Calloway v. Commissioner

*1059 This is a proceeding for the redetermination of a deficiency in income tax of Fuller E. Calloway, deceased, for the year 1923 in the amount of $1,113.39. Said Calloway died subsequent to the filing of the petition, and at the hearing, upon suggestion of the death of said original petitioner, his executrix and executor were substituted as petitioners herein. The only issue raised by the pleadings is whether or not the respondent erred in disallowing a deduction claimed as a loss in the amount of $13,960.68, alleged to have been sustained by the said Fuller E. Calloway, deceased, on the sale in 1923 of 255 shares of stock of the West Boylston Manufacturing Co. to the Fuller E. Calloway Co., as trustee for certain beneficiaries.

FINDINGS OF FACT.

Fuller E. Calloway died February 12, 1928. Prior to his death, Calloway entered into a contract*2537 dated November 2, 1917, with the Fuller E. Calloway Co., a Georgia corporation, whereby Calloway agreed to transfer to said company, and the company agreed to accept, as trustee, 400 shares of the common stock of J. H. Lane & Co., a New York corporation, 300 shares of preferred stock of the same company, and the "home place" where Calloway then resided. Said property was to be held in trust for Ida C. Calloway, wife, and Cason J. Calloway and Fuller E. Calloway, Jr., sons of the settlor. The income from the trust property was to be used primarily for the maintenance of the home and of the beneficiaries. The trustee was given authority to manage the trust property as it might deem best, including the power to sell any part or all thereof for the purpose of reinvestment, and was specifically directed, in the event all of the income was not required at any time to accomplish the objects of the trust, to invest such unused income in other property. It was further provided in said agreement as follows:

This contract and each and every provision thereof remaining unexecuted may at any time be cancelled and revoked in whole or in part, or may be modified or supplemented, by a written*2538 instrument executed by Fuller E. Calloway, *1060 Mrs. Ida C. Calloway and Cason J. Calloway, or such of them as may be alive and competent to act, until Fuller E. Calloway, Jr., becomes of age, and thereafter by the written instrument of the four named persons, or such as are alive and competent to act.

By contract dated April 26, 1918, Fuller E. Calloway transferred to said trustee additional corporate stocks to be held under the terms and conditions provided in said trust agreement of November 2, 1917. The property so placed in trust had an aggregate value at the time of transfer in excess of $200,000, and the income therefrom was approximately $25,000 per year.

On November 2, 1917, the stock of the trustee corporation, Fuller E. Calloway Co., was owned as follows:

Shortly after November 2, 1917, the directors of the Fuller E. Calloway Co. were Cason J. Calloway, Hatton Lovejoy, J. A. Perry, Ely R. Calloway, and Fuller E. Calloway. The officers were J. A. Perry, president; Cason*2539 J. Calloway, vice president; Hatton Lovejoy, secretary; Ely R. Calloway, treasurer.

Prior to the year 1917 and subsequent to March 1, 1913, Fuller E. Calloway acquired 255 shares of stock of the West Boylston Manufacturing Co., a Massachusetts corporation, at a cost of $16,510.68, which stock he sold to the trustee corporation, Fuller E. Calloway Co., on December 20, 1923, for the sum of $2,550, or $10 per share. Said amount of $2,550 was paid to said Calloway by the trustee out of surplus income funds belonging to the trust estate, which consisted of dividends and interest accumulated from investments.

Prior to the purchase of the stock in question, the president of the trustee corporation wrote to the Hotchkin Co., investment brokers of Boston, Mass., with a view to ascertaining the then market value of said stock, and was advised by letter dated December 17, 1923, as follows:

The best bid we have been able to obtain this afternoon for West Boylston common is $10 per share, and even at this low price we would not want to leave the bid open indefinitely. We could probably use 50 shares of stock at $10 per share if you should care to sell same.

*1061 In his tax*2540 return for 1923 Fuller E. Calloway deducted from his gross income for that year the amount of $13,960.68, which he claimed as a loss on the sale of said stock. The deduction was disallowed by the respondent, which results in the deficiency here in controversy.

OPINION.

TRAMMELL: The parties stipulated, and we have found, that the 255 shares of stock of the West Boylston Manufacturing Co., acquired subsequent to March 1, 1913, cost the taxpayer $16,510.68. We have also found that he sold this stock in 1923 to the trustee corporation for $2,550. He thus sustained a loss in 1923 of $13,960.68, which is the amount claimed as a deduction in his return for said year. The deduction was disallowed by the respondent, however, for the reason that it was held not to be a closed transaction in which a loss had been sustained, but was a transfer of property to a trust created for the taxpayer's wife and children. The respondent contends in his brief that the alleged loss should be disallowed because the transaction did not represent a bona fide sale. We are unable to concur in these contentions of the respondent.

When the stock was sold by Fuller E. Calloway to the trustee corporation, *2541 he definitely parted with both the legal and equitable ownership of the property, and also the control over it passed out of his hands. The legal title, together with the exclusive management and control of the stock, became vested in the corporate trustee, and the equitable title was vested in the beneficiaries. The stock was paid for with surplus income funds of the trust estate, consisting of dividends and interest accumulated from investments. Control of the trustee corporation was not in Calloway, since he held only four out of the 10 shares of its capital stock, and in creating the trust estate for the benefit of his wife and children, he did not retain the power of revocation. The West Boylston stock was sold to the trust estate at its then current market price or vaue, and Calloway could have repossessed the stock only by purchase from the trustee or the unanimous written consent of all the beneficiaries under the trust agreement.

The evidence, from which we have found the facts above set out, establishes, we think, that the transaction in question constituted a bona fide sale, as a result of which the taxpayer sustained the loss claimed. The respondent erred in disallowing*2542 the deduction.

Judgment will be entered under Rule 50.