DocketNumber: Docket No. 90592.
Citation Numbers: 40 B.T.A. 1266, 1939 BTA LEXIS 739
Judges: Hill
Filed Date: 12/22/1939
Status: Precedential
Modified Date: 1/12/2023
*739 1. In the absence of considerations invoking equitable estoppel,
2. A parent corporation, owning more than 95 per centum of the capital stock of a subsidiary, transferred approximately 54 per centum of the subsidiary's stock into the name of a nominee.
*1266 OPINION.
HILL: Respondent determined a deficiency in petitioner's income tax liability for the year 1933 in the amount of $3,206.48. Such deficiency*740 results from respondent's holding that petitioner, sometimes hereinafter called the M.D. & S., was not affiliated during the tax able year, within the purview of the applicable revenue act, with the Seaboard Air Line Railway Co., hereinafter for convenience called the Seaboard.
Petitioner was included in a consolidated income tax return filed by the Seaboard for 1933, and it is conceded that if petitioner was not affiliated with Seaboard in that year for tax purposes, the deficiency determined by respondent is correct, but if so affiliated, no deficiency in tax is due.
The Revenue Act of 1932, in section 141(a), (d), provides that an
Petitioner is a railroad corporation, organized under the laws of the State of Georgia, with its principal office at Macon, Georgia, and its principal accounting office in Portsmouth, Virginia.
The Seaboard Air Line Railway, also referred to as Seaboard, a railroad corporation organized under the laws of Virginia and other states and predecessor of the Seaboard Air Line Railway Co., purchased all of the outstanding securities of the M.D. & S. from the Atlantic Coast Line Co. in January 1907, pursuant to an agreement dated October 11, 1906. The securities so acquired by Seaboard included all of petitioner's outstanding capital stock, consisting of 20,400 shares.
On October 23, 1907, the board of directors of Seaboard adopted a resolution authorizing a committee to sell, under advice of counsel, all or any part of the company's holdings of M.D. & S. stock, reserving an option, if the committee deemed it advisable or practicable, to repurchase the stock at a figure to be determined by the committee.
Pursuant*742 to such resolution, Seaboard entered into a written agreement dated November 29, 1907, with S. D. Loring & Son of Boston, Massachusetts, sometimes hereinafter referred to as Loring, whereby Seaboard purported to sell to the latter firm 11,000 shares of M.D. & S. stock for a consideration of $1,000, and Seaboard purportedly was granted an option to repurchase the stock at any time within five years for the sum of $2,000. The instrument further provided that the stock should be transferred into the name of S. D. Loring & Son and deposited with the New York Trust Co., endorsed or assigned in blank, to be held by the trust company subject to the terms of the instrument.
At the time of the transfer of stock to Loring, the shares had a value substantially in excess of the "purchase price." At the time the purported option to repurchase was granted by Loring, and at the dates of subsequent similar options hereinafter referred to, the 11,000 shares of stock had a value substantially in excess of the respective option prices.
It was further provided in the agreement between Seaboard and Loring that if Seaboard exercised its "option to repurchase" within the five-year period, the trustee*743 should deliver the 11,000 shares t0 Seaboard and the stock should "thereupon become the absolute property of Seaboard Air Line Railway, its successors or assigns." The agreement also provided that until Seaboard exercised its option, S. D. Loring & Son should be "clothed with all rights of ownership, and * * * entitled to all rights and privileges incident to said stock." Each of the subsequent agreements hereinafter mentioned contained similar provisions.
*1268 Petitioner offered evidence to establish that, although the transaction between Seaboard and Loring took the form of a sale with an option to repurchase, Loring had no intention to buy, and Seaboard had no intention to sell, the 11,000 shares of petitioner's stock. The understanding of both parties was that Loring would act as nominee of the stock for Seaboard. Loring regarded the transaction as an accommodation to Seaboard, with which the firm then had close connections.
The transaction between Seaboard and the Loring firm was negotiated in behalf of the latter by Homer Loring, who, at the suggestion of Seaboard, became president and a director of the M.D. & S. during the time the stock stood in the name of*744 his firm. However, Loring never participated in the management of the M.D. & S. nor attended any of its stockholders' or directors' meetings. Loring executed proxies for the annual meetings of the M.D. & S. in accordance with the request of Seaboard. The stock was not considered an investment by Loring and was not carried as such on its books.
In 1912 Loring requested Seaboard to relieve the firm of its relationship to the 11,000 shares of M.D. & S. stock. Thereupon the secretary of Seaboard made arrangements with one James A. Blair, Jr., of New York City, to transfer the stock into his name. Blair at that time was associated with Blair & Co. which controlled Seaboard.
A written assignment was executed by Loring to Blair, dated November 23, 1912, for the recited consideration of $2,000 in cash. On the same date Loring and Seaboard by letter directed the New York Trust Co. to cause the 11,000 shares of petitioner's stock to be transferred into the name of Blair and to continue to hold the stock subject to the terms of the option agreement. A written instrument was executed between Blair and Seaboard under date of November 29, 1912, which purported to grant to Seaboard an*745 option to repurchase the shares of stock from Blair within one year for $2,120. This instrument was substantially the same as that previously executed by Loring and Seaboard. The pruported option price represented the $2,000 paid by Blair, plus 6 percent interest. The agreement was renewed from year to year to and including November 29, 1924.
It was the intention of both parties to the agreement between Seaboard and Blair that Blair was to serve as Seaboard's nominee. Blair considered that Seaboard was the owner of the stock, and consented to have the stock transferred into his name as an accommodation to Seaboard. Blair did not regard the stock as an investment. He served as president and director of the M.D. & S. during the time the stock stood in his name, but took no part in its management and received *1269 no compensation. He executed proxies for the annual meetings in accordance with instructions of officers of Seaboard.
In 1915, during which year the 11,000 shares of stock stood in Blair's name, the Seaboard Air Line Railway was consolidated with another company to form Seaboard Air Line Railway Co., which succeeded to all of the rights of the Seaboard Air*746 Line Railway in the M.D. & S. stock.
The Seaboard had agreed on request to take the 11,000 shares of stock out of Blair's name at any time, and accordingly at his request in 1925 Seaboard arranged to transfer the stock to the Continental Trust Co., Baltimore, Maryland, hereinafter called Continental. The relationship between Seaboard and Continental at that time was close, and has continued through the Maryland Trust Co., Continental's successor, down to the present time. In 1925 the president of Continental was also president of Seaboard.
On November 14, 1930, the Maryland Trust Co., successor to Continental, executed a written instrument purporting to grant to Seaboard an option to repurchase the 11,000 shares of petitioner's stock within one year for $4,265.86, the recited consideration for the transfer of the stock from Blair to Continental. Provision was made for an automatic annual extension of the so-called option up to and including November 14, 1935, and thereafter until 60 days after notice of termination by the trust company.
In October 1933 petitioner's outstanding capital stock was reduced from 20,400 to 17,500 shares, and this resulted in the reduction of*747 the number of shares held by the Maryland Trust Co., from 11,000 to 9,434 shares. The agreement of November 14, 1930, was amended accordingly.
In entering into the transactions above mentioned, neither the Continental Trust Co. nor the Maryland Trust Co. had any intention to buy, nor did Seaboard have any intention to sell, the 11,000 shares of petitioner's stock. At the time the stock was transferred to it, Continental made no inquiry as to the value of the stock, and considered the amount paid to Blair as an advance to Searboard. Both Continental and the Maryland Trust Co. caused their nominees, in whose names the stock was registered, to follow Seaboard's instructions as to voting and giving proxies in respect of the stock.
At the hearing respondent objected to admission of the evidence offered by petitioner to show that the transactions above mentioned were in fact not what they purported to be according to the terms of the various written instruments. The objection is based on the ground that the testimony violated the parol evidence rule. The presiding Board Member reserved ruling on the objection until consideration of the case on the merits.
*1270 Decision*748 of the issue submitted herein turns upon this point.
On brief respondent quotes an extract from Jones on Evidence to the effect that "parol evidence can not be received to contradict, vary, add to or subtract from the terms of a valid written instrument", and argues that such rule is applicable in suits involving third persons, not parties to the written instrument. Respondent further contends that one of the chief functions of the parol evidence rule is to protect innocent third parties, and says that admission in evidence of the oral testimony offered by petitioner "would prejudice an innocent third party, namely, the Commissioner of Internal Revenue."
We are unable to agree with the respondent's contentions. If it be true that Seaboard did in fact own directly more than 95 percent of petitioner's capital stock during the taxable year, then under the statute there is no deficiency in tax due from petitioner, and it is difficult to comprehend, in the absence of any considerations invoking equitable estoppel, how the admission of evidence to establish the true facts could be prejudicial to the rights of respondent, or how in that connection he could properly be regarded as an*749 innocent third party. We see no question of estoppel involved here. There is no suggestion that respondent has been induced to change his position to his injury in reliance upon the written instruments in controversy, and hence, if no tax is due, respondent has no rights in the premises and is not an innocent third party. Surely, the doctrine urged by respondent, even if applicable in some circumstances, could not be invoked by respondent to permit him to collect as a tax, upon a purely technical ground, an amount not rightly owing by petitioner.
In support of the second proposition that the parol evidence rule is applicable in cases involving third persons who are not parties to the written instrument, respondent cites
The
*751 What we said in
Application of the parol evidence rule under the facts of the present case would be inconsistent with the broad, general principles of construction applied to taxing statutes. "Taxation is an intensely practical matter, and laws in respect of it should be construed and applied with a view of avoiding, so far as possible, unjust and oppressive consequences." *752
Again, it was said by the court in
While extraneous evidence is not generally admissible for the purpose of construing the terms of a written instrument, "it is competent to show by parol what the transaction was."
The question of the application of the parol evidence rule, in cases similar to the present proceeding, has been specifically considered by *1272 us many times and its application uniformly denied. In
The rule against varying or contradicting writings by parol evidence obtains only in suits between and is confined to parties to the writing and their privies and has no operation with respect to third persons nor even upon the parties themselves in controversies with third persons. [Citing authorities.]
This rule is supported by the great weight of authority. See 22 C.J. 1291, 1292, P1725.
*754 In
In
In many cases both this Board and the courts have denied loss deductions claimed on transactions appearing from contracts or other written instruments to be sales, where such instruments were contradicted or varied by other evidence indicating a lack of intent to change ownership. See cases cited in
In
Respondent's objection to the admission of the oral testimony in the present case is overruled, and exception noted.
*756 Respondent makes one further contention which requires brief consideration, namely, that even if admissible the oral evidence establishes only beneficial ownership in Seaboard of the 11,000 shares of petitioner's stock, and this does not meet the statutory requirement of direct ownership. In other words, respondent here urges the proposition that ownership through a nominee is not "direct ownership." This contention, in our opinion, is not only untenable but contrary to the conclusions reached in
Where a parent corporation, for a legal intra vires purpose, has placed the record ownership of a share of stock of a subsidiary in a nominee, such nominee being at all times legally obligated to hold and deal with such share according to such orders and directions as the parent corporation may, from time to time, give him, the ownership of the parent corporation is "direct" within the meaning of section 141(d) of the Revenue Act of 1928.
Section 141(d) of the Revenue Act of 1928 is identically the same in terms as section 141(d) of the 1932 Act, which governs the instant proceeding.
The direct*757 ownership required by the statute is not merely possession of the naked legal title, but beneficial ownership, which carries with it dominion over the property. Any other conclusion would lead to absurd and ridiculous results. For illustration, if Seaboard had transferred to the Continental Trust Co., as its nominee, the legal title to more than 95 percent of petitioner's stock, for some lawful
We hold that petitioner was affiliated with Seaboard during the taxable year, and hence there is no deficiency in tax due from petitioner.