Scanlon v. Commissioner , 42 B.T.A. 997 ( 1940 )

ROBERT H. SCANLON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Scanlon v. Commissioner

Docket No. 98020.

United States Board of Tax Appeals

42 B.T.A. 997; 1940 BTA LEXIS 919;

October 18, 1940.

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A voluntary contribution by a taxpayer to a corporation of which he is the sole owner, held not a gift subject to gift tax. Frank B. Thompson,42 B.T.A. 121">42 B.T.A. 121, distinguished.

A. W. Helvern, Esq., for the petitioner.

Harry R. Horrow, Esq., for the respondent.

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OPPER

This proceeding was brought for a redetermination of a deficiency in gift tax for the year 1935 in the amount of $24,005.61.

The questions presented for determination are (1) whether a transfer by petitioner of certain shares of stock to a corporation, all of the stock of which was owned by petitioner, constituted a gift within the meaning of section 501 of the Revenue Act of 1932 and (2) whether the Commissioner's determination of value for such stock is correct.

FINDINGS OF FACT.

The proceeding was submitted on a stipulation and exhibits received in evidence at the hearing. All of the stipulated facts are hereby found. They disclose the following:

On or about November 1, 1931, petitioner, an individual, caused to be organized under the laws of the Bahama Islands a corporation known as "Teshqvoit Corporation, Limited" (hereinafter sometimes referred to as Teshqvoit). Five qualifying shares were issued to directors without any consideration being paid therefor and without any record as to liability with respect to these shares being made upon the general books of the corporation. Upon dissolution of Teshqvoit on December 30, 1937, the qualifying shares were canceled without participation by the holders thereof in the assets of the corporation.

On November 13, 1931, Teshqvoit, in accordance with a resolution of its board of directors, accepted from petitioner 269 shares of the common stock and 420 shares of the preferred stock of the Powell River Co., Ltd., and issued therefor, in exchange 269 shares of its common stock and 420 shares of its preferred stock. These 269 shares of preferred stock and 420 shares of common stock were the only shares of capital stock (other than the directors' qualifying shares issued without consideration) ever issued by Teshqvoit. These shares were at all times, from the date of their issuance on November 13, 1931, to the date of the dissolution of Teshqvoit on December 30, 1937, owned by petitioner.

On November 1, 1933, petitioner sold and transferred to Teshqvoit certain other shares of stock in exchange for promissory notes of Teshqvoit, payable to petitioner. Teshqvoit paid petitioner interest at the rate of 3 percent per annum on the balances outstanding on its promissory notes, which interest petitioner reported in his Federal income tax return.

On December 12, 1935, petitioner caused to be transferred to Teshqvoit 445 shares of preferred stock and 11,790 shares of common stock of the Powell River Co., Ltd., which he had acquired by inheritance from the estate of his mother. No stock of Teshqvoit was issued to petitioner, nor did Teshqvoit pay him any cash or distribute any property to him by reason of the transfer to it of the 445 shares of preferred and 11,790 shares of common stock of the Powell River Co., Ltd. This stock was recorded upon the books of Teshqvoit as investments at the values of $90 per share for the preferred stock and $17.50 per share for the common stock, or a total of $246,375. On its books the corporation set up an account entitled "Capital Surplus" and credited to it the amount of $246,375.

After the transfer of the 445 shares of preferred and 11,790 shares of common stock of the Powell River Co., Ltd., and until the dissolution of Teshqvoit no dividends paid on the Powell River Co., Ltd., stock to Teshqvoit were included in the Federal income tax returns of petitioner.

On Teshqvoit's dissolution on December 30, 1937, all of its assets were transferred in liquidation to petitioner.

Respondent treated the transfer of the 445 shares of preferred and 11,790 shares of common stock of the Power River Co., Ltd., as a taxable gift under section 501 of the Revenue Act of 1932 and determined a total value of $274,804 therefor.

OPINION.

OPPER: The present controversy involves the transfer by petitioner to his wholly owned corporation of shares of common and preferred stock of the Powell River Co., Ltd. The parties differ as to whether this was a gift subject to tax under the provisions of Revenue Act of 1932, sections 501, et seq., and, if so, as to the value of the stock transferred. Since we are of the opinion that the gift tax sections do not apply, consideration of the second question will be unnecessary.

Characterization of the transfer as a gift seems to us to be contrary to the generally accepted and ordinary meaning of the term. ; see . Webster ¹ defines a gift as "anything voluntarily transferred by one person to another without compensation; a present." We think it clear that there was full and satisfactory compensation to petitioner, through the corresponding enhancement in the value of his shares, even though it be conceded that this was a transfer by one person to another. Motive may not be conclusive and it may not help merely to say there was no donative intent. But see . Yet the existence of compensation to petitioner is indicated by the answer to the question: Did he make the transfer to benefit the corporation as a disconnected and isolated entity, or to benefit some third person, or was it for his own benefit exclusively? Formulation of the question is its own best answer.

It is indeed difficult to say that this was a "gift" for purposes of perpetuating the transferor's basis under, e.g., the Revenue Act of 1926, section 204(a)(2), ; certiorari denied, , and not for purposes of the gift tax. Yet if the property had been transferred for stock in the transferee corporation the basis would still have been that of the transferor. Sec. 204(a)(8). Hence, it made little difference in the Rosenbloom case which way the transfer was regarded. See ; affd., . But the main strength of the gift argument would in such condition disappear. For the stock would represent consideration, even though perhaps it gave the transferor nothing he did not have before. . For this very reason no attempt should be made to lay undue emphasis on the fact that petitioner's compensation here was by way of increase in the value of his existing shares rather than the "proliferation" of his interest by issuance of new ones. See

It is true that , indicates that if the corporate form is used the taxpayer must take the consequences. But here, not the existence of the corporation but the form of the transfer creates the question. We do not say, disregarding the corporate entity, that petitioner made a transfer to himself, so much as we do that, having due regard to the realities, petitioner's interest as sole stockholder in the corporation's property gave him a corresponding compensation for the transfer, which prevents it from being a true gift within the meaning of the gift tax law.

If petitioner were not the sole shareholder a different question would arise. For other shareholders would benefit proportionately from the receipt of the property by the corporation. As to them, particularly members of the transferor's family, there is no reason to disregard the gift theory. And if to that extent the transfer is a gift there may be no practical method of administering the act save to treat the tax as applying to the whole. . But no such difficulty need disturb us here, since no one but petitioner was interested in either the property transferred or its recipient. We are not unmindful that in , the Circuit Court of Appeals, Ninth Circuit, affirming the Board, applied the rule of the Rosenbloom decision to the case of a sole stockholder in holding that the basis of his transferee corporation was the same as his own. But the conclusion there expressed that the transfer was a "gift" seems to have rested principally on the taxpayer's concession of fact that consideration was lacking.

Since a different question is presented here, and since we think it strains the sense and purpose of the gift tax act to call this transaction a gift within its intendment, we conclude that the deficiency was erroneously determined.

Reviewed by the Board.

Decision will be entered for the petitioner.

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Footnotes

• 1. Webster's New International Dictionary, 2d Ed. ↩