Court Opinion

ID: 4603886
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:32:59.924188+00
Date Added: 2024-06-11T07:52:55.173005
License: Public Domain

MARGARET E. KIDDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kidder v. CommissionerDocket No. 98845.United States Board of Tax Appeals30 B.T.A. 59; 1934 BTA LEXIS 1375; March 13, 1934, Promulgated *1375  On account of the provisions of section 118, Revenue Act of 1928, a sale of voting trust certificates for common stock at less than cost and the purchase of an equal number of shares of common stock on the same day, does not give rise to a deductible loss.  William S. Lare, Esq., for the petitioner.  C. C. Holmes, Esq., for the respondent.  TRAMMELL*59  This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1930 in the amount of $3,015.64.  The error assigned is the disallowance by the respondent of a loss on the sale of shares of voting trust certificates for common stock.  The facts were stipulated and we adopt the stipulation of the parties as our findings of fact, incorporating such part of the exhibits included in the stipulation as we deem to be material to the issue, the entire exhibits being, however, incorporated herein by reference.  FINDINGS OF FACT.  On August 19, 1929, petitioner, through her brokers, A. M. Kidder & Co., purchased from J. S. Bache & Co. 500 shares of Indian Refining Co. stock trust certificates for common stock for $24,825.  Said stock trust certificates were issued*1376  pursuant to, and the rights of petitioner as the holder thereof were subject to, the terms and conditions of a certain stock trust agreement dated July 22, 1925, between Bayard Dominick, J. H. Graham, and W. C. Janey, as a committee, and Bayard Dominick, David M. Goodrich, J. H. Graham, Walter C. Janey, and Robert L. Montgomery, trustees.  The stock certificate provided in part that the certificate holder "will be entitled to receive a certificate or certificates, for shares of the par value of $10 each of the common capital stock of Indian Refining Company, a Maine corporation, expressed to be fully paid and in the meantime to receive payments equal to the cash dividends, if any, collected by the trustees upon a like number of such shares standing in their names." Among other things the voting trust agreement provided as follows: Ninth.  Until the actual delivery of stock certificates in exchange for Stock Trust Certificates, the Trustees, subject to the provisions hereof, shall possess, and, in their discretion, shall be entitled to exercise, all rights and powers of absolute owners of said stock, including the right to vote for every purpose and to consent to any corporate*1377  act of the Company, and to receive dividends on said stock; it being expressly stipulated that no voting right passes to *60  others by or under the Stock Trust Certificates, or by or under this Agreement, or by or under any agreement, express or implied.  The Trustees will not, however, during the continuance of this Agreement, vote in respect of the shares of the capital stock of the Company held by them hereunder, to authorize (1) any increase in the authorized maximum amount of any class of stock of the Company, or the creation of any new class of stock of the Company superior to the common stock outstanding at the date hereof, or (2) the sale or other disposition of the properties of the Company as an entirety, or (3) the merger or consolidation of the Company with any other corporation or (4) the creation or placing of any mortgage (except a purchase money mortgage) or other lien upon property of the Company to secure an issue of obligations of the Company, without, in either case, the consent of the holders of Stock Trust Certificates, then issued and outstanding hereunder, calling for not less than a majority of the shares of stock deposited hereunder.  * * * In all cases*1378  under this Agreement in which the consent of the holders of Stock Trust Certificates is required, the holders of Stock Trust Certificates for Preferred stock shall have ten (10) votes for each share of preferred stock called for thereby, and the holders of Stock Trust Certificates for Common stock shall have one (1) vote for each share of common stock called for thereby.  Tenth.  The Trustees may, in their discretion, at any time, and from time to time, during the continuance of this Agreement with the consent of the holders of Stock Trust Certificates, then issued and outstanding hereunder, calling for not less than a majority of the shares of stock then deposited hereunder, given as in Article Ninth hereof provided, sell and transfer all the stock of the Company held by them hereunder, or all the shares of any class thereof, for cash and/or securities (including in that term shares of stock) in such amounts as they may deem advisable, and hold under this Agreement the net consideration so received, and distribute the same proportionately to the holders of the Stock Trust Certificates hereunder which called for the shares of stock so sold.  On July 16, 1930, petitioner, through*1379  her brokers, A. M. Kidder & Co., sold to Babcock Rushton & Co. said 500 shares of Indian Refining Co. stock trust certificates for common stock for $6,185.50, or for $18,639.50 less than she paid for them on August 19, 1929.  On July 16, 1930, petitioner, through her brokers, A. M. Kidder & Co., also purchased from Erich & Drevers 500 shares of the common stock of the Indian Refining Co.  In her Federal income tax return for the year 1930, petitioner, in determining her taxable net income for that year, deducted as a loss the amount of $18,639.50, being the difference between $24,825, the cost on August 19, 1929, of said 500 shares of Indian Refining Co. stock trust certificates for common stock, and $6,185.50, the price received from the sale thereof on July 16, 1930.  In determining the deficiency herein the respondent has disallowed the amount of $18,639.50 as a deductible loss, upon the ground that the sale of the 500 shares of Indian Refining Co. stock trust certificates for common stock and the purchase on the same day in open market of 500 shares of common stock of the Indian Refining Co. falls within the provisions of section 118 of the Revenue Act of 1928.  *61 *1380  OPINION.  TRAMMELL: The petitioner contends that she sustained a deductible loss on the sale on July 16, 1930, of 500 shares of Indian Refining Co. stock trust certificates for common stock, on the ground that the purchase on the same day of 500 shares of common stock of that company was not the acquisition of substantially identical property within the meaning of section 118 of the Revenue Act of 1928.  That section provides as follows: SEC. 118.  LOSS ON SALE OF STOCK OR SECURITIES.  In the case of any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed under section 23(e)(2) of this title; nor shall such deduction be allowed under section 23(f) unless the claim is made by a corporation, a dealer in stocks or securities, and with*1381  respect to a transaction made in the ordinary course of its business.  If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.  The respondent takes the position that the acquisition of the common stock was the acquisition of substantially identical property as the voting trust certificates for common stock and that, therefore, under the statute, the petitioner sustained no deductible loss.  The voting trust certificates represented the interest of the petitioner in the common stock.  She would have been entitled to the common stock represented by the trust certificates six days after the sale of the certificates.  We think that the voting trust certificates for common stock were substantially the same, within the meaning of the statute, as common stock.  The holders of the common stock voluntarily created the trust to hold the stock for them.  While after the creation of the trust the holders of common stock did not hold legal title to the stock, they were the beneficial owners.  The trustee held the stock for them.  It is true that the owners of*1382  the common stock could not vote it during the existence of the trust agreement.  In our opinion, this fact is not sufficient to make such certificates a substantially different kind of property from the common stock itself.  Otherwise, stockholders could circumvent the statute by creating trust agreements in order to sell certificates representing their ownership within 30 days from the creation of the trust agreement and buy back common stock.  We do not believe that it was the purpose of the statute to permit such transactions.  It would seem clear that an exchange of voting trust certificates *62  for common stock would be such an exchange as would leave the taxpayer with substantially the same property as was possessed before and would not result in gain or loss.  This is the position the respondent has taken in IT-2292, C.B. V-1, p. 12.  A sale of trust certificates under circumstances such as existed in this case would not result in an actual loss.  The petitioner, on the same day of the sale, purchased an equal number of shares of stock to which she would have been entitled, in any event, six days after the sale.  The common stock merely took the place of the certificates*1383  and it is our opinion that no deductible loss resulted from the transaction within the meaning of section 118 of the Revenue Act of 1928.  Reviewed by the Board.  Judgment will be entered for the respondent.