Court Opinion

ID: 4614649
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:30:40.374787+00
Date Added: 2024-06-11T07:54:49.615180
License: Public Domain

COMMUNITY BOND AND MORTGAGE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Community Bond & Mortg. Corp. v. CommissionerDocket No. 43784.United States Board of Tax Appeals27 B.T.A. 480; 1932 BTA LEXIS 1058; December 30, 1932, Promulgated 1932 BTA LEXIS 1058">*1058  In 1926 petitioner purchased certain corporate stock to prevent loss and injury to its business, reputation and good will.  The stock became worthless during that year.  Held, petitioner sustained a deductible loss in 1926, which caused a net loss within the meaning of the statute, allowable as a deduction in the succeeding taxable year.  Dean Hill Stanley, Esq., and Alfred C. Frodel, Esq., for the petitioner.  R. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.  MARQUETTE 27 B.T.A. 480">*481  This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent for the years 1926 and 1927 in the amounts of $1,745.81 and $2,300.14, respectively.  The errors alleged are: (1) That respondent failed to allow as a deduction in 1926 a loss of $30,000 causing a net loss to petitioner, and (2) that respondent increased petitioner's net income for 1927 in the amount of the net loss sustained in 1926.  FINDINGS OF FACT.  Petitioner is a corporation having its principal office in Waterbury, Connecticut.  Its business is that of making second mortgage loans on real estate.  On August 20, 1925, shortly after petitioner1932 BTA LEXIS 1058">*1059  was incorporated, it entered into an agreement with Burns & Steta, Inc., whereby the latter company was employed as exclusive selling agent on a 25 per cent commission, for all shares of petitioner's capital stock.  During the ensuing year the arrangement proved to be harmful and embarrassing to petitioner because of the sales method employed by Burns & Steta, Inc.  Petitioner's standing and reputation in the community were impaired, business was diverted from it, and its success and continuance were seriously threatened.  In order to get rid of the stock-selling agreement and thus prevent further injury from that source, the petitioner, at a meeting of its directors on November 11, 1926, voted to purchase the contract from Burns & Steta, Inc., for not to exceed $50,000.  That purchase was not made directly, however, but on December 1, 1926, petitioner purchased the outstanding capital stock of Burns & Steta, Inc., for $30,000.  Petitioner at once returned that stock to the treasury of Burns & Steta, inc., whence it was reissued to dummy stockholders who voted to cancel the stock-selling contract between Burns & Steta, Inc., and the petitioner.  By mutual consent the agreement was1932 BTA LEXIS 1058">*1060  canceled and that fact was noted on the contract on December 1, 1926.  The dummy stockholders were chosen as the directors of Burns & Steta, Inc., and empowered to effect the dissolution of that corporation.  On December 20, 1926, the preliminary certificate of dissolution was filed with the Secretary of the State of Connecticut and the final certificate was filed with the same official on August 8, 1927.  As part of the transaction whereby petitioner acquired the Burns & Steta, Inc., stock, John Steta assumed all the liabilities of Burns & 27 B.T.A. 480">*482  Steta, Inc., in consideration for which all the assets of that company, except its stock-selling contract with petitioner, were given to him.  Petitioner received no cash consideration for the Burns & Steta, Inc., stock when it was returned to the treasury of that company, nor did it receive any dividend of any kind or character upon the said stock.  No liquidating dividend or anything of value was received by petitioner upon the dissolution of Burns & Steta, Inc.  In its income tax return for 1926 petitioner reported as a deductible loss the $30,000 paid for the Burns & Steta, Inc., stock, with a resulting net loss for that year1932 BTA LEXIS 1058">*1061  in the amount of $15,068.08.  Respondent disallowed the deduction on the ground that the outlay of $30,000 was a capital expenditure.  For the year 1927 petitioner reported as a deduction its claimed net loss of $15,068.08 from the preceding year.  Respondent disallowed the deduction and added the amount to net income.  OPINION.  MARQUETTE: The petitioner rests its case upon the proposition that the $30,000 paid for the capital stock of Burns & Steta, Inc., is deductible either as an ordinary and necessary business expense, or as a loss.  The respondent contends that the payment was a capital expenditure and not deductible.  The capital stock of Burns & Steta, Inc., had no value after it was purchased by the petitioner.  There were no assets back of it, and, forthwith, the issuing corporation was dissolved.  The preliminary certificate of dissolution was filed in December, 1926, and, in our opinion, the stock became worthless at that time, even though the final formalities of dissolution were not completed until 1927.  We conclude, therefore, that the cost of the stock in question resulted in a deductible loss for the year 1926.  Any consequential net loss should be allowed1932 BTA LEXIS 1058">*1062  as a deduction in computing the petitioner's net income for the succeeding taxable year.  Decision will be entered under Rule 50.