Guarantee Title & Trust Co. v. Commissioner

GUARANTEE TITLE & TRUST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Guarantee Title & Trust Co. v. Commissioner

Docket No. 6063.

United States Board of Tax Appeals

10 B.T.A. 599; 1928 BTA LEXIS 4066;

February 8, 1928, Promulgated

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Loss on sale of securities allowed.

Stanley Spurrier, C.P.A., for the petitioner.

A. H. Fast, Esq., for the respondent.

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LANSDON

The respondent has asserted a deficiency in income and profits tax for the year 1920, in the amount of $8,758.80, of which the petitioner avers that only $4,465 is in controversy. The respondent is alleged to have erred (1) in disallowing as a deduction from such income a loss alleged to have been sustained in the year 1920, and (2) in overstating the petitioner's income for the taxable year by including therein a certain net credit to profit and loss.

FINDINGS OF FACT.

The petitioner is a Kansas corporation with its principal office at Wichita. During the taxable year it was engaged in the banking and trust business and in the purchase and sale of municipal bonds and other securities.

It is the consistent accounting practice of the petitioner to take all securities purchased for resale into its assets accounts at par, and to adjust its books to cost thereof, by debit and credit entries of the differences between cost and par. Pursuant to this custom, when the bonds in controversy were purchased, the petitioner credited to a bond premium account the amount of $1,069.95, representing discount on bonds purchased, less premium paid on the day of such entry. On December 31, 1920, "Bond Premium Account" was charged, and "Profit and Loss" was credited with the same amount.

On December 31, 1920, the petitioner sold to the First National Bank of Wichita bonds of the par value of $69,000, and received therefor the amount of $56,197.60. The cost of such bonds was $67,930.05. The difference between par value and cost, in the amount of $1,069.95, was debited to "Bond Premium Account" and credited to "Profit and Loss" in conformity with the petitioner's accounting practice as set forth above. The result of this transaction, as reflected by the book entries pertaining thereto, was that the petitioner took into its accounts on December 31, 1920, a loss in the net amount of $11,732.45. In its income and profits-tax return for the taxable year it deducted a loss of $12,802.40, and included the amount of $1,069.95 in its income, which procedure was, in effect, a net deduction from gross income of $11,732.45 as a loss resulting from the transaction here involved.

The bonds in question were sold and delivered to the purchaser, payment therefor was received and the proceeds thereof were deposited to the account of and made available for the use of the petitioner on December 31, 1920. There was no repurchase agreement. The bonds became the property of the purchaser on such sale and delivery. All the accounting entries relating to the transaction are in conformity with the petitioner's usual procedure and were made contemporaneously with the transaction. The price received was the market value of the bonds on date of sale.

On January 5, 1921, the petitioner repurchased the bonds in question for the same amount it had received on December 31, 1920, and made entries on its books which restored the assets status in existence prior to the sale which is the basis of this controversy.

OPINION.

LANSDON: The respondent attacks the bona fides of the sale and repurchase of bonds as recited in our findings of fact, and contends that when such sale was made there was an agreement for repurchase. He admits, however, that if there was an actual sale, even though for the sole purpose of realizing a loss and reducing tax liability, that the petitioner was within its legal rights, and that the deduction claimed should be allowed.

The petitioner concedes that the sale was made for the purpose of realizing a loss which it had sustained in the shrinkage of the value of the bonds in question, and that it made the sale for the purpose of reducing its tax liability for the year in question, and accepts the burden of proof that the sale was bona fide and not a mere "wash" transaction.

The evidence is conclusive that the sale was made and payment received on December 31, 1920, that there was no repurchase agreement, and that the title to the bonds rested unconditionally in the purchaser from the date of the sale until January 5, 1921, the date of the repurchase. On this record we are of the opinion that the bona fides of the transaction is established, and that the loss sustained, in the amount of $11,732.45, is deductible from the petitioner's gross income for the taxable year. ; .

Our findings of fact, above, settle the controversy over the respondent's addition of $1,069.95 to the income of the petitioner. Nothing more than a matter of accounting is involved in this queston. This amount was not income. The deductible loss from the transaction is as set forth above.

Reviewed by the Board.

Judgment will be entered on 10 days' notice, under Rule 50.