COMMISSIONER OF INTERNAL REVENUE v. Burdick, 4699.
| Decision Date | 13 May 1932 |
| Docket Number | No. 4699.,4699. |
| Citation | 59 F.2d 395 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. BURDICK. |
| Court | U.S. Court of Appeals — Third Circuit |
Hayner N. Larson, of Washington, D. C., for appellant.
Wm. Wallace Booth, and W. A. Seifert, both of Pittsburgh, Pa. (Smith, Shaw, McClay & Seifert, of Pittsburgh, Pa., of counsel), for appellee.
Before DAVIS, Circuit Judge, and DICKINSON and McVICAR, District Judges.
The very full discussion of the legal merits of this cause returned with the order of the Board in redetermining the tax due by the respondent's decedent has made further extended discussion unnecessary except as the argument addressed to us by the experienced counsel for the Commissioner calls for consideration. Respondent's decedent was heavily interested in a corporation which for brevity we will call the Marf Company. He was was the owner of all the preferred stock of the company consisting of 600 shares of the nominal par value of $100 each. For this stock he had paid $60,000. The company had a further total issue of 1,900 shares of common stock of a like nominal value or $190,000 in all. Of this the decedent held 950 shares. What he paid for these shares does not appear, otherwise than by the finding that the loss on 441 of them is measured by $41.66 per share. He seems to have first acquired 600 shares and subsequently 350 more. He sold these 350 shares, but no loss is claimed because of this, for the reason that, he being deceased, what they cost him was unknown. The decedent had another side interest in the company because he was a creditor in the sum of $25,000 and his father in the sum of $36,328.60 and another stockholder in the sum of $2,000. For these latter sums the decedent felt a moral responsibility or at least wished to have them paid in full. The company fell into financial difficulties so that the need of fresh capital and of new management was felt. A man by the name of Louis C. Kunz was willing to step into the breach upon terms satisfactory to him and the decedent. These terms included the furnishing by Kunz of $40,000. The services of the Guaranty Trust Company were called in to act as trustee for all parties pending the carrying out of the arrangement made. The terms of the agreement were embodied in a joint letter to the trust company dated November 28, 1922. For a full understanding of the transaction it may be interpolated that Arvid Jansson held 475 and Frank Cohen 475 of the shares of common stock, they with the decedent being thus the owners of the whole 1,900 shares of the common stock issue.
The terms of the agreement, in substance, were as follows: Certificates of stock, obligations of the company, and money were to be deposited in escrow with the trust company; by the decedent 950 shares of common stock, 600 shares of preferred, and the note of the company for $25,000, which he held; by Jansson 475 shares of common stock; by Cohen 475 shares, and by Kunz $40,000. Out of the $40,000 the trust company was to purchase the $36,328.60 note of the company held by the father of the decedent and the $2,000 note held by Jansson and pay the balance of the $40,000 to the decedent on account of interest due him on the $25,000 of notes of the company which he held. The $25,000 of notes held by the decedent were to be surrendered to the company upon receipt in exchange of a series of new notes maturing at different dates. The 1,900 shares of common stock were to be apportioned 1,425 to Kunz and the remainder divided equally among the other parties to the transaction, the decedent to receive 159 shares as his portion. The purchased notes held by the father of the decedent and by Jansson were to be stamped "paid" and delivered to the company. There was a further stipulation that the parties were "to use their best efforts" to have the company "reduce" its capital by the withdrawal of its preferred stock and the "cancellation" of the 600 shares issued. The agreement above outlined was carried out in all its features; the preferred stock being assigned to Kunz and "withdrawn" and certificates for the 159 shares of common stock which the decedent was to retain were duly issued to him. These he sold in 1927 for $7,950. In 1923 he made an income tax return in which he claimed a loss on the above transaction of $78,376.06 made up as follows:
600 shares of preferred stock at
$100.00 ...................... $60,000.00
600 shares (less 159) of common
stock at $41.66 .............. 18,376.06
__________
Total $78,376.06
The Commissioner disallowed any deduction from taxable income holding there was no loss arising out of the recited transaction treating it "as a reorganization under the provisions of section 202 (c) (2) of the Revenue Act of 1921 42 Stat. 229 and determined a tax deficiency in the amount of $11,110.20." The decedent was duly notified of such finding of deficiency, and demand was made for the payment of the tax thus unpaid. The decedent thereupon applied to the Board of Tax Appeals asking it to find that the petitioner had "suffered a loss on the above transaction and that said loss is an...
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