1931 BTA LEXIS 1647 | B.T.A. | 1931
Lead Opinion
OPINION.
The respondent has determined a deficiency in income tax for 1923 in the amount of $654.73, of which the petitioner admits that $119.16 is correct. A redetermination of the balance of the deficiency is sought on the ground that the respondent erred in disallowing the deduction of a loss in the amount of $4,284.50 claimed in the return. The petitioner is a New Mexico corporation, with principal office at German Valley, Ill.
It is alleged in the petition and admitted in the answer that A. L. Parsons, hereinafter referred to as Parsons, then president of the petitioner, fraudulently issued certificates of capital stock of the petitioner as follows: In 1909 certificate No. 44, for 20 shares, to D. J. Avers, who assigned the stock to H. W. Brockmeier, and certificate No. 57, for 57 shares, to H. W. Brockmeier, in 1910, certificate No. 77, for 12 shares, to H. W. Brockmeier. The petitioner has always disputed the validity of these certificates, aggregating 89 shares, and has refused to pay dividends upon them.
In 1912, it came to the notice of Henry C. Fosha, then assistant secretary of the petitioner, that the above described certificates had been issued by Parsons, whereupon Fosha made a personal investigation of petitioner’s records, which resulted in the conclusion that no cash or other consideration had ever been paid in for the 89 shares
The petitioner claims that it is entitled to a deductible loss on account of the above payment. The primary purpose of the payment was to settle a controversy and avoid embarrassing litigation and not to acquire stock. They did not recognize the stock itself as having value and their object was to get rid of it through this means. It acquired nothing of any recognized value, but paid out money in the nature of damages. It had not recognized the stock as outstanding but knew that it had been fraudulently issued. It sustained no loss until the payment was made — no recovery could be had from Parsons and it had no way of making itself whole. We think the petitioner is entitled to the deduction.
Judgment will be entered under Rule SO.