Messenger Corporation v. Smith, 8208.

• Decision Date: 08 June 1943
• Docket Number: No. 8208.,8208.
• Citation: 136 F.2d 172
• Parties: MESSENGER CORPORATION v. SMITH, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Seventh Circuit

136 F.2d 172 (1943)

MESSENGER CORPORATION v. SMITH, Collector of Internal Revenue.

No. 8208.

Circuit Court of Appeals, Seventh Circuit.

June 8, 1943.

William B. Waldo, and Samuel O. Clark, Jr., Asst. Attys. Gen., Sewall Key and A. F. Prescott, Sp. Assts. to Atty. Gen., Alexander M. Campbell, U. S. Atty., of Fort Wayne, Ind., and Luther M. Swygert, Asst. U. S. Atty., of Hammond, Ind., for appellant.

James M. Barrett, Jr., Phil M. McNagny, Leigh L. Hunt, and Barrett, Barrett & McNagny, all of Fort Wayne, Ind., for appellee.

Before EVANS and KERNER, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

Whether an asserted loss was a deductible income tax loss or a capital expenditure is the issue. The taxpayer filed suit for a refund and the District Court found in its favor, granting judgment for $12,927.30 and interest. The Government appeals.

In March, 1937, plaintiff executed a contract with a broker whereby the latter was to effect the conversion of plaintiff's debentures into its common stock. Plaintiff agreed to, and immediately did, convey to the broker, as compensation, six thousand shares of its common stock, having the agreed value of $45,000. The broker became a bankrupt, May 20, 1937, having previously disposed of all but one of said six thousand shares. He had effected no transfer of plaintiff's debentures to stock.

Plaintiff reported the loss of the value of these six thousand shares in its income tax return for 1937. The Commissioner disallowed the asserted loss.

Sec. 23 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, pages 827, 828, contains the following:

"In computing net income there shall be allowed as deductions: * * * (f) In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise."

Regulations 94, Art. 22 a-16, provide:

"Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances."

The trial court's findings of fact disclose that plaintiff at first contracted, July 23, 1936, with an Indianapolis broker to effect the conversion of the debentures into stock, agreeing to pay $1 for each share of stock taken in exchange, the first conversion date being July 15, 1937.¹ This contract was abandoned. On March 15, 1937, plaintiff entered into a similar contract with a Chicago broker. Four days later the contract was changed so that the compensation of the broker was to be six thousand shares of plaintiff's common stock, having a fair market value of $42,500.² Plaintiff issued the six thousand shares "but the Chicago broker did nothing to carry out its contract or to effect the conversion of these debentures and became a bankrupt on May 20, 1937, having previously disposed of all but one of the six thousand shares it had received" and that "by reason" of these facts "plaintiff sustained a loss of $42,500 during its fiscal year * * * 1938 * * * and said loss was not compensated for by insurance or otherwise."

Counsel for plaintiff states that no claim was filed in the broker's bankruptcy proceedings because the assets were so small, although demand was made for the six thousand shares of stock, which demand was ignored. Five percent was paid on claims in the bankrupt estate.

The Government contends: (1) There is no proof of a base on which to calculate the loss; (2) the loss, if any, was to stockholders of plaintiff, since all that occurred was that their proportionate interests were diminished (or diluted) by the additional stockholders, having rights in and to the corporate...