White v. United States, 43001
| Decision Date | 06 December 1937 |
| Docket Number | 43002.,No. 43001,43001 |
| Citation | 21 F. Supp. 361 |
| Parties | WHITE et al. v. UNITED STATES. WHITE v. SAME. |
| Court | U.S. Claims Court |
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John P. Ohl, of New York City (Charles C. Parlin and Wright, Gordon, Zachry & Parlin, all of New York City, on the briefs), for plaintiffs.
Daniel F. Hickey, of Washington, D. C., and James W. Morris, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The two suits above entitled are each brought upon claims for refund. In case No. 43001, the recovery of $13,246,94 with interest is asked; in case No. 43002, $446.06 with interest is sought to be recovered. In both cases the recovery is sought on the ground of alleged overpayments of income taxes. The suits are brought by the respective executors of Alexander M. White in No. 43001 and William A. White in No. 43002. Refund claims were duly filed by the testators. In No. 43001, the plaintiffs contend that the Commissioner of Internal Revenue erred in treating as a capital loss on the liquidation of preferred stock an item of $104,500, deducted as an ordinary and uncompensated loss in the income tax return for the year involved. The same contention is made by the executor of William A. White in No. 43002 with regard to a loss of $22,500 sustained on the same liquidation of preferred stock and deducted as an ordinary loss by the Commissioner. The issue in both cases is whether the action of the Commissioner was correct.
The findings show that sometime prior to March 18, 1927, Alexander M. White (No. 43001) acquired for cash bonds of the Seabrook Company of the face value of $110,000. This corporation operated a large agricultural and horticultural project in New Jersey. In 1925, its name was changed to Del-Bay Farms, Inc., which will hereinafter be referred to as the old or New Jersey corporation.
March 18, 1927, William A. White (No. 43002) also acquired for cash bonds of the same issue in the amount of $50,000 face value.
Alexander M. White, his family, relatives, and associates owned the entire issue of the corporation bonds and a majority of the voting stock of the New Jersey corporation.
The old corporation fell into financial difficulties which led to a plan for reorganization which involved the foreclosure of the bonds upon the property of the old corporation and the acquisition of its property by a new corporation through judicial proceedings. Acting in accordance with this plan, Alexander M. White, for the bondholders, purchased the properties of the old corporation at a judicial sale made subject to certain prior mortgages. The bonds were applied on the purchase price to the extent of approximately $763.19 per $1,000, and stamped paid to that extent. The remainder of the purchase price was paid by Alexander M. White who assigned his bid to the newly incorporated Del-Bay Farms, Inc., organized in conformity to his plan, and by deed dated October 13, 1927, in which he was joined by all parties in interest, there was conveyed to the new Delaware corporation title to the properties bought in by him at the foreclosure sale.
In consideration of the receipt of the mortgaged assets, the new corporation issued preferred stock of which Alexander M. White received as his share of the distribution made to the former holders of mortgage bonds of the New Jersey corporation 1,100 shares. William A. White having deceased, his estate received from the distribution mentioned 500 shares of the preferred stock of the Delaware corporation. There was no equity for or distribution to the stockholders of the old New Jersey corporation.
We need not set out in detail all of the proceedings which are shown by the findings. It is sufficient to say that the parties agree that the new Delaware company sold all of its assets and paid a liquidating dividend of $5 on each share of the preferred stock which thereupon became worthless, resulting in the loss on the bonds of the New Jersey corporation acquired by Alexander M. White in the sum of $104,500, and a similar loss on the bonds acquired by William A. White of $22,500.
The case turns on the construction of section 101, Revenue Act 1928 (26 U.S. C.A. § 101 note) and section 115 of the Revenue Act of 1928 (26 U.S.C.A. § 115 and note) as applied to capital gains and losses.
Subsections (a) and (b) of section 101, in...
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