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Ansley v. Commissioner of Internal Revenue

decided: November 22, 1954.


Author: Staley

Before MARIS, McLAUGHLIN and STALEY, Circuit Judges.

STALEY, Circuit Judge.

The Tax Court held that there were deficits in the income tax of Arthur C. Ansley for the years 1945, 1946, and 1947.*fn1 The taxpayer contends on this appeal that the Tax Court erred: (1) in treating an approximate $29,000 loss as a "non-business debt" loss rather than a "business" loss or a loss from a "transaction entered into for profit;"*fn2 (2) in finding that the $29,000 loss was not sustained in 1947; and (3) in holding that the Ansley Radio Corporation stock had not become worthless in 1947.

The following facts were found by the Tax Court:

The taxpayer, Arthur C. Ansley, was the president, general manager, and principal stockholder (owning over 90 per cent of the outstanding corporate stock) of the Ansley Radio Corporation, which existed under the laws of New York from 1932 to 1946 and under New Jersey laws from 1946 to its adjudication in bankruptcy in 1948.

From the time of its organization, the taxpayer had made personal loans to the corporation and occasionally had endorsed its notes. All loans were repaid, and at no time was the taxpayer required to make any payments by reason of having endorsed the corporation's notes.

In May, 1946, the First Mechanics National Bank of Trenton, New Jersey, loaned the taxpayer $28,000 at 2 per cent interest. The loan was secured by United States Treasury 21/2 per cent bonds in the face amount of $30,000. In turn, the taxpayer made a loan to the corporation of $30,000 at 5 per cent interest. In June of 1946, a public stock issue was planned by the corporation as a method of raising additional capital. Rather than continuing to have the corporation's debt owing to its president and majority stockholder, the corporation borrowed $30,000 from the bank at 2 per cent interest in order to cancel its $30,000 debt to the taxpayer. In the arrangement, the taxpayer's $28,000 debt to the bank was cancelled. By agreement, the bank retained the taxpayer's bonds as security for the corporation's $30,000 note, the corporation agreeing to pay the taxpayer 3 per cent for the use of his bonds as security. The bonds were to be returned to the taxpayer as soon as the corporation's note to the bank was paid.

On February 20, 1947, because of the development of certain unfavorable business conditions, the corporation filed a petition for reorganization under Chapter 10 of the Bankruptcy Act, 11 U.S.C.A. ยง 501 et seq. The petition was approved, and the taxpayer was appointed operating trustee. On July 3, 1947, the bank sold the taxpayer's bonds because the corporation failed to meet the bank's demand for payment of the $30,000 note.

The corporation's difficulties became steadily worse. The taxpayer, as operating trustee, the disinterested trustee, and the creditors' committee attempted to find a satisfactory plan of reorganization. In September of 1947, the creditors' committee refused to consider a plan which provided for settlement of claims at 121/2 cents on the dollar.

A general feeling of pessimism had set in by November, and the only hope remaining was for the possible production of an electronic piano, a new development which was unique in the trade, but this failed to materialize. The corporation suffered a net-operating loss of $74,679.63 during the last six months of 1947. On January 8, 1948, the creditors' committee made a final decision to request liquidation of the corporation. Adjudication in bankruptcy followed on February 16, 1948. In the bankruptcy liquidation proceedings, the assets of the corporation were insufficient to pay priority claims in full, and no sums were ever paid to the general creditors, including the taxpayer.

We hold, contrary to the Tax Court, that the taxpayer's $29,000 loss was a loss sustained as a result of a "transaction entered into for profit" within the purview of Section 23(e) (2)*fn3 of the Internal Revenue Code and was not a "non-business debt" loss under Section 23(k) (4).*fn4

It is clear that the taxpayer sustained his loss because of his agreement to lend his bonds as security for the bank's loan to the corporation. At the time the bonds were loaned to the corporation, no debtor-creditor relationship was established between the taxpayer and the corporation or the bank, so that there was no debt owing to the taxpayer which could have become bad.

By lending his guarantee, in the form of bond collateral, the taxpayer was motivated by a desire to protect and perhaps augment the value of his capital stock. In principle, the loan of the bonds does not differ from an endorsement by a guarantor who lends his credit to guarantee corporate notes. We recently held in Pollak v. Commissioner of Internal Revenue, 3 Cir., 1954, 209 F.2d 57,*fn5 that a taxpayer's guarantee by way of endorsing corporate notes constituted a transaction entered into for profit since the taxpayer was a large stockholder and his guarantees were a means of enabling the corporation to prosper and improve its position, thereby protecting any value which the guarantor's stock might have. In the present case, the taxpayer's anticipated profit from the loan of his bonds was not limited to protecting or increasing the value of his stock, but he was also to receive three per cent of the value of the bonds annually as payment for the use of his bonds.

On July 3, 1947, the bank sold his bonds to satisfy the corporation's note. It was at that time that a definite, identifiable loss was suffered. To say otherwise would be unrealistic, for the taxpayer was in a distinctly different financial situation after the sale.Before the sale he owned bonds worth $30,000; after the sale the bonds belonged to another. Because of the agreement and the loan of the ...

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