*993 1. Where the taxpayer corporation, nearly all of whose stock was held directly or beneficially by relatives of the same family, sold certain land to a second corporation whose stock was entirely owned by a trust for the benefit of two members of the family, and there was no option or agreement for reacquisition of the land by the taxpayer and it was sold at the market price, Held, a deduction in full for loss on the sale is not prevented by the provisions of section 24(a)(6) of the Revenue Act of 1934 and, since the sale was bona fide, must be allowed.
2. Losses suffered by petitioner as a result of foreclosure of properties owned by it are deductible in the year in which the equity of redemption expires.
*498 This is a proceeding to redetermine a deficiency in income tax of $22,249.67 and a deficiency in excess profits tax of $8,059.54 for the calendar year 1934. There are two issues: Whether petitioner is entitled to deduct a loss on the sale of certain land to another corporation, and whether certain losses*994 suffered by petitioner as the result of foreclosures of properties owned by it are deductible in the year of foreclosure or in the year in which the equity of redemption expired.
*499 FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of Michigan. On December 26, 1934, its outstanding capital stock, of a total par value of $100,020, was owned as follows:
| Alger Shelden | $22,666.67 |
| Henry Shelden | 40,666.67 |
| Allan Shelden trust | 10,666.66 |
| Allan Shelden III trust | 10,000.00 |
| William Warren Shelden trust | 10,000.00 |
| Squire trust | $2,000.00 |
| Bronson trust | 2,000.00 |
| Alger Shelden trust | 2,000.00 |
| Hiram E. Hees | 10.00 |
| Fred E. Klockow | 10.00 |
H. D. Shelden is the father, and Caroline A. Shelden, now deceased, was the mother of Alger Shelden, Henry Shelden, and Allan Shelden. Elizabeth Warren Shelden was the wife of Allan Shelden (now deceased), and Allan Shelden III and William Warren Shelden are their children. Hiram E. Hees and Fred E. Klockow are not related, either by blood or marriage, to any of the above named persons.
The Allan Shelden trust was created March 10, 1920, the trustees being H. D. Shelden, Alger Shelden, and Henry*995 Shelden, and the settlor being Caroline A. Shelden. It provided that the trust income should be paid in such amounts as the trustees might deem advisable to Allan Shelden during his life, the remainder to be accumulated, that the corpus was to be paid to Allan Shelden upon his reaching 45, that if he died before then the trust estate was to be delivered to his children 21 years after his death, and that if none of them were then surviving, the distribution was to be made to other persons upon terms and conditions not here material.
The Allan Shelden III trust was created December 30, 1916, with Allan Shelden as trustee and Elizabeth Warren Shelden as settlor. Its provisions were that the trust income was to be paid over to Allan Shelden III during his minority for his support and education, that the corpus was to be delivered to him upon his reaching 50, but that if he died before then, the income was to be paid over to his widow and children in the trustee's discretion, and the corpus distributed to them 21 years after his death.
The William Warren Shelden trust was created December 22, 1919, with Allan Shelden as trustee. Elizabeth Warren Shelden succeeded to the trusteeship*996 upon the death of Allan Shelden. This trust was identical in its terms with the Allan Shelden III trust, except that William Warren Shelden was the beneficiary.
The Squire trust was created on April 23, 1923, with Allan Selden as trustee and H. D. Shelden as settlor. Subsequently, Alger Shelden succeeded to the trusteeship. This trust provided that its income was to be paid to the children of Allan Shelden in such amounts as the trustee might deem advisable for their best interests, and that the *500 corpus was to be delivered to them when the oldest child should reach 40. Alternative dispositions of the corpus, upon terms and conditions not here material, were prescribed in the event that none of the children survived.
The Bronson trust was created on April 13, 1923, with Alger Shelden as trustee and H. D. Shelden as settlor. Henry Shelden later succeeded to the trusteeship. Its terms were the same as those of the Squire trust, except that the beneficiaries were the children of Alger Shelden.
The Alger Shelden trust was created on March 10, 1920, with H. D. Shelden, Allan Shelden, and Henry Shelden as trustees, and with Caroline A. Shelden as settlor. Its terms*997 were the same as those of the Allan Shelden trust, except that the beneficiary was Alger Shelden.
The Warren Corporation is a corporation organized under the laws of Michigan. On December 24, 1934, its capital stock, consisting of 100 shares, was owned as follows:
| Elizabeth Warren Shelden | 51 shares |
| Allan Shelden III trust | 25 shares |
| William Warren Shelden trust | 24 shares |
On December 24, 1934, the above stockholders transferred all their stock in the Warren Corporation to the Harrington trust, for which they received sums aggregating $403.32. The Harrington trust thus owned all the capital stock of the Warren Corporation on December 26, 1934.
The Harrington trust was created December 21, 1923, with Allan Shelden as trustee and Allan Shelden, H. D. Shelden, and Caroline A. Shelden as settlors. Elizabeth Warren Shelden later succeeded to the trusteeship. It provided that its income should be paid to the children of Allan Shelden and Elizabeth Warren Shelden, in such amounts as the trustee might deem advisable for their best interests, and that the corpus was to be delivered to them when the oldest child should reach 40. Alternative dispositions, upon terms*998 not here material, were prescribed in case no child should survive.
On December 24, 1934, the Harrington trust loaned the Warren Corporation $33,000.
Several days prior to December 26, 1934, Allan Shelden made a gift of all his stock in petitioner to his brother, Henry Shelden. At the same time H. D. Shelden amde a gift of all his stock in petitioner in equal shares to Alger Shelden, Henry Shelden, and the Allan Shelden trust.
On December 26, 1934, petitioner was the owner of 160 acres of land located in Wayne County, Michigan, which it had acquired in 1925 at a cost of $268,212.93. The acreage consisted of undeveloped farm land. Contiguous property, also owned by petitioner, had been developed *501 and subdivided. A number of houses had been erected on this contiguous property, which was known as Rosedale Gardens. Nearby properties had been sold for various prices, ranging from $150 to $195 an acre.
On December 26, 1934, petitioner sold the above described land to the Warren Corporation for $32,446.79. On that day, the fair market value of this land was $200 per acre. The deeds of conveyance were duly recorded on December 27, 1934. Said acreage has never*999 been reconveyed to petitioner, nor has any agreement or option ever been entered into for petitioner's reacquisition of this acreage.
Before making the sale, petitioner, through its agents, investigated the fair market value of the land in order to ascertain what was the best price that could be obtained.
At the time of the sale, petitioner needed cash, since it owed about $100,000 in debts on land contracts, past due taxes, and various obligations.
On December 31, 1934, petitioner retired certain of its outstanding bond issues for $250,031.45 less than their face value.
On February 11, 1932, petitioner bought, for $500, certain premises in Detroit known as 585 Newport Avenue from Frederick M. Alger and wife. It acquired the premises subject to a mortgage running to the Detroit & Security Trust Co. as mortgagee. During 1932 the mortgage was foreclosed, the sheriff's deed being dated, January 13, 1933. The equity of redemption expired January 13, 1934, and petitioner surrendered possession of the premises on that date to the purchaser at the foreclosure sale. During the period of redemption petitioner collected the rents, issues, and profits of the property.
On February 11, 1932, petitioner*1000 bought, for $307, certain premises in Detroit known as 15838 Normandy Avenue from Frederick M. Alger and wife. It acquired the premises subject to a mortgage running to the Detroit Trust Co. as mortgagee. During 1932 the mortgage was foreclosed, the sheriff's deed being dated January 13, 1933. The equity of redemption expired January 13, 1934, and petitioner surrendered possession of the premises on that date to the purchaser at the foreclosure sale. During the period of redemption petitioner collected the rents, issues, and profits of the property.
On February 20, 1932, petitioner bought, for $2,100, certain premises in Detroit known as 4890 Yorkshire Avenue from John Rattenbury and wife. It acquired the premises subject to a mortgage running to the Detroit Trust Co. as mortgagee. During 1933 the property was foreclosed, the sheriff's deed being dated April 11, 1933. The equity of redemption expired April 11, 1934, and on that date petitioner surrendered possession of the premises to the purchaser at the foreclosure sale. During the period of redemption petitioner collected the rents, issues, and profits of the property.
*502 On April 2, 1931, petitioner bought, *1001 for $2,268, certain premises in Detroit known as 9316 Stoepel Avenue from Nina W. Van Tifflin. It acquired the premises subject to a mortgage running to the Northwestern State Bank as mortgagee. The property was foreclosed during 1933, the sheriff's deed being dated July 27, 1933. The equity of redemption expired July 27, 1934, and on that day petitioner surrendered possession of the premises to the purchaser at the foreclosure sale.
It is stipulated that petitioner is not entitled to a loss of $700 in respect of certain other property, known as 15793 Mendota Avenue, also foreclosed. The total foreclosure loss in issue is thus $5,175.
OPINION.
LEECH: The first issue arises out of respondent's disallowance of a loss of $235,766.14 which petitioner claims as a result of the sale of land made by it to the Warren Corporation. Respondent's action is predicated on two propositions, first that the sale falls within section 24(a)(6) of the Revenue Act of 1934, and, second, that the interfamily character and other circumstances of the transactions in connection with the sale contradict its bona fides and render the sale a nullity for tax purposes.
Section 24(a)(6) disallows*1002 any deduction for "loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph - (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants."
The net result of the sale here was that petitioner, the greater part of whose stock was held directly or beneficially by various relatives of the Shelden family, transferred certain property to the Warren Corporation, all of whose stock was held in trust for the benefit of the two children of Allan and Elizabeth Warren Shelden. Considering the factual situation against the provisions of the statute, we do not think the section can be applied.
Subsection (A) of the quoted statutory provision specifies sales, directly or indirectly, between members of a family. *1003 To hold that this was a sale between members of the same family would require not only the disregard of several trust entities, as well as two corporate entities, but also the specific language of subsection (D) of the same statute.
*503 It is true that, in determining the number of $5,000 exclusions in connection with gifts to trusts, it has been held that such exclusions apply separately to each beneficiary rather than, as formerly, to the trust itself. . "But the very doubt which has affected the question as to trusts strengthens the conclusion that a gift to a corporation may not be treated as a group of gifts to its shareholders." . Here the seller and purchaser are both bona fide corporations. And, no such circumstances are discernible as would warrant our disregard of the entities of these two corporations. ; ; *1004 . But, even if the separate entities of the several trusts and corporations here involved be ignored, the sale was not between "members of a family", as that term is defined in section 24(a)(6)(D), supra. The individuals owning the stock of the buying corporation, under the provisions of section 24(a)(6)(C), supra, were William Warren Shelden and Allan Shelden III. But, in the petitioner, the seller, these individuals owned, both actually and constructively, as described in subsection 24(a)(6)(C), supra, only the stock held in the Allan Shelden III trust, the William Warren Shelden trust, the Allan Shelden trust and the Squire trust. The aggregate of the par value of all of this stock is $32,666.66, which is substantially less than the 50 percent ownership which section 24(a)(6)(B), supra, requires. The majority stock of the seller, i.e., $63,333.34 in par value, is owned by their uncles, Alger and Henry Shelden, who are not "brothers and sisters, spouses, ancestors, or lineal descendants" of William Warren and Allan Shelden III.
The controlling statute does contain the ambiguous expression "directly or indirectly.*1005 " (Emphasis supplied.) But there appears to be no legislative history resolving that uncertainty or, at least, none that can give respondent any encouragement here. 1 We, therefore, refuse to construe it as including the present situation. See
Subsection (B) of section 24(a)(6) singles out sales between an individual and a corporation in which the individual owns more than 50 percent in value of outstanding stock. This provision is clearly inapplicable here, since petitioner, the vendor, is a corporation.
Congress amended section 24(a)(6), supra, in several respects in section 301 of the Revenue Act of 1937. That section, as thus amended, disallows losses, in addition to the instances already covered by section 24(a)(6), in exchanges between corporations where more than 50 percent of the value of the outstanding stock in each of which is owned *504 by or for the same individual, provided either one of such corporations is a personal holding company. The section, as amended, also provides that where a trust is involved, the beneficiaries*1006 shall be considered as owners of stock held by the trust, and where a corporation is involved, a person shall be considered as owning stock owned by members of his "family."
Assuming that the Warren Corporation is a personal holding company, section 301 of the 1937 Act would nevertheless not apply here, even if it were, as argued by respondent, a mere clarification of existing law. As already discussed, under the specific terms of the statute, the individuals owning the stock of the Warren Corporation, the purchaser, owned less than 50 percent of the stock of the taxpayer, the selling corporation. We therefore conclude that the deduction of the loss on the present transaction is disallowed by neither the 1934 nor the 1937 Revenue Act. Cf. .
Petitioner needed the money, arising from the transaction, to meet pressing obligations. The fair market value of the land was subjected to an investigation, from which it was determined that $32,446.79 was the best price that could be obtained for the acreage. Petitioner proved by an expert witness, whose testimony was unchallenged, that the fair market value of the land sold was $200*1007 per acre, or a total of $32,000. The consideration for the purchase was not furnished by the seller, petitioner, nor any of its stockholders. There was no agreement or option for reacquisition by the petitioner, nor was the property ever reconveyed to the petitioner. Consequently, we think, the second premise, upon which respondent denied any loss on this sale, is likewise without merit. ; affd., , and ; ; ; ; ; ; ; ; affd., ; ; ; ; *1008 .
Respondent contends that petitioner's loss on the sale to the Warren Corporation, if otherwise allowable, is allowable only to the extent of $2,000 under section 117 of the Revenue Act of 1934 because the property was a capital asset. This contention was made neither in the deficiency letter nor in the pleadings and is raised for the first time on brief. Respondent has thus made no determination that the property in question was a capital asset, and no presumption to that effect can properly be entertained. Indeed, since contiguous property had been developed, subdivided and sold, it is likely that petitioner was merely awaiting a favorable time to accord this tract of land the same *505 treatment and that this fact could easily have been shown had the issue been timely raised. In any event, we will not consider the question now, especially since petitioner, not having been apprised in advance of the hearing of respondent's reliance on this ground, would thereby be seriously prejudiced and robbed of an opportunity to offer proof on the point. *1009 , and cases therein cited.
Accordingly, we hold that the loss suffered by petitioner upon the sale of its property to the Warren Corporation may be deducted in full. This conclusion is not affected by the fact that petitioner may have made the sale in order to reduce its tax liability on account of retirement of bonds at less than face value. Without now deciding whether petitioner realized income by reason of such retirement, it is well settled that a transaction is not vitiated because motivated by a desire to reduce taxes. ; ; .
Respondent disallowed petitioner's foreclosure loss on the sole ground that the loss occurred in the year of foreclosure rather than the year in which the equity of redemption expired. It is settled, however, that it is the expiration of the period of redemption which is the indentifiable event fixing such a loss. *1010 ; ; affd., . See also . The case of , upon which respondent relies, is distinguishable in that there an abandonment of worthless property occurred in the year of foreclosure. Here, far from abandoning the property, petitioner remained in possession and collected rents, issues, and profits during the period of redemption. We hold that petitioner is entitled to deduct a loss of $5,175 by reason of the foreclosures of its properties. In view of the stipulation of the parties that petitioner is not entitled to a loss of $700 in respect of certain other property which was foreclosed,
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. See Seidman, Legislative History of Federal Income Tax Laws, pp. 316, 317. ↩