Opinion
Docket No. 8993.
1950-10-20
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George H. Koster, Esq., for petitioner. Earl C. Crouter, Esq., for the respondent.
Petitioner transferred legal title to eight of its banking premises to Capital Co. for a consideration which was less than the adjusted bases of the properties. Capital Co. was the wholly owned subsidiary of a holding company which owned a substantial interest in petitioner. Prior to the transfers, the parties agreed orally that title to the properties would be reconveyed on petitioner's command to petitioner, or to its wholly owned subsidiary, Merchants, in about 30 days for the same consideration as was originally advanced. During the time Capital Co. held title to the properties, it was paid a ‘rental‘ calculated to yield a return to it of 6 per cent per year upon the amounts advanced to petitioner. After approximately 30 days, Capital transferred formal title to the bank premises to Merchants.
Merchants was a wholly subsidiary of petitioner which had no salaried employees of its own. Its own business was the ownership of property which it leased to petitioner, and whatever work was necessary to the operation of this business was performed by employees of petitioner. Petitioner had complete dominion and control over Merchants and the properties transferred to it. Held:
1. The sale to Capital Company was not bona fide, and Capital Company was a mere conduit for the conveyance of legal title from petitioner to Merchants.
2. The transactions between petitioner and Merchants lacked substance and reality, and petitioner did not suffer a deductible loss therefrom. Higgins v. Smith, 308 U.S. 473, followed. George H. Koster, Esq., for petitioner. Earl C. Crouter, Esq., for the respondent.
The Commissioner originally determined a deficiency in petitioner's income tax liability for 1943 in the amount of $915,040.93 and a deficiency in petitioner's declared value excess profits tax liability for 1943 in the amount of $161,650.70. In an amended answer, the Commissioner has made claim for increased deficiencies in both taxes, increasing the deficiencies to $942.337.38 and $166,472.87, respectively, upon his determination that petitioner had additional income in 1943. The petitioner concedes that the increase in the amount of its taxable income, in this respect, is correct.
The issue in this proceeding is whether the transfer by petitioner of the legal title to eight of its banking premises for a price which was less than the adjusted bases of the properties resulted in deductible losses to petitioner in the amount of $464,811.68 where, pursuant to an oral agreement with petitioner the transferee corporation reconveyed title to the banking premises to a wholly owned subsidiary of petitioner about 30 days later.
Other adjustments made by respondent in petitioner's income are not in dispute.
Petitioner filed its returns for the year in question with the collector for the first district of California.
The record in this proceeding consists of a stipulation of facts and various joint exhibits.
FINDINGS OF FACT.
All of the facts which have been stipulated are found as stipulated.
Petitioner is a national banking association which was incorporated on March 1, 1927, under the laws of the United States. It operates a banking system in California through approximately 500 branches, and has its principal place of business in San Francisco. Title to some of the buildings in which petitioner conducts its banking business is held in the name of petitioner, and title to other properties is held in the name of petitioner's wholly owned subsidiary, Merchants National Realty Corporation (hereinafter referred to as ‘Merchants‘).
At all times pertinent to this proceeding, Merchants was a wholly owned subsidiary of petitioner. Many of the officers and directors of petitioner were also officers and directors of Merchants. The only business of Merchants was the ownership of property which it leased to petitioner. Merchants had no salaried employees. Whatever work was necessary to the operation of its business was performed by employees of petitioner. Merchants' place of business was in the headquarters of petitioner in San Francisco.
The basic lease agreements under which petitioner leased property from Merchants provided that in exchange for a 10-year lease, petitioner would pay to Merchants as rent ‘an amount equal to the total of all expenses and charges of the Lessor, which are allowable to the Lessor, Merchants National Realty Corporation, as deductions from gross income for Federal income tax purposes less an amount equal to the total income of the Lessor derived from all services other than the rental to be paid hereunder.‘
On August 31, 1939, bank examiners from the office of the United States Comptroller of the Currency determined that the values of the banking properties in the books of petitioner were in excess of their fair market value, and they recommended that petitioner be required to reduce the book values to the actual values of the banking properties in its books. Petitioner refused to comply with the recommendation of the bank examiners and contended that the Comptroller of the Currency did not have the authority to require it to write down the value of any of its assets. After a number of conferences and exchanges of correspondence between petitioner and the Office of the Comptroller of the Currency, an agreement was reached on March 6, 1940, as to the amount at which each banking property should be carried on petitioner's books. This agreement provided that ‘the unallocated reserve set up by the Bank shall be reduced by the difference between the present carrying value of each such premise and the value of such as determined by the committee (comprised of three Government banking officers). * * * The remainder of such reserve, if any, may be returned to the undivided profits accounts.‘ In March 1941, petitioner informed the committee that:
We will agree to establish a new cost basis for the bank premises listed in Exhibit ‘A‘ hereto attached in such manner as will result in a charge of approximately $1,000,000 against our profits for the period ending June 30, 1941, and a similar charge in the third quarter of 1941. The new cost basis to be established shall be determined from the American Appraisal Company appraisal, using the lowest appraisal of the American Appraisal Company as to the particular properties involved. No adjustment will be made as to properties with respect to which American Appraisal Company's most adverse appraisal exceeds book value.
The committee recommended that $2,000,000 be written off by petitioner in 1941 and $2,000,000 be written off in 1942. The Comptroller of the Currency accepted this proposal and informed petitioner to that effect. The Comptroller also informed petitioner that:
Any or all of the amount may be charged to Undivided Profits instead of the Unallocated Reserve if desired, the amount of that Reserve, however, not to be reduced below $4,000,000 except after writeoff of the $2,000,000 in 1941 and approximately $2,000,000 in 1942.
The petitioner informed the Comptroller that these arrangements for a ‘reduction in book value of banking premises‘ were satisfactory to it.
George H. Koster, one of petitioner's counsel, was asked by petitioner if he could advise it of a method whereby the Comptroller's requirement that the properties be written down could be met, without at the same time receding from petitioner's position that it was entitled to carry the properties at cost. He gave suggestions to the petitioner in a memorandum to petitioner dated January 10, 1941, part of which is set forth in the margin.
Koster and L. M. Giannini, president of petitioner, discussed the tax effects of the transactions and the results to be achieved by them with a representative of the Comptroller who informed them that the Comptroller could not pass upon the tax consequences of any of the transactions.
Transamerica Corporation is a holding company. It owns substantial amounts of stock of many banks and industrial concerns. During 1941, 19442, and 1943, either Transamerica Corporation or its subsidiary companies owned common and preferred stock of petitioner, each of which had equal voting rights. During 1941, 1942, and 1943, the outstanding common stock of petitioner amounted to 4,000,000 shares; and there was preferred stock outstanding in the amount of 540,000 shares in 1941, 460,796 shares in 1942, and 405,146 shares in 1943. Transamerica and its subsidiaries owned common and preferred stock of petitioner in 1941, 1942, and 1943 in the total amounts set forth below:
+-----------------------------------------------+ ¦Stock owned by Transamerica and subsidiaries ¦ +-----------------------------------------------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------+
1941 1942 1943 Common 899,820 692,394 570,134 (outstanding) (4,000,000) (4,000,000) (4,000,000) Preferred 500,844 425,174 370,634 (outstanding) (540,000) (460,796) (405,146)
Capital Co. (hereinafter referred to as ‘Capital‘) is a wholly owned subsidiary of Transamerica Corporation and is engaged in the real estate business.
Sometime in 1941, R. G. Smith, who was the executive vice president of petitioner and the president of Merchants, conferred with E. C. Woodruff, the president of Capital. An agreement was reached between these two executives in behalf of their respective companies. The parties to this proceeding have stipulated that this agreement provided:
* * * That the Bank (petitioner) or Merchants would execute deeds to Capital Company with respect to (certain) banking premises * * * ; that would deliver its checks to the Bank (petitioner) and to Merchants in amounts equal to the value of said premises as appraised by the American Appraisal Company; that the Bank (petitioner) intended to and would receive back, deeds to the said property within thirty days or so after delivery of deeds thereto to Capital Company, and Capital Company agreed to execute and deliver deeds to said property to the Bank or Merchants at any time upon request of the Bank; that there would not be any written agreement between the Bank, Merchants and Capital Company providing for the execution and delivery of deeds from Capital Company to the Bank or to Merchants; that when the Bank requested delivery of deeds to such property from Capital Company to it or to Merchants, the Bank or Merchants would give its check to Capital Company for the same amount of the check which Capital Company gave the Bank or Merchants for the respective property, plus acquisition costs incurred by Capital Company in connection with the transaction; and that between the time of the delivery of the deeds with respect to the respective properties from the Bank or from Merchants to Capital Company and the time of the delivery of the deeds with respect to the respective properties from Capital Company to the Bank or to Merchants, the Bank would pay to Capital Company as rental amounts equal to 6% per annum net upon the amounts paid by Capital Company to the Bank or to Merchants, as aforesaid.
Pursuant to this agreement, Merchants deeded four of the banking premises to which it held title to Capital in 1941, and Capital, in turn, deeded the properties to petitioner shortly thereafter. The amounts paid by petitioner to Capital were the same as the amounts which had been paid by Capital to Merchants. Merchants showed losses from these transactions on its books and in its tax return in the total amount of $503,373.97. In 1942 Merchants similarly deeded 10 of the banking premises to which it held title to Capital which, in turn, deeded them to petitioner for the same amounts which it had paid to Merchants. Merchants showed losses from these transactions in the amount of $463,593.85 on its books and in its tax return.
In the year 1941, petitioner executed and delivered to Capital deeds to 16 banking premises. About 30 days after each deed was delivered to Capital, Capital executed and delivered a deed to the same property to Merchants. The amounts received by petitioner from Capital were the same as the amounts which were paid to Capital by Merchants. According to petitioner's books and tax return, these transactions resulted in losses to it in 1941 which totalled $1,383,039.64. In the year 1943, petitioner executed and delivered to Capital deeds to eight banking premises. About 30 days after each deed was delivered, Capital executed and delivered a deed to the same property to Merchants. The amounts received by petitioner from Capital for these properties were the same as the amounts received by Capital from Merchants. The details of the 1943 transactions are set forth in the following schedule:
+-------------------------------------------------------------------------------------------------+ ¦Properties deeded by petitioner in 1943 to Capital, and deeded by Capital to Merchants ¦ ¦ ¦ +-------------------------------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Loss per ¦ ¦ ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦ ¦ ¦Reserve ¦ ¦Received ¦ ¦petitioner's¦Deed ¦ ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Property ¦Cost ¦for ¦Net cost ¦by ¦Revenue ¦books ¦to ¦Deed¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦ ¦ ¦depreciation¦ ¦petitioner ¦stamps ¦and ¦Captial¦to ¦ +----------+------------+------------+------------+------------+--------+------------+------------¦ ¦ ¦ ¦ ¦ ¦from ¦ ¦return ¦Merchants ¦ +----------+------------+------------+------------+------------+--------+------------+------------¦ ¦ ¦ ¦ ¦ ¦Capital ¦ ¦ ¦ ¦ ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Palo Alto ¦$200,575.94 ¦$41,441.37 ¦$159,134.57 ¦$107,788.76 ¦$118.80 ¦$51,464.61 ¦5/7/43 ¦6/8/¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Fall Brook¦10,561.60 ¦1,329.30 ¦9,232.30 ¦7,477.09 ¦8.25 ¦1,763.46 ¦5/7/43 ¦6/8/¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Sacramento¦1,505,312.78¦445,475.13 ¦1,059,837.65¦971,262.59 ¦1,068.65¦89,643.71 ¦6/30/43¦7/29¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦/43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Santa ¦72,230.47 ¦13,885.67 ¦58,344.80 ¦52,019.79 ¦57.75 ¦6,382.76 ¦5/7/43 ¦6/8/¦ ¦Maria ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Oakland ¦2,076,834.44¦378,437.66 ¦1,698,396.78¦1,441,888.17¦1,586.20¦258,094.81 ¦6/30/43¦7/29¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦/43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Balboa ¦43,075.90 ¦9,418.55 ¦33,657.35 ¦30,554.28 ¦34.10 ¦3,137.17 ¦5/7/43 ¦6/8/¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Mission ¦278,556.23 ¦21,434.71 ¦257,121.52 ¦208,821.54 ¦229.90 ¦48,529.88 ¦3/31/43¦4/30¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦/43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦McArthur ¦45,047.70 ¦5,642.65 ¦39,405.05 ¦33,647.17 ¦37.40 ¦5,795.28 ¦5/7/43 ¦6/8/¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦43 ¦ +----------+------------+------------+------------+------------+--------+------------+-------+----¦ ¦Total ¦4,232,195.06¦917,065.04 ¦3,315,130.02¦2,853,459.39¦3,141.05¦464,811.68 ¦ ¦ ¦ +-------------------------------------------------------------------------------------------------+
The only losses directly involved in this proceeding are those claimed by petitioner for the year 1943 in the amount of $464,811.68.
In carrying out the aforesaid transactions, all formalities in connection therewith, such as the execution and recording of deeds, the affixing of documentary stamp taxes, the transfer of fire insurance, and the recording of the transactions on the books of all companies as purchases and sales of property, were compiled with. When the properties were deeded to Capital, the outstanding fire insurance policies covering the respective properties were amended by riders to provide that any loss payable thereunder should be paid to Capital; and when Capital deeded the properties to petitioner or to Merchants, the policies were again amended by riders to provide that any loss payable thereunder should be paid to petitioner or to Merchants, respectively.
Upon the execution and delivery of the deeds to the respective properties by petitioner or Merchants to Capital, petitioner and Capital executed a ‘lease‘ agreement with respect to each property, which provided for the payment by petitioner to capital of a ‘rental‘ equal to a return of 6 per cent per year to Capital on the money which it had paid out.
All of the properties to which Merchants acquired formal title through Capital were immediately leased by Merchants to petitioner under the same form of a basic lease agreement between those parties as stated above.
At all times pertinent to this proceeding, the banking properties which were the subject of the transactions involved herein were occupied and used by branches of petitioner. It was not contemplated at any time that there would be any interruption or change in the use and occupancy of the banking properties by the branches of petitioner which occupied them.
The explanation given by the respondent in the notice of deficiency for disallowing the claimed loss deduction is set forth in the margin.
Capital was merely a conduit through which petitioner made formal transfers of the title to the eight properties involved in this proceeding to its subsidiary, Merchants. The transfers of title to the eight properties by petitioner to Capital did not constitute bona fide sales of the parcels of property to Capital.
Petitioner at all times had complete ownership, dominion, and control over Merchants and over each of the eight parcels of property.
OPINION.
HARRON, Judge:
The issue in this proceeding is whether transfers by petitioner of the legal title to eight of its banking properties resulted in deductible losses under section 23(f).
Petitioner contends (1) that the transfer of properties to Capital were bona fide sales which resulted in deductible losses; and (2) that even if the transactions are viewed as sales of the properties by petitioner to Merchants, the fact that Merchants was a wholly owned subsidiary of petitioner does not require disallowance of the claimed deductions.
Respondent contends that the losses are not deductible because petitioner never relinquished dominion and control over the properties. With respect to the transfers to Capital, respondent contends that the transfers did not constitute bona fide sales because of Capital's oral agreement to retransfer the properties to Merchants, a wholly owned subsidiary of petitioner. With respect to the transfers to Merchants, respondent contends that no loss was sustained by petitioner as a result of the transfers of the title to the properties to Merchants. Respondent emphasizes the point that Merchant's was a wholly owned subsidiary of petitioner, subject to petitioner's complete dominion and control and that the ‘lease‘ arrangements with Merchants were not arms-length lease agreements such as would be made with a stranger.
In order for a loss upon the sale of property to be deductible, it must be established by a bona fide sale. Higgins v. Smith, 308 U.S. 473. See, also, Regulations 111, section 29.23(e)(1), (f)(1). And the loss must be actual and real. Gregory v. Helvering, 293 U.S. 465; Burnet v. Huff, 288 U.S. 156; Weiss v. Wiener, 279 U.S. 333. Also, under section 23(f), a taxpayer must prove that a loss is sustained. The transactions between petitioner and Capital do not satisfy these requirements.
All of the facts in this proceeding have been stipulated, and they are not in dispute. In fact, the petitioner has not concealed at any time any of its arrangements, but has made full disclosures of them, at least as far as this proceeding is concerned. The facts show that petitioner conveyed the legal title to the properties to Capital, and that it meticulously complied with all of the customary formalities necessary for the transfers of title. However, transfer of naked legal title is but one of the elements to be considered in determining the true nature of a transaction. United States v. Utah-Idaho Sugar Co., 96 Fed.(2d) 756. The other circumstances present in this proceeding establish that there was not a bona fide sale of the properties to Capital with a complete termination of petitioner's interest in the properties.
Prior to the transfer of the banking properties to Capital, petitioner reached an agreement with Capital which provided:
* * * that the Bank (petitioner) intended to and would receive back, deeds to the said property within thirty days or so after delivery of deeds thereto to Capital Company, and Capital Company agreed to execute and deliver deeds to said property to the Bank of Merchants at any time upon request of the Bank; that there would not be any written agreement between the Bank, Merchants and Capital Company providing for the execution and delivery of deeds from Capital Company to the Bank or to Merchants; that when the Bank requested delivery of deeds to such property from Capital Company to it or to Merchants the Bank or Merchants would give its check to Capital Company for the same amount of the check which Capital Company gave the Bank or Merchants for the respective property, plus acquisition costs incurred by Capital Company in connection with the transaction; * * *
Where a sale is made as part of a composite plan which includes, as in this proceeding, an agreement for the reacquisition of the property sold, and the plan is carried out, any loss suffered as a result of the ‘sale‘ of the property is not deductible. Pierre S. DuPont, 37 B.T.A. 1198, affd., 118 Fed.(2d) 544, certiorari denied, 314 U.S. 623; Sidney M. Shoenberg 30 B.T.A. 659, affd., 77 Fed.(2d) 446; Foster v. Commissioner, 96 Fed.(2d) 130; Commissioner v. Dyer, 74 Fed.(2d) 685, certiorari denied, 296 U.S. 586. It makes no difference that the property is to be reacquired by a subsidiary or a close affiliate of the original seller, rather than by the seller itself. Rand Co., 29 B.T.A. 467, affd., 77 Fed.(2d) 450; John M. Burdine Realty Co., 20 B.T.A. 54. The reason for the general rule was stated by the Court of Appeals in Shoenberg v. Commissioner, 77 Fed.(2d) 446, 449, as follows:
A loss as to particular property is usually realized by a sale thereof for less than it cost. However, where such sale is made as part of a plan whereby substantially identical property is to be reacquired and that plan is carried out, the realization of loss is not genuine and substantial; it is not real. This is true because the taxpayer has not actually changed his position and is no poorer than before the sale. The particular sale may be real, but the entire transaction prevents the loss from being actually suffered. Taxation is concerned with realities, and no loss is deductible which is not real.
The facts in this proceeding show beyond any doubt that there were no real and complete sales of any of the banking properties to Capital by petitioner in 1943 which can be recognized for tax purposes. Petitioner never relinquished dominion or control over the eight properties to Capital. Petitioner intended only a temporary vesting of title in Capital, and it was assured of its ability to recover the properties under its oral agreement with Capital.
Petitioner argues that it lost dominion and control over the properties because it could not have compelled Capital to reconvey the properties to it or its subsidiary. In other words, petitioner now asserts that its oral agreement violated the requirement of the statute of frauds that all agreements for the transfer of title to real property must be in writing, and, therefore the oral agreement with Capital is now said to have been an invalid agreement. Aside from the point that partial performance probably took the transaction out of the reach of the statute of frauds, the fact is that the oral agreement actually was executed by the reconveyance of title to the properties by Capital and it was the intention of the parties that Capital should be merely a conduit through which petitioner could transfer formal title to Merchants.
The petitioner also refers us to Bancitaly Corporation, 34 B.T.A. 494, 509-16, in support of its contention that the transaction with Capital was a completed transaction which should be recognized for tax purposes, and contends that a holding in this proceeding which would sustain the respondent's determination, that is, a holding to the effect that the steps followed in the transaction with Capital had no substantive effect, would be inconsistent with our holding in Bancitaly Corporation. However, we find little similarity between this proceeding and that of Bancitaly Corporation in the matter of either the facts or the issue involved in the respective proceedings. In the Bancitaly case, the Bancitaly Corporation sold 150,000 shares of stock and subsequently reacquired 84,198 of the shares which it had sold. The issue in the case was whether the Bancitaly Corporation realized taxable income upon the sale of the 84,198 shares which it subsequently repurchased. As the basis for the holding that taxable income was realized the Board expressly found as a fact that the sale of 150,000 shares of stock and the subsequent repurchase of 84,198 of the shares were two separate and independent transactions and that the original purchaser was under no obligation to resell any of the shares to petitioner. In this proceeding, however, Capital was merely a conduit for the passage of title to the eight bank properties from petitioner to Merchants. Capital was obligated to deliver deeds to the eight branch banks back to petitioner or Merchants, and the parties never intended, under any circumstances, that Capital should retain title to any of the eight properties.
In the last analysis we must weigh the evidence in this proceeding and make an independent determination about the transaction which is involved here. This we have done, and we have concluded that respondent's determination on this issue must be sustained. The interjection of Capital between petitioner and Merchants does not insulate the transactions from any infirmities arising from the fact that Merchants was a wholly owned subsidiary of petitioner subject to petitioner's complete dominion and control. The sale must be viewed as being made between petitioner as vendor and Merchants as vendee, and the question thus becomes what effect does the closeness of the relationship between petitioner and Merchants have upon the deductibility of the loss in question.
This is not a new question. In Higgins v. Smith, supra, the Supreme Court considered the question of whether a sale of stock at a loss by an individual to a corporation which was wholly owned by him resulted in a deductible loss to the individual. The business of the corporation consisted of buying and selling securities, largely from and to the taxpayer. The Supreme Court held that ‘domination and control is so obvious in a wholly owned corporation as to require a peremptory instruction that no loss in the statutory sense could occur upon a sale by a taxpayer to such an entity.‘ See, also Crown Cork International Corporation, 4 T.C. 19, affd., per curiam, 149 Fed.(2d) 968.
Petitioner attempts to distinguish Higgins v. Smith and Crown Cork International Corporation, supra, on the ground that in those cases no business purpose other than the saving of taxes was shown, while in this proceeding it claims that it has shown another business purpose, namely, to satisfy the demands of the Comptroller of the Currency. However, the basis of the Smith and Crown Cork International Corporation cases was not that the transactions in question were designed to save taxes, but that they lacked substance and reality because of the continued control of the taxpayer over the property transferred through its domination and control of the wholly owned corporation which received the property. Indeed, both cases cite Gregory v. Helvering, supra, which is authority for the rule that an intent to save taxes is not to be condemned, and a taxpayer may resort to any legal means to accomplish that result. Moreover, petitioner has not shown that the Comptroller of the Currency required that the bank properties be sold. The only requirement of the Comptroller was that petitioner write down the value at which it carried the properties on its books by charging the excess of book value over fair market value to a surplus account. This was consistent with the general authority of the Comptroller contained in the National Bank Act, United States Code, Title 12, passim, and the decision of the Supreme Court in Thomas v. Taylor, 224 U.S. 73; cf. Yates v. Jones National Bank, 206 U.S. 158. The evidence shows that possible tax advantages were an important consideration in arriving at the complicated form in which the simple requirement of the Comptroller was met.
However, the ground for this decision is not whether or not the intent to effect a tax savings was the dominant purpose of petitioner. The basis for the decision is the complete dominion and control which petitioner continued to exercise over the properties transferred through its complete domination and control of its wholly owned subsidiary. Petitioner makes no argument that such dominion and control did not exist. In light of the stipulated facts, it can not. Petitioner owned all of the outstanding stock of Merchants, and the two corporations had interlocking officers and directors. Merchants had no independent business or economic life of its own. It had no salaried employees, and whatever work was necessary to the operation of its business was performed by employees of petitioner. The only business in which Merchant's was engaged was the ownership of the property which it leased to petitioner. However, the lease agreements between petitioner and Merchants were not arms-length transactions such as would be entered into with a stranger. The rental formula between the parent and the subsidiary provided that Merchants would receive as rent from petitioner an amount equal to the total of all expenses and charges, including depreciation, allowable to Merchants as deductions from gross income for Federal income tax purposes, less any income derived by Merchants from any other incidental source. Thus, for Federal income tax purposes, Merchants could never show a profit or a loss.
In order for a taxable gain to be realized or a deductible loss to be sustained, property must in general be sold, abandoned, discarded, or otherwise disposed of. Just as the appreciation in value of property without its disposition does not result in a taxable gain, similarly the mere shrinkage in value of property does not constitute a deductible loss. Gulf Power Co., 10 T.C. 852; C. F. Mueller Co., 40 B.T.A. 195; White Star Line, 20 B.T.A. 111. In effect, petitioner is claiming a loss upon the diminution in value of certain of its fixed assets. The fact that the write-down which reflected the shrinkage in value was accomplished through the medium of a ‘sale‘ to its wholly owned subsidiary, Merchants, does not, under the doctrine of Higgins v. Smith, supra, effect a change in its essential nature from that of an accounting entry designed to account for the diminution in value of assets still controlled by petitioner. It makes no difference that the write-down was pursuant to a recommendation of the Comptroller of the Currency. See Gulf Power Co., supra, with respect to accounting rules and orders of the Federal Power Commission; Old Colony R. Co. v. Commissioner, 284 U.S. 552, and Gulf, Mobile & Northern R. Co., v. Commissioner, 82 Fed.(2d) 788, with respect to accounting rules and orders of the Interstate Commerce Commission; and National Airlines, Inc., 9 T.C. 159, with respect to accounting rules and orders of the Civil Aeronautics Board.
The facts clearly show that there is no substance to the sale of the branch banks by petitioner to its wholly owned subsidiary. Petitioner had complete domination and control over Merchants, and the properties in the hands of Merchants were as much subject to petitioner's control as they were while legal title was in petitioner's own name. Higgins v. Smit;, supra; Sidney M. Shoenberg, supra; Thal V. Commissioner, 142 Fed.(2d) 874; cf. Corliss v. Bowers, 281 U.S. 476. In effect and substance Merchants was no more than the alter ego of petitioner, and ‘no loss could occur upon a sale by a taxpayer to such an entity.‘
The respondent's determination is sustained.
Decision will be entered under Rule 50.