Court Opinion

ID: 4628168
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:48.164285+00
Date Added: 2024-06-11T07:57:10.033870
License: Public Domain

FAIRMOUNT FOUNDRY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fairmount Foundry, Inc. v. CommissionerDocket No. 97910.United States Board of Tax Appeals42 B.T.A. 1087; 1940 BTA LEXIS 907; October 29, 1940, Promulgated *907  DEDUCTION - BAD DEBT - YEAR. - The petitioner in 1933 accepted 200 shares of its own stock in exchange for an account receivable and released the former guarantor of the account and also gave him an option to repurchase the shares at a fixed price within three years.  Held, no loss occurred in 1936 when the option expired.  Robert F. Lehman, Esq., and Warren S. Spalding, Esq., for the petitioner.  Paul E. Waring, Esq., for the respondent.  MURDOCK *1088  The Commissioner determined deficiencies of $4,914.46 in income tax and $867.97 in excess profits tax for the calendar year 1936.  The only issue for decision is whether the petitioner is entitled to a deduction of $24,713.72, the difference between the value of 200 shares of the petitioner's stock and the amount of an account receivable assigned to the guarantor of the account in 1933 in exchange for 200 shares of the capital stock of the petitioner subject to an option in the guarantor to repurchase the stock for the amount of the account receivable within three years.  FINDINGS OF FACT.  The petitioner is a corporation, engaged in the manufacture of metal products.  It filed its*908  return for the taxable year with the collector of internal revenue for the first district of Pennsylvania.  Daniel G. Redmond was engaged in the business of manufacturing athletic equipment.  He traded under the name of "Milo Bar Bell Company" until August 13, 1930, at which time he incorporated the business under that name and became the sole stockholder of the corporation.  He was also engaged in the publishing business and operated both businesses as a unit, recording all transactions in a single set of books.  The gross receipts of his businesses were substantial prior to 1929.  The petitioner made sales to the Milo Bar Bell Co. on open account during the period 1924 to 1935.  Payments on the account fell off during 1929.  The unpaid debit balance in the account as of November 1, 1929, was $21,154.68.  The petitioner decided at that time that it would give no further credit to Milo unless the debit balance was reduced or some assurance of payment was given.  The petitioner informed Daniel H. Redmond, the father of Daniel G. Redmond, of this decision.  Daniel H. Redmond, hereinafter referred to as Redmond, was an officer of the petitioner and a minority stockholder, owning 600*909  shares of its capital stock.  Redmond believed that the Milo account was good and should be continued.  He gave the petitioner a written guarantee of the account and the petitioner, relying upon the guarantee, continued to make sales to Milo.  Redmond was then the owner of property worth about $600,000.  The debit balance in the Milo account was $44,713.72 on February 28, 1933, and the stockholders of the petitioner called upon Redmond for a settlement in accordance with his guarantee.  Redmond was then in financial difficulties.  He had liquidated most of his personal property and had borrowed money in order to protect, as far as possible, his holdings of real estate.  His home was mortgaged and he was practically judgment-proof.  His 600 shares of stock of the petitioner were pledged as security for a loan of $40,000 from his wife.  He was unable *1089  to pay the Milo account or to raise any money for that purpose.  The stockholders of the petitioner were familiar with his financial condition.  They also knew that Daniel G. Redmond and Milo were insolvent, so that nothing could be recovered from them.  Redmond agreed to obtain the release of 200 shares of the petitioner's*910  stock from his wife and to exchange them for the Milo account upon condition that he be given an option to repurchase all or any part of the shares within three years at $223.07 per share.  The petitioner accepted the offer as the best terms it could obtain under the circumstances.  The stockholders and directors of the petitioner adopted the following resolution on March 9, 1933: Whereas, Milo Barbell Company is indebted to the Company in the sum of Forty Four Thousand seven hundred thirteen dollars and seventy-two cents ($44,713.72); and Whereas, this account has been guaranteed by Daniel H. Redmond; and Whereas, Daniel H. Redmond has agreed to turn over to the treasury of the company in exchange for said account two hundred (200) shares of the capital stock of the company on conditions hereinafter mentioned.  Now, THEREFORE, Resolved that the Fairmount Foundry, Inc. accept two hundred (200) shares of its own capital stock from the said Daniel H. Redmond or his nominee, for an assignment of the said account, which account on delivery of the stock to the company is to be assigned to the said Daniel H. Redmond or his nominee, and upon the further condition, that the said Daniel*911  H. Redmond or his nominee shall have the right, option and privilege within three years from the date hereof to repurchase any or all of said two hundred shares (200) of said stock at the price of Two hundred twenty-three dollars and seven cents ($223.07) per share; * * * Redmond delivered certificates for 200 shares of the petitioner's stock properly endorsed to the petitioner on March 29, 1933, at which time his written guarantee was returned to him and canceled.  He relied upon the resolution of March 9, 1933, as evidence of his rights to the Milo account in lieu of any other assignment of that account.  The petitioner credited the Milo account with $44,713.72 on March 31, 1933.  Redmond's wife was furnished with and thereafter held a note of Milo in the amount of $44,713.72, endorsed by Daniel G. Redmond.  Redmond never exercised his option.  The petitioner passed a resolution in 1936 reciting that the option had expired and declaring the 200 shares to be treasury stock.  The fair market value of the petitioner's stock in 1933 and also in 1936 was $100 per share.  The petitioner, on its income tax return for 1933, claimed a deduction of $44,713.72, as a debt of Milo ascertained*912  to be worthless and charged off, and showed a net loss on that return of $33,143.44.  The Commissioner disallowed the deduction.  The petitioner, on its income tax return for 1936, claimed a deduction in the amount of $24,713.72 as a loss resulting from the failure *1090  of Redmond to exercise his option to purchase the 200 shares.  The Commissioner, in determining the deficiency, disallowed the loss on the ground that the Milo account became worthless in 1933.  OPINION.  MURDOCK: The petitioner would have us hold that its transaction with Redmond in 1933 was in substance a deposit of the 200 shares of stock with the petitioner as collateral for the debt of $44,713.72, the transaction therefore remained open until the option expired in 1936, and then, for the first time, the petitioner could apply the 200 shares in satisfaction of a portion of the debt ($20,000) and ascertain that the balance of the debt, $24,713.72, became worthless.  Neither in form nor in substance was there a deposit of the 200 shares of stock as collateral for the debt.  Cf. *913 . The debt of Milo in the amount of $44,713.72 was completely and absolutely transferred by the petitioner in March 1933 and at the same time Redmond's guarantee was returned to him and canceled.  Thereafter no part of the above amount was owing to the petitioner as a debt, either from Milo or from Redmond.  The debt transaction was forever closed and could not affect the income tax liability of the petitioner for any subsequent year.  The petitioner recognized this fact, charged off the account, and claimed a deduction on its return for 1933.  Furthermore, the fact that the petitioner received the 200 shares of stock subject to the right of Redmond to repurchase them within three years did not prevent the petitioner from sustaining a loss in 1933.  Had there been a mere bailment or had the petitioner received some valuable right through the option, the situation might be different.  But the petitioner, in March 1933, became the absolute owner of the shares subject to the right of Redmond to repurchase them within three years at the fixed price.  Cf. *914 ; ; . The petitioner had no right to require Redmond to repurchase the shares.  Fluctuation in the value of the shares could not change the amount of the petitioner's loss, since the stock was accepted in 1933 in complete settlement of the Milo account and the Redmond guarantee.  Redmond allowed his option to expire in 1936, but nothing of value owned by the petitioner disappeared at that time.  If the petitioner had received property other than it own shares, clearly, the petitioner's basis for subsequent gain or loss upon the property would have been $20,000, the fair market value of the property in March 1933, when the petitioner acquired title to it.  Subsequent gain or loss would depend upon *1091  whether the property was later disposed of for more or less than the basis.  Even if the petitioner had had reason to anticipate a favorable disposition of the shares to Redmond during the option period, nevertheless, failure to realize an anticipated profit is not a loss.  Furthermore, *915  its loss in 1933 would have been unchanged had Redmond or any other person purchased the shares during or after the expiration of the option period at any price.  Thus, the possible disposition of the shares under the option could have had no effect whatsoever upon the loss.  The petitioner sustained no loss in 1936 and is not entitled to any deduction under the law.  Nor is a deduction justified by the inconsistency of the Commissioner.  The petitioner could have insisted upon its rights as to 1933 had they been of importance.  Cf. ; ; ; ; affd., . Decision will be entered for the respondent.