1936 BTA LEXIS 669">*669 1. The taxpayer's exercise of an unqualified right to surrender shares in a security-holding organization and receive an aliquot portion of its assets, a composite fund, resulted in a deductible loss, it appearing that the taxpayer's ownership of an interest in the fund was different from the ownership by the organization in the fund itself.
2. A loss on the sale of shares through a broker, held, deductible although an equal number of the same shares was simultaneously purchased by a business associate of the taxpayer and by him transferred to the taxpayer's wife, who paid for them with her own funds and exercised control over them thereafter.
34 B.T.A. 648">*649 Respondent determined a deficiency of $27,371.88 in petitioner's income tax for 1932 and a fraud penalty of $13,685.94. Petitioner assails the disallowance of loss deductions arising (1) from a surrender of shares in a trust for securities of the trust, and (2) from a sale of shares through a broker, it appearing that a friend simultaneously purchased shares of1936 BTA LEXIS 669">*670 the same kind and number through the same broker and then sold them to petitioner's wife.
FINDINGS OF FACT.
1. On December 1, 1932, petitioner owned 10,000 shares of Trust Shares of America, of which he had held 9,000 over two years. The cost of the 9,000 was $62,988.04. These shares were acquired under the terms of a trust agreement entered into between Distributors Guild, Inc., called the depositor, the Central Hanover Bank & Trust Co., called the trustee, and holders of the trust shares.
The agreement provided that certificates for 1,000 shares each be issued upon the depositor's delivery to the trustee of common stock in 19 named corporations; the trustee was authorized to hold these corporate shares in one commingled trust fund, in which each trust certificate represented an undivided interest, and to place all income and profits therefrom in a currently distributable fund, to be distributed semiannually to trust shareholders. The trustee had the power to determine the time, place, and manner in which sales of the stock, warrants, and subscription and other rights should be sold. and the depositor was authorized to vote the corporate shares. In case of a fall in1936 BTA LEXIS 669">*671 the commercial rating of a corporation in which the trust held shares or of the failure of dividends for a year, the trustee was directed to sell such corporate shares and credit the proceeds to a capital distribution account of the currently distributable fund for distribution to trust shareholders. The owner of each 1,000 trust certificate had an option at any time to surrender it and receive in exchange either all of the shares of corporate stock, cash and other property on deposit with the trustee then constituting his "Trust Unit" or the cash proceeds of the trustee's sale of such property.
On December 1, 1932, petitioner surrendered his 10,000 trust shares, and received in exchange shares of 16 corporations which then had 34 B.T.A. 648">*650 an aggregate value of $24,425.63, of which he allocated $21,165.75 to the 9,000 trust shares held over two years, and used that figure as the proceeds of his disposition of them. Nine-tenths of $24,425.63 is $21,983.07, and the difference between this amount and the aforesaid cost of $62,988.04 petitioner sustained as a capital loss in 1932.
2. In December 1932 petitioner had owned for over two years corporate shares which had cost him $178,008. 1936 BTA LEXIS 669">*672 He sold them in December 1932 for $6,065.87, and sustained a loss of $171,942.13.
These stocks had declined in value, and for income tax reduction purposes petitioner wished to sell them. He suggested to his wife that she buy them. Being under the impression that a loss on a direct sale from husband to wife was not deductible, petitioner, who was then president of the Hupp Motor Car Co., arranged with Lyons, an old acquaintance, and treasurer of the Hupp Co., that Lyons should purchase an equal number of the same shares, and that petitioner's wife should buy them from Lyons. There was no understanding or agreement between petitioner and his wife or Lyons that petitioner would repurchase or reacquire any of the shares. Petitioner delivered the certificates to a broker with instructions to sell, and they were sold between December 20 and 27, 1932, for $6,065.87, which was credited to petitioner's account. Lyons ordered the same broker to buy the same number of shares at market price. This order was executed between December 21 and 30, at a cost of $6,928.63. Petitioner's son, an employee of the broker, handled both transactions.
Lyons had ample securities which he could1936 BTA LEXIS 669">*673 have used as collateral for the purchase price, but did not have sufficient money in his bank account to cover it. It was customary for the Hupp Co. to lend to its officers, and Lyons borrowed, as he had done before, receiving its three checks for $5,000, $600, and $1,460, dated December 21, 22, and 28, 1932, respectively, which were charged against his account on the corporate books. The checks, endorsed "For deposit only", were deposited in a joint bank account of Lyons and his wife, in which there was, on December 21, a credit balance of $1,254.48.
On December 21, 22, and 28 Lyons gave to the broker his checks for $4,169.63, $1,300, and $1,459, which were credited to his account, and on January 6, 1933, he received certificates for the shares. When Lyons advised petitioner that he wanted to clear up his account with the Hupp Co., petitioner replied that he would get a check from Mrs. Young and that she would take the securities. Mrs. Young's bank account at that time had a balance of $4,337.81. Petitioner gave her his check for $5,000, which she deposited, and on December 28, 1932, she paid for the shares by her check for $6,928.63 34 B.T.A. 648">*651 drawn in favor of the Hupp1936 BTA LEXIS 669">*674 Co. and credited on its books to Lyons' account. On December 30 Lyons settled the remainder of his indebtedness to the corporation by a payment of $131.37. Prior loans of the corporation to petitioner were sometimes paid by such checks of his wife, which were then accounted for as loans by her to him.
In 1933 Lyons turned over the share certificates to petitioner's secretary, who placed them in a bundle containing other securities of Mrs. Young, which was lodged in a vault at the Hupp Co.'s offices. Petitioner had securities in the same vault in a separate bundle, and other officers similarly stored personal property there. Some of the certificates were transferred to Mrs. Young's name; others, paying no dividends, were held with Lyons' endorsement in blank.
In December 1932 Mrs. Young owned stocks which had cost her about $400,000 and were then worth between $125,000 and $150,000. Petitioner has frequently borrowed money from her since 1929, and at the end of 1932 owed her about $200,000. Careful records of their separate properties and transactions with each other were systematically kept, and petitioner directed that the $5,000, represented by petitioner's above mentioned1936 BTA LEXIS 669">*675 check to his wife, be applied on his indebtedness to her.
Some of the shares received from Lyons have been sold by Mrs. Young, but most of them are still held by her and are now kept in her safety deposit vault. In some instances new shares have been issued in her name for the original ones surrendered upon changes in capital structure. Since his sale, petitioner has not reacquired such shares.
3. If there is any deficiency disclosed by a recomputation under Rule 50, pursuant to this report, no part thereof is due to fraud with intent to evade tax.
OPINION.
STERNHAGEN: 1. The respondent held that when the petitioner turned in the 9,000 Trust Shares of America, which he had held more than two years, and received the aliquot portion of the assets consisting of various corporate shares which had been part of the composite fund of the trust, he did not sustain a loss, but only reduced his existing right to such shares to possession. The defense of this determination relies largely upon the fact that among the incidents of ownership of the trust shares was the unqualified right to exchange them for the proportionate trust assets. 1936 BTA LEXIS 669">*676 The petitioner contends that the trust shares were essentially different property from the corporate assets which gave them value, and that by turning them in for assets in the fund he exchanged property at a loss which must be recognized as deductible under the Revenue Act of 34 B.T.A. 648">*652 1932, section 112(a). 1 This seems to us to be inescapable, Allen v. Commissioner, 49 Fed.(2d) 716; certiorari denied, 284 U.S. 655">284 U.S. 655; Bancker v. Commissioner, 76 Fed.(2d) 1; certiorari denied, 296 U.S. 603">296 U.S. 603; Prescott v. Commissioner, 76 Fed.(2d) 3. We are not persuaded by G. C. M. 10235, XI-1 C.B. 68 (1932). Although the organization called Trust Shares of America appears to be a trust, it is in our opinion not essential to the present decision to call it by a definitive name. It is sufficient if it be separate from the petitioner so that his ownership of an interest in the fund is different from the ownership by the organization of the fund itself. The evidence, as shown by the findings, clearly indicates such a difference in ownership as would insulate the petitioner from direct taxation upon1936 BTA LEXIS 669">*677 the gains and income of the organization, cf. Wild v. Commissioner, 62 Fed.(2d) 777, and would require that he be taxed if the value of the assets received from the organization had exceeded the cost of his shares, Allen v. Commissioner, supra.He can not, therefore, be denied the deduction when by the same reasoning the exchange results in a loss.
* * *
2. The respondent has disallowed any deduction in respect of the sale by petitioner through his broker of shares subsequently acquired by his wife under the circumstances set forth in the findings. The respondent argues that the sale was a sham which left the petitioner as much the owner of the shares as he had been before it was attempted. In our opinion, however, the evidence establishes a sale, with the resulting loss. While it has frequently been said that transactions between a husband and wife are subject to more careful scrutiny, 1936 BTA LEXIS 669">*678 P. B. Fouke,2 B.T.A. 219">2 B.T.A. 219; James L. Robertson,20 B.T.A. 112">20 B.T.A. 112; Joseph E. Uihlein,30 B.T.A. 399">30 B.T.A. 399 (on review C.C.A., 7th Cir.); than transactions in the ordinary course of business, and in some instances alleged sales were refused recognition because in all the circumstances it could not be found that title had passed or the alleged loss had been sustained, Shoenberg v. Commissioner, 77 Fed.(2d) 446; certiorari denied, 296 U.S. 586">296 U.S. 586; Lulu Tirrill Coombs,30 B.T.A. 35">30 B.T.A. 35; Joseph Blumenthal,30 B.T.A. 125">30 B.T.A. 125; W. E. Brochon,30 B.T.A. 404">30 B.T.A. 404; D. A. Belden,30 B.T.A. 601">30 B.T.A. 601, there have been, on the other hand, numberous cases where intrafamily transactions were held, upon the evidence, to require full recognition, Merritt J. Corbett,16 B.T.A. 1231">16 B.T.A. 1231; Benjamin T. Burton,28 B.T.A. 1242">28 B.T.A. 1242; 30 B.T.A. 399">Joseph E. Uihlein, supra;Charles F. Fawsett,31 B.T.A. 139">31 B.T.A. 139; 34 B.T.A. 648">*653 1936 BTA LEXIS 669">*679 Frank M. Arguimbau,31 B.T.A. 604">31 B.T.A. 604; Edmund S. Twining,32 B.T.A. 600">32 B.T.A. 600 (on review C.C.A., 2d Cir.); Thomas W. Behan,32 B.T.A. 1088">32 B.T.A. 1088 (on review, C.C.A., 2d Cir.). The evidence in this proceeding, in our ipinion, establishes the sale by the petitioner of the shares, and the deduction of the resulting loss can not properly be denied. It matters not that the sale was arranged by petitioner in order that he might realize as a loss the diminution in value for tax purposes, nor does it matter that he was able to persuade his wife to purchase similar shares because of his belief that they would "come back." The fact that he thought it necessary to procure Lyons to act as an intermediate owner, with the assurance to Lyons that Mrs. Young would purchase the shares from him so that Lyons would not be expected to hold them, does not destroy the genuineness of the petitioner's complete disposition. The respondent's argument proceeds upon the erroneous conception that a wife's ownership may be regarded as dominion or control by the husband. There is nothing in the present record to support this view. Mrs. Young is shown1936 BTA LEXIS 669">*680 to have substantial wealth of her own, far more than was necessary to enable her to buy these shares. Her property was kept and accounted for separately from that of her husband. Some of the shares here involved were recorded in her name and some continued in the name of Lyons with his blank endorsement. All of them were kept among her separate properties, and some of them have since been sold by her. None of the proceeds or of the shares have been acquired subsequently by the petitioner, and there is no evidence to support the respondent's suggestion that they were used by petitioner as collateral security for his personal loans. Under these circumstances, we have found that petitioner sold the shares in 1932 and thereby sustained the loss which he claims, and we conclude as a matter of law that he is entitled to the deduction of the amount of his loss.
3. The fraud penalty was predicated entirely upon the respondent's view that the foregoing sales of shares were sham, that the petitioner sustained no loss thereby, that his return was fraudulent, and that, since the deficiency was due in part to fraud with intent to evade tax, the statutory penalty of 50 percent should be1936 BTA LEXIS 669">*681 assessed. In view of our finding that the deduction was proper, the determination of fraud necessarily falls, and the penalty may not be assessed.
4. The remaining items have been amicably adjusted by stipulation and do not require decision.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. ↩