time of the sale. To attempt to place a value upon LeClere's continued association with the company up to the time of the sale and prospectively into the future would, in my opinion, be impractical and entirely within the realm of speculation. A simpler and more logical approach is to permit the estate to deduct the difference between the amount realized in cash and the price at which it was charged to the estate as a loss, to regard the dividends as income and to deal with the increase, if any, in the value of the remaining holdings as a profit at the time of the disposition of those shares. Normal accounting processes require that the loss be shown by the trustees in their estate account. The final paragraph of the opinion of Judge Learned Hand, 74 F.2d at page 743, is particularly pertinent at this point: 'This last consideration also shows the injustice of disallowing the loss at the present time; it is now or never. If Wood's accession did turn out to be as profitable as Scherman and Haas expected, there would be larger dividends if the shares were kept, and a higher sale price if they were sold. But the shareholders could not set off this loss- for there surely was a loss de facto- against either of these. There would be no injustice in this if Scherman had given Wood the shares because a gift is not 'entered into for profit'; but this was a business venture, in which if Scherman is to be charged with the profits- as he will be- he ought to be allowed to deduct what they have cost him.'
In order for LeClere to earn the right to purchase the shares at the book value, he had to be responsible for producing certain percentages of profits for the corporation which in the normal course of business would result in dividends for the stockholders, in this case the estate. In that respect the estate will be charged with the profits and therefore ought to be allowed to deduct what those profits have cost it.
The final contention of the defendants is that the difference in value involved was a capital contribution by the decedent to the corporation. The corporation, as such, does not enter into this transaction. We are not here concerned with the services as such. Rather, we are concerned with the results of the services, dividends to the estate and enhancement in the value of the remaining stock held by it. As I have stated before, the transaction was entered into solely for the benefit of the estate and for profit. The corporation was merely the conduit or agency through which LeClere's services would be translated into income and profit for the estate. So far as the corporation was concerned in its relations with LeClere, so long as LeClere was an employee of the corporation he was bound to give it his best services. So far as the estate was concerned, it sought to insure his continued association with the corporation. Viewing it in that light, I cannot agree with the contention of the defendants that LeClere's services constituted a capital contribution to the corporation by the decedent.
In support of their contention that this transaction involved a gift or bequest, defendants have cited several cases, among which was Evans v. Rothensies, 3 Cir., 1940, 114 F.2d 958. Clearly, under the facts of that case, the transaction involved a gift. It was a family transaction which did not, as in the instant case, involve substantial and very valuable services. Under proper facts I would have no hesitancy in applying the doctrine of the Evans case, but is is clearly distinguishable from the case at bar and not applicable under the facts before me. As I have indicated above in my discussion concerning the question whether this was a 'transaction entered into for profit', there is no evidence to support any finding of donative intent.
Having found that this was a transaction entered into for profit, and not a gift or bequest, the loss in dollars from the sale of the shares is a deductible loss under the provisions of the Internal Revenue Code. Therefore, I make the following
Conclusions of Law
1. That the sale by the estate of Frederick J. Kress of 1452 shares of stock of the F.J. Kress Box Company during the taxable year of 1941 was a transaction entered into for profit.
2. That the value or cost basis of the shares to the estate was $ 516,912.00; that the total amount received by the estate of Frederick J. Kress, deceased, from the sale of the said 1452 shares of stock in the year 1941, $ 330,698.52, represented a loss to the estate of $ 186,213.48, sustained in a transaction entered into for profit under Section 23(e)(2) of the Internal Revenue Code.
3. That the deductible loss of $ 186,213.48 resulted in no tax being due the United States for the Taxable year of 1941.
4. That plaintiffs are entitled to separate judgments against defendants in the total sum of $ 27,131.15, with interest.
Appropriate orders will be entered.
© 1992-2004 VersusLaw Inc.