Opinion
Docket Nos. 3440 3441.
1944-12-27
DUDLEY R. PARSONS AND MARY J. PARSONS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HAROLD B. NIVER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Elorion Plante, C.P.A., for the petitioners. Melvin S. Huffaker, Esq., for the respondent.
The only assets of value owned by two corporations, consisting of unsold subdivision lots, were taken over by the State of Michigan for delinquent taxes in 1938 and were finally sold at auction in 1941. Held, that the evidence fails to overcome the presumptive correctness of the respondent's determination that the stock of the corporations became worthless prior to January 1, 1941; held, further, that the provisions of the so-called ‘Scavenger Sale Act‘ (Michigan Public Act 155) giving former owners the right to redeem real estate taken over by the state for delinquent taxes within 30 days after its public sale by paying, or agreeing to pay, an amount equal to the highest bid obtained at such sale, is not shown to have given any value to the corporate shares under consideration. Elorion Plante, C.P.A., for the petitioners. Melvin S. Huffaker, Esq., for the respondent.
These proceedings, consolidated for hearing, involve income tax deficiencies for the year 1941 as follows:
+-----------------------------------------------------------+ ¦Petitioner ¦Docket No.¦Deficiency¦ +-------------------------------------+----------+----------¦ ¦Dudley R. Parsons and Mary J. Parsons¦3440 ¦$2,377.98 ¦ +-------------------------------------+----------+----------¦ ¦Harold B. Niver ¦3441 ¦369.80 ¦ +-----------------------------------------------------------+
The only question in issue is whether petitioners are entitled to a loss deduction in 1941 on account of the worthlessness of shares of stock in two corporations engaged in real estate developments whose properties were taken over by the state in a prior year for delinquent taxes.
FINDINGS OF FACT.
Petitioners are residents of Allen Park, Michigan. They filed their income tax returns for 1941 with the collector of internal revenue for the district of Michigan. Mary J. Parsons is the wife of Dudley R. Parsons. The term petitioners as hereinafter used will refer to Dudley R. Parsons and Harold B. Niver.
The Parsons Land Co. and the Penn Allen Land Co. were corporations engaged in the development of separate real estate subdivisions in the vicinity of Allen Park, Michigan. Petitioners were officers and stockholders of both corporations.
Parsons Land Co. was organized in 1925. Petitioner Dudley R. Parsons acquired 400 shares of its common stock in 1929 for $5,000 and petitioner Harold B. Niver acquired 500 shares in 1925 and 1926 for $5,000. Petitioners were, respectively, president, and secretary and treasury of the company. On November 2, 1925, the company purchased two adjoining tracts of farm land in the vicinity of Allen Park which it subdivided and undertook to sell to the public. For one of such tracts it paid $20,000 cash and gave a mortgage for $114,750, and for the other it paid $20,000 cash and gave a mortgage for $90,275. The properties were developed as a single subdivision known as State Allen Park Subdivision No. 1.
About half of the lots in the subdivision were sold under land contracts during the years 1925 to 1931, inclusive. In 1928 the company negotiated a bond issue of $135,000, pledging the land contracts and deeds to the lots as security for the bonds. The bond indebtedness was reduced by the close of 1932 to $102,000. At about that time, under a creditors' agreement, the company liquidated the bond indebtedness, with the approval of the Public Trust Commission, by assigning to a trustee certain funds on deposit in a sinking fund, together with all of its interest in the land contracts on the lots already sold, and deeds to certain of the unsold lots.
No lots were sold by the company after 1930 or 1931. The company stopped paying taxes on its remaining lots about 1936. During that year and later years its officers undertook to obtain a loan from F.H.A., but were unable to do so.
In May 1938 the State of Michigan took over all of the lots which the company then owned for unpaid taxes. The company did not determine the amount of the accrued and delinquent taxes. Its officers had decided that the taxes would never be paid. The company had no other assets of any value. The 18-month statutory period of redemption under the laws of the State of Michigan expired on November 3, 1939. However, under the Michigan law, Michigan Public Act 155, enacted in 1937, referred to as the Scavenger Sale Act, lands taken over by the state for delinquent taxes may, upon application of the municipality in which they are situated, be withheld from public sale and redeemed by the municipality for the benefit of the former owner. Even after public sale of such lands by the state a former owner may reacquire them within 30 days thereafter by meeting the highest bid offered at the public sale. He may pay the purchase price either in cash or in installments over a 10-year period.
In January 1940, after the lots in question had been taken over by the state for delinquent taxes, the municipality of Allen Park, upon request of Dudley R. Parsons, made application to the State Land Board and was granted a postponement of the sale of the lots for a period of one year.
The lots were all sold at public auction by the state in November 1941.
The capital stock of Parsons Land Co. became worthless prior to 1941.
The Penn Allen Land Co. was organized in 1926. Petitioner Dudley R. Parsons, president of the company, acquired 2,050 shares of its common stock at a cost of $20,500 and petitioner Harold B. Niver, secretary and treasurer, acquired 250 shares at a cost of $2,500. The total cash paid into the company at the time of its organization was $35,000. Thereafter, $3,650 additional was paid in for stock. In 1932 there was a reduction of the company's capitalization, as a result of which petitioners' holdings were reduced to 266 and 32 shares, respectively.
In September 1926 the company purchased a tract of farm land in the vicinity of Allen Park for $146,240, paying $27,312 in cash and assuming a mortgage for $118,928. This tract also was subdivided and was known as State Allen Park Subdivision No. 2. Only one or two of the lots were ever sold and those sales were later canceled, leaving the tract intact.
As in the case of the Parsons Land Co., a large amount of the taxes on the lots was permitted to become delinquent and in 1938 the property was all taken over by the State of Michigan for such delinquent taxes. The 18-month statutory period of redemption expired on November 3, 1939.
Also as in the case of the Parsons Land Co., the public sale of the property was postponed for one year upon application of the municipality of Allen Park. The property was finally sold by the state at public auction in November 1941. The officers of the company did not undertake to bid in the property at such sale or to redeem it within the statutory 30-day period thereafter.
During the fall of 1939 a representative of a broadcasting company made inquiry to the sales manager of the company about a site for a broadcasting station. Efforts were made to interest him in some of the company's acreage, but they were not successful. In 1940 the sales manager learned that the broadcasting company had failed to obtain a permit to erect the proposed broadcasting station.
The real estate described above was the only property of value ever owned by the Penn Allen Land Co.
The stock of the Penn Allen Land Co. became worthless prior to January 1, 1941.
OPINION.
SMITH, Judge:
Under section 23(e), Internal Revenue Code, deductions on account of the worthlessness of shares of stock acquired for profit are allowable in the year when the stock actually becomes worthless. Petitioners here contend that the stock of both Parsons Land Co. and Penn Allen Land Co. became worthless in 1941, when the real estate which those companies had formerly owned and which had comprised their only assets of any value was finally sold at public auction for delinquent taxes. The respondent has determined that the shares of both corporations became worthless prior to January 1, 1941, and had no value on or after that date.
We think that the evidence before us simply supports the respondent's determination. The companies were engaged in a hazardous and highly speculative business. Their prosperity was dependent upon a sustained market for real estate of the subdivision character. In the case of Parsons Land Co., which was the more promising of the two, no lots were sold after 1930 or 1931. Thereafter the company remained more or less dormant, permitting a large amount of delinquent taxes to accrue against its properties and finally permitting the seizure and sale of them by the state.
In their contention that the stock of both corporations became worthless in 1941, petitioners rely chiefly upon the provisions of the Michigan statute referred to above which extended the corporations' right to redeem the properties even after they had been taken over by the state and sold at public auction. However, it is quite apparent from the evidence, we think, that this right was not of sufficient importance to give the companies' shares any market value. The evidence is that the officers of the corporation— petitioners herein— never made any effort to redeem the properties and never had any expectation of doing so at any time during the taxable year.
We do not think that the public sale of the companies' properties in 1941, or the lapse of the 30-day period thereafter, was in any sense the ‘identifiable event‘ which determined the loss to the stockholders of their investments in the companies' stock. See United States v. White Dental Mfg. Co., 274 U.S. 398.
Since, as we have found on the evidence of record, the stock in question had no value at January 1, 1941, or thereafter, no loss deduction on account of its worthlessness can be taken in that year. See San Joaquin Brick Co. v. Commissioner, 130 Fed.(2d) 220.
We have before us here not a question as to the time when the corporations owning the real estate might properly have claimed a deduction on account of their losses, whether prior to or at the time of the expiration of the last period of redemption (see Intercounty Operating Corporation, 4 T.C. 55, and cases there discussed), but rather the question of the time when the stock of these corporations became worthless. Conceivably, the corporations might still have had some rights of value in the real estate long after their shares became worthless. The evidence before us here, however, does not show either the value of the properties or the amount of the encumbrances against them. On the record before us we must sustain the respondent in his determination that the shares of stock of both corporations became worthless prior to January 1, 1941.
Decisions will be entered for the respondent.