Curry v. Commissioner

*282 Proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $174,008.32, which has been assessed by the respondent under section 279(a) of the Revenue Act of 1926.

Counsel for the parties filed a written stipulation agreeing that decedent's net income, as shown in the notice of deficiency, should be decreased by $214,004 for dividends, by $22,167.14 for a loss on rents, and by $1,011.02*2327 for depreciation, which stipulation disposes of all questions raised by the original petition and answer.

Upon leave granted, the petition was amended to allege that the respondent erred in not deducting from decedent's gross income for 1921 the amount of $42,918.71, representing loss on the sale of bank stock, and further alleging that the respondent is estopped to deny the propriety of said deduction. To these allegations respondent entered a general denial.

*283 FINDINGS OF FACT.

Petitioner's decedent, William L. Curry, purchased stock of the Second National Bank of Pittsburgh, the certificates for which stood in his name, at the following dates and prices:

Said decedent also purchased stock of the same bank the certificates for which were held for him in the name of his brother, Grant Curry, at the dates and prices as follows:

The total number*2328 of shares of stock of the Second National Bank of Pittsburgh owned by decedent on March 1, 1913, was 240, which he had acquired at a cost of $54,635.

The stock of the Second National Bank of Pittsburgh was listed on the Pittsburgh stock exchange. Prices, bids and offers for the stock on the exchange on various dates in the early part of 1913 were as follows:

The March 1, 1913, fair market value of the stock was $195 per share.

In March of 1913 the directors of the Second National made a proposition to the directors of the First National Bank of Pittsburgh for the uniting of the two banks on the basis hereinafter set forth. The proposition was submitted to the Comptroller of the Currency who, by letter of March 14, 1913, advised the president of the Second *284 National that the plan "will not be opposed by this office provided it is satisfactory to the directors and stockholders of the two banks."

On March 15, 1913, the*2329 boards of directors of the banks each held a meeting, at which meetings the proposed plan was approved and the officers of the bank were authorized to execute the necessary agreements between the banks. The agreement executed by the officers, in so far as material here, provided as follows:

WHEREAS the said First National Bank of Pittsburgh, Pa., having proposed to sell its entire assets to the said Second National Bank of Pittsburgh, Pa., for the consideration of One Million Five Hundred Thousand ($1,500,000.00), and such purchase being deemed advantageous by the said Second National Bank, this agreement of sale and purchase in entered into as follows:

FIRST: That the capital stock of the Second National Bank shall be increased from $1,800,000.00 to $3,400,000.00.

SECOND: That the Second National Bank shall declare a pro rata stock dividend at par of Six hundred thousand ($600,000.00) Dollars out of its surplus to be distributed among its present shareholders, and the stockholders of the second National Bank are to waive all right to further participation in the distribution of such increased stock.

THIRD: That the said consideration of $1,500,000.00 shall be paid out of*2330 the increased stock of said Second National Bank to be issued at One hundred fifty ($150.00) Dollars a share and distributed among the present shareholders of the said First National Bank or as its Board of Directors shall determine.

FORTH: Said First National Bank shall go into liquidation in conformity with the United States Statutes; and all its assets, good will, business, &c. shall be turned over to the said Second National Bank.

FIFTH: The Second National Bank, as part of the consideration for the purchase of said assets of the First National Bank, shall assume all the liabilities of said First National Bank, including the redemption of its circulating notes.

SIXTH: The name of the Second National Bank shall be changed to FIRST-SECOND NATIONAL BANK OF PITTSBURGH, PA.

This agreement was approved and ratified by the stockholders of the two banks at meetings held on April 18, 1913. The agreement was carried out and the First National went into voluntary liquidation on April 19, 1913.

On or about April 30, 1913, decedent purchased two-thirds of a share of stock of the First-Second National for $100, which he held in his own name.

By certificate dated April 21, 1913, the*2331 office of the Comptroller of the Currency approved the change of name as provided in the above agreement. The certificate of approval bore the number 252, which is the number under which the Second National was originally chartered on February 13, 1864.

On July 7, 1913, the First-Second National Bank was placed in the hands of a receiver and its doors closed.

Thereafter, and prior to the reopening of the bank, the stockholders, directors, and depositors executed certain agreements designated *285 as "Plan for Resumption of Business," "Stockholders' Deposit Agreement," and "Participation Agreement." These agreements provided in substance:

1. That the capital stock should be reduced from $3,400,000 to $200,000, which was to be accomplished by the stockholders surrendering their certificates and receiving pro rata the reduced capital stock.

2. That the capital stock should then be increased from $200,000 to $4,000,000 by the issue of $3,800,000 of new stock, par value $100, at the price of $125 per share. The new stock was to be first offered to the old stockholders, and then creditors having claims of over $2,000 were "to be requested to take and pay for" the remainder*2332 by giving credit to the bank on their claims. The term "creditors" included depositors, excepting savings depositors.

3. Upon reopening, the unconverted assets delivered to the bank were to be placed in a "participation account" for a period of three years, during which time the amount realized from such assets was to be applied to the indebtedness of the bank; thereafter the assets remaining in that account were to be appraised and the bank to have the right to take them over at the appraised value and if it failed to take them, they were to be offered at public sale; upon termination of the participation account any surplus therein was to be divided one-half to the bank and one-half to the holders of the participation certificates which were to be issued pro rata to the old stockholders.

The bank was reopened on April 25, 1914, under the old charter No. 252, and under the same name of the "First-Second National Bank of Pittsburgh."

As a result of the refinancing outlined above, decedent was entitled to 7 15/17 shares of the reduced stock of the bank for the 134 shares carried in his name, and upon reopening of the bank a certificate for 7 shares was issued to him. On April 23, 1915, he*2333 purchased 2/17 of a share for $11.76 and thereupon a certificate for 1 share was issued to him. He also received, upon reopening, 134 participation certificates.

For the stock of decedent standing in his brother's name the bank issued 11 shares of the reduced stock and 186 2/3 participation certificates. The participation certificates had no market value.

Upon reopening of the bank, the decedent purchased 220 shares of the new stock issued and paid therefor $125 per share, a total of $27,500. This stock is not involved in this proceeding.

On December 4, 1917, the 186 2/3 participation certificates issued for the stock in decedent's brother's name were paid off at 62 cents each, or a total of $115.73, and on March 4, 1919, decedent's remaining 134 certificates were completely liquidated by the payment to him of $83.08.

*286 By certificate of the Comptroller of the Currency, bearing number 252, and dated January 18, 1918, the name of the First-Second National Bank of Pittsburgh was changed to "First-National Bank at Pittsburgh."

The 19 shares of decedent's stock, representing the 18 15/17 shares received on the refinancing plus the 2/17 of a share purchased in*2334 1915, were sold by decedent in 1921, the 8 shares standing in his name being sold on September 16, 1921, for $1,479.69, and the 11 shares in his brother's name being sold on September 21, 1921, for $2,034.56.

In another transaction in 1921 decedent realized a profit of $250 on the sale of 25 shares of First National Bank stock.

OPINION.

ARUNDELL: There is no evidence in the record as to the estoppel urged against the respondent and that allegation will not be considered.

The remaining claim is that the income for 1921, as found by respondent, should be reduced by $42,918.71, representing loss on the sale of bank stock. Disregarding for the moment changes in the names of the banks, the following is the substance of the facts. Prior to March 1, 1913, decedent acquired by purchase and stock dividends 240 shares of bank stock at a total cost of $54,635. The fair market value of that stock at March 1, 1913, was $46,800. Thereafter he acquired as a stock dividend 80 additional shares, and by purchase 2/3 of one share for $100, making his total holdings 320 2/3 shares prior to the refinancing. As a result of the refinancing his shares were reduced to 18 15/17 in number and*2335 thereafter he purchased 2/17 of a share for $11.76, making his total holdings 19 shares. He also received upon the refinancing 320 2/3 participation certificates which were liquidated prior to 1921 by payments aggregating $198.81. In 1921 he sold the 19 shares for the sum of $3,514.24.

The March 1, 1913, value of the stock then owned by decedent being less than cost, petitioners claim a loss of the difference between (1) that value plus the cost of subsequent purchases and (2) the amount realized on the sale in 1921 plus the distributions made on the participation certificates.

The respondent argues that, taking into consideration the consolidation of the First and Second National Banks and the receivership and reorganization of the First-Second National Bank, the conclusion must be reached that the stock sold in 1921 was not the same interest which decedent purchased in the Second National Bank and that no deductible loss was sustained on the sale. His argument is predicated on , and similar cases where the additional value of new securities distributed was held to be taxable as income to the stockholders.

*2336 *287 At the hearing considerable weight was apparently attached to the question of whether the institution known in 1921 as the First National Bank at Pittsburgh was a continuation of the corporation originally chartered as the Second National Bank of Pittsburgh and in which decedent originally acquired stock. We think it must be held that it was, because throughout all the years involved the institution operated under the one charter, No. 252. So it was in , where three banks united and continued business under the charter of one of them, with a change of name, we held that as to that one "the corporate existence * * * continued under its new name."

Considering now the outstanding facts affecting this proceeding, we have first the effect of the steps taken in uniting the two banks. A preliminary measure was the increase of the stock of the Second National out of which decedent received a stock dividend, and which of course under , did not affect his tax liability except to reduce the cost of each share for the purpose of computing gain or loss on a subsequent sale. Cf. *2337 . The issue of the balance of the increase in stock for the assets of the First National Bank did not change the character of decedent's holdings, either intrinsically or for gain or loss purposes. All that that amounted to was the conversion of a surplus liability into a stock liability. On this point the Siegel case, supra, is not controlling, for there the stockholders of the three uniting banks surrendered their stock and received stock in the enlarged corporation in an entirely different number of shares which changed their proportionate interests. Here the stockholder received only a stock dividend and thereafter the bank in which he owned stock purchased the assets and assumed the liabilities of another bank. The purchase was effected by the issuance of stock, but this did not change the stockholders' investment any more than if the purchase had been made for cash.

The next steps for consideration are the reduction of the capital stock of the bank from $3,400,000 to $200,000 and the issue of the "participation certificates." Upon the completion of these transactions decedent had one-seventeenth of the*2338 number of shares of stock he theretofore had plus the participation certificates, which together represented his investment in the bank and left him with the same proportionate interest as before the stock reduction. The situation here is different than that in . There the stockholder received stock issued by a new corporation organized for the purpose of taking over the assets of the old company, and "certificates of interest" issued by a third corporation which held, as trustee, a part of the assets of the old company. Here *288 the stock for the reduced number of shares and the participation certificates were both issued by the bank in which the decedent owned stock, the stock and participation certificates together representing the same interest he theretofore had.

After the increase of capital stock from $200,000 to $4,000,000, the decedent still had his original investment in the shares he held. True, his proportional interest was changed, but that it quite commonly the case where a corporation increases its capital by such means as the issue of stock rights or the sale of treasury stock and a stockholder fails to*2339 exercise his right to acquire his pro rata share of the increase. In such case it can not be said that gain or loss comes to the stockholder or that his failure to exercise his rights creates a new basis for a subsequent determination of gain or loss.

Thus it is seen that throughout all the various steps outlined, decedent's investment in stock of the corporation remained in its original form; that is, it remained an investment in stock in the one corporation. There was not here, as in , a segregation and distribution to stockholders of certain corporate assets, nor, as in , a change of corporate identity and exchange of stock for "essentially different" stock; there was not even a technical change of corporate identities as in .

It is our opinion that decedent sustained a loss on the sale of his stock in 1921 and that the amount thereof, making allowance for the distribution on the participation certificates, should be computed as follows:

*2340 Reviewed by the Board.

Judgment will be entered under Rule 50.