Lloyd-Smith v. Commissioner of Internal Revenue
Decision Date | 06 January 1941 |
Docket Number | No. 12.,12. |
Citation | 116 F.2d 642 |
Parties | LLOYD-SMITH v. COMMISSIONER OF INTERNAL REVENUE. |
Court | U.S. Court of Appeals — Second Circuit |
Wright, Gordon, Zachry & Parlin, of New York City (Charles C. Parlin and James A. Fowler, Jr., both of New York City, of counsel), for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Norman D. Keller and Maurice J. Mahoney, Sp. Assts. to Atty. Gen., for respondent.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
In 1932 the above taxpayer, Marjorie Fleming Lloyd-Smith, transferred to Jorwil Corporation certain assets belonging to her which had a cost basis of $2,636,778.49, and a fair market value at the time of transfer of $477,606.19. In exchange Jorwil Corporation issued to her its capital stock of the par value of $15,000 and its unsecured two year 6% promissory note for $303,000. In 1933 the note was split into two notes, one for $70,000 and the other for $233,000. In the same year the $70,000 note was sold for $70,000 in cash. Both the Commissioner and the Board of Tax Appeals held that the cost basis to be used for computing income taxes on the sale of the note was $70,000 and that on that basis the sale resulted in no loss which could be deducted for tax purposes. The taxpayer, however, says that the note represented a part of a total consideration of stock and notes received in exchange for assets valued at $477,606.19, but which had a cost basis of $2,636,778.49. She accordingly argues that the note should be given a proportionate cost basis of $386,458 and that its sale at $70,000 involved a loss of $316,458. The disallowance by the Board of this alleged loss resulted in an order determining a deficiency of $21,299.17. We think the order was right and should be affirmed.
The question before us on this appeal is what was the proper basis for tax purposes to be applied on the sale of the $70,000 two year unsecured note of Jorwil Corporation which was disposed of for its face value in the year 1933.
The consequences of such a transfer of property as the taxpayer made to Jorwil are set forth in Section 112 (b) (5) and (e) and Section 113 (a) (6) of the 1932 Revenue Act, 26 U.S.C.A. Int.Rev.Acts, pages 511, 513, 515:
Sec. 113 (a) (6): * * *"
According to the above provisions no gain or loss shall be recognized where property is transferred in exchange for stock or securities of a corporation controlled by the transferor; and where as in 112 (e), the property received in exchange includes money or "other property" as well as the stock and securities referred to in 112 (b) (5), "no loss from the exchange shall be recognized". Section 112 (e) also provides that no loss shall be recognized where similar exchanges accompany socalled reorganizations. Now, if the $70,000 note received in partial exchange for the assets transferred came within the meaning of the word "securities" as used in 112 (b) (5), the taxpayer was entitled to claim a loss based on that proportion of the cost of the assets transferred which the note bore to the total value of the assets received. If, on the other hand, the note came within the description of "other property" then under Section 113 (a) (6) no loss from the exchange involved in the case at bar would be recognized because, under subdivision (a) (6),...
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