Nature of the Case
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Facts
Gilbert (P) was president and principal stockholder of Bruce, Inc. which was engaged in the lumber business. In 1961, P acquired on margin and with borrowed money, a substantial personal and beneficial ownership of stock in another lumber company with the idea of merging this company, Celotex, with Bruce. P persuaded associates to purchase stock in Celotex and P granted Bruce an option to purchase his Celotex shares at cost. In May 1962, 62% of Celotex was controlled by P and Bruce. The stock market declined on May 28, 1962, and P was faced with a margin call. P instructed the secretary of Bruce to supply the necessary margin money. A total of $1,958,000 was withdrawn with only $5,000 repaid. P testified that he intended to repay the monies and was acting in Bruce’s best interests. P did consult outside counsel to determine how to retire the monies owed to Bruce and negotiations were entered to sell many of the shares to another company. P executed an interest bearing note to Bruce on June 8th. The tax court found that up to June 12th the net value of the assets assigned substantially exceeded the amounts owed. The board refused to ratify the withdrawals and then word came that the company considering buying the Celotex shares had declined the deal. Bruce demanded P’s resignation and P flew to Brazil. On June 13th Celotex stock plummeted and trading was suspended by the SEC. Tax liens were filed against P for $1,720,000 for 1962. Bruce claimed a loss deduction of $1,953,000 for 1962. P pled guilty to unlawful withdrawal of funds. The tax court determined that P had realized income and efforts at restitution did not entitle him to an offset.
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