Opinion
Docket No. 1087.
1944-06-29
GEORGE HEWITT MYERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William H. Harrar, Esq., for the petitioner. E. M. Woolf, Esq., for the respondent.
Loss sustained when, by reasons of unpaid stock assessment for which petitioner had no personal liability, his stock was sold pursuant to state statute and bought in by issuing corporation, held subject to capital loss limitations of Revenue Act of 1936, section 117. William H. Harrar, Esq., for the petitioner. E. M. Woolf, Esq., for the respondent.
By this proceeding petitioner contests a portion of a deficiency determined in his income tax for the calendar year 1936 in the amount of $7,056.15. The sole question presented is whether petitioner realized a capital loss under the provisions of section 117(d) of the Revenue Act of 1936, or an ordinary loss under section 23(e)(2) of the same act, upon the disposition of certain stock in that year.
FINDINGS OF FACT.
The facts in this proceeding have all been stipulated and are hereby found accordingly.
Petitioner, George Hewitt Myers, in an individual residing in Washington, D.C. His income tax return for the calendar year 1936 was filed with the collector of internal revenue at Baltimore, Maryland.
During the years 1932 and 1933 petitioner acquired, at a cost of $15,500, 122,000 shares of the capital stock of the Shamrock Gold Mining Co., a corporation organized under the laws of the State of Nevada. This stock was subject to assessments in accordance with section 1673 of the Compiled Laws of the State of Nevada, 1929. In January 1936 petitioner received a notice of assessment from the company wherein it was stated that the board of directors on January 11, 1936, had levied an assessment of one cent per share on all outstanding stock. The assessment was payable immediately and it was provided that any stock upon which the assessment remained unpaid on February 10, 1936, would be delinquent and advertised for sale at public auction and, unless payment was made on or before March 10, 1936 would be sold on that date to pay the delinquent assessment, together with the cost of advertising and the expense of the sale.
Petitioner decided not to pay the assessment ‘and thereby became one who was delinquent under the notice of assessment.‘ Accordingly, pursuant to the provisions of section 1673 of the Nevada Compiled Laws of 1929, the Shamrock Gold Mining Co. caused the stock of petitioner to be placed on sale at public auction on March 10, 1936. There were no bids on the stock at the auction. The company purchased the stock and held it for the benefit of the corporation, in accordance with section 1673 of the Nevada Compiled Laws of 1929. No part of the purchase price was paid to or received by the petitioner.
Under date of November 10, 1936, the Security Registrar & Transfer Co. or San Francisco, agent of the Shamrock Gold Mining Co., directed the following letter to petitioner:
Mr. George Hewitt Myers,
730 15th St. N.W.
Washington, D.C.
IN RE: SHAMROCK GOLD MINING COMPANY
Dear Sir:
In reply to your letter of November 4, 1936, requesting information regarding 122,000 shares of the above company issued in n/o George H. Myers, upon which assessment No. 1 levied by the above company was not paid.
Our records show that the above shares were ‘Sold to the Company‘ in their entirely at the Delinquency Sale held on March 10, 1936. Nevada law provides that shares upon which an assessment is unpaid, and for which no bids are made at a Delinquent Sale, revert to the company.
The following is a list of the certificates, which for the reason given above are no longer valid:
+-----------------------------------------------------+ ¦Certificate number¦Number of ¦Issued in n/o ¦ +------------------+-------------+--------------------¦ ¦ ¦shares ¦ ¦ +------------------+-------------+--------------------¦ ¦B44-45 ¦2,000 ¦George Hewitt Myers.¦ +------------------+-------------+--------------------¦ ¦583 to 592 ¦10,000 ¦George H. Myers. ¦ +------------------+-------------+--------------------¦ ¦BI ¦5,000 ¦“ “ “ ¦ +------------------+-------------+--------------------¦ ¦B2 to B9 ¦80,000 ¦“ “ “ ¦ +------------------+-------------+--------------------¦ ¦ ¦Total 122,000¦ ¦ +-----------------------------------------------------+
Trusting that the above will give you the complete information requested, we are.
Yours very truly,
SECURITY REGISTRAR & TRANSFER CO. (S) W. F. S. Secretary
In his tax return filed for the taxable year 1936 petitioner claimed a deduction from income in the amount of $15,500. In the return this loss was said to be: ‘122,000 shares of stock sold at auction by Company in 1936 for Non-payment by taxpayer of assessment on stock. Stock required (sic) in 1932 and 1933 at a cost of $15,500.00.‘ Respondent in his notice of deficiency determined that the loss of $15,500 designated as ‘worthless stock‘ of the Shamrock Gold Mining Co. was a capital loss rather than ordinary loss and was accordingly subject to the limitations prescribed in section 117(d) of the Revenue Act of 1936.
OPINION.
OPPER, Judge:
Petitioner urges that the principle applicable to these proceedings is that ‘If a disposition of property does not (1) involve a sale or exchange through which (2) the person disposing of the property receives some consideration, either by way of money of property or by way of release from personal liability with respect to the property disposed of, the loss thereby sustained is ordinary in nature and not subject to the limitations of Section 117(d).‘ If this statement is correct, petitioner must prevail. There is no dispute about the facts and they make it apparent that, when petitioner's stock was taken over by the issuing corporation upon his default in discharging a stock assessment, nothing was paid to him, and from all that appears he had no personal obligation to payment the assessment from which he was relieved by the sale.
Of course, there can be no question about the first half of the requirement listed by petitioner. Thus a mere abandonment in favor of the lien holder without the interposition of any sale falls outside the definition. E. g., Bert B. Burnquist, 44 B.T.A. 484; appeal dismissed (C.C.A., 8th Cir.) 123 Fed.(2d) 64; James B. Lapsley, 44 B.T.A. 1105; Stokes v. Commissioner (C.C.A., 3rd Cir.), 124 Fed.(2d) 335. But it is not entirely apparent that petitioner denies the existence of a sale here. In any event, we find it impossible to do so. The Nevada statute under which this transaction occurred provides in part:
Nevada Compiled Laws, 1929, sec. 1673.
If * * * any stockholder shall make default in the payment of the assessment upon the shares held by him, so many of such shares may be sold as will be necessary for the payment of the assessment upon all the shares held by him * * * The sale of said shares shall be made at the office of the company at public auction to the highest bidder * * * and at such sale the person who shall pay the assessment so due, together with the expense of advertising and sale, for the smallest number of shares, or portion of a share, as the case may be, shall be deemed the highest bidder.
Every corporation in this state shall also have the power, whenever at any assessment and sale of the stock of said corporation no person will take the stock and pay the assessment * * * to purchase such stock and hold the same for the benefit of the corporation * * *
The stipulated facts show that the statutory design was pursued in every detail. The stock was placed on sale at public auction and, when there were no outside bidders, the corporation bought it in as the statute contemplates. The similarity to a foreclosure sale at which a mortgage creditor or tax lien holder is the successful or only bidder must be manifest. We see no reason to question the presence of a sale in this situation in the sense in which Congress meant to employ it in section 117(d). Helvering v. Hammel, 311 U.S. 504; Electro-Chemical Engraving Co. v. Commissioner, 311 U.S. 513; Helvering v. Nebraska Bridge Supply & Lumber Co., 312 U.S. 666; Commissioner v. Coggan (C.C.A., 1st Cir.), 119 Fed.(2d) 504; certiorari denied, 314 U.S. 652.
In the last cited case a sale for unpaid assessment upon corporate stock was squarely held to be within the class of sales to which the capital loss limitation applies. In that case it was recognized that ‘In a sense the sale was in involuntary one, but these two cases (Hammel and Electro-Chemical Engraving Co.) make clear that the sale need not be by voluntary action of the taxpayer in order to be a 'sale or exchange’ within the meaning of Sec. 117. That there was literally a sale is unquestionable.‘
Petitioner seeks to distinguish the case on the grounds that the stockholder there obtained a release of personal liability and that apparently the purchaser was a stranger to the transaction. In this, petitioner apparently resorts to the second part of his statement of the asserted capital loss requirements. But in this phase of his contention we are unable to concur. Neither the creditor's purchase of the property for the amount of the debt, nor the failure of all consideration, including any release of liability, is fatal to the operation of the capital loss limitation. In Helvering v. Nebraska Bridge Supply & Lumber Co., supra, the state foreclosed a tax lien for which the owner of the property had no personal obligation and bid in the property at the tax sale. See 115 Fed.(2d) 288. No payment or consideration of any kind appears to have been received by the property owner. See 40 B.T.A. 40. Yet a decision in the Board of Tax Appeals and the Circuit Court in favor of the taxpayer was reversed by the Supreme Court on the authority of Helvering v. Hammel, supra. See also Commissioner v. Coggan, supra.
Petitioner relies upon an unpublished opinion of the United States District Court for the Southern District of California, Adamson v. United States, 26 A.F.T.R. 1188; appeal dismissed (C.C.A., 9th Cir.); 107 Fed.(2d) 1022. The facts are not fully stated and it is not clear whether there was a sale by the corporation or a mere abandonment to it by the stockholder. But in any event the conclusion reached was founded upon Nebraska Bridge Supply & Lumber Co., 40 B.T.A. 40; C. G. Ganopuls, 39 B.T.A. 1120; and Commissioner v. Freihofer ( c.c.a., 3d Cir.), 102 Fed.(2d) 787. All of these cases were decided prior to the Hammel case. As has been observed, the Nebraska Bridge case was subsequently reversed and, as we said in Edward F. C. McLaughlin, 43 B.T.A. 528:
* * * Any intimations to the contrary that may appear in Commissioner v. Freihofer, 102 Fed.(2d) 787, must be regarded, since the decision of the Hammel and Electro-Chemical Engraving Co. cases, as no longer the law. * * *
For the reasons stated we are of the opinion that the loss suffered by petitioner was the consequence of a ‘sale or exchange‘ and hence is limited by the provisions of section 117(d). We regard respondent's determination as correct. By reason of other items said to require adjustment,
Decision will be entered under Rule 50.