1952 U.S. Tax Ct. LEXIS 98">*98 Decision will be entered under Rule 50.
Taxpayer, a wholesale liquor dealer, found it difficult to procure liquor in 1943 because of Government restrictions on production. Taxpayer's officers learned that American Distilling Company was offering its stockholders the privilege of purchasing their proportionate shares of its bulk whisky inventory at cost. Taxpayer bought shares of this stock in 1943 and 1944, exercised the right to acquire the whisky, and sold the stock in 1944 at a loss. Held, the loss was a part of the cost of the whisky and not a short term capital loss. Held, further, the shares of stock were not capital assets and were not "inadmissible assets" as defined in section 720, I. R. C.
18 T.C. 1090">*1091 The Commissioner determined the following deficiencies in taxes:
| Declared | |||
| value | Excess | ||
| Year | Income tax | excess- | profits tax |
| profits tax | |||
| 1943 | $ 2.40 | $ 679.89 | |
| 1944 | $ 4,466.65 | 5,875.78 | 55,848.84 |
The principal question for decision is the proper treatment to be accorded the purchase and sale by the taxpayer of shares of stock of the American Distilling Company which shares carried certain whisky purchase privileges or rights. Put another way, was the loss sustained by taxpayer on the sale of the shares purchased, a short term capital loss, or did it, or a portion thereof, represent additional cost of whisky purchased by taxpayer in exercising the whisky purchase rights incident to the shares?
In its income tax return for the calendar year 1943 taxpayer listed as an asset in the end year balance sheet the amount of $ 201,937.50, representing its investment in stock1952 U.S. Tax Ct. LEXIS 98">*100 of the American Distilling Company. The Commissioner made an adjustment on account of excluded capital with respect to this item in computing the excess profits credit based upon income. In computing its excess profits credit under the invested capital method for the calendar year 1944 the taxpayer treated the amount of its investment in American Distilling Company stock as an admissible asset. The Commissioner determined that this stock was an "inadmissible asset" as defined in section 720 of the Internal Revenue Code and reduced the taxpayer's invested capital accordingly. The issue here is whether the shares acquired by taxpayer constituted "capital assets" under section 117 of the Internal Revenue Code and hence were "inadmissible assets" under section 720.
For the purposes of this proceeding the Commissioner has abandoned a contention originally made, "that the excess of the fair market value over the actual cost of whiskey acquired * * * represents a taxable dividend within the meaning of section 115(a) of the Internal Revenue Code."
Part of the facts have been stipulated and are found as stipulated.
FINDINGS OF FACT.
Taxpayer is a corporation organized under the laws of1952 U.S. Tax Ct. LEXIS 98">*101 Nebraska. Its tax returns were filed on the accrual basis with the collector for the district of Nebraska.
During the taxable years taxpayer was engaged exclusively in the wholesale liquour business in Omaha, Nebraska.
18 T.C. 1090">*1092 On November 8, 1942, the Federal Government issued an order curtailing and restricting the further production of whisky. Distillers, not knowing how long the emergency which led to the curtailment would last, took means to stretch the available supply of bulk whisky as far as possible. The supply situation with reference to whisky became extremely tight and distillers, suppliers, brokers, and wholesalers supplemented their whisky stocks with importations of rum, brandies, wines, habaneros, and tequila.
During 1943 and 1944 the demand for whisky was very strong and wholesale whisky dealers such as taxpayer received allocations from various distillers less than the amounts called for under their contracts with their suppliers. In this period the taxpayer would normally sell and deliver case goods of whisky to its customers within two or three weeks after the whisky was delivered to its warehouse. It could have sold substantially more whisky than it did1952 U.S. Tax Ct. LEXIS 98">*102 had more whisky been available to it.
In order to keep its business going taxpayer was faced with the necessity of obtaining more whisky than it was allotted by its suppliers.
On November 12, 1943, the board of directors of the American Distilling Company (hereinafter called Distilling), adopted the following resolution:
RESOLVED, that The American Distilling Company shall extend to all of its Common stockholders, as of a record date to be fixed at a subsequent meeting of this Board, the privilege of purchasing substantially all of the inventory of the Company which it shall be practicable so to dispose of, at a purchase price equivalent to the book cost or value thereof on the books of The American Distilling Company as of November 30, 1943; and be it
FURTHER RESOLVED, that the President and the General Counsel of this corporation be directed forthwith to prepare the detailed plan for the orderly consummation of said sale and purchase to be presented to this Board for its consideration and approval at the earliest possible date.
Information concerning this resolution was given to Paul C. Gallagher, president of the taxpayer, by a representative of Harris, Upham & Co., brokers. Gallagher1952 U.S. Tax Ct. LEXIS 98">*103 learned of the probable details of the offering, the important detail to him being that at an approximate cost of $ 30, a stockholder could obtain one barrel or sixteen cases of whisky for each share of Distilling owned.
Gallagher took the matter up with another of taxpayer's officers and they determined to have the taxpayer buy a substantial number of Distilling shares for the sole purpose of procuring the whisky available under the plan. During November and December, 1943, taxpayer purchased 2,000 shares of Distilling stock. In February 1944 taxpayer acquired 550 additional shares.
18 T.C. 1090">*1093 On December 9, 1943, the directors of Distilling adopted a resolution approving the details of a plan pursuant to which its stockholders could purchase merchandise inventory as follows:
RESOLVED, that this Board approves the plan contained in the document presented to this meeting entitled, "Method by which stockholders may purchase, merchandise inventory" and dated December 17, 1943; and be it
FURTHER RESOLVED, that the proper officers of this corporation are hereby authorized and directed to assign, transfer and convey to Gilbert B. Geiger, as Trustee, 237,500 barrels of bulk merchandise1952 U.S. Tax Ct. LEXIS 98">*104 as provided for in said plan, to be subject to the terms and conditions of a Trust Agreement to be entered into between this Company and said Gilbert B. Geiger, as Trustee; * * *
* * * *
The document entitled "Method by which stockholders may purchase merchandise inventory" provided, in substance, as follows:
(a) The stockholders of the company could, during the period December 24, 1943, to and including February 29, 1944, designated the "purchase period," purchase from the Trustee their pro rata share of 237,500 barrels of whisky at a price equal to the cost of the whisky as shown on the books of Distilling on November 30, 1943. This cost was stated to be $ 30.52 per barrel.
(b) After the close of business December 24, 1943, the Trustee would furnish the stockholders with a purchase order form and advise them when orders for the whisky would be accepted.
(c) The stockholders desiring to purchase were required to send the order to one of the company's stock transfer agents, accompanied by the stock certificates in respect of which the purchase order was submitted and a certified check or its equivalent for the amount of the purchase price of the whisky.
(d) The purchase order was1952 U.S. Tax Ct. LEXIS 98">*105 to be delivered by the transfer agent to the Trustee, and the stock certificates exchanged by the transfer agent for new certificates bearing a stamp indicating that the merchandise available for purchase in respect of said shares had been sold. The new certificates were to be known as "stamped" certificates and it was expected that both stamped and unstamped certificates would be traded in on the New York Stock Exchange during the purchase period.
(e) Deliveries of the merchandise ordered would be made generally over a 10-month period.
(f) During the "purchase period" each stockholder could purchase in respect of each share of stock held by him 16 cases of blend of straight whiskies, 80.6 proof, bottled in fifths, at a cost per unit of 16 cases of $ 242.70, including book cost to the company, Federal taxes, and bottling charges, but exclusive of local state tax or markups or freight charges and clearance fees.
18 T.C. 1090">*1094 (g) In lieu of the 16 cases of bottled whisky per share, the stockholders could, subject to the approval of the Trustee, purchase the equivalent thereof in bulk whisky.
(h) If at the close of the purchase period there were outstanding shares of stock of the company1952 U.S. Tax Ct. LEXIS 98">*106 (which would be evidenced by unstamped certificates) in respect of which no purchase orders had been received, the Trustee would sell the whisky that could have been purchased in respect thereof and remit the net proceeds pro rata among the persons who held unstamped shares at the close of business on February 29, 1944.
(i) Stockholders of record at the close of business on February 29, 1944, were given the additional privilege of purchasing with respect to each share of stock, one case of rye whisky bottled in bond in quarts, and one case of straight Bourbon whisky bottled in bond in quarts, upon payment by the stockholder of $ 46.50 for both cases. In the event any such shareholder failed to exercise this privilege on or before March 20, 1944, the Trustee was required to sell the whisky that could have been so purchased and to remit the net proceeds pro rata among such shareholders.
(j) The Trustee would carry out the plan pursuant to the terms of a Trust Indenture between himself and the company dated December 11, 1943, and under the supervision of the United States District Court for the Southern District of Illinois, Northern Division.
Certain changes in the trust indenture 1952 U.S. Tax Ct. LEXIS 98">*107 were made in an amendatory indenture dated February 23, 1944. This extended the time within which some of the purchase rights could be exercised and made certain other privileges available to stockholders.
On January 5, 1944, taxpayer forwarded to the transfer agent its purchase order for 16,000 cases of blended whisky, together with its draft in the amount of $ 85,132 and certificates for 1,000 shares of the stock of Distilling.
On January 10, 1944, the taxpayer forwarded its purchase order for 4,800 cases of blended whisky, together with its draft in the amount of $ 25,399.60 and certificates for 300 shares of the stock of Distilling.
In the early part of February 1944 taxpayer, due to the action of the Office of Price Administration in reducing the resale selling price of the bottled whisky obtainable from the Trustee under the plan, canceled its orders of January 4, 1944, and January 10, 1944, and in place thereof ordered whisky in bulk with respect to the 1,300 shares involved in those orders. Taxpayer also at that time forwarded the certificates for the remaining 700 shares of the 2,000 shares of Distilling stock purchased during November and December of 1943 and an order for1952 U.S. Tax Ct. LEXIS 98">*108 the purchase in bulk of the blended whisky obtainable with respect thereto.
18 T.C. 1090">*1095 During January and February of 1944 the transfer agent issued and delivered to taxpayer in exchange for the certificates for the 2,000 shares, new certificates bearing the following stamp:
THIS CERTIFICATE REPRESENTS SHARES IN RESPECT OF WHICH THE PRIVILEGE TO PURCHASE A PRO RATA INTEREST IN THE MERCHANDISE AVAILABLE FOR PURCHASE DURING THE PERIOD DECEMBER 24, 1943, TO AND INCLUDING FEBRUARY 29, 1944, HAS BEEN EXERCISED IN ACCORDANCE WITH LETTERS TO STOCKHOLDERS DATED DECEMBER 17 AND DECEMBER 24, 1943.
Taxpayer sold these stamped certificates as soon as possible after they were received for a total consideration of $ 91,835.09. They were all sold by February 15, 1944.
On February 11, 1944, taxpayer acquired 500 more shares of unstamped stock of Distilling and on February 17, 1944, acquired 50 more shares at a total cost for the 550 shares of $ 60,824.60. These shares were acquired for the sole purpose of obtaining the whisky allocable thereto under the plan.
Taxpayer directed that the stock certificates for these 550 shares be sent directly from New York to the transfer agent. Taxpayer executed1952 U.S. Tax Ct. LEXIS 98">*109 and delivered purchase orders for all of the whisky, both blended and bonded, available with respect to such shares.
The transfer agent issued and delivered to taxpayer in exchange for the certificates for such shares new stamped certificates. Taxpayer sold the stamped certificates as soon as possible after it received them from the transfer agent for a total consideration of $ 16,778.17. These were all sold by March 16, 1944.
The following is a summary of the Distilling shares acquired by the taxpayer and the amounts paid and received on their disposition:
| Date first shares acquired | Nov. 18, 1943 |
| Date last shares acquired | Feb. 17, 1944 |
| Date first shares sold | Jan. 31, 1944 |
| Date last shares sold | Mar. 16, 1944 |
| Total paid | $ 262,762.10 |
| Total received | 108,613.26 |
In January and February, 1944, taxpayer exercised the whisky purchase privileges granted to stockholders of Distilling and paid under the plan $ 59,431.64 to the Trustee under the trust indenture. The fair market value and the O. P. A. ceiling price of such whisky at the date of acquisition was $ 136,045.65. Taxpayer received negotiable whisky warehouse receipts representing the whisky so acquired, which certificates1952 U.S. Tax Ct. LEXIS 98">*110 were exchanged during 1944 for various nationally advertised name brands of bottled case whisky which became part of taxpayer's regular inventory.
Taxpayer's officers made no investigation of the value of Distilling stock before purchasing it; they had no intention of having taxpayer 18 T.C. 1090">*1096 retain the stock after exercising the whisky purchase rights; the stamped stock was sold as soon as practicable after it was received from the Trustee in the ordinary course of business; the whisky received was treated as a part of taxpayer's regular inventory; taxpayer had never before, nor has it since, purchased stock or bonds of another corporation; its officers considered the whole transaction as a method of purchasing whisky; and in its computations taxpayer treated the difference between the amount paid to obtain the stock and the amount received on its disposition as part of the cost of the whisky.
OPINION.
Shall we for tax purposes split what is obviously an integrated transaction into a series of splinters; in other words, "atomize" the transaction, as put by Judge Learned Hand in Helvering v. New Haven & S. L. R. Co., 121 F.2d 985, or shall we 1952 U.S. Tax Ct. LEXIS 98">*111 look to what we consider to be the "substance" of the plan and "view it as a whole"?
Respondent's position is that the purchase and sale of the stock was one transaction and the acquisition and sale of the whisky was another and that the two are not to be treated as one; that taxpayer sustained a short term capital loss on the sale of the stock and that the basis for the whisky was the amount paid for it alone, $ 59,431.64, since the taxpayer paid that amount for the whisky and $ 262,762.10 for the stock. If taxpayer sustained a short term capital loss it would not be allowable as a deduction because of the provisions of section 117 (d) (1).
We think the taxpayer's view leads to the fair and equitable result in the present case. Furthermore, as the Court of Appeals for the Sixth Circuit said in Commissioner v. Ashland Oil & Refining Co., 99 F.2d 588, at page 591:
* * * the courts have recognized that where the essential nature of a transaction is the acquisition of property, it will be viewed as a whole, and closely related steps will not be separated either at the instance of the taxpayer or the taxing authority.
The testimony and evidence establish1952 U.S. Tax Ct. LEXIS 98">*112 that this taxpayer purchased the Distilling stock, not as an investment in stock, but only to acquire more whisky to replenish its inventories in order to sustain its business. In the words of taxpayer's president:
We found ourselves confronted with very little stocks, very low stocks on hand, and the distiller -- in fact, all the distillers had cut down their allowance to us very materially. * * * we were confronted with procuring merchandise or having to practically close up our Western Wine and Liquor division because * * * we could not keep our men on the road if we did not have supplies for them. * * * the value of the stock had nothing to do with it. 18 T.C. 1090">*1097 We were interested in procuring this whisky to keep our organization intact. * * * We simply purchased the stock to get the whisky and the minute we had received the whisky, we were going to sell and dispose of the stock. * * * That is what we did.
This testimony sums up the position. It also epitomizes the "substance" of the transaction and there is nothing in the record which would demand a contrary conclusion.
The Commissioner relies strongly on Harry Sackstein, 14 T.C. 566; Exposition Souvenir Corporation v. Commissioner, 163 F.2d 283,1952 U.S. Tax Ct. LEXIS 98">*113 (affirming a Memorandum Opinion of this Court) and Logan & Kanawha Coal Co., 5 T.C. 1298. Taxpayer has undertaken to distinguish each of these cases, and we think it has successfully done so.
In Sackstein, the taxpayer was a stockholder in United Meat Company, Inc., and had made certain payments to that company. The question was whether the payments were "contributions to capital" or payments for the purchase of meat. We said, in part:
Sackstein's testimony indicates that the payments were contributions of additional capital to make up for that lost by United in its operations. * * * Sackstein was told by Present that he could expect calls for additional capital contributions in proportion to meat purchased, but whether the actual payments were in proportion to meat purchased from United is not at all clear. * * * The record as a whole does not show how the amounts paid were determined to be due, how they were recorded on its books by United, or how they were used by United. A finding that these payments were ordinary and necessary expenses paid or incurred in carrying on the business during 1945 can not be made from the evidence.
The record1952 U.S. Tax Ct. LEXIS 98">*114 does not justify any change in the determination of the Commissioner.
The decision against the taxpayer was based largely on a lack of proof. Here, we think the proof overwhelming that the payments made for the stock less the amount realized from sale of the stock was in fact part of the cost of the whisky acquired by taxpayer.
In the Exposition case, the taxpayer, in order to qualify as a bidder for a concessions contract at the New York World's Fair, purchased sometime prior to May 1939, debentures of the New York World's Fair 1939, Inc., in the amount of $ 130,000. Taxpayer obtained the concession and operated it until the Fair closed in October 1940. In April 1941 taxpayer sold the debentures at a loss. The Court of Appeals in affirming a Memorandum Opinion of this Court said, at page 285, 163 F. 2d:
* * * the Tax Court made an express finding that the debentures were not held for sale in the ordinary course of business. That is a question of fact. * * * Upon this record we cannot upset the finding. There is no evidence of any attempt to sell the debentures, or any of them, before the sale of all after the Fair was over and when they were in default. They were 1952 U.S. Tax Ct. LEXIS 98">*115 treated as investments upon the taxpayer's books and tax returns. The reasonable inference is that when they were purchased the taxpayer intended to hold them until they matured. * * * [Emphasis added.]
18 T.C. 1090">*1098 Here, we find nothing in the record to justify an inference that the taxpayer intended to hold the stock as an investment. It was sold as soon as practicable after the whisky rights were obtained and realized on and we have found as a fact that the disposition of the shares was made in the ordinary course of taxpayer's business.
In the Logan & Kanawha case the company bought stocks of various coal companies for which it was a sales agent, in order to maintain favorable relations. The stocks were true investments even though sometimes resulting in losses. The facts required a holding that the shares of stock purchased by the taxpayer constituted a capital investment and that a capital loss was sustained on sale of the shares. We can not so find here.
At the same time, while we recognize that the cases relied on by the taxpayer can be distinguished on the facts or because of the different sections of the Code involved, we nevertheless think the principles of1952 U.S. Tax Ct. LEXIS 98">*116 those cases may properly be applied here in favor of taxpayer.
The case of Tube Bar, Inc., 15 T.C. 922, is one of those. There a corporation operating a bar had its liquor license revoked. The public officials involved indicated that if a new corporation were formed they would approve a transfer to it of a license from an existing licensee Such a licensee was found. A new corporation was formed which acquired the premises, fixtures, and license for a lump sum of $ 4,950, had the license reissued to it, and then sold the premises and fixtures for $ 3,000. The question was whether the loss was deductible. This Court held, however, that the purchase and sale of the property were incident to and but a step in acquiring a liquor license and the loss was, in substance, a part of the cost of acquiring the license. The taxpayer here persuasively paraphrases the language of this Court in the Tube Bar case as follows:
Respondent seeks to have us treat the purchase and sale as transactions having no relation to the acquisition of the whiskey; whereas, Petitioner's view is that the acquisition of The American Distilling Company stock was merely incidental1952 U.S. Tax Ct. LEXIS 98">*117 to the purchase of the whiskey, and accordingly, the amount should be regarded as part of the cost of the whiskey. The question should not be considered without the surrounding facts. So considered, more appears than an isolated sale of The American Distilling Company stock.
Petitioner's intention at all times was to acquire whiskey with which to conduct its wholesale liquor business. A supply of whiskey being essential, Petitioner was willing to purchase The American Distilling Company stock not required in its business in order to have a supply of merchandise for sale. The whiskey was its ultimate objective, and the acquisition of the stock was merely incidential thereto. Under the evidence, a supply of whiskey could be secured only by purchasing The American Distilling Company stock. Obviously, here the stock was obtained only in order to secure the whiskey, and was a mere incident. The unimportance of the stock is shown also by the sale thereof as soon as the whiskey was obtained. It is evident that the purchase and sale of the stock were mere steps of a single transaction to obtain a supply of whiskey to operate a wholesale liquor business.
18 T.C. 1090">*1099 Here, instead of1952 U.S. Tax Ct. LEXIS 98">*118 a purchase of stock in connection with which whiskey was received, there was, in substance, a purchase of the whiskey, with the stock incidental thereto.
See also Commissioner v. Ashland Oil & Refining Co., supra, and Prairie Oil & Gas Co. v. Motter, 66 F.2d 309.
We think this taxpayer acquired the Distilling stock incident to the conduct of its business and not for investment and that it held the stock only long enough to acquire the whisky and then sold it to reduce the cost of the whisky as much as possible. In the circumstances, and as contended by taxpayer, the sale of the securities became an incident of the business. The loss was not a capital loss of taxpayer. Cf. Hercules Motor Corporation, 40 B. T. A. 999. Also see Lawyers Title Co. of Missouri, 14 T.C. 1221, which involved a title insurance company which had insured titles on a housing development and was also acting as escrowee of the borrowed funds and had guaranteed completion of the project. Taxpayer was forced to take over the work, finished it, and sold all the properties the same1952 U.S. Tax Ct. LEXIS 98">*119 year. It suffered a loss. We said:
* * * we are convinced that the properties came into petitioner's possession as a necessary incident to the conduct of its business and that they were held and completed primarily for sale to customers in the ordinary course of its business. Joe B. Fortson, 47 B. T. A. 158. The fact that petitioner had not had occasion to follow this course of action before (so far as our record shows) does not prevent its being in the ordinary course of petitioner's business in the light of the surrounding circumstances. [Emphasis added.]
Accordingly, we hold that the loss on the sale of the Distilling stock in this case was properly treated by the taxpayer as a part of the cost of the whisky acquired.
Since the stock was not acquired as an investment or for any purpose other than as a means of acquiring the whisky, and it was sold as promptly as possible in the ordinary course of business after this purpose was accomplished, it was property held primarily for sale to customers in the ordinary course of business and was not a capital asset. Hence, the shares were not "inadmissible assets" as defined in section 7201952 U.S. Tax Ct. LEXIS 98">*120 of the Internal Revenue Code.
Decision will be entered under Rule 50.
Van Fossan, J., dissenting: I am unable to follow the reasoning of the prevailing opinion which leads to the conclusion that the sale of the stock here involved did not result in capital loss but was a part of the cost of goods sold. Albeit the expectation of getting a supply of whiskey may have motivated the purchase of the stock, I nonetheless believe it was an investment and was a capital asset in petitioner's 18 T.C. 1090">*1100 hands. The query arises, where would the same reasoning lead us if circumstances were such that the stock was sold at a profit. Or, again, assume the stock was held for more than a year during which time the whiskey was all disposed of by petitioner and the tax returns had been filed accounting for the same, to what item of petitioner's accounting for such later year would the gain or loss be attached as part of the cost of goods sold.
Yet, further, how can the author of the prevailing opinion either directly or by necessary inference hold that the stock was sold to customers in the ordinary course of his business? Petitioner was in the whiskey business, not in the business1952 U.S. Tax Ct. LEXIS 98">*121 of buying and selling securities. Its customers were customers for whiskey, not customers for securities.
Believing, as I do, that the reasoning employed in the prevailing opinion results in confused accounting and that such results will rise to plague the Court in future cases, I respectfully dissent.