Corrado & Galiardi, Inc. v. Commissioner ( 1931 )

CORRADO & GALIARDI, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Corrado & Galiardi, Inc. v. Commissioner

Docket No. 41246.

United States Board of Tax Appeals

22 B.T.A. 847; 1931 BTA LEXIS 2048;

March 20, 1931, Promulgated

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Sale of stock by corporation to stockholders was a bona fide sale.

Clarence A. Miller, Esq., for the petitioner.

J. L. Backstrom, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency in tax of $2,198.79 for the calendar year 1926. The error assigned is the failure to allow a deduction of $18,960 representing a loss incurred in the sale of some stock.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation with its principal place of business in Connellsville, Pa. All of its stock was owned during the period here in question by G. Corrado, Philip Galiardi, and their families. G. Corrado was president of the petitioner.

On or about February 4, 1924, a partnership known as Corrado & Galiardi purchased 422 shares of Southern Connellsville Coke Company stock, for which it gave its check in the amount of $12,960, its promissory note in the amount of $15,000 endorsed by G. Corrado and Philip Galiardi, and, as collateral security, the 422 shares of Southern Connellsville Coke Company stock.

After several months the petitioner became the owner of the above mentioned shares under circumstances not shown by the record.

On or about December 12, 1924, the petitioner purchased 135 shares of Southern Connellsville Coke Company stock for $4,000.

On December 30, 1926, by which time $2,000 had been paid on account of the principal of the original loan of $15,000 above referred to, the petitioner executed its promissory note for $13,000 endorsed by G. Corrado and Philip Galiardi. On the same day G. Corrado and Philip Galiardi purchased the 557 shares of Southern Connellsville Coke Company stock from the petitioner by assuming payment of the note of $13,000.

Under date of December 31, 1926, the following entries were made on the petitioner's journal:

	Dr.	Cr.
Notes Payable	$13,000.00
Southern-Connellsville Coke Company stock		$13,000.00
Southern-Connellsville Coke Company's stock was sold to G. Carrado and P. Galiardi in payment for which they assume note at Citizens National Bank.
Profit and Loss	18,960.00
Southern-Connellsville Coke Company stock		18,960.00

To charge Profit & Loss with loss incurred from their sale of Southern-Connellsville Coke Company's stock to G. Corrado and P. Galiardi.

The note was renewed every sixty or ninety days. Interest on it was paid and the principal amount was reduced from time to time. All of the renewal notes were given by the petitioner, all save the last were endorsed by G. Corrado and Philip Galiardi, and the 422 shares of Southern Connellsville Coke Company stock remained as collateral security for each. The last note was one for $500 given May 24, 1929, and was endorsed by G. Corrado only.

The petitioner paid the interest on the note of $13,000 and the renewals of that note. It also made payments on the principal of the note until it had paid the entire amount of the principal. The last payment was one of $250 on July 22, 1929. Every time that it made a payment on the principal or interest of the note, it charged one-half of the total amount paid to the account of G. Corrado and one-half to the account of Philip Galiardi. Each of these accounts showed a credit balance at the end of the year 1929.

The stock was never reacquired by the petitioner. It became entirely worthless a year or so after the transaction here in question.

The stock certificate book of the Southern Connellsville Coke Company shows that stock certificates were issued as follows:

Issued to	Certificate No.	Date	Shares
Corrado & Galiardi	94	Feb. 25, 1924	422
Gaetoni Corrado	98	Dec. 1, 1924	50
Philip Galiardi	99	Dec. 1, 1924	50
Corrado & Galiardi	100	Dec. 1, 1924	35
Philip Galiardi	104	Nov. 22, 1927	211
Gaetoni Corrado	105	Nov. 22, 1927	211
Philip Galiardi	106	Oct. 20, 1927	35

The Commissioner disallowed the claimed loss of $18,960, added the amount to the petitioner's income, and thus determined the deficiency.

OPINION.

MURDOCK: The Commissioner stated in the deficiency notice in explanation of the disallowance of the loss that no formal sale was made, but mere entries were made on December 31, 1926, the effect of which was to write off the petitioner's books its equity in the stock. The respondent's brief states that the sole question is whether or not there was a bona fide sale. Bona fide means, with good faith; without fraud or deceit. Fraud is not to be presumed. Here there was a full disclosure of all circumstances incident to the alleged sale, and Corrado, the only witness, testified that he and Galiardi purchased the 557 shares of stock from the corporation. Entries were made on the books of the corporation to show that a sale had been made. It is true that the corporation actually paid the interest and principal of the note, but it immediately charged each payment to the two stockholders, and the total amounts of these various charges against their accounts were eventually offset by credits. Thus, the two stockholders paid the $13,000 and interest. It is also true that stock certificates were never issued in the name of the petitioner; there was no clear proof of the fair market value of the stock at the date of the sale to the stockholders; and the petitioner always remained primarily liable on the note. But these circumstances do not show fraud in the sale nor do they show that it was not a genuine sale. Corrado stated as a reason for the sale that he and Galiardi felt that the stock had greatly depreciated in value and was probably not worth $13,000, so the two of them felt that they should take over the stock and assume the payment of the balance due at the bank. We, therefore, decide that the sale was bona fide and further that it was genuine. As this is the only point in controversy, our judgment must be that there is no deficiency.

If we were called upon to determine the cost to the petitioner of the 422 shares of stock, we could not do so from the record before us. We have been told that a partnership first acquired these shares by paying $27,960 for them. We do not know how the petitioner acquired this stock or how much it paid for it, other than that it gave its note in the amount of $13,000 as a renewal for the loan which was originally $15,000. Thus, the greatest cost of the 557 shares which could be determined from the record would be $17,000. But we understand from counsel for the respondent that there is no question of the cost of the stock to the petitioner. This being so, we need not trouble ourselves about the inadequacy of proof of this point.

Judgment of no deficiency will be entered.