1937 BTA LEXIS 636">*636 A corporation whose stock was owned by members of a single family made sales of some of its securities to its stockholders at the then market price, which was much below cost to the corporation. Held, the sales were bona fide and there were no exceptional circumstances warranting the discregard of the separate entities of the corporation and its stockholders and the corporation was justified in claiming a deductible loss with respect to said sales.
36 B.T.A. 943">*944 These proceedings involve proposed deficiencies in Federal income tax and penalties, as follows:
| Year | Tax | Penalty | Total |
| 1932 | $1,200.02 | $600.01 | $1,800.03 |
| 1933 | 1,775.78 | 887.89 | 2,663.67 |
The petitioner, a Washington corporation having its principal office in Seattle, assigns as error that the respondent disallowed petitioner's claims made in its income tax returns for 1932 and 1933 of losses of $7,605 and $13,124.66, respectively, on alleged sales of securities to two of its stockholders.
The record is voluminous, consisting of the1937 BTA LEXIS 636">*637 testimony of a number of witnesses, a stipulation, and many exhibits admitted in evidence.
FINDINGS OF FACT.
Herman Schoenfeld, Max Schoenfeld, and Theodore Schoenfeld, brothers, for a number of years prior to 1914 engaged as a partnership in the manufacture and sale of men's neckwear. In 1914 they incorporated their business as Schoenfeld Bros. Inc., the petitioner herein, and as such corporation have continued to operate. Each brother owned one third of its stock, with the exception of a qualifying share held by their father, A. Schoenfeld. Herman Schoenfeld, who resided in New York, was president of the corporation; Max Schoenfeld, vice president; and Theodore Schoenfeld, secretary-treasurer and manager. Both of the latter resided in Seattle, Washington.
During the years involved herein the capital stock outstanding was $100,000, owned as aforesaid.
The corporation always has been solvent and able to pay salaries of its officers, but they drew only such portions of their salaries as were needed in their personal affairs, preferring to leave some of the money due them as salaries in the corporation. At all times during the taxable years involved herein and for some1937 BTA LEXIS 636">*638 years prior thereto, Max Schoenfeld and Theodore Schoenfeld had substantial amounts of money owing to them from the corporation - amounts 36 B.T.A. 943">*945 considerably in excess of the fair market value of the securities alleged to have been sold them by the corporation as hereafter stated.
Under its articles of incorporation, the corporation was authorized to buy and "otherwise deal in stocks, bonds, mortgages, notes and negotiable paper and securities of other corporations and persons." During the latter months of the year, it often would have on hand a large cash surplus, which it would invest in dividend earning stocks and bonds which it was thought could be liquidated promptly when capital was required. Each of its stockholders had authority to purchase securities for it. When bonds were purchased for it they were ordinarily paid for by the corporation's check. When stocks were purchased for it by a stockholder, the stockholder's individual check was usually given in payment and the stockholder was reimbursed by the corporation. The certificate of stock so purchased were for convenience in trading often made in the name of the stockholder who purchased the same and would hold1937 BTA LEXIS 636">*639 them in trust for the corporation. The securities so purchased and held were carried as corporate assets on the books of the corporation. They were kept in the safety deposit bos of the corporation, segregated from the individual stock holdings of the stockholders.
The corporation had pursued the policy of selling securities owned by it when they had greatly depreciated in value. It so sold securities in the years 1929 to 1934, some of the sales being made to its stockholders, who had for years traded in securities on their own account. Sales of securities to stockholders were made by petitioner during 1930 and 1931 and deductions claimed in its income tax returns for losses sustained from such sales. An officer of the corporation had been advised that such sales might legally be so made and that deduction for losses actually sustained therefrom might be legally claimed and taken by the corporation. With respect to such sales and claimed deductions for losses reported therefrom in petitioner's returns for 1930 and 1931, no contention was ever made by the Bureau of Internal Revenue that the sales were illegal or that the alleged losses were not allowable.
Prior to 1932, there1937 BTA LEXIS 636">*640 were no minutes of the trustees showing authority to sell stock. Counsel, however, had advised officers of petitioner such were not necessary. After suggestion by a revenue agent that it would be well to have such minutes, the suggestion was adopted and followed thereafter and in the taxable years involved herein. On December 7, 1932, at a meeting of the stockholders, in the minutes termed "trustees", of Schoenfeld Bros. Inc., on motion duly made and passed it was decided to declare a dividend in the amount of $30,000 from the surplus profits of the corporation, payable on December 31, 1932, to all stockholders of record on that date
36 B.T.A. 943">*946 At the same meeting, on motion duly made and carried, it was decided to sell securities held by the corporation, as follows:
10 Shares Tricontinental Stock
2,500 Central Power & Water Co
5,000 North American Power & Light
2,000 Utility Power & Light
3,000 American & Foreign Power
at the market price prevailing on this date. The stockholders of the company were given the privilege of purchasing these securities if they so wished.
Following the action taken at the aforesaid meeting, Fred L. Taft, an accountant and auditor, 1937 BTA LEXIS 636">*641 employed professionally as such during many years by Schoenfeld Bros. Inc. to audit its books and superintend the work of its regular bookkeeper, was directly by officers Max and Theodore Schoenfeld to ascertain the market price of the above described securities which stockholders were given the privilege of purchasing at their market price, prevailing on December 7, 1932, pursuant to the motion duly made and passed by the directors of the petitioner on that date.
After Taft made careful inquiry and investigation as to the market price of the above described securities as directed, he ascertained and correctly determined their market value or price on the date stated to be as indicated in the followin table, in which there is set out the list of securities authorized by petitioner to be sold, the cost prices to it of the securities, the aggregate sales price of each kind of security, the sale price per hundred or share, and the market price per hundred or share, as of December 7, 1932.
| Security | Sales price per 100 | Market price per 100 | Aggregate purchase price | Aggregate sales price |
| 5,000 No. Am. Pow. & Lt | 43 | 44 1/2 high | $4,725 | $2,150 |
| 42 1/2 low | ||||
| 2,500 Cent. Pow. & Lt | 64 | 64 3/4 high | 2,400 | 1,600 |
| 62 1/2 low | ||||
| 2,000 Util. Pow. & Lt | 28 | 29 1/2 high | 1,960 | 560 |
| 27 low | ||||
| 3,000 Am. & For. Pow | 29 | 30 1/4 high | 2,700 | 870 |
| 28 low | ||||
| 10 sh. Tri. Cont | 4 | 57 1/2 bid | 1,040 | 40 |
| 12,825 | 5,220 | |||
| 5,220 | ||||
| Loss claimed by corporation on income tax return. | 7,605 |
1937 BTA LEXIS 636">*642 Pursuant to instructions previously given him by Max and Theodore Schoenfeld, Taft had entries made in the books of the petitioner under date of December 31, 1932, indicating the sale of the aforesaid securities to Max Schoenfeld and Theodore Schoenfeld, as hereinafter stated, at the sale price set out in the foregoing table, which except as to Tri-Continental were the market prices for the same on December 36 B.T.A. 943">*947 7, 1932. The individual account of Max Schoenfeld was charged or debited with the aforesaid sale price of 2,500 Cental Power & Light bonds, the 5,000 North American Power & Light bonds, and the 10 shares of Tri-Continental stock, and the individual account of Theodore Schoenfeld was charged or debited with the amount of the sale price of the 2,000 Utility Power & Light bonds and the 3,000 American Power & Light bonds.
The 10 shares of Tri-Continental, through what is shown to have been an error of auditor Taft - who was under the impression that the stock was common stock, whereas it was preferred stock - were charged to the account of Max Schoenfeld at only $4 per share, whereas the bid or market price on December 7, 1932, was $57.50 per share. This error and1937 BTA LEXIS 636">*643 the entries made in the books of petitioner and Max Schoenfeld resulted in the petitioner taking a loss on the transaction in its return of $535 more than it was entitled to and Max Schoenfeld receiving for $40 stock the fair market value of which was $575. No correction or adjustment of the excessive loss taken by petitioner in that transaction is shown ever to have been made, though in brief for the petitioner error is admitted and the assertion made that adjustment thereafter would be made. We find that the stock was intended to be and was sold for $575, the market value then, the use of the figure $40 being error as to market value.
After the transactions mentioned, entries which were made in the books of the petitioner completely closed out of petitioner's investment account all the securities above described as having been acquired by Max Schoenfeld and Theodore Schoenfeld and none of them was thereafter carried on the books of petitioner or otherwise shown as its assets.
On December 7, 1932, when arrangements were made for Max Schoenfeld to purchase at their market price certain of the securities before described, he had a credit balance of approximately $50,000 with1937 BTA LEXIS 636">*644 petitioner, and the journal entry of petitioner shows his credit balance was charged or debited in the sum of $3,790 - the aggregate sales price of the securities acquired by Max Schoenfeld from petitioner as heretofore indicated. The losses alleged to have been sustained by petitioner by reason of the purchase by Max Schoenfeld of the securities heretofore indicated were shown by entries made, however, not as of December 7, 1932, but at the close of the year, under date of December 31, 1932, on petitioner's ledger loss and gain account. Under date also of December 31, 1932, Max Schoenfeld's ledger account was charged in the aggregate amount of $3,790, the market price on December 7, 1932, of the aforesaid securities acquired by him in the manner above set out.
The securities so purchased by Max Schoenfeld, in keeping with such acquisition, were transferred from petitioner's safety deposit 36 B.T.A. 943">*948 box in the National Bank of Commerce to the personal safety deposit box of Max Schoenfeld at the Peoples Bank & Trust Co., where they were at the time a revenue agent made an inspection of the contents of the safety deposit box on December 14, 1934. At all times after the alleged1937 BTA LEXIS 636">*645 sale of said securities, which we find was a sale to Max Schoenfeld in December 1932, he has had dominion and control over them and still has, with the exception of the Tri-Continental stock which was "called" shortly prior to the hearing herein by the Tri-Continental Co. and surrendered to the Peoples Bank & Trust Co. for collection, the amount received therefor being deposited to his personal credit.
The interest coupons derived from the bonds purchased by Max Schoenfeld were properly allocated between him and the petitioner, with the exception of one coupon which through a bookkeeping mistake was received by petitioner instead of by him. The dividends for the Tri-Continental stock, $60 yearly, payable quarterly, were, due to errors in bookkeeping, received by the petitioner until April 5, 1935. That petitioner was improperly receiving said dividends, after Max Schoenfeld acquired the stock as heretofore indicated, was discovered by auditor Taft, who instructed the bookkeeper to make correction and proper adjustment in the accounts, but the bookkeeper neglected making the proper entries and as a consequence the petitioner owes Max Schoenfeld dividends on said stock received1937 BTA LEXIS 636">*646 since 1932, the evidence showing that they have not been received by him, though they were returned by him as received, in his income tax returns.
On December 7, 1932, when arrangements were made for Theodore Schoenfeld to purchase at their market price certain of the securities before described, he had with petitioner a credit balance of approximately $53,000, and the journal entry of petitioner shows said credit balance was charged or debited in the sum of $1,430 - the aggregate sales price of the Utility Power & Light bonds and the American & Foreign Power bonds purchased by him from petitioner as heretofore indicated.
The losses alleged to have been sustained by petitioner by reason of the acquisition by Theodore Schoenfeld of the securities heretofore described were shown by entries under date of December 31, 1932, on petitioner's ledger loss and gain account.
Under date of December 31, 1932, Theodore Schoenfeld's ledger account was charged with the aggregate amount of $1,430, the market price on December 7, 1932, of the aforesaid securities acquired by him in the manner heretofore set out.
After the transactions mentioned in which Theodore Schoenfeld acquired the1937 BTA LEXIS 636">*647 aforesaid securities, they were, under date of December 36 B.T.A. 943">*949 31, 1932, closed out of the bond ledger account of petitioner by credit entries in the amounts of $1,960 and $2,700, the original purchase prices of the Utility Power & Light bonds and the American & Foreign Power bonds, respectively, and thereafter were not carried on petitioner's books or otherwise shown as assets.
At the date he acquired the securities mentioned, Theodore Schoenfeld kept some of his belongings in the petitioner's safety deposit box, but the securities purchased by him were segregated from petitioner's by being placed in a separate envelope, with his name thereon. Later in 1934, he secured a safety deposit box in the Peoples Bank & Trust Co. and removed his personal securities to it, where they were examined on December 14, 1934, by the same revenue agent who made the inspection of Max Schoenfeld's box, heretofore indicated.
The petitioner's books show that it did not receive any interest from either of the last above-described bonds, with the exception of(1) the interest coupons for theUtility Power & Light bond due February 1, 1933, (collected November 2, 1933) to which it was entitled, 1937 BTA LEXIS 636">*648 because it owned the bond during the major portion of the interest period; and (2) interest coupons due March 1, 1933, (collected May 23, 1933) and September 1, 1933, (collected November 2, 1933) on the American & Foreign Power bond.
The interest coupon due March 1, 1933, properly went to the petitioner since it owned the bond during the interest period.
The interest coupon due September 1, 1933, (received on November 2, 1933) should have gone to Theodore Schoenfeld, but was through a bookkeeping error credited to the petitioner's interest account.
All of the other interest coupons on said bonds were received by Theodore Schoenfeld and were returned by him in his income tax return.
On December 4, 1933, the aforesaid "trustees" of petitioner authorized the sale of the following securities at the market price for them prevailing on that date, and the stockholders were given the option of so purchasing them:
| Bonds | Stocks |
| 1,000 No. Ohio Pow. & Lt., 5 1/2, 1951 | 20 No. Am. Edison pfd. |
| 5,000 Chile Copper, 5, 1947 | 25 Westinghouse El. |
| 5,000 Cities Service, 5, 1958 | 20 Commonwealth Sec. pfd. |
| 4,000 Gatineau Pow., 5, 1956 | |
| 5,000 No. Am. Edison, 5 1/2, 1963 | |
| 1,000 Pac. N W Public Serv., 6, 1950 | |
| 1,000 Duquesne Gas, 6 1/2, 1935 | |
| 4,000 Wash. Wat Pow., 5, 1960 |
1937 BTA LEXIS 636">*649 At that meeting Max Schoenfeld agreed to so purchase the above specified securities and authorized the petitioner to charge them at the then market price to his account on its books. Pursuant thereto 36 B.T.A. 943">*950 auditor Taft was instructed by officers of petitioner to ascertain the market price of the securities on the aforesaid date and use the same in the purchase computations.
The following table shows the list of securities purchased on December 4, 1933, by Max Schoenfeld at their then market value, their original cost price to petitioner, and the aggregate sales price of each kind of security purchased by him:
| Security | Aggregate purchase price | Aggregate sales price | Loss claimed by corporation |
| 1,000 No. Ohio P. & L | $925.00 | $737.50 | $187.50 |
| 5,000 Chile Copper | 4,837.50 | 2,700.00 | 2,137.50 |
| 5,000 Cities Service | 4,587.50 | 1,550.00 | 3,037.50 |
| 4,000 Gatineau Power | 3,900.00 | 3,124.80 | 775.20 |
| 5,000 No. Am. Edison | 4,874.30 | 2,975.00 | 1,899.30 |
| 1,000 Pac. N.W., Pub. Serv | 995.00 | 300.00 | 695.00 |
| 1,000 Duquesne Gas | 985.00 | 35.00 | 950.00 |
| 4,000 Wash. Water Power | 3,940.00 | 3.080.00 | 860.00 |
| 20 sh. No. Am. Edison | 1,967.66 | 960.00 | 1,007.66 |
| 25 sh. Westinghouse | 2,525.00 | 950.00 | 1,575.00 |
| Total loss claimed by corporation in 1933 income-tax return | 13,124.66 |
1937 BTA LEXIS 636">*650 Proper entries with respect to the foregoing securities so purchased by Max Schoenfeld of petitioner were made in the books of petitioner under date of December 4, 1933.
The journal entry of petitioner covering the sale of said securities to Max Schoenfeld shows that his account - having then a credit balance of about $23,000 - was charged or debited in the sum of $16,412.30, the aggregate sales price of the securities so purchased. The evidence shows the original cost of the securities, $29,536.96, to petitioner was credited to the investment account; that $13,124.66, the total loss to the petitioner from said transaction, was charged or debited as loss to the petitioner's loss and gain account. These entries, when carried forward to investment ledger account, completely closed the securities out of the petitioner's investment account and they were not thereafter carried as assets of the petitioner.
Max Schoenfeld's ledger account on December 4, 1933, was charged in the aforesaid aggregate amount of $16,412.30. Thereafter said securities were listed in Max Schoenfeld's personal books and records as his personal assets, over which he claimed ownership and had possession1937 BTA LEXIS 636">*651 and control during the year in issue. Said securities were after December 4, 1933, transferred from the safety deposit box of petitioner in the National Bank of Commerce to the personal safety deposit box of Max Schoenfeld at the Peoples Bank & Trust Co., where they were at the time a revenue agent made an inspection of them on December 14, 1934, preparatory to making a report with respect to petitioner's income tax returns for the years in issue.
36 B.T.A. 943">*951 The petitioner's books and the records of Max Schoenfeld show that the petitioner did not receive any interest from any of the above described bonds after December 4, 1933, with the exception of interest coupons on Chile Copper bonds, Gatineau Power bonds, and Washington Water Power bonds to which it was entitled because it owned the bonds during the interest period covered by the coupons involved. All other interest coupons on the bonds acquired by Max Schoenfeld on December 4, 1933, were received by him and deposited in bank to his own account.
None of the dividends from the Westinghouse Electric stock was received by petitioner after December 4, 1933. There was only one dividend paid and that was received by Max Schoenfeld1937 BTA LEXIS 636">*652 on September 6, 1935, and deposited to his personal account.
All dividends of North American Edison, preferred, $6 per share annually, guaranteed, payable quarterly, were received by the petitioner subsequent to December 4, 1933, whereas they should have been received by Max Schoenfeld. The error or mistake was due to the bookkeeping staff and had not been called to the attention of Max Schoenfeld until a short time prior to the hearing herein.
Max Schoenfeld and Theodore Schoenfeld had separate safety deposit boxes and their securities were segregated therein from any of petitioner's securities, which were not, at the time of an examination by a revenue agent, in either Max Schoenfeld's or Theodore Schoenfeld's box at the Peoples Bank & Trust Co.
We find there were no revenue stamps placed on any of the securities purchased as aforesaid by Max and Theodore Schoenfeld of Schoenfeld Bros. Inc. We, however, find the omission therefrom was due to the belief by the interested parties that none were required.
The record shows and we find that no agreement or understanding, oral or written, ever existed between the petitioner and Max and Theodore Schoenfeld, or between Max1937 BTA LEXIS 636">*653 and Theodore Schoenfeld themselves, that the securities sold as aforesaid by petitioner were to be repurchased by it. Nor was there ever any agreement between petitioner and either Max or Theodore Schoenfeld or between Max and Theodore Schoenfeld themselves that when securities were bought by either of them for petitioner, those securities later would be sold by petitioner to the one who originally bought them for the petitioner.
OPINION.
DISNEY: After careful consideration of the voluminous transcript of the testimony given at the hearing herein and the numerous exhibits admitted in evidence, we have found the facts as heretofore set forth, which make the applicable law thereto not very difficult.
36 B.T.A. 943">*952 The record shows that Schoenfeld Bros. Inc., the petitioner herein, was a going corporation and had been such since its organization in 1914. The facts do not show exceptional circumstances - although all its stockholders were members of the same family - that would, in our opinion, warrant us in disregarding the petitioner's claim that it and its stockholders are separate taxable entities. Such, in our opinion, they were.
1937 BTA LEXIS 636">*654 It is definitely settled by numerous decisions of this Board and of the courts that separate taxable entities generally do exist between a corporation and its stockholders, and, when such is the case, losses when arising from bona fide sales or exchanges between them may be allowed to either. See ; ; affd., ; ; affd., ; ; ; ; ; ; certiorari denied, .
All the sales in question herein were consummated prior to the enactment of the Revenue Act of 1934 and, therefore, at a time when the full amount of losses resulting from such sales were allowable, provided the sales were bona fide. 1937 BTA LEXIS 636">*655
The record shows that prior to the aforesaid sales the petitioner was the owner of he securities in question, which securities had been purchased for it with its funds through the instrumentality of its stockholders, in whose names certificates of stock were at times issued and held in trust for petitioner, but only for the purpose of facilitating and expediting trading therein, the real ownership thereof being in the petitioner.
The record further shows that petitioner by proper resolutions of its stockholders (termed trustees) definitely decided to sell at the then market price certain designated securities and by said resolutions the stockholders were given the option of buying the designated securities at said market prices.
The evidence, in our opinion, further shows that Max and Theodore Schoenfeld purchased from petitioner the securities involved herein, described and set forth in our findings of fact, at the prevailing market prices for the same existing on the dates the resolutions authorizing their sale were passed. The manner in which the sales in question were effected is set out fully in our findings of fact, and it is not1937 BTA LEXIS 636">*656 necessary to repeat it here.
The record shows there were several mistakes or errors made in the matter of entering on the books of the petitioner and of Max and Theodore Schoenfeld proper credits and debits resulting from the 36 B.T.A. 943">*953 various transactions described in our findings of fact, which errors, in our opinion, are satisfactorily explained and show that there was no attempt made thereby to defraud the United States or evade the payment of any income tax due the United States from the petitioner.
Because of the error of use of the figure $40 instead of $575 as sale price of the Tri-continental shares, petitioner's loss is to be reduced by $535.
Counsel for respondent say in their brief:
The important question is not whether the stockholders ever came into ownership of the securities but whether the alleged sales took place within the taxable years. If they did not take place within the taxable years then the losses claimed thereon are not deductible and the taxes are due. If no valid sales were ever made, or if a subsequent sale was made and the losses were put on the returns with the knowledge on the part of the corporation that no such sales occurred within1937 BTA LEXIS 636">*657 the taxable years, then the fraud penalties are likewise due.
In the light of the facts and circumstances disclosed by the record and the law of the State of Washington, we are of the opinion and hold that the sales in question were bona fide and that the title to the securities involved herein was intended to pass and did pass from the petitioner to Max and Theodore Schoenfeld in the taxable years, as claimed by the petitioner. We are further of the opinion and hold, in the circumstances shown, that the fact of the securities not being endorsed and having thereon no transfer revenue stamps did not invalidate the sale. The pertinent law of the State of Washington is, as set forth in Remington's Revised Statutes, as follows:
Section 5836-18. Property in specific goods passes when parties so intend.
(1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intentions of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of1937 BTA LEXIS 636">*658 the case.
Section 5836-19. Rules for ascertaining intention.
Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer:
Rule 1. Where there is an unconditional contract to sell specific goods, in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment, or the time of delivery, or both, be postponed.
Rule 2. Where there is a contract to sell specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing be done.
With respect to respondent's insistence that petitioner is or may be subject to the 50 percent penalty as prescribed in section 293(b) of the Revenue Act of 1932, it is well and definitely settled that fruad is 36 B.T.A. 943">*954 never presumed. "Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence." 1937 BTA LEXIS 636">*659 ; affd., .
The burden of proving fraud is upon the respondent and his proof must be clear and convincing. ; affd., ; ; ; .
In view of our findings of fact, there is, in our opinion and we so hold, no sufficient evidence in the record on which to base the imposition of any penalty, and imposition thereof is disapproved.
Decision will be entered under Rule 50.