Becker v. United States, Civ. No. 02942.

• Decision Date: 28 January 1970
• Docket Number: Civ. No. 02942.
• Citation: 308 F. Supp. 555
• Parties: John H. BECKER and Elizabeth Becker, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Nebraska

308 F. Supp. 555

John H. BECKER and Elizabeth Becker, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 02942.

United States District Court D. Nebraska.

January 28, 1970.

Edward G. Garvey, and James R. McGreevy, Omaha, Neb., for plaintiffs.

Darrell Hallett and James Parker, Dept. of Justice, Washington, D. C., for defendant.

MEMORANDUM

RICHARD E. ROBINSON, Chief Judge.

This matter was tried to the Court without a jury, jurisdiction being based upon Title 28 U.S.C.A. § 1346 a 1. It is basically a suit for a tax refund centering upon the issue of whether or not plaintiff's declaration of certain stock as worthless in 1956, thereby entitling him to a deductible tax loss, was allowable under the taxing laws. The Court is now ready to render a decision, announcing its findings of fact and conclusions of law.

Basically the issue here presented is whether plaintiff, John Becker, his wife a party because a joint return was filed had stock in a company called Townsend Motors which became worthless during the year 1956 thereby entitling plaintiff to a loss deduction pursuant to Section 165 of the Internal Revenue Code of 1954. More specifically the Court is faced with the problem where a plaintiff is a man well versed in business and familiar with the tax laws who declares his stock worthless in a corporation which completely ceased to operate in 1956, whose liabilities exceeded its assets during that year but which had accumulated operating losses in excess of $164,000. Taxpayer admits that he was aware of the tax advantages of placing a new business within the corporate shell. He also states that certain negotiations had occurred during 1956 in order to make use of the previous losses. The evidence also shows however that as of the date that plaintiff states the stock to be worthless, December 31st, 1956, there were no negotiations in progress nor were any specifically being contemplated. In short there was no business in sight although there still remained a desire to make use of the corporation in order to take advantage of the tax consequences.

The facts which present this issue are simple and not essentially in dispute. Plaintiff-taxpayer acquired 890 shares of the predecessor of Townsend Motors for $93,450 in 1951. There is no dispute that if the Court were to hold the stock worthless then taxpayer's capital loss carryover from the year 1956 was $86,091.52. In about 1952 the corporation began to sustain losses which were never recovered as of December 31st, 1956. As of that date liabilities exceeded assets. In the late spring of 1956 the corporation ceased to operate but still remained in existence. Taxpayer after that date attempted to find a new business for the corporation and at least on one occasion went into negotiations. Taxpayer does state that after these negotiations failed there was no business in sight as of December 31st, 1956 but that he hoped that the losses previously incurred might still be utilized. In the summer of 1957 after declaring the stock worthless and by this time being the sole owner of Townsend Motors, taxpayer's corporation acquired and operated at a profit a lumber business in California utilizing Townsend's losses to offset income.

The writer points out at the outset that from these facts this is not a case where a taxpayer buys a corporation merely to utilize its tax losses. There was initially from the time the stock was bought a profit and a period of five years from the date bought until the business completely ceased to operate. It may be deduced therefore from its history and the time span occurring to its ceasing operations that the taxpayer did not therefore buy the corporation merely for its tax advantages now available.

As is usually the case there is no hard and fast rule that will enable the Court to determine whether it was proper for the taxpayer to declare his stock worthless. In fact there seems to be a large variance of rules explainable however because of the variations in factual situations. The burden of producing evidence is upon the plaintiff. Taxpayer must prove that the stock is worthless and that it became worthless in the year claimed. Boehm v. United States, 326 U.S. 287, 66 S.Ct. 120, 90 L.Ed. 78 1945; ...