Court Opinion

ID: 4600004
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:24:34.455253+00
Date Added: 2024-06-11T07:52:13.511256
License: Public Domain

GEORGE M. WRIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wright v. CommissionerDocket No. 24851.United States Board of Tax Appeals18 B.T.A. 471; 1929 BTA LEXIS 2035; December 11, 1929, Promulgated 1929 BTA LEXIS 2035">*2035  The petitioner in 1922, in accordance with a plan of the bankers to manage the company in which he was a stockholder, surrendered 131 shares of stock.  The stock was given to the new manager.  Held the petitioner is entitled to deduct from gross income for 1922 the cost of the stock surrendered.  O. G. Maxwell, Esq., for the petitioner.  T. M. Mather, Esq., for the respondent.  ARUNDELL18 B.T.A. 471">*472  This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $1,453.35.  The only question at issue is the disallowance of a deduction in that year in the amount of $13,100 alleged to have been a loss upon the disposition of certain stock in the year 1922.  FINDINGS OF FACT.  Petitioner is a resident of Danville, Ill.  In 1902 he purchased 257 shares of stock of the American Hominy Co. for which he paid $100 per share.  In 1922 the company was in financial difficulties and the bankers who had been furnishing the company funds informed the stockholders that they would not furnish any more funds and would be obliged to throw the company into bankruptcy unless the stockholders would surrender 51 per cent1929 BTA LEXIS 2035">*2036  of their stock to the bankers.  In accordance with this offer the petitioner surrendered 131 shares in 1922.  All of the stock so surrendered by the petitioner and other stockholders was given to a new manager of the American Hominy Co., selected by the bankers, as compensation for his services in further conducting the business.  The purpose of the bankers was known to the stockholders at the time they surrendered the stock.  The business of the American Hominy Co. was continued under the new manager until 1924, when a receiver was appointed and the affairs of the company were wound up.  The stockholders received nothing upon dissolution of the company in that year.  The cost of the stock surrendered by the taxpayer in 1922, 131 shares, was $13,100, which sum was claimed as a loss in his return for that year; the cost of the remaining shares, or $12,600, was claimed as a deduction by the petitioner in his return for 1924.  The March 1, 1913, value of the stock in the American Hominy Co. was $100 per share.  The respondent disallowed the deduction of $13,100 for the year 1922, and determined the deficiency in question.  OPINION.  1929 BTA LEXIS 2035">*2037  ARUNDELL: The only question to be determined in this proceeding is whether there was a closed transaction in 1922 with respect to 131 shares of stock in the American Hominy Co. which petitioner surrendered in that year to the bankers of the company, and which in turn the bankers paid over the a new company manager of their selection.  If the stock had been merely surrendered to the company so that the proportionate representation of stockholders remained 18 B.T.A. 471">*473  the same, a different question would be presented (see ), but it is clear from the stipulated facts that such was not the case, the stock being released to the bankers and by them turned over to the new manager, who became the majority stockholder, and the petitioner definitely parted with 131 shares of stock which cost him $13,100, and which had a value of that amount on March 1, 1913.  We are of opinion petitioner is entitled to the loss claimed. Reviewed by the Board.  Judgment will be entered under Rule 50.MURDOCK MURDOCK, dissenting: I dissent from the prevailing opinion in this case.  This Board has frequently held that a stockholder in a corporation1929 BTA LEXIS 2035">*2038  who, for one reason or another, makes a contribution in cash to the corporation, is not entitled to deduct as a loss or otherwise, the amount of his contribution, but that amount is to be considered an additional cost of his stock.  Harry E. Lutz,2 B.T.A. 484">2 B.T.A. 484; John G. Paxton,7 B.T.A. 92">7 B.T.A. 92; W. R. Ranney,16 B.T.A. 1399">16 B.T.A. 1399; Henry Adamson et al.,17 B.T.A. 17">17 B.T.A. 17; B. Estes Vaughan,17 B.T.A. 620">17 B.T.A. 620. Cf. Winthrop Ames,1 B.T.A. 63">1 B.T.A. 63; Warren E. Burns et al.,11 B.T.A. 524">11 B.T.A. 524; Lesh & Matthews Lumber Co.,17 B.T.A. 58">17 B.T.A. 58. What difference then does it make if a stockholder contributes a part of his stock in the corporation to or for the benefit of the corporation?  If he is not entitled to deduct the cash which he contributes, there would certainly be no greater reason to allow him to deduct any amount to represent the cost or value of his stock which he contributes.  Whether he contributes cash or gives up part of his stock as here, his reason for so doing is to protect and make more valuable the stock which he continues to own.  A relationship between the stock he gives up1929 BTA LEXIS 2035">*2039  and that he continues to hold is thus established and he can have no loss on the one, when contributed, but must wait until he finally disposes of the other, for at that later time it may develop that he has a gain on the whole transaction.  But even if he has a loss finally, nevertheless that loss can not be computed until such final disposition.  Cf. Edith Scoville,18 B.T.A. 261">18 B.T.A. 261. The present petitioner, along with other stockholders of the company, made his contribution with the understanding that it was to compensate a new manager for his future services to the company.  The petitioner must have believed that the benefits which he thus secured were as valuable or more valuable than the stock which he gave up, otherwise, he would hardly have made the contribution.  18 B.T.A. 471">*474  In giving up his stock he did not realize a loss.  On the contrary, he was trying to avoid a loss, and to make his investment in this company's stock more valuable.  He should wait to see the result of his move to avoid loss and to realize a gain.  TRAMMELL agrees with this dissent.