Eldridge v. Commissioner

*1322 The respondent determined deficiencies in income tax for the year 1929 as follows: A. S. Eldridge, Docket No. 64778, $2,213.90; Alice H. Eldridge, Docket No. 64779, $2,124.13.

Both petitioners challenge the same adjustments made by the respondent, namely, the disallowance of a claimed loss on the sale of securities, and the inclusion in 1929 income of dividends the checks for which were received*1185 in 1930. Other adjustments made by the respondent are not in issue.

FINDINGS OF FACT.

Petitioners are husband and wife, residents of the State of Washington, and all of the income in controversy or deductions claimed in these proceedings involve community income or community property. *1323 Petitioner A. S. Eldridge is, and at all times material here was, president of the Eldridge Buick Co., a corporation engaged in distributing and retailing automobiles. Eldridge owned all the stock of the corporation except qualifying shares, which were owned by members of his family.

In October 1929 Eldridge bought 1,000 shares of Carnation Milk Co. common stock at a cost of $39,604, and 1,000 shares of Fox Theatres Corporation class A stock at a cost of $38,500. Before the end of 1929 the market price of these stocks had materially declined, and Eldridge became pessimistic as to the future of the stocks and decided to sell them. At a conference in December 1929 with an accountant who had been employed for a number of years to handle accounting and financial matters, the accountant advised Eldridge to transfer the stock to the Eldridge Buick Co. rather than to sell it on the*1186 open market. The accountant suggested that course for the purpose of avoiding the brokerage fees that would be incurred in a sale on the market and for the further purpose of having the corporation benefit from any rise in the market price. It was his opinion that the market price would rise. Eldridge accepted the accountant's advice and on December 30, 1929, delivered to a securities company in Seattle the certificates for both blocks of stock, with directions to transfer them to the name of the Eldridge Buick Co. The transfers were made as directed and the new certificates in the name of the Eldridge Buick Co. were delivered to Eldridge in January or February 1930. The market value of the Carnation Co. stock on December 30, 1929, was $30 per share and the market value of the Fox Theatres Corporation Class A stock on that date was $5 per share.

The Eldridge Buick Co. sustained a loss in its operation for 1929, but at the close of the year it had a substantial surplus. Eldridge carried a personal account with the company, which at the close of 1929 had a debit balance of $20,730.49. It had been the policy of Eldridge in prior years to have a credit balance in his account. *1187 At the close of 1929 he voluntarily reduced the salary he had drawn of $36,000 to $12,000 and the difference of $24,000 was charged to his account, making his total debit balance $44,730.49. A dividend of $50,000 was declared out of the corporation's surplus, which was credited to the account of Eldridge at December 31, 1929. At the same time his account was also credited with $35,000 representing the market value of the Carnation and the Fox stock transferred to the corporation. Upon completion of these adjustments his account showed a credit balance of $40,269.51. He received no cash from the company for the stock transferred to it.

No record was made on the minute books of the Eldridge Buick Co. concerning the transfer of the Carnation and the Fox stock. It had *1324 not been the custom to record such matters or purchases and sales on the minute books. On one or two previous occasions Eldridge had had stock of other corporations transferred to the Eldridge Buick Co.

In 1929 petitioner A. S. Eldridge was president of the Eldridge Securities Corporation, which was engaged in the business of handling sales contracts on automobiles. The corporation had several classes*1188 of stock outstanding and Eldridge was the owner of a large majority of the common stock. On December 17, 1929, the directors of the corporation adopted the following resolution:

Resolved that a semi-annual dividend be paid upon the capital stock of this company as follows:

Employees Preferred	5 per cent
Class A Preferred	3 1/2 per cent
Common	50 cents per share

The resolution did not fix a time for payment of the dividends. On December 27, 1929, the corporation issued a check payable to "Eldridge Securities Corp. Dividend a/c" for $40,486.25, which was cleared through the bank on December 28. On December 31, 1929, the treasurer of the corporation issued and mailed dividend checks to the individual stockholders. Eldridge received his dividend checks on January 2, 1930. Two of the four checks received by Eldridge were for dividends on stock of Mrs. Eldridge. The four checks, aggregating $15,825, were cleared through the bank on January 3, 1930.

The dividends so received were not reported by petitioners in their 1929 returns, but were added to 1929 income by the respondent, one half to each petitioner, with certain adjustments not here involved. The*1189 books of Eldridge were kept on the cash receipts and disbursements basis.

The method of disbursing the dividend declared in December 1929 was in accordance with that which had been followed for several years. That is, the treasurer of the corporation drew checks against the dividend account on the last day of the year and mailed them to stockholders on that day. The stockholders did not receive the checks until after the close of the year.

OPINION.

ARUNDELL: In their income tax returns for 1929 the petitioners claimed deductions for losses sustained on the sale of Carnation Co. and Fox Theatres stock. The deductions were disallowed by the respondent on the ground that the transfer of those stocks was not a bona fide transaction. The shares of stock were community property and were transferred by the husband, A. S. Eldridge, to a corporation in which he owned all the stock except qualifying shares and they were owned by members of his family. There is no question *1325 as to the formality of the transfer. The certificates were delivered up and new certificates issued in the name of the transferee corporation. The question for decision is whether, in view of the*1190 circumstances surrounding the transfer, recognition should be given to it as a bona fide transaction resulting in a realized loss to petitioners.

The respondent's argument against recognizing the transaction as a bona fide sale is based on Eldridge's ownership of stock in the transferee corporation. Because of this stock ownership, it is argued, Eldridge had no one to deal with but himself.

It has been emphasized of late by the highest authority we have that the general rule, and the rule for tax purposes, is that corporations and their stockholders are to be treated as separate entities. : "A Corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances * * * can the difference be disregarded." : "Certainly, under the general rule for tax purposes a corporation is an entity distinct from its stockholders, and the circumstances here are not so unusual as to create an exception." *1191 ; "Counsel for respondent concede that ordinarily a corporation and its stockholders are separate entities, whether the shares are divided among many or are owned by one." Klein v.Board of Supervisors (a state tax case), : "But it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with intent that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members." See also ; . In the Jones case, four brothers owning all the stock of a corporation transferred to it certain bonds at the then market price, which was less than cost to them, and claimed deductions in their income tax returns. The court held that the deductions were allowable, saying in part:

That the result of this was to enable taxpayers to claim a deductible loss in their income and at the same time, by reason of control of the corporation, *1192 to retain an indirect interest in the bonds is undoubtedly true, but it is for the legislature and not the courts to find a way of taxing such a transaction. As the matter now stands, inequitable as it may appear, there is no statute condemning it.

In this connection it is noted that in the Revenue Act of 1934, section 24(a)(6), deductions are not allowable for losses on the sale or exchange between an individual and a corporation in which he owns more than 50 percent of the outstanding stock. But prior *1326 to the 1934 Act there was no such statutory restriction. Under the earlier acts the general rule was to recognize gains or losses on all sales or exchanges and it was only in cases specially excepted - for example, in the reorganization cases - that gain or loss was not recognized.

The weight of authority thus requires the recognition of the separate entities of corporations and their stockholders, and consequently effect must be given to gain or loss transactions between them in the absence of restricting statutes or unusual circumstances or peculiar facts which "may require disregard of corporate form." *1193 We see nothing so peculiar about the facts in this case as to warrant a holding that Eldridge and the corporation were one. The corporation was an entity of substance and the evidence indicates that it had been a going concern for some years. It was not, as in , created and utilized solely for the purpose of reducing taxes. Nor do we have here any evidence of a persisting intention on the part of Eldridge to hold title to the stocks, as in . The evidence here is that Eldridge had made a definite decision to sell and it was only on the advice of his accountant that he transferred the shares to the corporation in which he was interested rather than to outside interests. Upon the evidence we are of the opinion that the transfer by Eldridge to the Eldridge Buick Co. was a bona fide transfer to a separate entity, and as such it resulted in a loss deductible under the taxing statute.

The other question is whether dividends declared by the Eldridge Securities Corporation were income in 1929 or 1930. The dividends*1194 were declared on December 17, 1929, a check transferring funds to the corporation's dividend account was issued on December 27 and cleared through the bank on December 28, and the individual dividend checks were drawn and mailed on December 31, 1929. The checks were received by Eldridge on January 2, 1930, and cashed the following day.

This question is controlled by the opinion of the Supreme Court in . In both that case and this it was the practice to mail out checks on the last day of the year so as to reach stockholders on the first business day of the following year. It does not appear that the petitioner could have obtained payment in 1929, and the practice of the corporation shows that it was not intended that stockholders should receive their dividends until the year following declaration. The case here is even stronger for the petitioner than was the Avery case, for here the resolution did not fix a date of payment, while in the Avery case *1327 the dividends were declared payable on or before December 31. We accordingly hold that the dividends here involved were not income to petitioners in 1929.

*1195 Decision will be entered under Rule 50.