Stanton v. Commissioner ( 1937 )

GEORGE H. STANTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Stanton v. Commissioner

Docket No. 62100.

United States Board of Tax Appeals

36 B.T.A. 112; 1937 BTA LEXIS 770;

June 15, 1937, Promulgated

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The controlling stockholder of two banks which closed in 1923 became liquidator of those banks, and, in accordance with his agreement, placed some of his own assets in trust with the provision that they could be used after a certain time to pay the creditors of the banks in case he was unable to liquidate the assets of the banks for an amount sufficient to pay the claims in full. Some of the assets were used in 1929 with the petitioner's consent to pay some of the creditors of the banks. Held, his property was absolutely committed to discharge his liability as a stockholder for the first time in 1929 and, since such use represented additional cost of his stock which was already worthless, he is entitled to deduct losses in 1929 equal to the basis for gain or loss which the property had in his hands.

George H. Stanton pro se.

Philip A. Bayer, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency in the petitioner's income tax for 1929 amounting to $4,824.21. The only issue before the Board is whether or not the petitioner is entitled to deduct at least a sufficient amount of alleged losses to wipe out the net income of $51,147.57 determined by the Commissioner.

FINDINGS OF FACT.

The petitioner is an individual who resides in Great Falls, Montana. He organized the Stanton Trust & Savings Bank, hereinafter referred to as the Stanton Bank, in 1914, and thereafter held a controlling interest in its stock. He was president of that bank. At some time prior to 1923 he purchased a controlling interest in the First State Bank of Joplin, hereinafter referred to as the Joplin Bank. He held a controlling interest in both these banks in 1923. Both banks were located in Montana.

The Joplin Bank was closed and placed in receivership in July 1923, and on the same day the Stanton Bank suspended operations and went into voluntary liquidation. The Stanton Bank was then solvent. It closed because its officers realized it would not be able to withstand the increasing withdrawal of deposits. The petitioner, because of his liability to the depositors of the two banks, as a stockholder and officer, as well as for other reasons, verbally agreed with the superintendent of banks of Montana that he would place his own assets in trust under certain conditions for the protection of the depositors, if he were allowed to liquidate the two banks. He was appointed receiver of the Joplin Bank and liquidating agent of the Stanton Bank. His oral agreement with the superintendent of banks was reduced to writing on December 15, 1924.

He was designated in the agreement as "trustor." Other parties to the agreement were three men named as "Trustees for the Depositors and Creditors of Stanton Trust & Savings Bank, and as Trustees for the Depositors and Creditors of the First State Bank of Joplin, whose claims against either of said Banks as such Depositors and Creditors may be duly verified, filed and allowed as lawful claims aginst either of said Banks." The trustor transferred to the trustees some real estate and shares of stock. The agreement contains a recital that the trustor voluntarily manifested his desire and intention when the banks were closed of holding intact sufficient of his individual assets to protect the depositors of the banks against loss in the event the assets of the banks should prove insufficient to discharge the lawful claims of the depositors, and he was desirous of transferring his personal assets to trustees to hold the assets in trust as security for the payment in full of the lawful claims of the depositors and creditors and to remove those assets from the demands of personal creditors of the trustor. The trust instrument further provided that the trustees for the first five years could not sell or dispose of any of the trust property without written consent of the trustor, but could convey with his consent and the proceeds of all such sales should go immediately to pay and discharge the obligations of the bank. The trustees were to have full power to sell and dispose of the assets after five years, if the remaining assets of the bank were then insufficient to pay the claims in full. The trustor retained for the first five years the management, use, and occupation of the property and assets transferred to the trustees, including the voting power on all of the stock, and was to pay all taxes and upkeep, including insurance. Insurance in the case of loss was to replace the destroyed property in the trust. Any remaining property after the completion of the trust was to be returned to the trustor.

The trustees during the taxable year 1929 sold, with the consent of the petitioner, two pieces of real estate and two blocks of stock which the petitioner had placed in the trust. The proceeds of the sales were paid to the depositors of the Stanton Bank. The trustees during 1929, with the consent of the petitioner, conveyed to the Stanton Bank a piece of real estate and a block of stock which the petitioner had placed in the trust. The Stanton Bank, up to the time of the hearing, had returned to depositors 55 percent of their deposits. It still had some assets to be disposed of, but not enough to pay the depositors in full. The Joplin Bank receivership was completed prior to the year 1929 and but a small percentage of its total deposit liability was paid.

The petitioner, on his return for 1929, claimed a deduction of $267,200 as a loss sustained in the transactions described above. The deduction was disallowed by the Commissioner in determining the deficiency.

Properties which the petitioner had conveyed to the trust and which the trust disposed of in 1929, as described above, included the petitioner's former residence in Great Falls, a business property in Great Falls, stock of the Northern Montana Coal Co., stock of the Belt Valley Coal Co., stock of the American Brewing Co., and several acres of land in Cascade County. The petitioner's basis for gain or loss on those properties was in excess of $60,000.

OPINION.

MURDOCK: The petitioner, when he acquired controlling interests in the two banks, entered into the transactions for profit. The stock in the two banks became worthless prior to the taxable year 1929. The Commissioner does not dispute either of these points. He contends that the transfer by the petitioner of his property in trust in 1924 represented payment by him of legal obligations which he had as a stockholder and officer of the banks, increased the cost of his worthless bank stock, and represented a loss sustained by him at that time. If the petitioner had made an absolute and complete transfer of his property in 1924 the Commissioner's theory of this case would be correct. But the petitioner did not make an absolute and complete transfer of his property at that time. Instead he placed it in trust that he might be permitted to liquidate the assets of the two banks as best he could and that the depositors and creditors of the bank might be protected in case he should be unable to liquidate the assets of the banks for an amount sufficient to pay their claims. The trustees had no power to use the property to pay claims without his consent for the first five years. Had he been able to liquidate the assets of the banks for an amount sufficient to pay the claims in full, then his property would have been returned to him and he would have had no loss whatsoever. Likewise if some part of his property had not been needed to pay the claims it would have been returned to him. His loss was not sustained and could not have been computed prior to 1929.

The property in question was used by the trustees with his consent in 1929, prior to the end of the five-year period. Its use then was a continuation of the transactions originally entered into for profit when the petitioner acquired the stock of the two banks. Such use in 1929 was the equivalent of the payment by the petitioner of additional amounts as cost of his bank stock. The bank stock was already worthless. These additional payments were lost as soon as they were made. The Commissioner does not question that they were made because of the petitioner's legal liability as a stockholder. Thus the petitioner had additional losses on his bank stock in 1929, when for the first time his property was absolutely committed to and actually used in the discharge of his legal obligation.

The only remaining question is, How should his loss be computed? Since the property was sold in 1929 and the proceeds used in the same year, the answer to this question is simple. The amount which he is entitled to deduct in 1929 is his basis for gain or loss upon the properties disposed of. If any of the properties were sold for more than their bases to the petitioner, he would have to report that gain before he could claim a loss in excess of basis. Likewise, if any properties were sold for less than their bases to the petitioner he would be entitled, in one way or another, to deduct a loss in 1929 equal to the exact amount of the bases which the properties had in his hands. The return filed showed no tax due. Since his basis for gain or loss on these properties far exceeded the net income as determined by the Commissioner, it follows that there is no deficiency.

Decision will be entered for the petitioner.