Edwards v. Commissioner , 39 B.T.A. 735 ( 1939 )

B. F. EDWARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Edwards v. Commissioner

Docket No. 89944.

United States Board of Tax Appeals

39 B.T.A. 735; 1939 BTA LEXIS 991;

April 7, 1939, Promulgated

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1. Book values of the assets of a corporation, held, in the absence of other evidence, sufficient to constitute a prima facie showing by petitioner that the corporation's stock was not worthless in prior years.

2. The Board will not take judicial notice of matters merely by reason of the fact that they are contained in its files.

Arthur E. Simpson, Esq., and Lydia Lee, Esq., for the petitioner.

F. B. Schlosser, Esq., for the respondent.

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OPPER

This proceeding involves a deficiency in income tax for the year 1935 in the amount of $275.26. The only adjustment which petitioner contests is the respondent's disallowance of a claimed loss on the sale of 57 shares of capital stock of the Franklin-American Trust Co.

FINDINGS OF FACT.

Petitioner in 1921 acquired certain shares of stock of the National City Bank of St. Louis for $120 per share. In 1930 this bank was merged with the Franklin-American Trust Co., and petitioner received one share of stock in the latter for every two shares held in the former, making his cost basis $240 per share. Thus, his total cost for the 57 shares sold in the taxable year was $13,680.

In December 1935 petitioner sold 57 shares of Franklin-American Trust Co. stock through a brokerage firm, in which he was a partner, for 10 cents a share, or a total of $5.70. After deducting commissions and tax, he received the sum of $2.42. This was a bona fide sale. Petitioner claimed only $2,000 of the alleged loss on his income tax return because of the limitation prescribed by the Revenue Act of 1934.

On December 21, 1931, the Franklin-American Trust Co., hereinafter referred to as the trust company, closed its doors and transferred its assets for liquidation to the First National Bank in St. Louis, hereinafter referred to as the bank, under a contract which provided that the latter would immediately take title to all of the assets of the former, including cash but excepting any trust assets or trusts being held or administered by the trust company. The bank assumed all the existing liabilities shown on the books of the trust company and agreed to liquidate the assets or to keep selected assets as its own, in each instance giving credit to the trust company against the amount of the liabilities assumed. The St. Louis Clearing House Association and certain corporations and individuals made up a guaranty fund of $2,000,000 to insure the bank against loss. The guaranty fund was to draw interest at the rate of 3 1/2 percent. It was provided that the proceeds of the liquidated assets should be first used to repay and reimburse the bank for all liabilities assumed and, after that, any surplus was to be turned over to the trust company or its nominee.

The trust company continued in existence after the foregoing agreement. Its balance sheet as of December 31, 1931, was as follows:

Resources
Demand Loans	$13,583,209.45
Time Loans	4,785,277.70
Real Estate Loans	942,468.76
Securities Owned	5,918,644.25
Other Notes & Bills	None
Bank Buildings	849,559.51
Safe Deposit Vaults	116,530.48
Furniture & Fixtures	197,507.57
Other Real Estate Owned	169,394.62
Interim Account	104.43
Other Resources	1,459.42
Interest Earned Uncollected	111,054.73
Other Income Accrued Receivable	413.66
Total	26,675,624.58
Liabilities
Capital	$2,600,000.00
Surplus	1,257,897.87
Due First National Bank in St. Louis	22,634,428.30
Interest & Expense accrued payable	63,911.95
Reserve for Depreciation (Bank Bldgs., Vaults, Fur. & Fix., & Other R. E. Owned)	119,386.46
Total	26,675,624.58

From January 1, 1931, up to the date of transfer on December 21, 1931, the trust company received net income of $451,767.27, out of which dividends of $286,000 were paid, leaving $165,767.27 to be transferred to surplus.

The balance sheet of the trust company as of December 31, 1935, was as follows:

Resources
Demand Loans		$2,717,907.67
Time Loans		319,238.33
Real Estate Loans		791,373.10
Securities Owned		3,105,969.49
Other Notes & Bills		333.00
Bank Buildings	$566,887.04
Safe Deposit Vaults	2.00
Furniture & Fixtures	2.00
Other Real Estate	531,198.09
	1,098,089.13
Less Reserve for Depreciation	9,217.23
		1,088,871.90
Other Resources		553.60
Interest Earned Uncollected		16,509.20
Other Income Accrued Receivable (Net)		1,677.50
Interim Account		2,673.32
		8,045,107.11
Liabilities
Capital	$2,600,000.00
Surplus (deficit)	1,217,354.83
		$1,382,645.17
Due First National Bank in St. Louis		6,642,712.54
Interest and Expenses Accrued Payable		19,749.40
		8,045,107.11

A deficit similar to that shown in the foregoing balance sheet appeared on the books of the trust company on December 31, 1934, in the amount of $759,110.76. The asset "Demand loans, $2,717,907.67" shown on the above balance sheet represented loans carried over from 1931 when the trust company was closed. Its real estate consists of sixty or seventy parcels in addition to its bank building.

The corporate charter of the trust company remained in good standing and the corporation still administered in its own name certain trusts.

The stock of the Franklin-American Trust Co. had some value prior to 1935.

OPINION.

OPPER: The sole issue is whether stock sold by petitioner in 1935 was actually worthless in a prior year. To sustain his burden of proof that it was not, petitioner produced balance sheets of the corporation whose stock was involved upon which the assets are given a substantial value. The assets of a corporation may be considered in arriving at the value of its stock, , and in the absence of any different showing, the book value of those assets is some evidence of their actual value sufficient to shift the burden of going forward to the respondent. See ; .

In this proceeding, however, it is contended that other facts indicate that the book figures have no bearing whatever upon actual value. To establish this, petitioner was asked upon cross-examination at the hearing whether two years previous to the tax year, that is in 1933, he had sold 87 shares of the same stock. He professed to be unable to answer the question and no evidence on this subject was introduced either by petitioner or by respondent. We have since, however, been referred by respondent to the Board's file in Docket No. 84634, a proceeding in which the same taxpayer was petitioner, for the true facts in this connection, and it is contended we may take what for want of a more precise term may be called judicial notice thereof.

The question thus presented has no bearing upon the weight or effect to be given to evidence appearing in the present record. Cf. . It relates solely to the propriety of dispensing with any proof whatever on the ground that the formality of evidence is unnecessary. 5 Wigmore on Evidence (2d Ed.) 567. See

Matters of general knowledge may be the proper subject of our notice without the necessity of formal proof. (inflation of basic commodities after April 1917); (existence of a general economic depression); ; (early nonrecognition of the Soviet Government); (prevalence of welfare work among industrial employees); ; (existence and contents of published Board decisions). It does not follow that the facts of a particular situation, the subject of private, rather than public knowledge, even though in some manner referred to in documents in the files of the Board, may be similarly treated. . Such material, if not part of the present record, would be beyond the scrutiny of the court on appeal. ; see . And orderly procedure requires that the parties to a dispute here be given every opportunity to meet adversary contentions. .

, may be thought to contain language laying down a broader rule. It is unnecessary here to discuss the extent to which that proceeding purported to rely upon the contents of documents in the Board's files not formally introduced in evidence, or whether or to what extent such reliance was necessary to the conclusion there reached. Suffice it to say that, to the extent, if any, to which the Groves case sought to relax the requirement that evidence to be relied upon must be properly introduced and proved, it may not be said to represent the correct principle nor the one which will hereafter be applied.

There being no evidence in the record to sustain the burden of going forward which was shifted to the respondent by petitioner's case, respondent's determination must be reversed.

Reviewed by the Board.

Decision will be entered under Rule 50.