Nutter v. Comm'r of Internal Revenue, Docket No. 6608.

Citation7 T.C. 480
Decision Date31 July 1946
Docket NumberDocket No. 6608.
PartiesCHARLES L. NUTTER AND HELEN D. NUTTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Cancellation of petitioner's indebtedness, representing money borrowed to purchase certain pledged securities, in return for transfer of the securities to pledgee, held not to result in taxable gain, notwithstanding that indebtedness exceeded adjusted basis of securities. Sidney B. Gambill, Esq., and A. G. Wallerstedt, C.P.A., for the petitioners.

Karl W. Windhorst, Esq., for the respondent.

Petitioners seek redetermination of a deficiency in income tax for the year 1941 in the amount of $1,707.91.

The sole issue is whether petitioners realized a capital gain, as contended by respondent, or sustained a capital loss, as urged by petitioners, and the amount of either, if any, as a result of a transaction in which petitioner Charles Nutter assigned and transferred to the pledgee certain pledged securities in full settlement of the balance due on his demand notes, the balance due being in excess of his basis for the pledged securities.

Some of the facts have been stipulated.

The present findings of fact and opinion supersede the memorandum opinion entered herein January 8, 1946.

FINDINGS OF FACT.

The stipulated facts are hereby found.

Petitioners, husband and wife, are residents of Pittsburgh, Pennsylvania, and filed their joint return for the period involved with the collector of internal revenue for the twenty-third district of Pennsylvania. It was prepared on the cash basis of accounting. (Hereinafter Charles Nutter will be referred to as petitioner.)

During the years 1925 to 1929 petitioner purchased various securities at an aggregate cost of $110,045.05. In negotiating the purchases he obtained loans from the First Portland National Bank of Portland, Maine (hereinafter referred to as the bank), giving his promissory notes to the bank and pledging the aforesaid securities as collateral thereon. The balance due on September 20, 1941, on the notes evidencing the indebtedness was $85,104.60, plus some accumulated interest.

Among the powers granted the pledgee bank under the pledge agreement was the power to sell and transfer any of the pledged securities without notice to petitioner at public or private sale, or to purchase them itself on the nonpayment of the liability on the notes and credit petitioner's account with the net proceeds thereof.

In 1940 the bank had sold some securities and applied the proceeds to petitioner's account. A portion of the pledged securities having a cost of $33,076.56 became worthless prior to 1941. The remaining collateral had greatly depreciated in value and on September 20, 1941, had a fair market value of $17,090.20.

The bank had often discussed with petitioner the matter of making some settlement of his obligation. On August 21, 1941, it wrote petitioner:

In reply to your letter of the 18th concerning settlement of your obligations now held by this Bank, the principal amount aggregating approximately $85,104.60, without reference to accrued interest, if you will submit an offer of approximately 10% of the amount of the indebtedness, say $8,500.00 with $1,000.00 cash payment and your unsecured demand note for $7,500.00 bearing interest at 2%, and agree to release without restrictions all collateral now held by us against your obligations, we will present the subject to our Directors for action.

Petitioner would not make such offer, but did propose to pay $1,000 in cash and assign over to the bank all of the securities which it held as collateral on his notes in settlement of his indebtedness. The bank accepted this offer and on September 20, 1941, petitioner transmitted to the bank his $1,000 check and the assignment of his securities and thereupon his notes for the unpaid principal of $85,104.60 were canceled and released to him.

He obtained $1,500 from his wife with which to consummate the transaction.

Prior to the settlement of his obligation with the bank, petitioner's liabilities exceeded his assets by $62,587.11:

+-----------------------------------------------------------------------------+
                ¦Assets                                             ¦Liabilities              ¦
                +---------------------------------------------------+-------------------------¦
                ¦Securities                               ¦$150.00  ¦Bank          ¦$85,104.60¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Securities pledged against bank loans    ¦17,090.20¦Henley-Kimball¦8,500.00  ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Notes receivable                         ¦600.00   ¦              ¦          ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Insurance payable to wife                ¦11,080.36¦              ¦          ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Cash (including $1,500 obtained from     ¦2,096.93 ¦              ¦          ¦
                ¦wife)                                    ¦         ¦              ¦          ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦                                         ¦31,017.49¦              ¦          ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Deficit                                  ¦62,587.11¦              ¦          ¦
                +-----------------------------------------+---------+--------------+----------¦
                ¦Total                                    ¦93,604.60¦Total         ¦93,604.60 ¦
                +-----------------------------------------------------------------------------+
                

Petitioner's net worth after settlement was $4,427.29, but this amount did not give effect to current bills on an aggregate amount not in excess of $200 and the sum of $1,500 obtained from his wife.

In 1941 petitioner was employed as manager of the Chrysler factory branch, Pittsburgh, at an annual salary of $8,400.

Petitioner in his 1941 income tax return deducted as a long term capital loss $13,029.72, computed as follows:

+----------------------------------------+
                ¦Total (cost of securities)  ¦$110,164.05¦
                +----------------------------+-----------¦
                ¦Amount received in 1941     ¦84,104.60  ¦
                +----------------------------+-----------¦
                ¦Loss sustained              ¦26,059.45  ¦
                +----------------------------+-----------¦
                ¦50 percent of loss allowable¦13,029.72  ¦
                +----------------------------------------+
                

In the amended petition the allowable loss claimed was $32,064.15, computed as follows:

* * * a loss of $64,128.29 and a long-term capital loss of $32,064.15 therefrom, representing the difference between the cost to him of those securities that had not become worthless prior to 1941, $76,968.49, less the fair market value of said securities on the date they were sold and transferred to the bank, $12,840.20.

Respondent determined that there was a gain on the transaction of $7,136.11, and a long term capital gain (50 per cent) of $3,568.06, computed as follows:

+-----------------------------------------------+
                ¦Selling price-total notes           ¦$85,104.60¦
                +------------------------------------+----------¦
                ¦Less cash paid                      ¦1,000.00  ¦
                +------------------------------------+----------¦
                ¦                                    ¦84,104.60 ¦
                +------------------------------------+----------¦
                ¦Corrected cost of securities        ¦76,968.49 ¦
                +------------------------------------+----------¦
                ¦Gain                                ¦7,136.11  ¦
                +------------------------------------+----------¦
                ¦Long term capital gain (50 per cent)¦3,568.06  ¦
                +-----------------------------------------------+
                
OPINION.

OPPER, Judge:

Petitioner borrowed the major part of the purchase price of certain securities. Some of these became worthless prior to the taxable year, leaving in the hands of the creditor, as collateral, securities with a basis to petitioner of less than the amount remaining due on the loan. The question is whether petitioner realized gain, suffered a deductible loss, or did neither, when in the tax year he settled with his creditor by surrendering title to the securities and delivering to it $1,000 in cash.

As in Lutz & Schramm Co., 1 T.C. 682, 689, ‘ * * * the question is not whether (petitioner) realized income from the discharge or forgiveness of indebtedness, cf. United States v. Kirby...

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4 cases
  • Millar v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • January 10, 1977
    ...Helvering v. A. L. Killian, Co., 128 F.2d 433 (8th Cir. 1942); Hirsch v. Commissioner, 115 F.2d 656 (7th Cir. 1940); Charles L. Nutter, 7 T.C. 480 (1946); Gehring Publishing Co., 1 T.C. 345 (1942). All these cases were decided before the Crane ...
  • Edwards v. Comm'r of Internal Revenue
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    • U.S. Tax Court
    • November 21, 1952
    ...taxpayer. We have carefully compared such cases as Hirsch v. Commissioner, 115 F.2d 656; Helvering v. Killian Co., 128 F.2d 433; Charles L. Nutter, 7 T.C. 480; Ahrens Publishing Co., 1 T.C. 345, and others cited by respondent with the present situation, and found them all distinguishable an......
  • Mendham Corp. v. Comm'r of Internal Revenue
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    • September 10, 1947
    ...petitioner was not itself liable on the mortgage. Lutz & Schramm Co., 1 T.C. 682; R. O'Dell & Sons Co., 8 T.C. 1165, followed; Charles L. Nutter, 7 T.C. 480, distinguished. Emanuel Wagner, Esq., for the petitioner.Albert Monacelli, Esq., for the respondent. Respondent determined deficiencie......
  • Johnson v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • July 31, 1946

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