Docket No. 101. | B.T.A. | Feb 28, 1925
Lead Opinion
The only question to be determined here is the amount, if any, taxpayer should be allowed to deduct in computing his net income for the year 1918 on account of the loss claimed to have been sustained by him on the sale in that year of his shares of the capital stock of Theodore B. Starr, Inc., of Delaware. Taxpayer claimed that the total loss, including the trading loss referred to, on the sale of the stock to the owners and holders thereof, was $111,591.94; that he was the owner of 48.56 per cent' of the stock, and that he is entitled to deduct, in determining his net income for the year 1918, 48.56 per cent of the total loss. The Commissioner determined that a loss was sustained and that taxpayer was entitled to deduct his proportionate share thereof. He, however, computed the total loss to be $14,397.94. The basis of the Commissioner’s determination as set forth in the deficiency letter is as follows:
It is shown in the corporation return that in August 1916 there was a reorganization, which under the provisions of the Revenue Act of 1916, constituted a closed transaction. The basis for computation of loss is, therefore, the cost of the stock in 1916 plus the actual cost to the taxpayer of any additional shares acquired subsequent to that date. The cost of the stock in 1916 is represented by the fair value of the assets paid into the corporation upon reorganization in that year, or $1,779,000. The difference between 17,990 shares and the 18,762 shares stated to have been sold is not accounted for in the corporation’s returns and is assumed to represent stock dividend distributions which would not affect the computation of the loss.
The loss has, accordingly, been recomputed as follows:
Cost of stock-$1,779,000.00
Selling price- 1, 774,385.18
Stock loss- 4, 614.82
Trading loss_____ 9,783.12
Total loss- 14,397.94
Allowance of your pro rata part of this loss discloses a net income of $51,-598.59 and a further tax due of $5,796.73.
The evidence establishes that in May, 1918, Theodore B. Starr, Inc., of Delaware, issued to this taxpayer and L. M. Starr 972 shares o f its capital stock of the par value of $100 each, in consideration of the cancellation by them of an indebtedness of the corporation in the amount of $97,200. This was the equivalent of the purchase of the stock for $97,200 cash, and that amount should be taken into consideration in determining the cost of the stock sold by taxpayer and others in July, 1918.
We find from the evidence that on or about July 1, 1918, taxpayer and others were the owners of 18,762 shares of the capital stock of Theodore B. Starr, Inc., of Delaware, and that the cost of the stock to them was $1,876,200. It was sold on or about July 1, 1918, for $1,774,385.18. They therefore sustained a loss at that time of $101,814.82. A further loss of $9,783.12, growing out of the same transaction, occurred later in the year 1918, making a total loss of $111,597.94 on the sale of the stock involved herein. Taxpayer was the owner of 48.56 per cent of the stock sold, and it follows that in computing his net income for the year 1918 he should be allowed to deduct 48.56 per cent of the total loss sustained.