Court Opinion

ID: 4617610
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:54.896747+00
Date Added: 2024-06-11T07:55:19.776366
License: Public Domain

ALBERT Y. GOWEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gowen v. CommissionerDocket No. 44021.United States Board of Tax Appeals24 B.T.A. 1028; 1931 BTA LEXIS 1553; November 30, 1931, Promulgated *1553 Held that petitioner has not proved that the respondent erred in disallowing claimed loss upon certain common stock.  I. W. Sharp, Esq., and William S. Hammers, Esq., for the petitioner.  T. M. Mather, Esq., and J. M. Morawski, Esq., for the respondent.  MCMAHON *1028  This is a proceeding for the redetermination of an asserted deficiency in income tax for the calendar year 1924 in the amount of $27,357.98.  It is alleged that the respondent erred, in the determination of such deficiency, in disallowing as a deduction the amount of $225,488.40 as a loss sustained by the petitioner upon a sale of all his interest in the assets held by the liquidating trustees of the Iceless Machine Company.  FINDINGS OF FACT.  Petitioner is an individual with residence at The Tavern Club, Cleveland, Ohio.  In 1911 or 1912 he became interested in a gas machine for domestic refrigeration, invented by two Chicago inventors.  Petitioner made an investigation at considerable expense and satisfied himself as to the fundamental character of the patents by obtaining the advice of able patent attorneys.  Petitioner then agreed to finance the inventors*1554  and he and Wilford C. Saeger underwrote $100,000 for the original development of the machine.  *1029  Two corporations were formed, the Iceless Refrigerator Company, hereinafter called the Refrigerator Company, and the Iceless Refrigeration Company, hereinafter called the Refrigeration Company.  The former owned the patents and the latter manufactured the machines.  On August 12, 1912, the Refrigerator Company was dissolved and the stockholders of that company received stock in the Refrigeration Company for their interest.  In 1915 the Iceless Machine Company, hereinafter called the Machine Company, was formed and succeeded to the business of the Refrigeration Company.  Petitioner owned 3,488 shares of the common stock of that company, which had cost him $225,488.40, and 50 shares of preferred stock, which had cost him $5,000.  The machines were manufactured in small quantities at first, but eventually quite a number were installed in Ohio.  Activities were later extended to other parts of the country.  Petitioner at all times kept himself advised of the developments with reference to the domestic iceless machine industry and all patents in connection therewith, and at*1555  one time was financially interested in an iceless machine operated by electricity.  Notwithstanding the fact that the Machine Company had been operating at a loss from its inception, it was constantly attempting to perfect its product and it was believed at all times that success was "just around the corner." It was thought that the machine would prove to be the best on the market.  The Machine Company was dissolved in May, 1918, and its assets were placed in the hands of liquidating trustees, who were J. H. Champ, C. A. Breighton, and G. W. Grandin.  The creditors of the Machine Company had all been substantially paid off before this time.  The assets which the liquidating trustees received consisted of approximately $17,000 in cash, numerous patents, and the machines and spare parts which were left on hand.  The plant and machinery of the company had been disposed of early in 1917.  The liquidating trustees immediately paid a 40 per cent liquidating dividend on the $34,500 par value preferred stock outstanding, leaving in their hands approximately $3,000.  The petitioner's share of this liquidating dividend was $2,000.  None of the common stockholders received anything by virtue*1556  of their stockholdings.  There were in the hands of the liquidating trustees some small accounts receivable and they continued to carry on certain uncompleted service contracts on machines that were out, receiving some small amounts of money for such services.  Petitioner did not charge off his investment in the enterprise after the distribution of the liquidating dividend because in his opinion the assets which were left in the hands of the liquidating committee, particularly the patents, had a substantial value.  *1030  During the time the liquidating trustees held the assets a number of people went to them to buy the patents.  One or two persons came to petitioner in this regard.  Throughout the time the liquidating trustees held the patents, such patents had some value.  They were finally sold in 1926 for $1,000.  In 1924 petitioner had a fairly successful year and decided to take a loss upon his investment in the refrigerating business.  He, therefore, on December 31, 1924, sold all of his right, title and interest in and to all of the assets of the Machine Company to James G. Bachman for $100.  In his return for the year 1924 petitioner claimed a loss in the amount*1557  of the difference between $228,488.40, his investment in preferred and common stock of the Machine Company, and $100, the amount which he received upon the sale of his interest in the assets of the Machine Company in 1924.  The respondent disallowed the deduction claimed by the petitioner and allowed instead a loss deduction in the amount of the difference between the $5,000, which he invested in the preferred stock of the Machine Company, and the $2,100 which he received ($2,000 by way of liquidating dividends and $100 from the sale of his interest in the property held by the liquidating trustees).  Petitioner was not allowed a loss on account of his investment in common stock.  OPINION.  MCMAHON: The only issue raised by this proceeding is whether petitioner is entitled to a greater deduction in 1924 than that allowed by respondent as a loss upon his investment in the Iceless Machine Company.  The parties are in agreement that petitioner's investment in the preferred and common stock of the Machine Company amounted to $230,488.40; that in 1918 petitioner received a liquidating dividend upon his preferred stock in the amount of $2,000; and that in 1924 petitioner sold, for $100, *1558  whatever interest he had in the assets of the Machine Company then held by the liquidating trustees.  It is the position of the respondent that all of the petitioner's loss was not sustained in the year 1924, but that most of it was sustained in 1920.  He contends that the common stock of the Machine Company became worthless in 1920, and refers to the findings of fact and opinion in , a copy of which was introduced in evidence, without objection, in this proceeding.  From the evidence it appears that when the liquidating trustees paid a 40 per cent liquidating dividend on the preferred stock of $34,500 par value, there were left in their hands only about $3,000 in cash, some small accounts receivable, some patents and some remaining machines and spare parts.  These assets would have to be applied *1031  in satisfaction of the claims of the holders of preferred stock of the par value of $20,700 before the holders of common stock would receive any liquidating dividend.  From the evidence we can not determine that these assets had a value in excess of the par value of the remaining preferred stock. *1559  The petitioner has therefore failed to show that his common stock in the Machine Company did not become worthless prior to the year 1924.  See ; affd., ; certiorari denied, . See also The respondent has already allowed the petitioner a deduction in the amount of $2,900, representing loss on his investment in the preferred stock of the Machine Company.  We must approve the respondent's determination.  Judgment will be entered for the respondent.