Appeal of Solof

OPINION.

Littleton:

In this appeal there are four issues to be considered, as follows:

(1) The market value of 225 shares of stock of the Kanawha Land Co.

(2) The correctness of a claimed deduction of $10,000 charged by the Kanawha Banking & Trust Co. for a loan of $90,000.

(3) Whether the transfer of $175,000 of the preferred stock of the Charleston Ofiice Building Co. by the taxpayer to the Central Trust Co. was a sale resulting in a taxable profit, or a loan.

(4) Whether taxpayer is entitled to deduct, in the year 1921, $7,500 charged by the Central Trust Co. for handling the transaction involved in issue No. 3, which amount was not paid by the taxpayer within the year.

The issues will be discussed in their order.

As shown by the findings of fact the taxpayer sold a certain lot, the consideration therefor being three promissory notes, the assumption of outstanding notes against the property, and the receipt of 225 shares, par value $100 per share, of the capital stock of the Kanawha Land Co. Only the value of the 225 shares of stock is in dispute. The Commissioner in computing the taxable gain resulting from this sale, as outlined in the deficiency letter, accepted the consideration of $57,000 reported by the taxpayer in his return for the year 1921. The taxpayer in his appeal alleged, as one of the errors committed by the Commissioner, that the 225 shares of stock of the Kanawha Land Co. should not have been included in any amount in computing the gain resulting from the sale of the lot, for the reason that the stock had no readily realizable market value and that the consideration of $57,000 reported by taxpayer in his return was incorrect. At the hearing the Commissioner contended, and introduced evidence in support thereof, that he was in error in accepting the consideration of $57,000 for the purpose of computing the profit on the sale and that the Board should hold under the evidence that the 225 shares of the Kanawha Land Co. stock received as part of the consideration of the sale of this property had a readily realizable market value of $17,000, or $75.55 per share.

The taxpayer insists that this stock had no readily realizable market value within the meaning of section 202(a) of the Revenue Act of 1921, which provides—

That the basis for ascertaining the gain derived or loss sustained from a snip or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that— *******

(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; * * *.

The taxpayer presented no evidence whatsoever in support of his allegations that the stock received by him in this sale had no market value. The evidence introduced shows that the stock of the Kanawha Land Co. was closely held by a group of wealthy business men who did not trade generally in other stock. The books of the corporation show that during the year 1921 there were two cash sales of 10 shares and 200 shares, respectively, for $75 per share, and that two transfers in trade of 200 and 555 shares, respectively, were made.. The revenue agent at the time of his investigation, at the suggestion of taxpayer’s counsel, interviewed Mr. Staunton, a banker and the principal stockholder of the Kanawha Land Co. as to the fair market value of the stock of that company. Mr. Staunton, in a written statement, fixed the value of this stock at from 75 to 80 per cent of par, but considered the stock which he owned in the company worth par. The mere fact that there were not a great number of sales of this stock during the year 1921 does not establish that the stock did not have a readily realizable market value. In a closely held corporation such as the Kanawha Land Co. there may not be many sales of its stock, but in this case every cash sale realized at least $75 per share, and the evidence before us justifies the opinion that other offers to sell would have realized an equal or greater amount per share. The evidence, in our opinion, preponderates against taxpayer’s claim that this stock did not have a readily realizable market value and clearly justifies, the conclusion that the stock of the Ka-nawha Land Co. during the year 1921 had a readily realizable market value, and that the 225 shares of stock received by this taxpayer had a fair market value of $75.55 per share, or $17,000, as now claimed by the Commissioner.

As to the claim of the taxpayer that he should be allowed as a deduction for the year 1921 the sum of $10,000 charged by the Kanawha Banking & Trust Co. for a loan made to him in that year in the amount of $90,000, we are of the opinion that the Commissioner correctly disallowed this deduction. The bank charged $10,000 for making the loan, and the taxpayer executed his promissory note, bearing interest at 6 per cent, for $100,000 and received $90,000. No payments were made on the note during the year 1921. The Commissioner held that since the $10,000 was not paid within the year it is not a legal deduction from gross income, as the taxpayer kept his books and rendered his returns on a cash receipts and disbursements basis.

As to the third issue, there is a wide difference of opinion between the Commissioner and the taxpayer as to the nature of the transaction. The taxpayer claims that the transaction was in reality a loan of $175,000 to him by the Central Trust Co.; that he received only $107,500 and should be allowed as a deduction in the year 1921 the sum of $7,500 commission charged by the Central Trust Co. On the other hand, the Commissioner claims that the transaction is shown by written agreements between the taxpayer, the Central Trust Co., and the Charleston Office Building Co. to be a sale of preferred stock by the taxpayer, which cost him nothing, to the Central Trust Co. for $167,500, and that this amount should be included as taxable income for the year 1921.

The taxpayer desired to erect an office building on a lot which he owned. Pie first applied to the Central Trust Co., of Charleston, for a loan of $175,000 for this purpose, as well as for other expenses. The Central Trust Co. declined to lend him the money directly on account of the absence of a market for that class of paper due to high State, county, and city taxes. The bank advised the taxpayer to form a corporation and to issue preferred stock with guaranteed dividends. The vice president of the Central Trust Co. testified on this point as follows:

Mr. Solof wanted to build a building on a lot that he had acquired on Quar-rier Street and wanted us to finance him. We agreed to finance him, provided he would form a corporation, let that corporation issue preferred stock, and we would buy the preferred stock from him, provided he guaranteed the preferred stock and dividends and gave us a mortgage on the property and other property and guaranteed that if the corporation did not meet the dividends or the stock when it was retired, that he personally would pay the dividend and retire the stock.

Under our local tax laws — the State, county, and city — the tax rate on bonds is so high that the trust company could not sell bonds. It is as high as 2.17 this year, I think, and it was a scheme that we got up so that we could sell this stock to the public. We were unable to sell local bonds at all on account of that tax rate. In fact, no banks or individuals can make loans on bonds there.

The taxpayer, therefore, at the suggestion of the Central Trust Co., incorporated the Charleston Office Building Co., of which he was the sole stockholder, and caused it to issue first $125,000 and a short time later $50,000 of 7 per cent cumulative preferred stock. The only asset which the Charleston Office feuilding Co. had was the 11-year lease of the lot, carrying with it the right, during the term thereof, to receive future rentals from the building which the taxpayer agreed to construct, which rentals it agreed to turn over to the Central Trust Co. This $175,000 of preferred stock was transferred by taxpayer to the Central Trust Co., for which he received $167,500; $7,500, represented by 75 shares, being the commission charged by the bank for handling the transaction. Simultaneously with the transfer of the stock to the Central Trust Co., and pursuant to written agreement by the taxpayer personally to retire the stock and pay the dividends thereon according to its tenor, he transferred by deed of trust certain real and personal property of the approximate value of $300,000. The 1,750 shares of preferred stock of the Charleston Office Building Co. had no value except for the personal guarantee of the taxpayer. The vice president of the Central Trust Co. testified that no value whatever was placed upon the stock and that the $167,500 was advanced to the taxpayer upon his agreement to pay the principal and dividends thereon. A year or two subsequent to 1921 taxpayer redeemed the $175,000 of the preferred stock at par.

It will be noted that, at one stage of the proceedings, taxpayer apparently received $167,500 for stock for which he paid nothing. The Commissioner contends that in deciding this question the Board must look only to the written instruments between the parties; that these agreements show that there was a sale by taxpayer of 1,750 shares of the preferred stock to the Central Trust Co. for $167,500; therefore, the Board should not consider oral testimony introduced to contradict, or explain away, the statements contained in the agreements. This evidence is admissible. Peugh v. Davis, 96 U. S. 332. 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. Sigua Iron Co. v. Greene, 88 Fed. 207; O'Shea v. New York, C. & St. L. R. Co., 105 Fed. 559; Mitchell v. McShane Lumber Co., 220 Fed. 878.

The question for determination by the Board is whether this transaction was a loan of $167,500 or a sale of stock resulting in a taxable gain of that amount. Section 213 (a) of the Bevenue Act of 1921 provides:

That for the purposes of this title (except as otherwise provided in section 233) the term “ gross income ”—

(a) Includes gains, profits, and income derived from * * * professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. (Italics ours).

It is clear from this section that the principal element of income is gains and profits. Gains and profits, of course, mean that which the recipient has for his own use and benefit.

The word “ income ” is used in tax laws in its ordinary meaning and not in its strict technical or true economic sense. In its ordinary and popular meaning income is the amount of actual wealth which comes to a person during a given period of time. 26 R. C. L. 147. See also Eisner v. Macomber, 252 U. S. 189.

In the case of the Safe Deposit & Trust Co. of Baltimore v. Miles, 273 Fed. 822, affirmed 259 U. S. 483, the District Court said:

The statute means what it says, and that is that the tax is to be levied on nothing else except gains, profits, and income, and upon them only when actually realized in money or in money’s worth, and in determining what is included therein the courts will look through form to substance. Doyle v. Mitchell Bros. Co., 247 U. S. 179. Eisner v. Macomber, 252 U. S. 189.

The evidence shows that the taxpayer incorporated the Charleston Office Building Co., using its preferred stock as a means to obtain a loan of $167,500; that he obligated himself to repay to the bank making the loan more than $175,000 — $7,500 of the amount which he agreed to pay in years subsequent to 1921 being a commission charged by the bank. To insure the future payment of more than $175,000 he transferred to the bank by deed of trust approximately $500,000 of his property. The evidence discloses that he did in fact, subsequent to 1921, repay the $175,000, together with interest thereon. _ We are of the opinion that the transaction was intended as, and in fact was, a loan in 1921 of $167,500 for which taxpayer obligated himself to pay to the bank $7,500 commission.

As to the taxpayer’s claim that be should be allowed a deduction of $7,500 for the year 1921 as commission paid to the Central Trust Co. for the loan of $167,500, we are of the opinion that this deduction can not be allowed for the same reasons given for the disallowance of the $10,000 mentioned in the first issue herein. The taxpayer was on a cash receipts basis. He did not pay the $7,500 commission within the year 1921 but only obligated himself to pay that amount at a future time.