happen and these securities should break down in price below the amount of the loan, then there is a question in my mind whether we could look to Mrs. McBride for the deficiency in the event there was any.  Therefore, the instructions to deliver, or sell the securities will have to come to us directly from Mrs. McBride and not from Clinton Distilleries Corporation.  *277  After the foregoing conversation with Hill of the bank, Henry, as counsel, and James E. McBride, the husband of the petitioner, as president of Delaware, talked to J. S. Bache & Co., brokers, "as to just how those sales could*1361  be made," and Bache & Co. stated to Henry and McBride as follows: As the stocks stood in the name of Mrs. McBride and were hypothecated in her name at the Shawmut Bank, before Bache & Co. could make the sales they would have to have an order from her to make the sales.  Thereafter the various shares of stock and other securities which had been loaned by petitioner to Delaware but were on deposit as collateral security with the bank were delivered to Bache & Co. for sale upon the order of petitioner, Margaret A. McBride, and were sold in 1935 and 1936.  The amount of the profits, if any, on the sales made in 1935, is not here in controversy.  The proceeds of all of the sales made through Bache & Co. were first applied to the liquidation of the petitioner's indebtedness at the bank and the checks for any excess over and above the amounts thus required were made payable to the petitioner, and all such checks received by her were endorsed over and delivered to Delaware, with the exception of a check dated January 15, 1936, for $6,540.80, which was deposited with the Boulevard Trust Co. of Brookline, $6,500 thereof being paid to Delaware by the petitioner's personal check drawn on*1362 the Boulevard Trust Co. of Brookline.  The Clinton Distilleries Corporation of Delaware never repaid to petitioner any of the proceeds of the sales made through Bache & Co., which, as above stated, were used for its benefit.  Nor did it return to her on June 10, 1936, or at any other date, any of the securities specified in the agreement of December 6, 1935, which were sold by Bache & Co. in the manner aforesaid.  The Clinton Distilleries Co. of Delaware is bankrupt and is entirely out of business.  OPINION.  BLACK: The amount of the capital gain which the Commissioner computed on the sales of the securities in question is not in dispute.  If petitioner is taxable at all on the gain from the sales in question, then she concedes that the amount of the capital gain which the Commissioner has computed is correct.  Petitioner contends, however, that she was not the owner of the securities in question at the time they were sold; that prior to the date of sale she had loaned them to the Clinton Distilleries Corporation of Delaware, with full power and authority to sell them for its own account; that the sales were made at its instance and for its benefit and not for hers, and that*1363  she is not taxable on any of the gain from the sales.  *278  The respondent disputes these contentions of petitioner.  In his deficiency notice he stated with reference to this particular transaction as follows: Your contention that the said stock had previously been loaned to Clinton Distilleries Corporation (a Delaware corporation) under an agreement to return the identical stock has not been substantiated.  For this reason, your further contention, that the profit from the above sale is not taxable to you cannot be conceded.  The respondent takes the same position in his brief.  As to the issue thus raised, we think petitioner must be sustained on authority of , and . The written agreement between petitioner and Delaware dated December 6, 1935, shows clearly that petitioner loaned the securities in question to Delaware and gave it the right to sell and dispose of them, and use the money thus obtained for its own benefit. Delaware obligated itself to repay the securities in kind, on or before June 10, 1936.  True, the securities were loaned by petitioner to Delaware*1364  subject to the prior rights of the bank, which held them as collateral security for a note which represented money that the bank had loaned petitioner to use for Delaware's benefit.  We think this makes no difference as to the validity of the transaction.  The fact that securities are up as collateral with a bank does not deprive their owner of the right to dispose of them, subject of course to the prior rights of the bank.  In , we held that the execution of the trust agreement therein involved effectively passed title to the trustee of certain shares of stock without manual delivery, despite the fact that the stock transferred in trust remained registered in the settlor's name and pledged as collateral security for certain loans.  We held that dividends on the stock which were paid subsequent to the transfer were taxable to the trust and not to the settlor.  At page 1008 of that opinion we cited numerous authorities in support of our holding. Respondent in his brief lays much stress on the fact that before the bank would deliver the securities to Bache & Co. for sale or before Bache & Co. would sell them, they required petitioner*1365  to sign an order directing the sale of the securities.  We see nothing unusual about that procedure.  The securities, although clearly loaned by petitioner to Delaware, were subject to the prior rights of the bank and still stood in the name of petitioner.  Naturally the bank was not going to release them for sale except upon the written order of petitioner.  The testimony shows that the bank, after applying the proceeds of the sales to the payment of the indebtedness to it, turned the balance over to petitioner, and petitioner *279  promptly endorsed the checks and delivered them to Delaware, which used the money for its own benefit.  Delaware has never repaid to petitioner either the money or the stock.  On the authority of , and Frank Kess, supra, we sustain petitioner on this issue.  Decision will be entered under Rule 50.