Court Opinion

ID: 4480993
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:38.364355+00
Date Added: 2024-06-11T14:53:59.876302
License: Public Domain

TaNNENWAld, /., dissenting: I cannot agree that petitioner’s loss occurred in 1962. In Sterling Morton, 38 B.T.A. 1270 (1938), affd. 112 F. 2d 320 (C.A. 7, 1940), the essential standards for a determination of worthlessness are lucidly set forth as follows at pages 1278-1279: The ultimate value of stock, and conversely its worthlessness, will depend not only on its current liquidating value, hut also on what value it may acquire in the future through the foreseeable operations of the corporation. Both factors of value must be wiped out before we can definitely fias the loss. If the assets of the corporation exceed its liabilities, the stock has a liquidating value. If its assets are less than its liabilities hut there is a reasonable hope and expectation that the assets will exceed the liabilities of the corporation in the future, its stock, while having no liquidating value, has’ a potential value and can not be said to be worthless. The loss of potential value, if it easists, can be established ordinarily with satisfaction only by some “identifiable event” in the corporation’s life which puts an end to such hope and expectation. There are, however, exceptional cases where the liabilities of a corporation are so greatly in excess of its assets and the nature of its assets and business is such that there is no reasonable hope and expectation that a continuation of the business will result in any profit to its stockholders. In such cases the stock, obviously, has no liquidating value, and since the limits of the corporation’s future are fixed, the stock, likewise, can presently be said to have no potential value. Where both these factors are established, the occurrence in a later year of an “identifiable event” in the corporation’s life, such as liquidation or receivership, will not, therefore, determine the worthlessness of the stoolc, for already “its value had become finally extinct.” De Loss v. Commissioner * * * [28 F. 2d 803 (C.A. 2, 1928), affirming 6 B.T.A. 784 (1927)]. Cf. Squier v. Commissioner * * * [68 F. 2d 25 (C.A. 2, 1934), affirming 26 B.T.A. 1407 (1932)]; Monmouth Plumbing Supply Co. v. United States, 4 F. Supp. 349 [(D.C. 1933)]. [Emphasis added.] I have no quarrel with, the facts as found herein. Bather, I disagree with my colleagues in the majority as to the proper legal criteria to be applied to those facts. In my opinion, these criteria as expounded in the Morton case require the conclusion that petitioner’s loss occurred subsequent to December 31,1962. As of that date, Bichards Music was actively engaged in the manufacture and merchandising of musical instruments. It had current assets having a book value of $3,600,000 and current liabilities having a book value of $3,700,000, or a net current deficit of only $100,000. The findings of fact show that, on January 8, 1963, the management foresaw a solution to the problems of the company’s shortage of working capital, increased sales, and modernization of its manufacturing processes. An executive committee and special finance committee were appointed to carry out the plans which would hopefully put the company on its feet. Four officers and directors were given stock options, which indicates that they considered that the company had some reasonable prospect of successful operation. Changes in management did not take place until April 1963, and it was only in May 1963 that a creditors’ committee was appointed. At that time, the company obtained an additional line of credit of over $300,000, which, even though the lender was a substantial creditor and the loan was secured by a pledge of inventory and accounts receivable, is consistent with the existence of reasonable hope that the business could be turned around. Business operations continued throughout 1963 and into 1964, when a petition in bankruptcy was filed. Con-cededly, Bichards Music has lost money for several years and its operating loss in 1962 was substantial, but this is clearly not sufficient in and of itself to establish the worthlessness of petitioner’s stock. The foregoing is a far cry from the situation which existed in Sterling Morton, supra, where the company involved was an investment concern, caught by the stock mlarket crash. As of the critical date, the book value of its assets was $145,000 (and they had a fair market value of only $42,000) and its liabilities, including a preferred stock issue which had priority over the taxpayer’s common stock, aggregated $625,000. Such a company had no choice but to liquidate. Similarly, in Mahler v. Commissioner, 119 F. 2d 869 (C.A. 2, 1941), the facts that the company was in receivership and that the receiver’s reports painted a hopeless picture as to the common stock were of such significance as to make that case clearly distinguishable. If the positions herein were reversed, with petitioner claiming his loss in 1963 and respondent having disallowed it on the ground that the loss occurred in 1962, I think we would have been hard put not to sustain the deduction. In this connection, while the position expounded by Judge Simpson is an attractive one, it seems to me that his choice-of-year rule fails to accord sufficient recognition to the hard facts of tax life that rates and taxable income vary from year to year and that the tax law is based on the concept of annual accounting periods. See, e.g., Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363-365 (1931); Wingate E. Underhill, 45 T.C. 489, 493 (1966). The most that can be said for the suggested rule is that it represents what we might like the law to 'be or what it ought to be, but not what the law is. Perhaps Congress may decide to modify the law accordingly, but this is its business and not ours. I agree that the tax laws do not require that the petitioner continue to ride a dead horse. But Richards Music was neither dead nor even on its deathbed. I think the most that can be said on the record herein is that it was sick and its prospects were discouraging — indeed, very discouraging — but this is not enough. Cf. Walter H. Goodrich & Co., 40 B.T.A. 960, 963 (1939). The critical element to me is that, as of December 31, 1962, the attitude of management was such that “obviously the corporation was not yet prepared to thrown in the sponge.” See Bullard v. United States, 146 F. 2d 386, 388 (C.A. 2, 1944); C. P. Mayer, 16 B.T.A. 1239, 1241 (1929). Thus, at December 31,1962, Richards Music was not an “exceptional * * * [case] where the liabilities * * * [were] so greatly in excess of its assets and the nature of its assets and business * * * such that there * * * [was] no reasonable hope and expectation that a continuation of the business * * * [would] result in any profit to the stockholders.” See Sterling Morton, 38 B.T.A. at 1279. Cf. Columbian, Rope Co., 42 T.C. 800, 819 (1964). I would therefore conclude that petitioner has not sustained his burden of proof.1  In view of this conclusion, there is no need to consider whether petitioner sustained his burden of proof that the loss was a business loss — a thorny issue where business-related investments, particularly those by lawyers,2 are involved. I note in passing, however, that the record before us does not clearly show that Richards Music was such a critical element of petitioner’s business so as to require us to apply the source-of-supply cases or our decision in Stuart Bart, 21 T.C. 880 (1954),3 or that petitioner was unable to find an outside investor (e.g., another nonstockholder like Gordon, Graves & Co.) for the 32,000 shares which he acquired, as he was able to do with respect to 38,000 of TO,000 shares which the existing stockholders were unwilling to purchase in order to keep American Research Development out of the picture. DeeNNEN, TietjeNS, Baum, and Hott, //., agree with this dissenting opinion.   I note In passing that petitioner did not claim a capital loss on his 1962 return with respect to the 12,000 shares In Richards Music which he had acquired at an earlier date and which he concededly held for investment, although he reported substantial capital gains.    See Frank A. Garlove, T.C. Memo. 1965-201.    In that case the customer was a source of both direct and indirect business and the taxpayer’s credit standing was also involved. See 21 T.C. at 881.