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Docket Number

No. 3239.

Attorney(S)

James O. Wynn, of New York City (Thomas G. Haight, of Jersey City, N.J., and Robert H. Montgomery and J. Marvin Haynes, both of Washington, D.C., on the brief), for petitioner for review. Ellis N. Slack, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key and Lucius A. Buck, Sp. Assts. to Atty. Gen., on the brief), for the Commissioner.

Judges

George Hutchins Bingham

Acts

Internal Revenue Code — Income Taxes — Normal Taxes And Surtaxes — Natural Resources — Deductions — Deduction And Recapture Of Certain Mining Exploration Expenditures

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Smart Summary

Powell v. Commissioner of Internal Revenue, C.C.A. 1 (Jan. 26, 1938) — Structured Summary

Factual and Procedural Background

The Commissioner of Internal Revenue determined a deficiency in petitioner Joseph W. Powell's income tax return for 1930 in the amount of $8,882.12. The Commissioner disallowed claimed deductions for certain losses the petitioner asserted arose from sales of stocks and demand notes (aggregate claimed loss $86,135.11). The Commissioner conceded, and the Board of Tax Appeals found, that traveling expenses of $9,442.38 were paid by the petitioner while away from home in pursuit of his trade or business; that matter is not before the Court on this petition.

The principal controversy concerns whether the petitioner is entitled to deductions for alleged losses resulting from sales of particular securities and notes: 200 shares of American Hawaiian Steamship Co., 3,150 shares of Atlas Tack Corporation, 525 shares of the Bank of the Manhattan Company, and demand notes of 1052 First Avenue, Inc. The Commissioner disallowed nearly all of the claimed losses; the Board of Tax Appeals affirmed the Commissioner to the extent of a deficiency of $7,687.20, and the petitioner filed this petition to review that Board decision.

Relevant facts (as recited by the Board and undisputed) include that the petitioner was sole trustee of the B.O. Powell Trust, established by his wife and funded largely with property given by petitioner; the Trust gave the trustee broad powers and near-plenary discretion to deal with Trust property, including buying from, selling to, borrowing from and lending to the Trust. The Board summarized the transactions as follows:

American Hawaiian Steamship Co. (200 shares): On December 1, 1930, petitioner directed brokers to sell 200 shares for his individual account and, the same day, to purchase 200 shares for the Trust; brokers executed the sell-and-buy at market. After thirty days, on January 26, 1931, petitioner (as trustee) directed sale of the 200 Trust shares and, as individual, purchased 200 shares — again effected at market.
Atlas Tack Corporation (3,150 shares): On December 1, 1930, petitioner directed brokers to sell 3,150 shares for his individual account and to purchase a like amount for the Trust; brokers effected these transactions at market. On January 26, 1931 (more than 30 days later), similar reverse transactions were effected between petitioner individually and the Trust.
Bank of the Manhattan Company (525 shares): Petitioner owned 525 shares pledged as collateral for his loan; the Trust owned a like amount. On December 29, 1930 petitioner borrowed the Trust's 525 shares and substituted them as collateral for his own pledged shares at Chase Bank. The New York Hanseatic Corporation, at petitioner's request, took petitioner's 525 shares, paid him $37,714.18, and delivered 525 shares to petitioner as trustee in exchange for $37,714.18 from the Trust. Petitioner deposited his check to the Trust account as security for the borrowed stock. The Trust paid interest to petitioner and received dividends until May 18, 1931; on that day petitioner bought from the Trust the 525 shares for $38,325 (the then market price).
1052 First Avenue, Inc. demand notes (face $41,000): Petitioner owned the notes and all the stock of the corporation. In November 1930 he placed the notes for sale at an open auction (Boston Auction), directing brokers to buy them for the Trust with an opening bid of $25,000 and other bids not to exceed face value. The brokers bid $25,000 and acquired the notes for the Trust; petitioner received $24,947.45 of the bid proceeds. The corporation paid the Trust $25,000 and gave a new $20,000 note to cover the balance of principal and accrued interest; on January 29, 1931 petitioner acquired that $20,000 note from the Trust (he acting as trustee).

The petitioner testified that he had no understanding or agreement reserving a right to repurchase, had no option to repurchase, and had no intention of repurchasing any of the securities. The Board, however, found that the petitioner never intended to finally and completely dispose of the stocks and notes, concluding the alleged sales were not final dispositions but steps in an effective plan to establish tax losses, and therefore that petitioner sustained none of the alleged losses for 1930.

Legal Issues Presented

Whether the petitioner is entitled to deduct claimed capital losses (totaling $86,135.11) from alleged sales of specified stocks and notes for the taxable year 1930.
Whether there was substantial evidence to support the Board of Tax Appeals' finding that, at the time of the alleged sales, the petitioner did not intend finally and completely to dispose of the securities (i.e., whether the transactions were not bona fide sales but steps to create tax losses).

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Slayton v. Commissioner, 1 Cir., 76 F.2d 497	Standard of review: appellate review of Board of Tax Appeals is limited and the court must determine whether there was substantial evidence to support the Board's findings.	The court applied the substantial-evidence standard from Slayton and concluded there was substantial evidence supporting the Board's finding that petitioner did not intend to finally and completely dispose of the securities.

Court's Reasoning and Analysis

The Court's review was confined to questions of law and whether the Board's decision was supported by substantial evidence. The Court identified the controlling legal question as whether substantial evidence supported the Board's finding that the petitioner lacked intent to finally and completely dispose of the securities at the time of the alleged sales.

The Board's factual findings were based upon the petitioner's testimony and documentary evidence, which the Board summarized and characterized as showing that the petitioner executed a plan in each transaction that left him essentially in the same ownership position as before the alleged sales. The Board discredited the petitioner's testimony about his intent—reasoning that his acts contradicted his testimony—and concluded the transactions were not genuine final sales but were steps to create deductible losses.

The Court emphasized procedural constraints on the record: although Mr. Smith (a Board member) who heard the testimony dissented from the majority, the report of the division that considered the case was, by statute, not part of the record when the chairman directed review by the full Board. Therefore the Court would not infer the content of Mr. Smith's report or treat it as part of the adjudicative record on review.

The Court explained that, because the petitioner was a highly interested witness and the sole witness as to his state of mind, the Board was not obliged to accept his account of intent, especially where the testimony conflicted with objective acts. Applying the substantial-evidence standard, the Court found that there was substantial evidence to support the Board's conclusion that the petitioner lacked intent to finally dispose of the securities and therefore did not sustain the asserted losses in 1930.

Holding and Implications

Holding: The order or decision of the Board of Tax Appeals is AFFIRMED.

The Board had entered a decision that there was a deficiency for 1930 in the amount of $7,687.20, and the Court affirmed that decision. The direct consequence for the parties is that the petitioner is not entitled to the claimed deductions for the alleged losses on the specified securities for 1930, and the deficiency as determined by the Board stands.

The opinion does not announce a novel rule of law; rather it applies the settled substantial-evidence standard of review to affirm the Board's factual finding concerning the petitioner's intent. No broader legal implications or new precedent are expressly articulated in the opinion beyond the application of the standard review principles cited.

Disposition

The order or decision of the Board of Tax Appeals is affirmed.

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POWELL v. COMMISSIONER OF INTERNAL REVENUE.

BINGHAM, Circuit Judge.

This is a petition to review an order or decision of the Board of Tax Appeals. The Commissioner determined a deficiency of $8,882.12 in the petitioner's income tax return for the year 1930. In determining the deficiency, the Commissioner passed upon two questions: First, was the sum of $9,442.38, which the petitioner spent for traveling expenses, expended in connection with a trade or business regularly carried on by him? The Commissioner disallowed it as a deduction in determining the deficiency; but before the Board of Tax Appeals he conceded that traveling expenses in that amount were paid out by the petitioner in 1930, and the Board found that sum was expended by him while away from home in pursuit of his trade or business and was an ordinary and necessary expense paid during the taxable year for carrying on his trade or business. No question in relation to that is before us on this petition. The main question is whether the petitioner is entitled to a deduction of $86,135.11, which he claims to have lost in the sale of shares of stocks and notes. The Commissioner disallowed nearly all of this amount, determined a deficiency in the sum of $8,882.12, and the Board affirmed the Commissioner's determination to the extent of $7,687.20. It is from this order or decision that the petition for review is prosecuted.

The alleged losses here in question, the disallowance of which as a deduction was affirmed by the Board, arose out of alleged sales of the following stocks and notes: Number Amount Claimed sold Cost realized loss American Hawaiian Steamship Co. shares 200 $ 6,705.00 $ 1,627.00 $ 5,078.00 Atlas Tack Corporation, shares .......... 3,150 31,302.02 9,092.44 22,209.58 Manhattan Co. shares .................... 525 63,525.00 37,714.18 25,810.82 1052 First Avenue, Inc., notes of $41,000 face value ............................ 41,000.00 24,947.75 16,052.25 __________ $69,150.65 It appears that the petitioner was the sole trustee of a trust, known as the B.O. Powell Trust, established by his wife shortly prior to 1930, from property largely given her by the petitioner; that the income of the Trust was payable to the wife for life at such times and in such amounts as the petitioner, in his discretion, saw fit; that he had extremely broad powers and a practically unlimited discretion in dealing with the Trust property, and could buy from, sell to, borrow from, or lend to, the Trust, and "exercise all the powers of owner of the Trust Estate"; and that, during the period of the transactions here involved, the Trust was in existence.

As to the 200 shares of American Hawaiian Steamship Company stock it appears that the petitioner, on December 1, 1930, directed Spencer, Trask Co., brokers, to sell 200 shares of that stock for his individual account, and, on the same day, instructed F.S. Moseley Co., brokers, to purchase for him as trustee a like amount of the same stock, and that the brokers sold and bought the 200 shares as directed at the market price prevailing for the stock on the New York Stock Exchange on that day; that, on January 26, 1931, after the lapse of thirty days from the alleged sale, the petitioner as trustee of the Trust directed Moseley Co., brokers, to sell for the Trust 200 shares of the Steamship Company's stock, and, as an individual, to buy for him 200 shares of the stock, which transactions the brokers effected at the market price prevailing on the New York Stock Exchange on that day.

The next transaction relates to 3,150 shares of the stock of the Atlas Tack Corporation. As to this stock it appears that the petitioner, on December 1, 1930, directed Moseley Co. to sell 3,150 shares of that stock for his individual account and to purchase a like amount of the same stock for the Trust; and that the brokers effected the transactions at the market price prevailing on the New York Stock Exchange on that day; that on January 26, 1931, and more than thirty days after the date of the alleged sale, the petitioner directed Moseley Co. to sell for the Trust 3,150 shares of the Atlas Tack Corporation stock and to purchase for him individually a like number of shares; and that the brokers effected these transactions at the market price prevailing on the New York Stock Exchange on that day.

As to the alleged sale of the 525 shares of the Bank of the Manhattan Company it appears that the petitioner in the latter part of December, 1930, was the owner of 525 shares of stock in that company, which he had pledged as collateral for a loan at the Chase Bank; that the Trust owned a like amount of the same stock; that on December 29, 1930, the petitioner borrowed the 525 shares belonging to the Trust and pledged them with the Chase Bank in substitution for his own shares pledged to that bank; that, on the same day, as a favor to the petitioner, the New York Hanseatic Corporation, a trading company, received from the petitioner the 525 shares of the Manhattan Company stock he had taken out of pledge at the Chase Bank and gave him a check for $37,714.18, the then current price for the stock; and delivered 525 shares of the same stock to the petitioner as trustee for the Trust and received from the Trust $37,714.18; that the petitioner then deposited the check for $37,714.18 which he, as an individual, had received from the New York Hanseatic Corporation, in a bank to the account of the Trust as security for the stock which he had borrowed from the Trust; that, thereafter, the Trust paid interest to the petitioner on the $37,714.18 and received the dividends on the stock, loaned to the petitioner and pledged with the Chase Bank, down to May 18, 1931; that on that day, and more than thirty days after the alleged transactions of December 29, 1930, the petitioner bought from the Trust the 525 shares which he had borrowed and pledged with the Chase Bank, paying the Trust therefor $38,325, the then current price of the stock.

As to the transactions relating to the demand notes of the face value of $41,000, the obligations of a company known as 1052 First Avenue, Inc., it appears that the petitioner owned these notes, having received them for loans made to that corporation and for interest accruing on the loans; that he owned all of the stock of the 1052 First Avenue, Inc.; that in November, 1930, he knew that the corporation had completed a transaction in real estate whereby it was shortly to receive $25,000 in cash which was to be used in paying $25,000 on the principal of the notes held by him, which were its only obligations, and that the notes were not in default; that on or about November 12, 1930, the petitioner placed the notes for $41,000 on sale at the Boston Auction, an open market where properties are auctioned off after they have been advertised, and directed his brokers to buy them on behalf of the Trust by an opening bid of $25,000, to be followed, in case others bid, by bids not to exceed the face value of the notes; that the petitioner was willing to permit the notes to go to outsiders for about $40,000; that the brokers carried out his instructions and bid in the notes for the Trust for $25,000; that the petitioner received $24,947.45 of the amount bid; that 1052 First Avenue, Inc., paid to the Trust $25,000 on the notes for $41,000, and then gave to the Trust a new note for $20,000 to cover the balance of the principal ($16,000) and accrued interest ($4,000) due on the original notes; that, on January 29, 1931, the petitioner acquired the $20,000 note from the Trust directly, he acting as trustee for the Trust.

The above facts as to the transactions concerning the shares of stock and notes are but a restatement by the Board of the testimony given by the petitioner and the documentary evidence in the case, and are not in dispute. The petitioner also testified that he had no understanding or agreement that he would have a right to repurchase at any time the stock and notes; that he had no option to repurchase a similar amount of stock from any one; and that he had no intention of repurchasing any of the stocks and notes at any time in the future.

The gist of the decision of the Board of Tax Appeals was that, "taking all the evidence into consideration, the petitioner never intended to finally and completely dispose of any of the stocks and notes"; that "the sales were not final dispositions but mere steps in an effective plan to establish losses for income tax purposes"; and that "the petitioner sustained none of the alleged losses for the year 1930."

In its opinion it also states that the "only evidence in the record of his intention is his testimony, that he did not intend to reacquire any of the property, and his acts." It refused to believe the testimony as to his intention, saying that "sometimes the acts of an interested witness speak louder than his words. Such is the case here." The Board was not obliged to believe him, for his testimony was belied by his acts in every one of the transactions, which showed that he had formed a plan for carrying out each transaction and that each was carried out accordingly so as to leave him in the same position of ownership that he would have been in had the alleged sales or transactions not taken place.

Our authority in reviewing an order or decision of the Board of Tax Appeals is limited to questions of law and fair trial, and the only question of law here presented is whether there was substantial evidence to support the finding of the Board — that, at the time of the alleged sales of the stocks and notes, the petitioner did not intend finally and completely to dispose of them. We are satisfied there was substantial evidence to support the finding and that the Board did not act arbitrarily in finding as it did. Slayton v. Commissioner, 1 Cir., 76 F.2d 497.

The petitioner, however, seems to think that the record in this case presents a situation different from that in the ordinary case of a review by this court of an order or decision of the Board, in that Mr. Smith, who heard the testimony, dissented from the majority opinion of the Board as to whether petitioner intended at the time of the alleged sales or transactions to repurchase the securities; that Mr. Smith's determination and report to the Board on this question must have been in accordance with his dissent, and, if so, the Board could not have reversed his determination without finding that it was clearly wrong.

The record discloses that Mr. Smith was the only member who took the evidence and heard the case and, as a proceeding before the Board is to be heard in the first instance by a division ( 45 Stat. 871, § 601, 26 U.S.C.A. §§ 603(c), 617(c, d, e), 618(a, b), it is to be presumed that he was the sole member of the division. But the determination and report Mr. Smith made to the Board is not a part of the record in this case. This also is in accordance with the law, which provides: "The report of a division shall not be a part of the record in any case in which the chairman directs that such report shall be reviewed by the Board." Section 601, 26 U.S.C.A. § 618(b). It further appears in the record that a review was had and that on June 3, 1936, the Board made its findings of fact and rendered an opinion in the case; that Mr. Smith dissented and Mr. Leech concurred in the dissent; and that, following the promulgation of the findings of fact and opinion, by the Board, the Board, on July 6, 1936, entered its decision reading:

"Pursuant to the Board's findings of fact and opinion, promulgated June 3, 1936, the respondent on June 16, 1936, having filed a proposed computation, and the petitioner on July 1, 1936, having filed notice of acquiescence to the said computation, it is ordered and decided that there is a deficiency for the year 1930 in the amount of $7,687.20."

The determination and report of Mr. Smith, as a division of the Board, not being a part of the record in the case, as the law required that it be excluded therefrom, we are not at liberty to infer what his determination and report was.

The Board of Tax Appeals consists of sixteen members. Volume 3, Prentis-Hall Federal Tax Service, 1938, p. 22011. And the procedure to be followed before the Board is outlined in section 601 of 45 Stat. 871, amending section 906 of the Revenue Act of 1924, 26 U.S.C.A. §§ 603(c), 617 (c, d, e), 618(a, b). Under section 906, as amended, the chairman of the Board is authorized from time to time to divide the Board into divisions of one or more members and assign the members of the Board to their respective divisions; and, when a division consists of more than one member, the chairman of the Board is to designate the chief of the division; and a division is to hear and make a determination upon any proceeding assigned to it by the chairman and make a report to the Board of any such determination. Section 906(a), as amended, 26 U.S.C.A. §§ 603(c), 618(a). And section 906(b), as amended, 26 U.S.C.A. § 618(b) provides that "The report of the division shall become the report of the Board within 30 days after such report by the division, unless within such period the chairman, has directed that such report shall be reviewed by the Board"; and that, when the chairman has so directed, "the report of a division shall not be a part of the record in any case." In other words that thereafter the case shall stand as though no determination and report had been made by the division and is to be decided by the Board on the evidence submitted at the hearing before the division. The exclusion from the record of the determination and report of a division when a review is directed by the chairman was evidently inserted by Congress in the statute to prevent the raising of just such a question as is here sought to be raised by the petitioner.

Furthermore, the petitioner was a highly interested witness, and he was also the sole witness as to his intention at the time of the alleged sales of the stocks and notes, and the subject matter of his testimony concerned his intention or state of mind at that time. In this situation we do not think that the Board was bound to accept his testimony as true, and that this is especially so under the circumstances here presented, as his testimony as to his intention does not accord with his acts but is in direct conflict with them.