*1457 A purported transaction in corporate shares between parents and child, held, under all the circumstances, lacking in intent to transfer ownership and therefore not a sale giving rise to a deduction for loss.
*931 Respondent determined deficiencies of $13,996.21 and $5,699.77 in petitioners' income taxes for 1928 in Docket Nos. 57267 and 57268, respectively. In making these determinations he disallowed the deduction of losses claimed on alleged sales of stock made to a son.
FINDINGS OF FACT.
Petitioner in Docket No. 57267 is a resident of Manchester, New Hampshire, and is the widow of Hovey E. Slayton, Deceased, who died January 18, 1933. Petitioners in Docket No. 57268 are the executors of said decedent's estate. Prior to 1928 decedent and his wife were the largest shareholders of the F. M. Hoyt Shoe Co., a shoe-manufacturing business founded by Mrs. Slayton's father. In 1903 decedent became connected with the company, and remained with it for 25 years as president, treasurer and manager. In 1927 the company*1458 was a financial difficulty. Kidder, Peabody & Co., a financing house, put its representative in charge of the business, *932 and decedent then became connected with the Massachusetts Investors, Trust, thereafter called Slayton, Learoyd Co., with which he remained until his death.
In 1928 the condition of the Hoyt Co. continued to grow worse, and Kidder, Peabody & Co. advanced $800,000 in exchange for voting trust certificates representing three sevenths of the common stock; the common shareholders surrendered their shares and received similar certificates representing four sevenths of the common stock.
In order to establish a loss for tax purposes, decedent and his wife each delivered to a broker voting trust certificates representing 1,500 shares of Hoyt common, which had cost them $145,980 and $147,120, respectively. On December 15, 1928, these certificates were delivered at $5 a share to the brokerage firm of E. M. Hamlin & Co., acting on behalf of Hovey E. Slayton, Jr., decedent's son. The son received the certificates and paid the broker $15,187.50, the amount of the bid, tax, and commission, with funds borrowed from Learoyd, Foster & Co., where he kept a current*1459 account. Decedent and his wife each received $7,425 from Hamlin & Co.
The son was thereafter asked by his broker, as usual, to liquidate his account at the end of the year. After discussing with his father whether he should borrow money on his own securities for this purpose, he was given by his parents $15,187.50 in two checks of equal amount, which he endorsed to the broker in settlement of his indebtedness. Mrs. Slayton first knew that the certificates had been acquired by her son when decedent suggested to her that they should provide the money to settle the account. He had previously mentioned to her that he was selling the stock to establish a loss for tax deduction. She did not keep in close touch with business matters.
In December 1928 the son was worth about $100,000; he was married and maintained a home separate from his parents. He is now 30 years of age. Since his twenty-first birthday he has repeatedly received gifts of substantial value in money and stocks from both parents, but prior to 1928 he had never purchased stocks from them, nor had he ever purchased any Hoyt stock; some shares, however, had been given him. Since 1926 he has been employed by the*1460 brokerage firms of Learoyd, Foster & Co. and Slayton, Learoyd Co., and has dealt in securities on his own account.
On December 17, 1929, the son acquired 300 shares of Hoyt common from his mother and 1,934 shares from his father, through the brokerage firm of L. Sherman Adams, at 10 cents a share. This price and the $5 paid in 1928 were determined as the market value of the stock by decedent after an examination of the company's books and consultation with an employee of Slayton, Learoyd Co. The stock was closely held, and there was no demand for it.
*933 On December 18, 1929, the son transferred to each of his parents two certificates each representing 1,500 shares of Hoyt common. He made these transfers at the request of decedent, who stated that he anticipated a reorganization of the company and wished to secure for himself a greater voting strength. Decedent was the owner of preferred shares and had guaranteed company loans.
In their tax returns for 1928 decedent and his wife reported respective losses of $138,555 and $139,695 as sustained on the sale of certificates of Hoyt common shares. The losses reported were measured by the difference between the cost*1461 of the shares and the amounts received from the broker. Respondent disallowed these deductions.
OPINION.
STERNHAGEN: Considering, as we have, all the evidence, it is our opinion that despite the appearance of sale, there was lacking the intent of the decedent and his wife to make a sale of these shares. First, we think the evidence, and more particularly the subsequent retransfer by the son, upon the first occasion when ownership became important, to the father solely for the purposes of the father, falls short of establishing a real transfer of ownership by petitioners for any purpose. While a sale for tax purposes is not to be disregarded because of its motive, on the other hand, a mere gesture without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one. Second, we think the evidence indicates a lack of intent to receive the consideration for a sale and hence that any transfer that might have occurred was a nondeductible gift. This we gather from the entire series of events and all the circumstances.
Having been unable from all the evidence to find that a sale occurred, the basis for a deductible loss*1462 is lacking, and the respondent's disallowance is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.
SMITH, dissenting: The evidence in these proceedings indicates that there was no market in 1928 for the voting trust certificates owned by the petitioners. They were practically worthless. The respondent does not question that the price paid for them by the son, namely, $5 per share, was the fair market price for them. I can not agree that the transaction by which the petitioners sold the certificates to their son was "a mere gesture without the vital intent to change ownership." Out of an abundance of caution the father sold the certificates through brokers rather than sell them directly *934 to his son. In my opinion the sale was a bona fide sale of the certificates at a fair market price. Cf. Commissioner v. Hale, 67 Fed.(2d) 561.
Luella Hoyt Slayton testified that she had no knowledge at the time she sold her certificates as $5 per share through the broker that her son was the purchaser. I can not see how it can be validly held that she did not make a valid sale of her certificates from*1463 which she sustained a deductible loss. So far as the mother was concerned the gift of a check to her son on or about December 31, 1928, was an entirely separate and unrelated transaction. In any event I think that the ruling that the sale by the mother was not bona fide is unwarranted.
TRAMMELL agrees with this dissent.