Court Opinion

ID: 4625609
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:32.810107+00
Date Added: 2024-06-11T07:59:16.616473
License: Public Domain

EDWARD C. LAWSON AND ALICE K. LAWSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  ROBERTA C. LAWSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lawson v. CommissionerDocket Nos. 99300, 99301.United States Board of Tax Appeals42 B.T.A. 1103; 1940 BTA LEXIS 900; October 30, 1940, Promulgated 1940 BTA LEXIS 900">*900  LOSSES - CORPORATE STOCK - YEAR IN WHICH SUSTAINED. - Petitioners owned preferred stock of a corporation for which a receiver was appointed in 1932.  The receivership also included two subsidiary corporations.  In 1934, proceedings having been instituted for reorganization under the National Bankruptcy Act, as amended, the receiverships were terminated and each company was adjudged to be insolvent.  During 1935 plans of reorganization were submitted to the court by both the debtors and a bondholders' committee, under each of which it was proposed that holders of the preferred stock participate in the reorganization was finally approved by the common stock of the new company for each share of the old preferred stock.  A plan of reorganization was finally approved by the court in 1936, pursuant to which the stockholders of the old corporation received nothing.  Held, petitioners sustained a deductible loss in 1936 of the stipulated cost basis of their preferred stock.  Roscoe E. Harper, Esq., and V. M. Kelly, C.P.A. for the petitioners.  Stanley B. Anderson, Esq., for the respondent.  HILL42 B.T.A. 1103">*1103  These proceedings, duly consolidated for hearing, 1940 BTA LEXIS 900">*901  are for the redetermination of deficiencies in income tax as follows: PetitionerDocket No.YearDeficiencyEdward C. Lawson and Alice K. Lawson993001936$1,548.12Roberta C. Lawson993011936245.2642 B.T.A. 1103">*1104  The sole issue for decision is whether or not the preferred stock of the Southwest Utility Dairy Products Co. became worthless during the taxable year 1936.  The facts were stipulated by the parties, other than the ultimate fact of the year of loss.  FINDINGS OF FACT.  Eugene B. Lawson died on June 25, 1931, owning 1,244 shares of preferred capital stock of the Southwest Utility Dairy Products Co., hereinafter sometimes called Dairy Products Co., which stock was included in his estate for Federal estate tax purposes at a value of $18,660 as of the date of his death.  During July 1931 the estate of Eugene B. Lawson, deceased, received the amount of $3,887.50 on the 1,244 shares under a repurchase agreement with that company, thereby reducing the basis for the determination of gain or loss to $14,772.50.  No dividend or other distribution was paid or made on the 1,244 shares of stock subsequent to the date of the death of Eugene B. Lawson, 1940 BTA LEXIS 900">*902  except the sum of $3,887.50 above noted.  On July 21, 1935, the 1,244 shares of preferred stock of the Dairy Products Co. were distributed one-half to Roberta C. Lawson and one-half to Edward C. Lawson, they being the only heirs of Eugene B. Lawson, deceased.  On August 2, 1936, Roberta C. Lawson and Edward C. Lawson formed a copartnership under the name of Estate of Eugene B. Lawson, each having a one-half interest therein, to which they contributed, among other things, their respective one-half interests in the shares of preferred stock of the Dairy Products Co.  Roberta C. Lawson and Edward C. Lawson were each entitled to a one-half interest in the distributive income of this copartnership for the period from August 2 to December 31, 1936.  The basis for determining gain or loss for the taxable year of the one-half interest in the preferred stock owned by each of the petitioners last mentioned was $7,386.25.  On March 1, 1932, the United States District Court for the Western District of Oklahoma appointed Paul H. Andres receiver in equity of the Southwest Utility Dairy Products Co. (formerly the Southwest Utility Ice Co.), Southwest Public Service Co., and Central Oklahoma Service1940 BTA LEXIS 900">*903  Co., with authority to continue the businesses of the respective companies.  The Dairy Products Co. owned all of the outstanding common stock of the Southwest Public Service Co. and the Central Oklahoma Service Co., and all of the outstanding preferred stock of the Southwest Public Service Co. and one-half of the outstanding preferred stock of the Central Oklahoma Service Co.  42 B.T.A. 1103">*1105  In June 1934 separate proceedings for the reorganization of each of the companies under the provisions of section 77(b) of the National Bankruptcy Act, as amended, were instituted in the Federal court above mentioned.  On November 5, 1934, the court took jurisdiction of the proceedings, and the receiverships of the companies were thereupon terminated.  At the same time the court adjudged each of the companies to be insolvent, and temporarily appointed Andres trustee of the estate of each company, with authority to continue their respective businesses.  Subsequently, the court made permanent the appointment of the trustee, fixing a date for the filing of claims, after which no claimant could participate in any plan except on order, for cause shown.  Thereupon, pursuant to order, a special master1940 BTA LEXIS 900">*904  appointed by the court divided all creditors and stockholders into classes according to the nature of their respective claims and interests and determined the value of the security for the first mortgage bonds of each of the debtor companies.  The findings of the special master with respect to the debtor companies determined the following financial conditions to exist as of June 11, 1934, the date the petitions in reorganization were filed: Southwest Utility Dairy Products Co.Southwest Public Service Co.Central Oklahoma Service Co.TotalBonded indebtedness and interest$2,472,815.88$1,050,219.77$1,730,560.53$5,253,596.18Unsecured indebtedness948,103.89285,778.47695,213.131,929,095.49Value of mortgaged assets807,500.00340,000.00552,500.001,700,000.00Value of unmortgaged assets109,920.03161,451.32(21,337.58)150,033.77Bondholders' deficiency1,665,315.88710,219.771,178,060.533,553,596.18The findings of the special master were incorporated in a report filed with the court on February 23, 1935, and, pursuant to order of the court, the separate reorganization proceedings of the three debtor companies were1940 BTA LEXIS 900">*905  consolidated.  On or about March 18, 1935, a plan of reorganization was submitted to the court by counsel for the debtor companies.  This plan provided that the newly organized company should distribute 10 shares of its common stock to the holders of each $1,000 par amount (i.e. 10 shares) of the then outstanding preferred stock of the three debtor corporations.  A bondholders' committee, constituted under a deposit agreement as of October 3, 1932, procured the deposit of a portion of the first mortgage bonds of the respective companies with the Bank of New York & Trust Co. as depositary, and as of April 17, 1935, there were on deposit with the committee 36 percent of such bonds of the Dairy 42 B.T.A. 1103">*1106  Products Co., 29 percent of the bonds of the Southwest Public Service Co., and 34 percent of the bonds of the Central Oklahoma Service Co.  On or about June 1, 1935, the bondholders' committee prepared and adopted a plan of reorganization of the respective companies and proposed the same in the consolidated reorganization proceedings.  This plan contained the following provisions: Holders of Preferred Stock of the Debtors shall be entitled to receive for each share and in full1940 BTA LEXIS 900">*906  satisfaction of all claims with respect thereof, except claims filed and allowed in respect of dividends declared thereon and unpaid which have been classified by the Court as unsecured claims and dealt with as such, the following securities of the new company: 1 share of Common Stock.  Pursuant to order of the court, the plan of reorganization prepared by the bondholders' committee was submitted to the creditors and stockholders of the debtor companies and a date was set to consider a motion to confirm the plan of reorganization and to hear any objections that might be filed thereto.  No plan formulated by either the stockholders or creditors, other than that prepared by the bondholders' committee, was submitted by the court to the creditors or stockholders for their assent.  Objections to the bondholders' plan were filed by an intervenor, and a hearing on such objections, and the motion to confirm, was held.  The hearing lasted two days, and subsequently briefs were filed by the committee and the intervenor.  On or about April 22, 1936, the court rendered its opinion, holding the proposed plans of reorganization of the bondholders' committee and of the debtors inequitable, not1940 BTA LEXIS 900">*907  feasible, and discriminatory against certain classes of creditors.  By order dated April 22, 1936, the court of its own motion appointed a reorganization committee, after reciting in the order that it appeared to be for the best interests of the creditors and stockholders of the respective companies to endeavor to formulate a plan of reorganization of each of the companies which would preserve their going-concern value, rather than to endeavor to liquidate the companies.  The order provided that each company should be reorganized separately, and contained the following further instructions to the committee: The Court directs and instructs said reorganization committee to afford the debtors and their counsel, the unsecured creditors' committee and its counsel an opportunity to be heard for the purpose of determining what recognition should be given to the preferred stockholders and unsecured creditors in the plan of reorganization to be formulated by the said reorganization committee.  The reorganization committee appointed by the court formulated a plan of reorganization dated June 11, 1936, which plan was approved and confirmed by the court on November 2, 1936.  The reorganization1940 BTA LEXIS 900">*908  proceeding was finally terminated March 15, 1937.  Under the plan 42 B.T.A. 1103">*1107  dated June 11, 1936, the stockholders of the three debtor corporations received nothing.  Petitioners Edward C. Lawson and Alice K. Lawson are husband and wife, and filed a joint return for the taxable year 1936 in which they deducted a loss of $7,386.25 representing the basis of their one-half interest in the 1,244 shares of preferred capital stock of the Dairy Products Co. hereinabove mentioned, which deduction was disallowed by respondent.  Petitioner Roberta C. Lawson deducted a loss of $7,386.25 in her Federal income tax return for the calendar year 1936, representing the basis of her one-half interest in the 1,244 shares of preferred stock above mentioned, which deduction was likewise disallowed by respondent.  The preferred stock of the Dairy Products Co. became worthless during the taxable year 1936.  OPINION.  HILL: The issue submitted for decision is whether or not petitioners are entitled to deduct from gross income for the taxable year 1936 the stipulated basis of the shares of preferred stock of the Southwest Utility Dairy Products Co. owned by them, respectively.  Respondent disallowed1940 BTA LEXIS 900">*909  the deductions claimed by petitioners on the ground that the losses were sustained in a prior year.  Whether or not corporate stock became worthless in a particular year is a question of fact which is often difficult to ascertain, and seldom can be demonstrated with mathematical certainty.  It must be determined from a practical consideration of all the facts and circumstances of each case.  ; , affirming . The statute contemplates allowance of deductions for losses which are fixed by identifiable events, , but facts which indicate merely imminence of loss, not the present fact of loss, are not such identifiable events, , and it has been held that a deduction is not allowable in the year claimed by the taxpayer merely because his stock subsequently became worthless, nor is such loss allowable because, in the light only of subsequent events, it may appear to have been inherently worthless1940 BTA LEXIS 900">*910  in the taxable year.  . Respondent argues that the preferred stock of the Dairy Products Co. involved herein became worthless prior to the taxable year 1936, and in support of his contention points to the following facts, namely, that the Dairy Products Co. and its two subsidiaries encountered financial 42 B.T.A. 1103">*1108  difficulties in 1932, and a receiver was appointed on March 1 of that year; in June 1934 proceedings for the reorganization of the companies under section 77(b) of the National Bankruptcy Act, as amended, were instituted in a Federal court.  On November 5, 1934, the court took jurisdiction, the receiverships were terminated, and each company was adjudged to be insolvent.  With respect to the Dairy Products Co., the special master's report, as of June 11, 1934, disclosed that its bonded and unsecured indebtedness amounted to $3,420,919.77, while the combined value of all of its assets amounted to $917,420.03, leaving a deficiency of $2,503,499.74.  A substantially similar financial situation was disclosed in respect of the two subsidiaries.  Respondent contends that the hopelessness of the financial1940 BTA LEXIS 900">*911  condition of the three companies during 1934 indicates that the preferred stock in question was without value in that year.  We are unable to agree with respondent's conclusion, which fails to take into consideration facts tending to establish that, notwithstanding that the preferred stock of the Dairy Products Co. had no liquidating value in 1934, it did have a substantial potential value in the years prior to 1936.  The facts cited by respondent are not in themselves conclusive, and indicate at most merely imminence of loss, not the present fact of loss.  Neither the receivership, the adjudication of insolvency, nor the reorganization proceedings under the Bankruptcy Act is sufficient to establish worthlessness of the stock.  As was pointed out by the Court of Claims in : It is generally held that the mere appointment of a receiver or even a showing of bankruptcy of a corporation is not sufficient in itself and alone to entitle a taxpayer to deduct the cost of the stock in such corporation as worthless.  See also 1940 BTA LEXIS 900">*912 , and . So long as corporate stock reasonably has a potential value, it can not be said that the taxpayer's investment therein has been lost.  "The ultimate value of the stock, and conversely its worthlessness, will depend not only on its current liquidating value, but also on what value it may acquire in the future through foreseeable operations of the corporation.  Both factors of value must be wiped out before we can definitely fix the loss." ; affd.,  "Until it is clearly shown that there is no probability that any portion of the investment will ever be recovered, no deductible loss under the statute has been sustained." . And see . The facts stipulated in the present proceedings show that in March 1935 a plan of reorganization was submitted to the court by the debtor 42 B.T.A. 1103">*1109  companies which, among other things, provided that one share1940 BTA LEXIS 900">*913  of common stock of the proposed new or reorganized corporation should be distributed to the holder of each share of the preferred stock of the debtors.  It is also shown that in June 1935 a bondholders' committee prepared and submitted a plan of reorganization which provided that the holders of the preferred stock of the debtors should receive for each such share one share of common stock of the new company.  These plans of reorganization were rejected by the court on April 22, 1936, apparently not on the ground that recognition was accorded to the preferred stockholders, but because other provisions were found to be inequitable, not feasible, and discriminatory against certain classes of creditors.  On the same date the court, of its own motion, appointed a reorganization committee.  This committee was specifically instructed by the court to endeavor to formulate a plan of reorganization which would preserve the going-concern value of each of the companies, and to afford the debtors an opportunity to be heard for the purpose of determining what recognition should be given to the preferred stockholders in the plan of reorganization to be formulated by such committee.  Under date1940 BTA LEXIS 900">*914  of June 11, 1936, the committee appointed by the court submitted its plan, which plan was approved and confirmed by the court on November 2, 1936.  Thereunder, the stockholders of the three debtor corporations received nothing.  All the plans of reorganization above referred to provided for the organization of a new company on a sound financial basis, and we can not assume that the common stock of any such new or reorganized company would have been without value.  It is our opinion, therefore, that prior to November 2, 1936, the holders of the preferred stock of the Dairy Products Co. had a reasonable basis for the expectation that they would receive a substantial interest in the new company in exchange for their stock in the old company.  This expectation was definitely foreclosed on the date last stated, when the court approved the plan of reorganization under which they received nothing.  We have, accordingly, found as a fact that the preferred stock of the Dairy Products Co. became worthless during the taxable year 1936.  Cf. 1940 BTA LEXIS 900">*915 . Petitioners are entitled to the deductions claimed.  Respondent's action on the issue submitted is reversed.  Decisions will be entered under Rule 50.