Kuldell v. Commissioner

R. C. KULDELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ETHELYN CRAMER KULDELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kuldell v. Commissioner

Docket Nos. 76799, 76800.

United States Board of Tax Appeals

34 B.T.A. 1116 ; 1936 BTA LEXIS 596 ;

October 16, 1936 , Promulgated

*596 Community property was transferred by petitioners through the agency of a trust company to a corporation. Held, that the transfer to the corporation was solely in exchange for the stock thereof; that immediately after the exchange the transferors were in control of the corporation, the stock received by each of the transferors being substantially in proportion to his interest in the community property prior to the exchange; that therefore petitioners sustained no deductible loss, and the determination of the respondent is approved.

Walter E. Barton, Esq., Raymond C. Cushwa, Esq., and J. L. Block, C.P.A., for the petitioners.

L. W. Creason, Esq., and Irving M. Tullar, Esq., for the respondent.

DISNEY

*1117 The respondent determined deficiencies in income taxes for the year 1930 against petitioners R. C. Kuldell and Ethelyn Cramer Kuldell, in the respective amounts of $4,137.67 and $4,155.11.

The petitioners are husband and wife and residents of the city of Houston, Texas. The errors assigned are the same in each case and are in substance that (1) the respondent erred in disallowing a community loss of $36,223.33 which it is *597 alleged they sustained during the year 1930 on the sale of certain securities to the Mount Rose Co. of Houston, Texas, and (2) in determining that said securities were transferred by them to the Mount Rose Co. in exchange for its capital stock within the meaning of section 112(b) (5) of the Revenue Act of 1928. The cases were consolidated for hearing, the facts being established by testimony of witnesses at the hearing, documentary evidence, and agreed stipulation.

FINDINGS OF FACT.

In April or May 1930, petitioner R. C. Kuldell advised with an attorney and with a tax accountant as to the advisability of creating a corporation to effect certain purposes, including taking title to a large apartment house known as Montrose Apartments, bonds of which he had purchased for $200,000. The petitioners owned as community property a considerable number of stocks and bonds, the records of which the husband kept, which involved much bookkeeping. He was advised prior to incorporation that if the proposed corporation should buy these stocks and bonds, it could keep the records and save unnecessary bookkeeping. He incorporated, in accordance with this advice, the Mount Rose Co. for the *598 purposes as expressed in its charter:

To accumulate and loan money, to sell and deal in notes, bonds and securities; to act as Trustee under any lawful express trust committed to it by contract, and as agent for the performance of any lawful act; to subscribe for, purchase, invest in, hold, own, assign, pledge and otherwise deal in and dispose of shares of capital stocks, bonds, mortgages, debentures, notes and other securities or obligations, contracts and evidences of indebtedness of foreign or domestic corporations not competing with each other in the same line of business, to borrow money or issue debentures for carrying out any or all purposes above enumerated. Provided that the power and authority herein conferred shall in no way affect any of the provisions of the anti-trust laws of the state of Texas.

The articles of incorporation were acknowledged May 17, 1930, and filed with the secretary of state on May 24 1930.

The stock consisted of 100 shares of the par value of $100 each. The entire capital stock, except one qualifying share owned by J. L. Block, was subscribed for by, and issued to, the two petitioners, R. C. Kuldell 50 shares and his wife 49 shares, petitioner *599 R. C. Kuldell executing his personal check to the Mount Rose Co., on the First National Bank of Houston, on May 16, 1930, for $10,000. On *1118 that date Kuldell's balance in his account at that bank was $387.58. The canceled check is stamped "Paid June 5, 1930," and was endorsed by the Mount Rose Co.: "Pay to the order of the First National Bank, Houston, Texas." It was entered on journal voucher No. 1 of the Mount Rose Co. on June 5, 1930, and approved for entry by R. C. Kuldell's signature.

R. C. Kuldell decided to sell the securities of himself and wife to the Mount Rose Co. He took a series of cards to the office of the secretary of the Mount Rose Co. and told him the cards were descriptions of securities which he desired to sell to the Mount Rose Land Corporation. (The Mount Rose Land Corporation was organized after the dissolution of the Mount Rose Co., about December 31, 1931.)

R. C. Kuldell prepared and delivered to the Houston Land & Trust Co. a list in his own handwriting of certain securities owned by him, and on the list he wrote the following instructions, as to the stocks: "Please sell these at May 31-30 closing prices for R. C. Kuldell. Plase buy these *600 at May 31-30 closing prices for Mount Rose Co."; and on the list of bonds: "Please price as of May 31, 1930. Issue sell slips for R. C. Kuldell. Issue bought slips for Mount Rose Co." The confirmation slips relative to sale of said securities were issued and addressed to R. C. Kuldell, bear date of May 31, 1930, and state that "We confirm sale for your account" or "for you." Slips were addressed to the Mount Rose Co. confirming "Purchase for you."

R. C. Kuldell either endorsed in blank all the securities involved herein or executed the requisite power of attorney that would enable the holder to negotiate them, and received on June 5, 1930, from the Houston Land & Trust Co. a cashier's check payable to his order for $473,417.65. It was dated June 6, 1930, because given after three o'clock on June 5, 1930. All the other checks in the transaction were dated and marked paid June 5, 1930. The check for $473,417.65 is endorsed "Deposit R. C. Kuldell." He had about $2,000 in the bank before the checks were deposited in this transaction and the same amount when it was concluded. On June 5, 1930, he deposited the check to his personal account in the First National Bank of Houston, Texas. *601 Immediately after depositing the aforesaid cashier's check, R. C. Kuldell drew his check on the First National Bank for $463,417.65, payable to the Mount Rose Co.

On the same date, June 5, 1930, the Mount Rose Co. opened its bank account with the First National Bank of Houston by depositing to its credit said check for $463,417.65 and also the R. C. Kuldell check for $10,000 dated May 16, 1930 - the aggregate amount of the deposits being $473,417.65.

*1119 Journal voucher No. 1 of the Mount Rose Co. contains the following entry under date of June 5, 1930: First National Bank $463,417.65

Capital surplus $463,417.65

Deposit of check by R. C. Kuldell on behalf of stockholders.

On June 5, 1930, R. C. Kuldell, as president, and J. L. Block, as secretary and treasurer of the Mount Rose Co., executed and delivered the checks of that company on the First National Bank to the Houston Land & Trust Co. in the following amounts: one check for $318,426.14, this being the total amount of the stocks, and another for $154,991.51, this being the total amount of the bonds - a total of $473,417.65. The securities were not transferred to the name of the Houston *602 Land & Trust Co. at any time. The first and only record of a transfer of the securities by R. C. Kuldell to any one is to the Mount Rose Co. There was only one transfer tax paid and that was upon the transfer of the securities to the name of the Mount Rose Co. All checks, except the $10,000 check, passed one afternoon, after three o'clock.

R. C. Kuldell enjoyed a large credit at the First National Bank of Houston, where he frequently was permitted to overdraw his account, which, however, he would make good upon notification of such overdraft. The $10,000 check which he gave the Mount Rose Co. on May 16, 1930, but which was not deposited for collection until June 5, 1930, would have been paid whenever demand therefor was made.

No commission was charged by the Houston Land & Trust Co. to R. C. Kuldell on this transaction. He had purchased various securities from that company and in some cases paid commissions or brokerage. In some instances, he resold securities to the Houston Land & Trust Co. and paid a commission. In other cases he did not pay a commission. This case was an isolated instance with that company. The transaction was made on June 5, 1930, but was made on *603 the prices of May 31, 1930, in accordance with the written instructions given by R. C. Kuldell. The amount for which the bonds were sold included $2,712.76 as interest on the bonds up to May 31, as shown on the sales slips, but after the sale R. C. Kuldell did not collect any interest on the bonds. The sales slips show the periods for which interest was computed and the rates, and at the same rate interest to June 5, 1930, would have been $160.46.

R. C. Kuldell had two main reasons for transferring these securities. One was to put the burden of taking care of the entries, bookkeeping, and accounting, on the office of the secretary of the company; and the second was that the matter of an estate settling seemed to him much more simple when he and his wife owned one security *1120 instead of these many securities, owned stock in one corporation instead of forty or fifty corporations. It was an argument that appealed to him. He asked the tax accountant whether the organization of the company and the transfer of the securities would affect his allowable deductions for income tax purposes, after the tax accountant's figures showed there was a difference between the purchase *604 price and the present market price. He had knowledge of the difference in those values before the entry was made in the journal voucher, which entry was made on June 5, 1930, and signed by him. He decided on the first day of June to claim a loss in his income tax. When he asked the tax consultant in regard to the effect on the tax, he was told that a loss of that nature was deductible, if it was a bona fide sale; that the only question was the bona fides of the sale; that the question of whether he owned and controlled the corporation which ultimately purchased the stock was beside the point. At the beginning of June 5, 1930, the account of the Mount Rose Co. in the First National Bank was zero and at the end of that day it was zero. The $463,417.65 check was deposited by R. C. Kuldell in behalf of the stockholders.

The stocks and bonds were in possession of the Houston Land & Trust Co. for some time prior to their sale and thereafter. They never left the bank, except to be transferred. The employee of the Houston Land & Trust Co. who attended to the transaction followed R. C. Kuldell's instructions. He was told by R. C. Kuldell that it was the Mount Rose Co. that was going *605 to buy the securities and knew beforehand that R. C. Kuldell had a purchaser, that the Mount Rose Co. would buy the stocks. Otherwise the Houston Land & Trust Co. would not have given the cashier's check for $473,417.65. It had every assurance that the securities would be repurchased from it. The cashier's check issued to R. C. Kuldell by the Houston Land & Trust Co. was recorded in its records, under the column "By whom purchased" as purchased by the Mount Rose Co. The cashier's check was endorsed "Deposit R. C. Kuldell."

Immediately preceding the transactions which took place on June 5, 1930, with respect to the securities here involved, R. C. Kuldell and wife owned them as community property. Immediately following those transactions, the Mount Rose Co. held title to the same securities and the petitioners owned all of its capital stock except one share.

The Mount Rose Co. was dissolved and liquidated on December 31, 1931, at which time all its assets were sold or distributed to its stockholders, who were the petitioners and J. L. Block, owner of one qualifying share.

The cost to petitioners of the stocks and bonds which were, on June 5, 1930, transferred to the Mount *606 Rose Co. as heretofore indicated, *1121 was $505,613.84. The fair market value on June 5, 1930, of said stocks and bonds was $473,417.65, which was the aggregate amount of the two checks the Mount Rose Co. gave to the Houston Land & Trust Co.

The transfer of petitioners' community property was to the Mount Rose Co. and solely in exchange for the stock thereof. Immediately after the transfer, the Mount Rose Co. was under the control of the transferrors, R. C. Kuldell and wife, who owned more than 80 percent of the stock, as community property, and the amount of stock received by husband and wife was substantially in proportion to the interest of each in the community property prior to the transfer to the corporation.

OPINION.

DISNEY: (1) The first question for our consideration and determination is whether or not the transactions here involved and set forth in our findings of fact constitute a sale of the securities involved to the Houston Land & Trust Co., as contended by petitioners.

The evidence is somewhat confusing and conflicting, but when all the facts and circumstances are carefully weighed and considered, looking through form to substance, we are of the *607 opinion and hold that there was no sale of the said securities to the Houston Land & Trust Co.

After the incorporation of the Mount Rose Co., R. C. Kuldell decided to transfer the securities to that company, and it was to the secretary of that company that he took a series of cards descriptive of the securities which he desired to transfer to the "Mount Rose Land Corporation." This corporation was, later, the successor to the Mount Rose Co., which plainly indicates that the witness Kuldell intended to designate the Mount Rose Co., and not the Houston Land & Trust Co. His written instructions to the Houston Land & Trust Co., which were followed, indicate clearly that it was his desire to transfer to the Mount Rose Co. In his written instructions the Trust Co. was not directed to purchase for itself, but for the Mount Rose Co. "Bought slips" were to be issued, not for the Houston Land & Trust Co., but for the Mount Rose Co. They were so issued and confirmed. The price of purported sale by R. C. Kuldell and purported purchase by the Mount Rose Co. was the same - the closing price of May 31, 1930. The purchase and sale confirmation slips show the transaction made as of May 31, 1930, consonant *608 with his instructions, and the Mount Rose Co., claiming loss on its income tax return on certain of the securities, stated on oath they were purchased by the Mount Rose Co. on May 31, 1930, which indicates strongly that the written instructions and purchase and sales slips reflect the true situation - a transfer to the Mount Rose Co., not to the Houston Land & Trust *1122 Co. The Houston Land & Trust Co.'s record showed its cashier's check, though issued to R. C. Kuldell, to have been purchased by the Mount Rose Co.

The bonds passed at $154,991.51. This includes $2,712.76 interest thereon, computed to May 31. The sale slips show the rate and the periods covered by the interest. Interest to June 5, 1930, at the same rate, would have been $160.46 additional. R. C. Kuldell collected no interest after the sale. By $160.46 interest, therefore, the Houston Land & Trust Co. would have profited if it had in fact been a transferee of the bonds. Such a gratuity is not consistent with an actual sale. That company itself understood the securities were not to be retained as its own, but would be immediately transferred to the Mount Rose Co., designated by R. C. Kuldell, which *609 was done with no profit or commission whatever to the Houston Land & Trust Co. Only one transfer tax was paid, and the only record of transfer of securities is to the Mount Rose Co.

We find it impossible to conclude that there was any intent to pass title to the Houston Land & Trust Co., and we hold that there was no sale to that company, but that that company acted only as agent for petitioners in passing title to the Mount Rose Co.

(2) Did petitioners sustain a deductible loss in 1930 on the stocks and bonds involved herein by reason of their transfer to the Mount Rose Co.?

The transactions which brought about a transfer of the securities to the Mount Rose Co. occurred almost simultaneously on June 5, 1930. In the transactions and transfer no actual money changed hands.

Section 112(b)(5) of the Revenue Act of 1928 provides:

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only *610 if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

The community securities involved herein were transferred to the newly organized Mount Rose Co., and the interest of each of petitioners in its stock which was issued to them was substantially the same as their respective interests in the securities transferred, over which they immediately after the transfer had absolute control, through control and ownership of more than 80 percent of the stock of the corporation.

In the case of , affirming the , an interpretation of section 202(c)(3) of the Revenue Act of 1921, corresponding to section 112(b)(5) of *1123 the Revenue Act of 1928, was involved. It was there held that a husband and wife who acquired a farm as partners and thereafter organized a corporation controlled by themselves, to which they claimed to have sold the farm at a loss, could not deduct the loss from income. The Court of Appeals of the District of Columbia quoted the Board with approval and said:

*611 The Board of Tax Appeals, in considering the application of that section to this case said: "The substance of the transaction is that the partnership exchanged the farms for stock of the corporation, and that after the exchange the partnership was in control of the corporation, as the word control is used in the section of the statute just quoted. We are of opinion that the transaction is essentially one of the kind in which Congress did not intend for the purposes of taxation to recognize either gain or loss, and that we should be governed by its substance and not its form." With that reasoning of the Board of Tax Appeals we agree.

In transactions like the one before us, substance and not form determines the applicability of the taxing act. ; ; .

The only thing which R. C. Kuldell and wife received in consideration for the transfer of securities was stock in the Mount Rose Co. They received no money. *612 The $463,417.65 check given the Mount Rose Co. was entered on the journal voucher as "capital surplus." This transfer took place within three weeks after the organization of the corporation and upon the same day that R. C. Kuldell's earlier check for $10,000 was deposited. Under such circumstances, the securities were the consideration for the capital stock. Article 67 of Regulations 74, applicable to 1930 taxes, provides in effect that voluntary payments by a stockholder to a corporation which are credited to surplus "represent an additional price paid for the shares of stock held by the individual shareholders." In , citing authorities, we held that where a stockholder paid an obligation due from a corporation for the purpose of protecting it from suit and protecting his interest therein "the payment * * * must be regarded as additional cost of the petitioner's stock."

The cost, then, to R. C. Kuldell and wife, of the stock in the Mount Rose Co., was the securities transferred, which was added to the $10,000 check, which, however, was deposited and put through the bank only in connection with the transfer of these securities. R. *613 C. Kuldell is therefore seen to have paid out no money upon the check, which went through the form of payment only when and because of the transfer of the securities. Plainly this was an exchange and not a sale to the Mount Rose Co. Since there had been, as we hold, no sale to the Houston Land & Trust Co., the cashier's check to R. C. *1124 Kuldell, the deposit thereof permitting passage through the bank of the checks for $10,000 and $463,417.65, and the two checks for $154,991.51 and $318,426.14 from the Mount Rose Co., totaling $473,417.65, to the Houston Land & Trust Co., are seen to constitute mere artifice for conveying the securities to the Mount Rose Co. There was no contribution of cash to the Mount Rose Co., for petitioners realized no cash, there being in fact no sale to the Houston Land & Trust Co. Even if it were considered that the securities were a contribution to capital surplus, instead of transferred for stock, petitioners would sustain no deductible loss.

Petitioners owned the securities before the said transactions of June 5, 1930, and immediately thereafter, though the title to the securities was in the Mount Rose Co., they were in control of the *614 corporation by virtue of their ownership of practically all, more than 80 percent of, its stock, in substantially the same proportions in which they had owned the securities transferred.

We are, therefore, further of the opinion and hold that the petitioners are not entitled to any deductible losses by reason of the transfer of securities to the Mount Rose Co. as shown herein, and the determination of the respondent in disallowing said alleged losses is accordingly approved.

Reviewed by the Board.

Decision will be entered for the respondent.