Howard v. Commissioner of Internal Revenue, 5863.
| Decision Date | 11 March 1932 |
| Docket Number | No. 5863.,5863. |
| Citation | 56 F.2d 781 |
| Parties | HOWARD v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Harry C. Howard, of Kalamazoo, Mich., for petitioner.
Hayner N. Larson, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, S. Dee Hanson, C. M. Charest, and Nina N. Gluckstein, all of Washington, D. C., on the brief), for respondent.
Before HICKS and HICKENLOOPER, Circuit Judges, and TUTTLE, District Judge.
Prior to 1922, petitioner had purchased, at par, $5,000 par value of the preferred capital stock of the Eddy Paper Company, a Michigan corporation. Thereafter the company became financially embarrassed and its capital was seriously impaired on November 5, 1922, when, in an effort to save some of the investment of its stockholders, the Eddy Paper Company, of Michigan, sold all of its assets to the Eddy Paper Corporation, organized under the laws of Illinois, for the sum of $625,000 and the assumption of all of the debts and liabilities of the vendor. This purchase price was paid by giving a ninety-day note, which was accompanied by an option to the Michigan corporation to purchase from the Illinois corporation all or any part of 31,250 shares of the common capital stock of the latter company at the price of $20 per share (an aggregate of $625,000). Thereafter the Michigan corporation exercised this option, paying for the capital stock thus purchased by redelivery of the $625,000 note. The petitioner's interest in the stock so purchased amounted to 75 shares having a market value of $1,750. The question for determination is whether the petitioner sustained a loss in 1922 of $3,250, or the difference between the value of his interest in the common stock of the Illinois corporation and the original investment of $5,000 in the preferred stock of the Michigan corporation. The Commissioner denied the deduction, and this action was affirmed by the Board of Tax Appeals.
Section 214 (a) (5) of the Revenue Act of 1921, c. 136, 42 Stat. 227, 239, permits deduction of "losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business." Under this provision losses may be deducted only where they result from or are evidenced by closed transactions. Deeds v. Commissioner, 47 F.(2d) 695 (C. C. A. 6), and cases there cited. If there be what in truth and substance amounts to a final disposition of an investment in the capital stock of a corporation, whether this disposition be by sale for cash or by exchange for other securities having a definitely ascertainable market value, the transaction is as definitely closed, and the loss deductible, as where such loss is otherwise clearly evidenced by some "identifiable events," United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 47 S. Ct. 598, 600, 71 L. Ed. 1120, or where the value of the stock, although the shares be still...
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