Dobson v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 106553.
| Decision Date | 27 March 1942 |
| Docket Number | Docket No. 106553. |
| Parties | JOHN V. DOBSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John W. Windhorst, Esq., and Leland W. Scott, Esq., for the petitioner.
S. U. Hiken, Esq., for the respondent.
The respondent determined a deficiency in income tax for the year 1939 in the amount of $9,108.06. The question presented is whether a sum of money, or any part thereof, recovered by the petitioner in the taxable year as a result of litigation involving certain stock transactions in prior years constitutes a return of capital, as contended by petitioner, or taxable income, as contended by respondent. The parties have filed a written stipulation of facts, with certain exhibits attached thereto, and the Board adopts such stipulation as its findings of fact. We shall recite only the facts deemed necessary to discussion of the issue presented.
Petitioner, a resident of Minneapolis, Minnesota, filed his 1939 income tax return with the collector of internal revenue for the district of Minnesota.
At various times in 1929 petitioner purchased, in transactions entered into for profit, a total of 440 shares of the capital stock of the National City Bank of New York. The stock also carried certain beneficial interests in the stock of the National City Co. of New York. The purchases were made in the State of Minnesota from the National City Co.
During the year 1929 petitioner sold a total of 240 shares of the stock, 90 shares of which resulted in a taxable gain of $8,168.44 and was so treated in closing petitioner's income tax liability for 1929. The sale of the remaining 150 shares in 1929 resulted in a loss of $13,168.44, properly disallowed as a deduction in closing petitioner's 1929 income tax liability because of the wash sales provisions of the Revenue Act of 1928.
In 1930 petitioner sold the remaining 200 shares of the stock for $20,897.44. These shares had actually cost the petitioner $70,000, but, because of the wash sales in 1929 which resulted in nondeductible losses for that year, the petitioner's basis for determining the amount of loss sustained in 1930 was $70,000 plus $13,168.44, or $83,168.44. The 1930 sale resulted in a deductible loss by the petitioner in the amount of $62,271, which was allowed by the respondent as a deduction in closing petitioner's income tax liability for that year.
On July 3, 1931, petitioner purchased 200 shares of the bank stock at a cost of $17,700, and on July 13, 1931, sold the said shares for $16,000, thereby sustaining a loss of $1,700 which was deductible for 1931, but was not claimed as a deduction. Upon audit of the return, no deduction was allowed by the respondent by reason of the loss realized on the sale, but had such loss been claimed as a deduction it would have been allowed by the respondent and would have reduced the income tax liability of petitioner for the year 1931, but would not have eliminated entirely liability to tax. Petitioner's 1931 return disclosed net income of $17,514.27, and a tax thereon of $125.43, which was paid to the collector during the year 1932.
Until September 1937 the petitioner regarded the aforesaid purchases and sales as closed and completed transactions. During that month petitioner learned for the first time that the stock had not been registered under the Minnesota Blue Sky Laws, and further learned for the first time facts which led him to believe that the sales by the company to him might have been fraudulent. On or about July 9, 1938, the petitioner filed a suit against the National City Co. in an effort to recover the amounts which he had paid for the stock in 1929 and 1931, alleging that the stock had been sold to him without having been registered in accordance with the requirements of the Minnesota Blue Sky Laws and that the sales had been fraudulent. He asked for a rescission of the entire transaction and tendered to the defendant company the proceeds of the stock or an equivalent number of shares of stock of the bank, plus interest and dividends received.
In 1939 the suit was settled by a net payment of $33,404 by the company to the petitioner, and upon receipt thereof the suit was dismissed, with prejudice, pursuant to a stipulation between the parties. Of the total net recovery, $157.04 related to 40 shares of stock which are not here involved and is conceded to be taxable income. Of the remainder, $32,294.96 is allocable to the stock sold by the petitioner in 1930 and the balance of $952 is allocable to the stock sold by petitioner in 1931.
If the entire deduction of $62,271, allowed as a deduction in connection with petitioner's 1930 Federal income tax liability had been disallowed, there would have been net income in the amount of $32,227.53 and a deficiency in petitioner's income tax for 1930 would have resulted in the amount of $1,232.75, computed as follows:
Net loss ____________________________________________________ ($30,043.47)
Add: Loss on National City Bank stock, eliminated ___________ 62,271.00
__________
Net income revised ___________________________________________ 32,227.53
Less
Dividends _______________________________________ $23,659.45
Personal exemption ______________________________ 3,500.00
Credit for dependents ___________________________ 1,200.00 28,359.45
__________ _________
3,868.08
=========
Normal tax: 1½% of $3,868.04 ______________________________ $57.02
Surtax on $32,227.53 _____________________________________________ 1,240.48
________
Total ____________________________________________________________ 1,297.50
Less: Earned income credit
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