1933 BTA LEXIS 994 | B.T.A. | 1933
Lead Opinion
OPINION.
This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1928 in the amount of $1,525.20. The only question at issue is whether the petitioner sustained a deductible loss upon the sale of a pro rata part of its holdings of the preferred stock of another corporation. The material facts have been stipulated substantially as follows:
The petitioner is a Delaware corporation, engaged in the production of natural gas and oil. During the period 1924 to 1927, the petitioner acquired for cash or its equivalent 1,767 shares of preferred stock of the Tri-State Refining Co., a domestic corporation. The
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Pursuant to the aforesaid agreement, the petitioner during 1928 surrendered it pro rata part, 222 shares of the second preferred stock, receiving from the corporation the amount of $222 in exchange therefor. The 222 shares had been acquired at a cost of $19,855.68. The proposed new issue of stock never took place. In the following
In the first place, it is quite apparent that, as the respondent has determined, there was not an outright sale by the petitioner and others to the Tri-State Refining Co. of a portion of their holdings of the company’s preferred stock. The preferred stock had a par value of $100 per share and was surrendered to the corporation for a nominal consideration of $1 per share. The transaction was, in effect, a surrender of the stock rather than a sale and the real consideration therefor was, as stated in the stipulation, the elimination of the operating deficit of the corporation for the purpose of making the proposed new issue of stock more attractive.
The Court of Appeals of the District of Columbia held, in Kistler v. Burnet, 58 Fed. (2d) 687; affirming 21 B.T.A. 433, that a stockholder of a corporation was not entitled to a deduction of a loss on account of the surrender of a pro rata part of his preferred stock to the corporation for the purpose of reducing the corporation’s deficit. The court in that case said:
The Bureau of Internal Revenue has consistently held that the surrender by stockholders ratably of a portion of their stock to the corporation for the purpose of supporting its credit constitutes capital contributions which are to be considered as additional cost to the stockholders of the stock retained; and that in such cases gains or losses of the stockholder are to be ascertained upon the final disposition of such stock.
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The present ease is similar in principle to cases wherein a stockholder, in order to benefit the financial condition of a corporation, without other consideration, either voluntarily or by assessment, pays additional cash into the corporation in proportion to his holdings. It has been uniformly held that such payments are capital contributions, that no deductible loss is thereby sustained by the stockholder, and that gain or loss therefrom is to be determined and accounted for when the stockholder’s shares are finally sold or otherwise disposed Cf. First Nat. Bank in Wichita v. Commissioner (C.C.A.) 46 F.*121 (2d) 283; Burns v. Commissioner (C.C.A.) 31 F. (2d) 399; Mastin v. Commissioner (C.C.A.) 28 F. (2d) 748, 753.
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Accordingly, for income tax purposes, no deductible loss is recognized because of the surrender of part of appellant’s stock, nor is any gain recognized because of the 1,000 shares of additional common stock issued to appellant as part of the transaction. Such gains or losses, however, are not to be overlooked, but are to be considered when appellant’s retained shares shall be sold or otherwise disposed of, or become worthless in whole or in part.
See also Charles M. Haft, 20 B.T.A. 431; Edith Scoville, 18 B.T.A. 261. Cf. Commissioner v. Wright, 47 Fed. (2d) 871; reversing 18 B.T.A. 471, where the corporate stock was surrendered to an outside party rather than to the issuing corporation, resulting, as the court held, in a deductible loss. Cf. also City Builders Finance Co., 21 B.T.A. 800.
There is no merit in the petitioner’s argument that it did not own the preferred and common stock of the Tri-State Refining Co. in the same proportion and that the remaining stock which it held after the surrender of the preferred did not receive all or an equal proportion of the benefit to the corporation. The proportion in which the various classes of stock was owned by the petitioner is not material. The surrender of the stock for cancellation being a capital transaction, Kistler v. Burnet, supra, no adjustment for any gain or loss on account thereof can be made until the petitioner has disposed of the remaining stock.
Judgment will ~be entered for the respondent.