Jopling v. Commissioner

MORGAN W. JOPLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Jopling v. Commissioner

Docket No. 105579.

United States Board of Tax Appeals

46 B.T.A. 262 ; 1942 BTA LEXIS 887 ;

February 4, 1942 , Promulgated

*887 Petitioner guaranteed notes of a corporation of which he was an officer and director and pledged his own securities as collateral for the notes. In the taxable year the pledged securities were sold to liquidate the corporation's indebtedness for a sum less than their cost to petitioner or their value at the date of pledge. Petitioner received a promissory note of the corporation and cash aggregating the amount for which the pledged securities were sold. Held, that petitioner sustained a capital loss on the sale of securities so that his loss is limited by the provisions of section 117(d) of the Revenue Act of 1936.

William E. Bardusch, Esq., for the petitioner.

Ellyne E. Strickland, Esq., for the respondent.

ARUNDELL

*263 The Commissioner determined a deficiency in petitioner's income tax for the year 1937 in the sum of $3,958.33. The sole issue before the Board is whether petitioner sustained an ordinary loss or a capital loss upon the sale of petitioner's securities pledged as collateral for loans made to a corporation.

FINDINGS OF FACT.

We adopt the stipulated facts as a part of our findings but set forth herein only those *888 facts necessary for discussion of the issue before us.

Petitioner is a resident of New York, New York, and filed his Federal income tax return for the taxable year with the collector of internal revenue for the third collection district.

From the year 1931 to September 1937 petitioner was a director and president of the MacArthur Concrete Pile Corporation, a New York corporation, hereinafter referred to as the MacArthur Corporation. From and after September 1937 petitioner was a director and chairman of the board of directors of the corporation. During the period 1931 to 1937, inclusive, petitioner owned 30 percent of the outstanding stock of Harrison-White, Inc., which owned approximately 90 percent of the outstanding stock of the MacArthur Corporation, but petitioner was not a stockholder of the MacArthur Corporation.

Beginning April 7, 1931, the MacArthur Corporation borrowed various sums of money from the Guaranty Trust Co. of New York, hereinafter called the trust company, giving its promissory notes therefor. These notes were personally guaranteed by petitioner. At the time the first loan was made by the trust company to the corporation, various securities owned *889 by petitioner were pledged with the trust company as collateral. From time to time during the period of 1931 to 1937, inclusive, certain of the securities originally pledged as collateral for the loan were sold or withdrawn by petitioner and other securities were deposited as collateral. From 1931 to 1937 dividends and interest on stocks and bonds held as collateral by the trust company were paid up to the date of sale to petitioner.

The pledged securities cost petitioner $66,538.70 and had an aggregate value as of the dates of pledge of $55,471.45. The pledged *264 securities were sold in 1937 for a total sum of $43,057.77 and the proceeds were applied against the amount owed by the corporation to the trust company.

On December 29, 1937, the MacArthur Corporation gave to petitioner its demand note in the amount of $43,000 and cash in the sum of $57.77. This was the amount for which the securities had been sold and the proceeds applied toward the liquidation of the MacArthur Corporation's indebtedness to the trust company.

The following facts were adduced from oral testimony and exhibits presented at the hearing.

Prior to 1931 the operations of the MacArthur *890 Corporation had been successful. In 1931 it became necessary for the corporation to borrow money. Since the corporation did not have sufficient credit to borrow funds, petitioner guaranteed the loans to the corporation and pledged some of his securities as collateral for the corporation's loans. It became apparent that the loans would extend over a considerable period of time and an agreement was reached between petitioner and the corporation whereby petitioner would be compensated for the use of his securities as corporate collateral by annual payments "out of the net earnings of the corporation in such amounts as would be considered to be reasonable under the circumstances."

From time to time the trust company called on petitioner for more collateral or requested that some of the pledged securities be sold and others more acceptable to the trust company be pledged in their place. Where the trust company requested the sale of pledged securities petitioner obtained approval from the MacArthur Corporation. In each case petitioner authorized the trust company to deliver to the broker the shares to be sold. The proceeds of the various sales were placed in the collateral account *891 in substitution for the securities sold. The trust company never sold any of the pledged securities of petitioner without his authorization.

OPINION.

ARUNDELL: It can not be questioned that the securities of petitioner which were sold in 1937 constitute "capital assets" as that term is defined in section 117(b) of the Revenue Act of 1936. Nor is it longer considered material whether such sale be a voluntary or involuntary one. . In the instant case petitioner's contention that the sales were involuntary might well be questioned if the point be material, for every sale of shares by the trust company was directly authorized by petitioner and no sale was made except after he had been consulted and approved the transaction.

*265 As stated by the Second Circuit Court of Appeals in ; affd., , "We should be surprised if a taxpayer who had pledged securities with a broker and had them sold out on the Stock Exchange could obtain a deduction of more than $2,000 for a capital loss incurred through such a liquidation. *892 " Nor does it seem to us material that the shares were used as collateral to secure the indebtedness of some one other than the taxpayer. The sale was no less a sale of capital assets whether it was made directly by the taxpayer, for him, or as an incident to carrying out a transaction into which he had entered. It is the sale of the capital assets which measures the loss rather than the circumstances which prompted the sale. The limitation on losses was a deliberate act of Congress and had its genesis in the great depression which brought about a tax consequence where current income was being offset to such an extent as seriously to impair the revenue.

Petitioner on brief urges that the loss is one sustained in a transaction entered into for profit and measures the loss by the difference between the fair market value of the securities at the date they were pledged and the price received for them on their sale. We know of no reason, however, why this transaction should not be treated for what it was, viz., a sale of securities. If petitioner's guarantee of the corporate notes had not been accompanied by the deposit of the securities as collateral and he had personally sold these *893 shares to make good the guarantee, we do not think he would have ventured the argument that the capital loss provisions would not be applicable Sec. 117(d), Revenue Act of 1936. We find no reason for a different treatment where a sale is made under the circumstances here present. The respondent is sustained.

Decision will be entered under Rule 50.