Miller v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 102985.
| Decision Date | 08 October 1941 |
| Docket Number | Docket No. 102985. |
| Parties | JULIUS C. MILLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Samuel D. Royse, Esq., for the petitioner.
Donald P. Moyers, Esq., for the respondent.
The Commissioner determined a deficiency of $6,280.44 in petitioner's income tax for the year 1937. The deficiency is due to the following adjustments to petitioner's net income as shown by his income tax return for the year 1937:
(a) Increase in business income _____________________________ $3,688.47
(b) Loss on stock, disallowed _______________________________ 20,000.00
The petitioner does not contest the correctness of adjustment (a).
By an appropriate assignment of error petitioner contests adjustment (b) and contends that he is entitled to the $20,000 loss which he claimed on his income tax return, that amount being the cost of 200 shares of stock which he surrendered to the Grossman Shoe Co. in the taxable year.
The respondent gave his reasons for disallowing this $20,000 loss in his deficiency notice as follows:
(b) You claimed a deduction of $20,000.00 for a loss on 200 shares of capital stock of Grossman Shoe Company donated by you to the corporation. This deduction is denied for the reason that said transaction is considered to be a contribution to capital, the basis of which is to be added to the cost of shares retained by you.
FINDINGS OF FACT.
The petitioner is an individual whose residence is Owensboro, Kentucky. He filed his income tax return for the calendar year 1937 with the collector of internal revenue for the district of Kentucky.
The Grossman Shoe Co., hereinafter referred to as the shoe company, is a corporation organized and existing under the laws of the State of West Virginia, with its principal place of business at Parkersburg, West Virginia, and is engaged in the business of manufacturing and selling shoes.
The shoe company was incorporated on August 8, 1935, with an authorized capital stock of $100,000, divided into 1,000 shares of common stock having a par value of $100 each, and from time to time thereafter it increased its authorized capital stock until it amounted to 2,500 shares of common stock having a par value of $100 per share.
On April 30, 1937, the issued and outstanding common stock of the shoe company was held as follows:
Shares
Julius C. Miller ________________ 500
Albert A. Ahner _________________ 400
Harry J. Grossman _______________ 110
Julius C. Miller (Certificate in
name of Gilbert W. Gambill) ___ 50
Ida J. Miller ___________________ 50
A. G. Baker _____________________ 50
Gilbert W. Gambill ______________ 50
All of this outstanding stock was paid for by the holders thereof in cash, at par, excepting 50 shares belonging to Gilbert W. Gambill that were issued to him in return for legal services at the rate of $100 per share.
The 50 shares of stock in the name of A. G. Baker were owned or controlled by Albert A. Ahner.
The shoe company started operations in the late fall of 1935, and up to the month of December 1936 it had suffered an operating loss of approximately $50,000 and was indebted to the petitioner in the sum of $40,000 for money loaned, $15,000 of which was guaranteed by Ahner.
Up to the first day of January 1937 the shoe company had been financed by loans from petitioner and the bank. At that time the bank and the creditors of the shoe company were pressing for payment, and the shoe company was having difficulty in obtaining material for further operations.
In December 1936 petitioner and Ahner discussed the liquidation of the business, and each agreed to advance an additional $25,000 to the shoe company so that the business could be carried on and liquidated in a more orderly manner. In January 1937 petitioner did advance the additional $25,000, but when Ahner was called upon to make the loan of $25,000 which he had agreed to make he was unable and unwilling to do so, and in order to keep the shoe company going petitioner, in the last of January or first of February 1937, loaned the company an additional sum of $10,000. Ahner insisted at that time that the company be liquidated.
The loans made by petitioner to the corporation were evidenced by the promissory notes of the shoe company. Thereafter, petitioner and Ahner held various conferences with reference to the conduct of the shoe company, and agreed that it should be liquidated.
At that time Harry J. Grossman, the then president of the shoe company, was opposed to liquidation and proposed to petitioner and Ahner that, if they would agree to procure an assignment to him or his nominee, without consideration, of all of the stock of the shoe company, he would attempt to refinance the company and pay or satisfy the indebtedness due from the company to petitioner. Petitioner and Ahner accepted this proposition, but Grossman was not able to carry it out.
The business of a shoe manufacturing company is divided into two seasons, one from November 1 to May 1 of the succeeding year, devoted to the manufacture of spring and summer shoes, and the other from May 1 to November 1, devoted to the manufacture of fall and winter shoes, and in the orderly conduct of the business the shoes manufactured during each season should be largely sold and distributed during the current season.
At the end of the spring season on May 1, 1937, the operating deficit of the shoe company had increased to $60,118.37, and the accounts payable and other current liabilities had increased to $81,031.76. At the same time the inventory of finished goods and goods in process was $58,000.
After various negotiations between petitioner and Ahner, they agreed that Ahner should surrender the 450 shares of stock owned or controlled by him to the shoe company in consideration for the payment of $1,000, and that petitioner should release Ahner from his guaranty of $15,000 of the indebtedness owed by the shoe company to petitioner. On June 3, 1937, the petitioner and Ahner entered into a written agreement carrying out such understanding.
The original understanding was that the stock should be delivered to the shoe company by Ahner, and the $1,000 paid to Ahner by the shoe company, but as the agreement was finally closed at St. Louis and no officer of the shoe company authorized to sign checks was present, the contract was made in the name of petitioner.
At that time the condition of the shoe company was such that it could not have continued without some financial adjustment of its affairs.
On June 9, 1937, at a meeting of the board of directors of the shoe company, the petitioner surrendered to the company the stock previously owned or controlled by Ahner, in consideration of the payment of $1,000, which had been advanced by petitioner to Ahner. At the same meeting the petitioner stated that on account of the losses theretofore sustained in the operation of the shoe company he would surrender $20,000 par value of the stock held by him, and he surrendered certificate No. 6 for 100 shares, dated December 9, 1935, and certificate No. 12, for 100 shares, dated July 24, 1936.
At the same meeting petitioner announced that he would subscribe for $75,000 par value of stock in the shoe company in consideration of the cancellation of the indebtedness due from the shoe company to petitioner, which subscription was accepted.
At the same meeting Harry J. Grossman stated that he would subscribe for 50 shares of the stock of the shoe company at par, which subscription was accepted.
At the time that the transactions in connection with the surrender of the stock by Ahner and petitioner to the shoe company took place, the books of the shoe company showed a book net worth value of $61,881.63.
As of April 30, 1937, the condensed balance sheet of the shoe company was as follows:
ASSETS
Current quick assets ____________________________________________ $75,278.89
Advanced to salesmen and employees ______________________________ 5,738.72
Inventory _______________________________________________________ 90,806.35
___________
Total _____________________________________________________ 171,823.96
Fixed assets
Machinery and equipment ____________________________ $16,279.23
Dies, patterns, lasts and forms ____________________ 18,879.34
Office furniture ___________________________________ 936.94
Deposit on leased machinery ________________________ 4,000.00
___________
Total fixed assets ________________________________________ 40,095.51
Deferred charges ________________________________________________ 8,933.92
___________
Total assets ______________________________________________ 220,853.39
===========
LIABILITIES
Merchandise and other current accounts payable __________________ $61,031.76
Notes payable, bank _____________________________________________ 22,500.00
Notes payable, J. C. Miller _____________________________________ 75,000.00
___________
Total current liabilities _________________________________ 158,531.76
Reserve for taxes _______________________________________________ 440.00
Capital stock outstanding _______________________________________ 121,000.00
Net deficit from operations _____________________________________ (59,118.37)
___________
Total liabilities _________________________________________ 220,853.39
As of April 30, 1937, adjusted to show capitalization changes as of June 9, 1937, the condensed balance sheet of the shoe company was...
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