*2298 The liquidation of liability under the guaranty by stockholding corporations of the bonds of a corporation created at their instance for the sole purpose of acquiring and eliminating competing properties, is a capital expenditure and may not be deducted by the principals as a loss.
*453 These proceedings are for a redetermination of deficiencies asserted by the Commissioner as follows:
| Petitioner | Year | Deficiency |
| Press Publishing Co | 1923 | $60,990.42 |
| Newspaper Printing Co | 1923 | 43,344.80 |
| Do | 1924 | 13,835.43 |
The assigned errors are:
1. The failure and refusal of the Commissioner to allow to each petitioner a deduction of $438,460.14 as a loss incurred in 1923 as guarantor of bonds of the Union Publishing Co.
2. The decision of the Commissioner that said sum of $438,460.14 was expended by petitioners for the purchase of good will and was, in consequence, not deductible under the provisions of the Revenue Act of 1921.
3. In the case of the Newspaper Printing Co., a third question*2299 arises, namely, whether in computing net taxable income for 1924, that petitioner is entitled to deduct as a net loss a part of the loss alleged in the issue first above stated.
The issues (except the third) and the amounts involved being identical, these cases were consolidated for hearing and determination.
FINDINGS OF FACT.
Most of the material facts have been stipulated and we adopt that stipulation, so far as it goes, as our findings.
1. Prior to the discontinuance of The Leader and The Dispatch, as hereinafter set forth, there were five newspaper companies publishing daily and Sunday newspapers in the City of Pittsburgh, Pennsylvania, as follows: Newspaper Printing Company, which published a morning and Sunday paper known as The Gazette-Times and an evening paper known as the Telegraph; The Press Publishing Company, which published a daily evening and Sunday paper known as The Press; the Post Publishing Company, which published a daily morning and Sunday paper, known as The Post, and an evening paper known as The Sun; the Dispatch Publishing Company, which published a daily morning and Sunday paper, known as The Dispatch; and the Leader Publishing Company, which*2300 published a daily evening and a Sunday paper, known as The Leader. This made three daily morning papers, four daily evening papers, and five Sunday papers.
2. In February, 1923, three of the above-named companies, to-wit, the Newspaper Printing Company, the Press Publishing Company, and the Post Publishing Company, caused the Union Publishing Company to be organized and incorporated under the laws of Delaware, with an authorized capital of $30,000, two-thirds of which, namely, $20,000, was subscribed and paid for by the said Newspaper Printing Company, Press Publishing Company, and Post Publishing Company in equal shares.
3. The purpose of said Newspaper Printing Company, Press Publishing Company, and Post Publishing Company in causing said Union Publishing Company *454 to be created was to provide an agency by means of which the papers known as The Leader and the Dispatch could be purchased and the Publication of those papers discontinued.
4. The Union Publishing Company had no credit or capital of its own and did not publish any newspapers so that to provide the necessary purchase money, the Union Publishing Company borrowed $1,590,000 from the Union Trust Company*2301 of Pittsburgh, issuing its bonds to secure payment of the same, payable at the rate of $318,000 a year over a period of five years. The Newspaper Printing Company, Press Publishing Company, and Post Publishing Company, and the responsible officers of these companies, as individuals, each guaranteed payment of one-third of the Union Publishing Company's bonds as they became due, that is to say, each guaranteed payment of $530,000 of the bonds, payable $106,000 a year for five years from February 1, 1923, the first payment becoming due on February 1, 1924, after the close of the year under consideration.
5. With the money so obtained the Union Publishing Company on February 13, 1923, purchased all of the Leader Publishing Company and of the Dispatch Publishing Company, except cash and accounts receivable. The publication of The Leader (daily, evening and Sunday) and of the Dispatch (daily, morning and Sunday) was immediately discontinued.
6. Thereafter, the Union Publishing Company proceeded to liquidate the tangible assets it had acquired from the Leader and the Dispatch Publishing Companies, and by the end of December, 1923, had disposed of all of the tangible assets except*2302 one parcel of real estate and some machinery. At a meeting held on December 19, 1923, the Union Publishing Company authorized the transfer of all of its remaining tangible assets to the Union Trust Company of Pittsburgh, Pennsylvania, for the benefit of the guarantors of its bonds, and on December 31, 1923, the land was conveyed by deed dated and recorded that day and bill of sale was executed and delivered for the machinery. This left the Union Publishing Company without any tangible assets of realizable value, and after deducting the value of the real estate and machinery conveyed and transferred to the Union Trust Company for the benefit of the guarantors as aforesaid, there was left an unpaid amount on the bonds of Union Publishing Company of $1,315,390.48, or an unpaid amount upon each of the guarantors of $438,460.14 payable as above set forth. Each of the petitioners deducted this sum from gross income in its tax return for the year 1923 as a fixed accrued liability as of December 31, 1923.
7. Both Newspaper Printing Company and Press Publishing Company kept their accounts and filed their returns for the calendar year 1923 on the accrual basis, and the Newspaper Printing*2303 Company kept its accounts and filed its returns for the calendar year 1924 on an accrual basis.
From the foregoing facts it appears that the sole purpose and the effect of this transaction was the elimination of one morning, one evening, and one Sunday newspaper which had theretofore been published in Pittsburgh, and that there remained two morning, three evening, and three Sunday newspapers, all of which were owned and published by these petitioners and the Post Publishing Co., which is not a party herein, but which was one of the three equal stockholders in the Union Publishing Co., and of the guarantors of its bonds.
*455 A special meeting of the directors of the Press Publishing Co. was held at Pittsburgh on February 13, 1923, at which the following occurred, as shown by the minutes of said meeting:
Special meeting called this date of Directors of the Press Publishing Company. All members present.
* * *
In relation to the purchase of the Dispatch and Leader by the Union Publishing Company, the following resolutions were, on motion duly made, seconded, and carried, unanimously adopted:
WHEREAS, The Union Publishing Company, a corporation of the State of Delaware, *2304 is about to purchase the property and assets of the Dispatch Publishing Company and the Leader Publishing Company, both corporations of Pennsylvania, each of which is engaged in the publication of a newspaper in the city of Pittsburgh, and in order to obtain the funds necessary for this purpose the Union Publishing Company proposes to issue $1,590,000 par value of six per cent. Debenture Gold Bonds; and
WHEREAS, In order to sell these bonds it is necessary that they shall be guaranteed by the stockholders of the Union Publishing Company and this Company is a stockholder of the Union Publishing Company, owning one-third of the outstanding stock of that Company; and
WHEREAS, The purchase of the property and assets of the Dispatch Publishing Company and the Leader Publishing Company by the Union Publishing Company will enure greatly to the benefit of the business of this Company and also will benefit it as a stockholder of the Union Publishing Company.
RESOLVED, That this Company either alone or jointly with others, guarantee the payment of the principal and interest of one-third of the six per cent. Debenture Gold Bonds to be issued by the Union Publishing Company, dated February 1, 1923, the*2305 bonds so guaranteed by this Company to have an aggregate par value of $540,000, and the officers of the Company are hereby authorized and directed to execute on that amount of such bonds, in the name of this Company and under its corporate seal, a guaranty in the following form:
"For value received, the undersigned, for themselves, their heirs, executors, administrators, successors and assigns, do hereby jointly and severally guarantee to the holders of these bonds the prompt and punctual payment by the Union Publishing Company of the principal and interest on said bonds as the same shall respectively become or be made due and payable according to the terms of said bond and of the Trust Indenture therein mentioned under which it is issued, dated February 1, 1923, made by the Union Publishing Company to The Union Turst Company of Pittsburgh as Turstee."
RESOLVED, That the officers of the Company are hereby authorized and directed to do such other acts and things and execute such other bonds, guarantees or other instuments as may be necessary and proper in order that the property to be purchased by the Union Publishing Company shall be sold by it.
There being no further business, *2306 the meeting adjourned.
O. A. WILLIAMS, Secretary.
At the regular monthly meeting of the directors, held March 6, 1923, these minutes were read and approved, and the president of the Press Publishing Co. reported that in accordance with the authority *456 therein conferred, he had signed a guarantee of one-third of a total issue of $1,590,000 of the bonds of the Union Publishing Co., such one-third amounting to $530,000, and that the guarantee had been properly attested.
On December 31, 1923, all the outstanding stock of the Union Publishing Co. (150 shares) owned by the Press Publishing Co. was sold by these owners to J. G. Hamilton, an accountant, for $3.
OPINION.
LOVE: On the very face of the admissions of these petitioners contained in the record, we have no alternative but to hold for the respondent, and we so do.
We quote again, for the purpose of emphasis, paragraph 3 of the stipulation:
The purpose of said Newspaper Printing Company, Press Publishing Company, and Post Publishing Company in causing said Union Publishing Company to be created was to provide an agency by means of which the papers known as The Leader and the Dispatch could be purchased*2307 and the publication of those papers discontinued.
Here is a declaration by the petitioners that the Union Publishing Co. was nothing more nor less than the "agency" or instrumentality of those who caused it to be created (and who with the Post Publishing Co. became its sole stockholders and the guarantors of its otherwise worthless bonds) for the sole purpose of purchasing the newspapers known as "The Leader" and "The Dispatch," and immediately thereafter discontinuing their publication. Such was the purpose and such, in fact, was the result accomplished.
Counsel for the respondent asks us to ignore the separate existence of a corporation which was used as the mere agent or instrumentality of another corporation. Counsel cites us to a number of cases and quotes from some of them. See ; ; ; ; ; *2308 ; ; .
On the other hand, counsel for the petitioners strongly urge that we are bound by precedent to respect the corporate entity (citing ) except only "in extreme cases where it was necessary to prevent fraud or avoid an inequitable result." Counsel is quick to assert that here is "no question of fraud," which is not charged, and adds "nor is there any inequitable result," with which we do not agree.
Nevertheless, we concede the separate corporate entity of the Union Publishing Co. and that the subsequent transactions were carried *457 out as if by it; but we hold that it acted not on its own behalf nor as a free agent, but as the "agency" or instrumentality of those who brought it into existence for this very purpose and no other.
The Union Publishing Co., so called, was never a publishing company in fact; its stockholders never subscribed to its stock nor guaranteed its bonds with any expectation of commercial gain, or that they would ever get a return of capital in the form*2309 in which it was turned over to the Union Publishing Co. or placed at its disposal as an available credit with the Union Trust Co. It was created as an agency through which the three newspaper corporations who formed its sole stockholders might purchase and destroy, as they did purchase and destroy "The Leader" and "The Dispatch."
E. R. Stowl testified that in 1923 he was secretary of the Pittsburgh Newspaper Publishers Association and that in that year he was made also manager of the Union Publishing Co. In that capacity he took charge of the property of the Leader and Dispatch, and on the day of their purchase he discontinued their publication and closed their plants. He disposed of some of their properties and the remainder, "machinery and stuff like that," to the value of $91,550, according to Charles B. Davis, trust officer of the Union Trust Co., was turned over to the Union Trust Co., according to the testimony of both Stowl and Davis, by assignment from the Union Publishing Co. to the Union Trust Co. as liquidating trustee. The total amount of such credits to the guarantors does not appear in the record, but it may be approximated as the difference between the total amount*2310 of the bonds, $1,590,000 and the amount of $1,315,390.48 which the guarantors were called upon to pay between February 1, 1924, and February 1, 1928; that is to say, about $275,000 so that it is evident that some tangible assets of substantial value were involved in the transaction.
But it is not important to inventory the benefits received by these petitioners in exchange for their admitted outlay of $438,416.14 each. The inescapable fact is that the actual value of the assets, either tangible or intangible, of both the Leader and the Dispatch was no more, at the most, than a secondary consideration in the price demanded by their owners for their extinction, which was the desideratum sought and for which the purchasers were willing to pay.
The witness, Stowl, testified on cross-examination that:
The object was simply to dispense with these newspapers on the theory there were more newspapers in the town than could live from the income which was derived from whatever revenues are possible for a newspaper to earn. (Italics ours.)
Counsel offers an ingenious, rather than an ingenuous, argument against the presumption that these petitioners "must have received *2311 some benefit," which thought is characterized as being "obviously *458 highly speculative." In our judgment the speculation is rather a safe one, nor can we readily believe that the astute business men of Pittsburgh who are his clients here were in a "highly speculative" frame of mind when at their special directors' meeting of February 13, 1923, they recorded their deliberate opinion that the purchase by the Union Publishing Co. of "the property and assets" of the Dispatch Publishing Co. and the Leader Publishing Co. "will enure greatly to the benefit of the business of this Company," and "for value received" authorized and directed the guaranty by their company of bonds of the Union Publishing Co. to the "aggregate par value of $540,000" and "authorized and directed" the officers of the company to execute the guaranty "on that amount of such bonds in the name of this company and under its corporate seal."
So that whether the purchase price paid was too great or too little, is immaterial; it was the fair market value as between these purchasers and sellers, of what these petitioners expected to acquire; it was the price that they themselves had established and agreed to; *2312 and whether the purchase price was paid for "good will" or for "nuisance value," or whatever else, is a matter of equal unimportance. They got just what they wanted to buy and did buy, and there is no evidence that it proved to be of less value than they appraised it at the time of purchase. In our opinion it was paid for an undepreciable asset and it is therefore a capital expenditure not deductible as a loss in any year.
It is our opinion, too, that the transaction is that of these petitioners and their associate, the Post Publishing Co., through their agency, the Union Publishing Co., as clearly and undeniably as it would be in the case of an individual who deputized another to purchase a property for him, saying: "Raise the money required on your own note to which I will give my endorsement. When the transaction is completed and the property or its equivalent turned over to me or applied on the note, I will pay the remainder of your note and hold you harmless." Certainly such a transaction could not give rise to a deductible loss in the tax return of the principal any more than if he had himself completed the purchase without the intervention of the second party; and in this*2313 case we can not distinguish between such a transaction of real persons and the similar case here between artificial persons created by law, where every cent of the cash required for the purpose for which the Union Publishing Co. was brought into existence was furnished by these petitioners and their associate either directly or upon their credit. We do not believe that, under the circumstances here existing, the Union Publishing Co. ever came into the unrestricted title to these funds so raised, but rather as the trustee or agency through which the purposes of its stockholders and guarantors of its bonds were to be *459 carried out; we believe that such trusteeship was so impressed upon these funds that if, as is conceivable, its directors representing two-thirds of its stock had voted to apply these funds to another purpose altogether, an action for conversion would lie in favor of the other one-third party in interest. Among other decisions and rulings, counsel for the petitioners cites . We have examined that decision carefully but find nothing in it that we think is in point here. We do find, however, a decision*2314 of the Supreme Court of Pennsylvania which seems to us to anticipate our reasoning in this case by about thirty-six years, and as all the corporations here involved are creations of that Commonwealth, we quote from it as being of interest. The case is Commonwealth v. Fall Brook Coal Co., decided July 19, 1893, on appeal from the Court of Common Pleas of Dauphin County, and reported in ; At. Rep., vol. 26, p. 1071.
The question therein considered was a double assessment of a capital stock tax, which had been sustained by the court below and which was reversed by the Supreme Court. In the course of its opinion the court found it necessary to consider the relationship that existed between the Fall Brook Coal Co. and the Fall Brook Railway Co. built to convey the products of the mines to market, all the stock of the railway company being owned by the coal company. The part of the court's opinion which we regard as relevant follows:
There is a very plain distinction between the title and the position of a trustee and the title of the cestui que trust, but the trust estate is one and the same. The legal title to the estate is in the trustee. An*2315 equitable title to the same estate is in the cestui que trust. When the trust ends, the titles coalesce. The holder of the equitable title then becomes the absolute owner of the estate. It is his title that has been increased by the merger, and not his property. He is worth no more money than before, but he has become the absolute owner of that in which he before had only the beneficial interest. A corporation is an artificial person created by law for the purpose of becoming the business representative, agent, or trustee of so many persons as may join to furnish the money with which the business to be done by the corporation may be carried on. The corporation comes into existence like a natural person - naked. The money furnished by those whose representative it is to be is its capital stock. The amount that each person contributes to this fund is his share in the venture, and is called his share or shares in the stock. The legal title to the whole sum so contributed is in the corporation, and so is the legal title to all the property, real or personal, in which it may be invested. The equitable title - that is, the rights to the profits from the business done, as to a return*2316 of the capital when the corporation is dissolved - is in the stockholders. There is one estate, one business, but the title has been divided by the separation of the power of control from the right to receive the profits. The nature of the undertaking, or the number of the persons uniting in it, makes this division desirable for convenience in the transaction of the business, and for the unity and efficiency of its management. Nevertheless, as in the ordinary case of trustee and cestui que trust, the real owners are the beneficiaries.
*460 Counsel contends, also, that "the sequence in priorities of the creditor, whether by direct or contingent liability, as distinguished from that of the stockholder in a given company is so well settled that it would be superfluous to cite authorities on that point." He does, however, cite , and argues therefrom that, inasmuch as the Commissioner recognized and allowed the loss incurred in the sale of the stock of the Union Publishing Co., he can not "disallow a loss as creditor of the same company resulting from payment of liability, originally contingent but which became*2317 fixed on or before December 31, 1923." The question of the "sale" of stock is not before us in the issues raised. Under the circumstances as disclosed by the record before us, we believe that the Commissioner was very generous in allowing as deductible the loss on the sale of stock.
Counsel for these two petitioners do not appear to be altogether in harmony regarding the purpose for which the Union Publishing Co. was created. The attorneys for the Press Publishing Co. assert that in their case there is no suggestion of an attempt to evade taxation, and that there is no indication that the subject was in the minds of the parties when the transaction occurred; while the contention of the representative of the Newspaper Printing Co. seems to contain a tacit admission of such a purpose in his statement that his client followed each and every step of the strict letter of the law giving a right to deduct a fixed, known, ascertained loss in the year 1923. But that is not important. Both the courts and this Board will sustain all legal acts that result in an avoidance of taxation; but we have repeatedly declared our duty to look to the substance of every transaction; and so, looking*2318 here through the diaphanous veil held before the facts, we sustain the Commissioner in every respect.
Reviewed by the Board.
Judgment will be entered for the respondent.