DocketNumber： Docket Nos. 11767, 24925.
Citation Numbers： 16 B.T.A. 8, 1929 BTA LEXIS 2662
Judges： Littleton
Filed Date： 4/15/1929
Status： Precedential
Modified Date： 10/19/2024
*2662 Certain losses claimed on account of the purchase by a syndicate of certain stock for the purpose of effecting the merger of two banks and the subsequent sale by the syndicate to syndicate members of the stock of the new bank,
*8 The Commissioner determined deficiencies in income tax against Joseph W. McCausey for the years 1919 and 1920 of $1,383.39 and *9 $1,191.84, respectively, and a deficiency for 1923 in the case of Frank Wolf in the amount of $2,856.84.
The deficiencies are due to the Commissioner's refusal to allow the deduction of certain claimed losses. The facts are stipulated.
FINDINGS OF FACT.
Both petitioners are residents of Detroit, Mich.
During 1919 Joseph W. McCausey was president and Frank Wolf, vice president of the Commonwealth Savings Bank of Detroit, Mich. They and 18 other stockholders therein formed a syndicate in 1919 to purchase a controlling interest in the Federal State Bank of Detroit, *2663 in order to consolidate the two banks. At that time neither petitioner was a stockholder in the Federal State Bank.
In 1919 the syndicate purchased 1,716 shares of the stock of the Federal State Bank at a cost of $313,732.50, which gave the syndicate a controlling interest. The syndicate borrowed money on notes signed by its members in order to purchase this stock. Thereafter the two banks merged and became the Commonwealth-Federal Savings Bank, the stock of which was issued share for share for stock of the predecessor banks.
During 1919 the syndicate offered the shares owned by it in the Commonwealth-Federal Savings Bank to its shareholders other than syndicate members, at $110 a share. Three hundred and sixty-seven such shares were purchased by shareholders, other than syndicate members. The remaining shares were purchased by syndicate members. at $110 a share. The total amount received by the syndicate in this manner from the sale of its stock of the Commonwealth-Federal Savings Bank was $188,760. The cost of conducting the sale, including commissions and other expenses, amounted to $1,931.32.
In 1919 a payment of $50,000 was made on account of the liability incurred*2664 by the syndicate at the time of its purchase of the Federal State Bank stock of which amount petitioner McCausey paid $5,239, inclusive of interest. In 1920 McCausey paid $2,700 on the same liability. The amounts so paid by McCausey were deducted by him on his income-tax returns for 1919 and 1920, but were disallowed by the Commissioner with the exception of $501.63 and $365.82, which amounts were allowed as aliquot parts of the interest paid in 1919 and 1920, respectively.
In 1923 petitioner Wolf paid $8,000.16 as principal and interest as part of the liability incurred by him as a member of the syndicate in satisfaction of the syndicate loss. This amount was claimed by him as a deduction on his income-tax return for 1923, but was disallowed by the Commissioner.
Both petitioners kept their accounts and rendered their returns on a cash receipts and disbursements basis.
*10 OPINION.
LITTLETON: The transaction as here involved may be briefly stated as follows: In 1919, 20 stockholders of the Commonwealth Savings Bank (two of whom are petitioners herein) formed a syndicate to acquire a controlling interest in the Federal State Bank, which it was proposed to merge*2665 with the former bank. In order to accomplish the foregoing purpose, the syndicate purchased 1,716 shares of stock of the Federal State Bank at a cost of $313,732.50, and borrowed money on notes signed by the syndicate members to make payment therefor. This represented an average cost per share of $182.83. The merger was then effected, in which stock of the new bank was issued to stockholders of the two old banks on share for share basis, the syndicate thus receiving 1,716 shares of this new stock. The syndicate then offered to sell this stock to other stockholders of the new bank, who were not members of the syndicate, at $110 per share, and of the stock so offered for sale, only 367 shares were purchased by these nonsyndicate members. The remainder of the stock was taken by the syndicate members on the basis of $110 per share. The amount thus shown as realized on the disposition of the stock was $188,760, or an amount of $124,972.50 less than the cost of the stock. Expenses incurred by the syndicate amounted to $1,931.32, which, when added to the foregoing amount of $124,972.50, makes a total of $126,903.82, and it is this last-named amount which the petitioners claim was a*2666 loss sustained by these syndicate members.
While the foregoing facts apparently form the basis on which petitioners might be claiming deductible losses, that is, a loss for each petitioner of his part of the foregoing amount of $126,903.82, we are not satisfied that the evidence before us - at least as to McCausey - goes even to that extent. In McCausey's stipulation as to the manner in which the amount claimed as a deduction was arrived at, we find these statements:
In the taxable year 1919 payment of Fifty Thousand Dollars ($50,000.00) was made on account of the liability incurred by the syndicate at the time of its purchase of shares of the Federal State Bank, of which amount the taxpayer paid Fifty Two Hundred Thirty Nine Dollars ($5239.00), inclusive of interest. In the taxable year 1920 he paid Twenty Seven Hundred Dollars ($2700.00) on the same liability.
In reporting taxable income for the years 1919 and 1920, the petitioner deducted amounts as foresaid representing his contributions to the reduction of syndicate liability.
From aught we know from the facts before us, what McCausey is saying is that a part of whatever payments he made on account of the liability*2667 incurred when the stock of the Federal State Bank was purchased should be allowed as a deduction. That is, the evidence does not go further in explanation of the liquidation of the original *11 liability than that these payments were made in the years on appeal and no information is furnished as to whether the amount realized on the sale of the stock to nonsyndicate members was used to reduce the original liability, or whether when the syndicate members took the stock on the basis of $110 per share an amount represented by such a price placed on the shares taken by the syndicate members was similarly used. Manifestly, without knowing more as to the nature of the payments made, we are in no position to say that the deductions claimed are allowable.
But even if the payments were only in liquidation of that which remained after reduction of the original liability by $188,760 (1,716 shares at $110 per share), are these payments deductible by the syndicate members? We think not. Apparently, the acquisition of the Federal State Bank stock, the effecting of the merger, and the disposition of the stock in the manner indicated in our findings was accomplished within a short period*2668 of time - at least within the year 1919. In the acquisition of the Federal State Bank stock and the exchange of this stock, through the merger, for the stock of the Commonwealth-Federal Savings Bank, no taxable gain or deductible loss resulted (section 202(b) of the Revenue Act of 1918). As to the next step, namely, disposition of the stock by the syndicate, we can not agree that the loss claimed can be allowed on account thereof. In so far as the so-called purchases by syndicate members are concerned, we can see in this little more than a sale by the syndicate members to themselves. A syndicate is defined in Bouvier's Law Dictionary, vol. 3, p. 3215, as "An association of individuals, formed for the purpose of conducting and carrying out some particular business transaction, ordinarily of a financial character, in which the members are mutually interested." After the stock of the new company had been received by the syndicate each syndicate member had an interest therein in proportion to his interest in the undertaking. Outside of the sales to the nonsyndicate members, all that the syndicate seems to have done was to divide the stock held by the syndicate among the syndicate*2669 members in proportion to their respective interests therein, assigning to such stock a price or value of $110 per share. The value of $110 was the price at which the stock was sold to nonsyndicate members, stockholders of the new bank, and indicates little as to the market value of the stock, such as we would have where there were sales as a result of a general offering to the public. It may well be that the stock received by the syndicate members had a value equal to or greater than the amount risked by the petitioners in the venture. This is not unreasonable, since the Federal State Bank stock acquired was that of a bank which the petitioners allege was in bad financial condition and it is only fair to *12 consider that what was sought to be accomplished was the creation of a stronger organization through the union of the two banks. When we consider the foregoing facts, particularly the relationship between the purchasers and sellers and evidence as to sale price, we fail to see where a deductible loss has been established. Cf. *2670 .
This leaves only the question whether a deductible loss was sustained on account of the sale to nonsyndicate members, and here, if we would give to the transaction its most favorable view for the petitioners, namely, that it was an arm's-length transaction between the syndicate or syndicate members and the nonsyndicate members, in which stock which cost $182.83 was sold for $110 per share, we would still be unable to determine how much of the payments made were allowable deductions, for the reason that we were furnished no information as to the interests of the petitioners in the syndicate venture.