Brown v. Commissioner of Internal Revenue

• Decision Date: 05 January 1938
• Docket Number: No. 7317.,7317.
• Parties: BROWN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

94 F.2d 101 (1938)

BROWN v. COMMISSIONER OF INTERNAL REVENUE.

No. 7317.

Circuit Court of Appeals, Sixth Circuit.

January 5, 1938.

W. W. Spalding, of Washington, D. C. (Mason, Spalding & McAtee, of Washington, D. C., on the brief), for petitioner.

Harry Marselli, of Washington, D. C. (Robert H. Jackson, Sewall Key, and Howard P. Locke, all of Washington, D. C., on the brief), for respondent.

Before HICKS and SIMONS, Circuit Judges, and RAYMOND, District Judge.

SIMONS, Circuit Judge.

The determination by the Board of Tax Appeals that an investment of the petitioner in the stock of a corporation became a loss sustained in the taxable year 1930, rather than in 1931, is the only finding or conclusion sought to be reviewed.

The corporation in the stock of which the investment was made is the Banco-Kentucky Corporation, incorporated in 1929 under the laws of Delaware for the purpose of owning and controlling banks and trust companies in Louisville, Ky., and elsewhere. Its short and turbulent history is sufficiently recited by us in Atherton v. Anderson, 6 Cir., 86 F.2d 518, 534 to 536. The petitioner purchased 2,000 shares of its capital stock in 1929 for $50,000. From the date of its organization to November 15, 1930, the corporation received into its treasury in payment for its shares upwards of $61,000,000 in cash and property. Among the assets acquired was stock in Caldwell & Co., a banking and brokerage firm of Nashville, Tenn., representing a purchase price of $22,500,000, trustee certificates representing stock in the National Bank of Kentucky and the Louisville Trust Company, both in Louisville, to the amount of $27,000,000, and stock in various banks, including the Security Bank of Louisville, costing upwards of $10,000,000. Banco-Kentucky stock was traded upon the Louisville Stock Exchange and the Chicago Stock Exchange. Upon the Chicago Exchange it reached a high in 1929 of $33 1/8 per share. By November 15, 1930, it had slipped to $7 per share.

Beginning with the latter date important events bearing upon the solvency of Banco-Kentucky followed in rapid succession to a catastrophic conclusion. November 15th Caldwell & Co. was placed in the hands of a committee of the National Clearing House, and two days later was put into receivership by the United States District Court at Nashville. November 17th the National Bank of Kentucky was taken over by the Comptroller of the Currency, and upon the same day the Louisville Trust Company turned over its affairs to the State Banking Commission, and the Security Bank closed its doors. At about the same time Banco-Kentucky sold its stock in various banks at a loss of nearly $8,500,000, and was itself placed in the hands of a receiver on November 24th, where it has since remained. The trial balance of its receiver as of December 31, 1930, disclosed net assets of a little over $6,000,000, but the receiver's estimate of their value as of that date was $1,688,577.52. Against such assets were claims, among which was an asserted liability against it as stockholder of the National Bank of Kentucky and the Louisville Trust Company, of approximately $5,400,000, and for the year 1930 it had sustained an operating loss of nearly $46,000,000. Following the happening of the events thus narrated Banco-Kentucky stock continued to be traded in upon the Chicago Exchange, although its price dropped on November 17th and 18th to $1.50 and $1 per share, respectively, and reached a low of 12½ cents per share on December 13th, after which it fluctuated between 12½ and 25 cents per share for the remainder of the calendar year. For the first five market days of 1931 trading still continued within such price range to January 8th, when the shares were removed from the list of the exchange.

The petitioner contends that since his shares still had a market value in 1931, even though small, his loss was not sustained until that year. It was then that he claimed it. The respondent asserted a deficiency, disallowing the deduction as a loss during that taxable year. The taxpayer sought review by the Board of Tax Appeals. There it was stipulated that evidence taken on the issue as to the time the shares became worthless in the District Court for the Western District of Kentucky (Wesch v. Helburn, 5 F.Supp. 581) be received. It consisted upon behalf of the respondent mainly of proof of the disasters which had overtaken the various banks and trust companies whose stock constituted the assets of Banco-Kentucky, together with an analysis by the receiver for Banco of the major losses suffered by such banks and trust companies and of the affairs of many of their principal debtors. The petitioner relied principally upon the quotations for Banco-Kentucky stock upon the several exchanges and evidence of efforts of creditors' committees in Louisville during 1930 and 1931 to formulate plans for the rehabilitation of the National Bank of Kentucky and other institutions involved. The Board of Tax Appeals sustained the Commissioner's finding that the petitioner's loss was suffered in 193...