Finlay v. Commissioner

*828 This proceeding is brought to redetermine the deficiency in the income tax of Albert W. Finlay for the year 1922 in the sum of $5,125.39.

The petitioner alleges that the respondent erred in disallowing a loss of $15,800 alleged to have been sustained by him on the sale of certain shares of stock of the Geo. H. Ellis Co. The petitioner concedes that the amount of the loss should be reduced to $10,000 by reason of an error in calculation.

FINDINGS OF FACT.

The Geo. H. Ellis Co. is a Massachusetts corporation with a capital stock of 750 shares of the par value of $100, each, and is engaged in the printing business. In 1902 the petitioner purchased from George H. Ellis 250 shares of the stock of the corporation at $50 per share. *829 In 1916 he purchased four additional shares at a price not stated. In 1918 he purchased*2232 396 shares at $200 per share. The book value of the stock was $75 per share in 1902; $218.32 in 1918; $338.35 on December 31, 1921; $368.72 on March 1, 1922; and $410 in November, 1922. In 1917 a 6 per cent dividend was paid and an 8 per cent dividend from 1918 to date.

In 1911 the petitioner established a revocable trust for the benefit of his children, and in it he placed the corporate stock of the Geo. H. Ellis Co. then owned by him. The stock did not leave his control and he received all dividends therefrom. In 1922 he revoked the trust.

In May, 1922, the petitioner offered to sell to his two sons, Robert Finlay and George Finlay, 100 shares each of the stock of the Geo. H. Ellis Co. at $150 per share, a price arbitrarily fixed by the petitioner and bearing no relation to the actual or book value of the stock. The sons had no money or resources with which to purchase the stock, were employed in the company in clerical capacities and each received a salary of $3,600 per year. One son was married and had one child. The sons executed and delivered demand notes to the petitioner. No transfer of such stock was made on the books of the corporation, but the petitioner endorsed*2233 or assigned the stock certificates in blank on the reverse side thereof and delivered them to the bookkeeper of the corporation to be placed in its safe. Control of the stock was never relinquished by petitioner. There was no agreement as to the amounts or times of payments to be made by the sons, but it was the understanding that any dividends and increases of the sons' salaries should be applied to their notes. The amounts of such salaries were determined by petitioner and no increases therein occurred nor were any dividends paid on the stock from May to November, 1922. The sons paid nothing on the principal or interest of their notes. The ostensible purpose of this transaction was to interest the sons in the corporate business, the majority of whose stock was owned by the petitioner.

In November, 1922, the petitioner offered to repossess the stock from the sons at the same price named in the transaction which occurred in May, 1922. The sons assented, the assignment of the stock was canceled and the sons' two notes of $15,000, each, were destroyed. The return of the stock to the petitioner was for the purpose of including it with other securities as the basis of a trust*2234 fund for the benefit of the two sons and the three other children of the petitioner. The petitioner agreed to place an additional 200 shares of the Geo. H. Ellis Co. stock in the trust for such purposes. He did include an additional 400 shares of that stock, together with other securities.

The trust so established was dated November 2, 1922, and named the sons, Robert N. Finlay and George E. Finlay, and Royden *830 Loring as trustees but the petitioner reserved the right to remove any or all such trustees and to substitute others for them.

On March 21, 1928, petitioner removed the above trustees and named the Peabody Trust Co. of Boston as the sole trustee. The trust further provided that a part of, or the entire net income of the trust estate and as much of the principal thereof as the petitioner might deem necessary should be paid to him for the comfortable support of himself and family. Books were not opened to record the transactions of the trust until 1924.

OPINION.

VAN FOSSAN: The sole question at issue in this proceeding is whether or not the alleged transfer or assignment of stock in the Geo. H. Ellis Co. by the petitioner to his sons was such a transaction*2235 as to justify the allowance of an alleged loss from the petitioner's income for the year 1922.

We have held repeatedly that a loss must be real and actual, and not merely a fiction, in order to entitle it to deductibility. ; ; ; ; . We must scrutinize with particular care the conditions surrounding an alleged transfer or sale of property between those who bear a confidential relationship to each other, such as members of the same family or those closely associated in business. ; ; ;;

The petitioner claims that the shares of stock which he sold to his sons were the identical ones which he purchased from George H. Ellis at $200 per share in 1918. He also held a block of stock in the same company purchased in 1902 at $50 per share. *2236 To establish a loss on the sale of specific stock the cost of the stock sold must be established. As to the proof of this fundamental fact there is such confusion in the evidence as to make it impossible for us to find as a fact that the stock here involved was that purchased in 1918 and not that purchased in 1902. This failure to establish the identity of property and consequently the cost thereof would alone necessitate a decision adverse to petitioner.

There are other considerations moving us to the same conclusion. Certain stock had been purchased in 1902 at $50 per share, when its book value was $75. Other stock was purchased in 1918 at $200 per share, when its book value was $218. There had been a steady increase in value thereafter until the book value in May, 1922, was $368 per share and in November of the same year, $410 per share. Nevertheless, a price of $150 per share was named in May, 1922, when *831 the purported sale occurred, and the same price was again named in November, when the alleged repurchase occurred. At the time of the alleged sale neither son had any money or means apart from his salary of $3,600 per year. The annual dividends had been*2237 at a rate that would have yielded each son $800 per year, or less than the usual interest charge of 6 per cent on the principal of notes. No payments were made of either interest or principal during the 6-month period. Though the stock was endorsed in blank, it never left the control of petitioner. No transfer was made on the corporate records. Petitioner was the moving spirit in both transactions. The sons were merely acquiescent. Petitioner controlled the corporation and could fix salaries, dividends, and policies. Taking the entire story into account, there arises a conviction in our minds that the purported sale in May, 1922, was not an absolute open and shut transaction of barter and sale.

Under these circumstances we are of the opinion that petitioner is not entitled to deduct the alleged loss on his income-tax return.

Decision will be entered for the respondent.