Opinion
No. 42.
January 8, 1946.
Petition to review a decision of the Tax Court.
Petition by William A. Barber and his wife to review a decision of the Tax Court redetermining a deficiency in the income taxes of the petitioners for the calendar year 1941.
Affirmed.
The petitioners are a husband and wife who filed a joint return of income for the calendar year 1941. A deduction taken under § 117 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 117, for a capital loss on the sale by the husband of 2,500 preferred shares of stock which he claimed to own was disallowed because his evidence of ownership and sale was not considered sufficient by the Commissioner. A deficiency was determined as the result since the deduction had wiped out all of the otherwise taxable income of the petitioners. This petition to review the decision of the Tax Court redetermining that deficiency was filed by the taxpayers.
The Tax Court on adequate evidence found that:
The petitioner William A. Barber, who will hereinafter be treated for convenience as the sole petitioner and taxpayer, is a resident of New York City who kept his books and filed his return for 1941 on the cash receipts and disbursements basis. He had for many years been a practicing attorney and since 1925 had been a director and, since 1930, the chairman of the board of the Childs Company which operated a large chain of restaurants.
In January of 1937 he owned among other securities common stock in the Childs Company but none of its preferred, and was convinced that the business prospects of the company were so good that its preferred stock, on which there were unpaid cumulative dividends amounting to thirty-five dollars a share, was selling so low on the market that dealing in it would be profitable. He had, however, become indebted to banks in excess of a million dollars and was not able to finance the purchase of the stock. So he called the attention of an old friend, Mr. Wiggin, to what he considered a good opportunity to make a profit and Wiggin promised to look into the situation. After that and on January 25, 1937, he wrote Mr. Wiggin the following letter:
"Confirming our understanding with respect to the Joint Account in Childs Company Preferred Stock as follows:
"You are to purchase through such broker or brokers as you may select and at such prices as you may determine, Childs Company Preferred in an amount not exceeding Five thousand (5000) shares, unless this amount is enlarged by mutual consent.
"This stock is to be carried by you for not exceeding one year, and I am to have one-half of any profit accruing to the account, less interest charge at the rate of five (5%) per annum for carrying my portion.
"You may purchase and sell for this account at your discretion and I am to be notified before the end of each month the number of shares bought and sold. This to enable me to make necessary reports, I being a director in the Company.
"If this is satisfactory I shall thank you to confirm."
Mr. Wiggin replied to this letter the same day, saying:
"I beg to acknowledge yours of the 25th instant. Your statement of the understanding in respect to the Joint Account in Childs Company Preferred Stock is correct, and I beg to confirm."
Thereafter, Wiggin purchased, between February 1, 1937, and June 8, 1937, 2,500 of said shares through a brokerage firm which took title in a street name and issued purchase slips to Wiggin with petitioner's name in the space left for the name of the account. These purchase slips were sent to the petitioner. The petitioner never advanced any money for the purchase of the shares, had nothing to do with the arrangements for purchasing and holding the shares, and never exercised any control over them.
The venture did not turn out successfully and the shares apparently were simply held as when purchased without any action in respect to them being taken by the petitioner until late in 1941. On December 3, 1941, Mr. Wiggin's secretary wrote petitioner that Wiggin had decided, in view of the obvious inability of the petitioner to pay the debt as shown by the financial data which he had given Wiggin the preceding summer and the then market value of the stock, it was best to terminate the account, and that Wiggin was willing to sell or take over the shares at the current market price and credit petitioner's account with the proceeds. That letter, almost five years after the original agreement, contained the first suggestion that petitioner owned the shares and was indebted to Wiggin for any of the losses which would be the result of then closing the joint account. The petitioner replied the next day as follows:
"Referring to my indebtedness to you in the amount of $215,456.28, plus interest, as collateral for which you hold 2500 shares of Childs Company preferred stock, I hereby consent to the purchase by you of the above mentioned shares at the current market price of $9 a share, the proceeds of $22,500 to be credited against the amount of my indebtedness, which will then be $192,956.28. I understand that you will purchase and affix the necessary Federal and State stock transfer stamps in this connection."
In this statement of the amount of the debt the petitioner acknowledged apparently the interest charges were ignored.
The petitioner was the only witness in the proceedings in the Tax Court and his testimony tended to support his contention that the stock had been his property since it had been purchased and that it had been held as collateral for his debt to Wiggin until the latter took it over in 1941. The petitioner has never paid Wiggin anything on this debt nor did it appear that Mr. Wiggin had ever requested him to do so.
The Tax Court further found and concluded that, "The agreement between petitioner and Wiggin, made on January 25, 1937, was an agreement under which Wiggin agreed to purchase at prices he determined not exceeding 5,000 shares of Childs Company preferred stock, which he was to carry, and over which he had full control. Wiggin did not loan petitioner the capital with which to purchase the stock, and petitioner did not purchase the stock. Under the agreement petitioner's interest was limited to the right to receive one-half of any profit accruing to the account, less a charge for interest. The agreement did not obligate petitioner to share in any loss and he did not receive the right to sell stock out of the account. There was no bona fide sale of 2,500 shares of preferred stock by petitioner to Wiggin in December 1941."
Ignatius Stone, of New York City (Milton B. Ignatius and Edward McFadden, Jr., both of New York City, of counsel), for petitioners.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Morton K. Rothschild, Sp. Assts. to the Atty. Gen., for respondent.
Before SWAN, CHASE, and FRANK, Circuit Judges.
The arrangement of 1937 which Mr. Barber and Mr. Wiggin made in respect to the acquisition and disposition of the shares by Wiggin, as stated in the letter January 25, 1937, from Barber to Wiggin which Wiggin briefly confirmed, did not compel a finding by the Tax Court that the petitioner became the owner of the shares which Wiggin purchased in compliance with the agreement. He paid nothing for them, did not have possession of them, none were ever transferred to him, and purchases and sales were to be made in the discretion of Mr. Wiggin, the petitioner being given an account of them each month and being entitled to receive one-half of any profits accruing to the account less interest at a stated rate on one-half the money Wiggin paid for the shares. Though in December of 1941, the taxable year here involved, the petitioner and Mr. Wiggin's secretary exchanged letters which seemed to show that the petitioner was indebted to Wiggin to the amount of the purchase price of the 2,500 shares which Wiggin had bought and that the latter was holding those shares as collateral for that debt, this was the first time so far as the evidence shows that the parties to the 1937 arrangement had so interpreted it. Previously they had acted for nearly five years in a manner consistent with an understanding that the so-called Barber account was a joint account in which Mr. Barber's only interest was, as the exchange of letters in 1937 seemed to show, the right "to have one-half of any profit accruing to the account, less interest charge at the rate of five per cent (5%) per annum for carrying my portion." This language was followed by such an interval of action and inaction as might be expected if an old friend financially able to do so had undertaken to risk any loss which might be the result of trying to help the petitioner profit by an anticipated increase in the market price of the stock while helping himself to some of the profit also. The time limit of one year was disregarded and only long after that did Mr. Wiggin exclude the petitioner from the venture. Even then no demand for payment was made but the reason stated by the secretary was that Mr. Wiggin was satisfied that the petitioner could not pay the debt and thought it best to terminate the account in view of the then market situation of the stock. Thus the joint speculation ended and thereafter Mr. Wiggin could, if the last exchange of letters were given face value, hold the shares solely for his own account and take all the profits, if any, when he saw fit to dispose of them, after saddling the loss up to then entirely upon the petitioner or at least to the extent that the petitioner was able to pay.
There was no conflict in the evidence as to the basic facts but the inferences to be drawn from them are decisive as to whether or not the petitioner did become the owner of the shares and did sell them at a loss or whether he merely relinquished the right in 1941 to share in a then nebulous profit. Such inferences were for the Tax Court. Dunne v. Commissioner, 2 Cir., 75 F.2d 255; Webb v. Commissioner, 2 Cir., 67 F.2d 859. Though we might have reached a different result we cannot now weigh the evidence and make findings. Webre Steib Co., Ltd., v. Commissioner, 324 U.S. 164, 65 S.Ct. 578. Our duty is to determine whether the inferences of fact which the Tax Court drew have a substantial basis in the evidence and, if they have, to make them effective. Commissioner v. Scottish American Investment Co., 323 U.S. 119, 124, 65 S.Ct. 169. When, as in this instance, the inferences are reasonable, though contrary ones might have been drawn from the undisputed evidence, there is no error of law which we can correct. Boehm v. Commissioner, 325 U.S. ___, 66 S.Ct. 120.
There is one claimed error in the exclusion of evidence which should be noticed. Mr. Barber testified in the Tax Court that he was familiar with the rules of the Securities and Exchange Commission which require anyone who is a director or officer of a corporation to report currently under oath his holdings of stock owned directly or indirectly and current sales and purchases. He testified that he considered himself subject to those requirements and that he had filed such reports with the Securities and Exchange Commission and identified one dated February 10, 1937, which he had so filed. His offer of it was objected to and it was excluded, as were all such reports he had made. While this ruling was erroneous, it does not justify a reversal and remand as the evidence was but cumulative since it was undisputed that the petitioner had filed the reports as he testified and so the excluded evidence was but additional evidence of a fact otherwise proved and entirely uncontradicted.
Affirmed.