The opinion
Disney, J., dissenting: I can not agree that the payment of taxes in 1944 caused an ordinary loss. Using the word “ordinary” in the sense commonly used, it seems obvious that payment of tax is not an ordinary loss. Inquiry must be made into the character of the loss, and such inquiry divulges the fact that it arises as a consequence of a distribution in complete liquidation in 1941. The petitioners as distributees had and reported a long term capital gain. As stockholders in the distributing corporation they had, at the time of distribution, potential liability as transferees. In effect, they took the distribution subject to adjustment because of such potential liability. That potential liability later became actual and in 1944, because of that liability, they paid the tax here involved, thereby incurring a loss. Was it an ordinary loss or a capital loss? Section 117 of the Internal Revenue Code shows that a capital loss means loss from the sale or exchange of capital assets. Under section 115 (c) of the code the amounts distributed in complete liquidation in 1941 “shall be treated as in full payment in exchange for the stock” and “the gain recognized resulting from such distribution shall be considered as a. gain from the sale or exchange of a capital asset * * * In my opinion, there is such causal connection between the distribution and the amounts distributed, to be treated as in full payment in exchange for the stock, and the loss occurring in 1944 because of the payment of the tax resulting from the liability as transferees, that the loss must be regarded as a capital loss. It grew out of and was at all times potentially a result from the distribution, which was an exchange of a capital asset, stock, for the amounts received upon distribution. In seeking the nature of the loss we may and should ascribe to it the same character as that from which it arose, to wit, the capital transaction in the corporate distribution, just as amounts received upon compromise of litigation partake of the same nature as the claim litigated so that, for example, amounts received upon settlement of a suit for recovery of corporate stock are considered as received upon sale of capital assets. Margery K. Megargel, 3 T. C. 238 . See also Raytheon Production Corporation v. Commissioner, 144 Fed. (2d) 110; Albert C. Bechen, Jr., 5 T. C. 498 . It seems to me that there is ample logical connection between the capital transaction in the distribution in liquidation and the loss to ally them in nature, when we consider the fact that the tax was paid only because of the transferee liability, subject to which the distribution was made. It is difficult for me to see how it can be denied that the loss from payment of the transferee liability, incurred solely because of a corporate distribution of too great an amount — considering the eventual transferee liability — is capital in its nature; for, in effect, the petitioner is merely paying after much delay the tax which should have been paid by either the corporation or the stockholders currently as a result of the distribution. At that time it would have been no loss, but a mere payment of tax, though it would, of course, have reduced the net financial result for the stockholder-taxpayer. In the taxable year here involved it is claimed as a loss, but this claim can not conceal the fact that it represents merely diminution in the capital gain received on the distribution in the earlier year. The liability for and payment of taxes by the transferee being an integral part of the distribution, there is much less reason, if any at all, to consider the tax payment as an ordinary loss rather than as capital in nature. Dobson v. Commissioner, 321 U. S. 231 , is not to the contrary, for that case involved mere sales of stock in a former year and later suits to recover because of alleged violation of Blue Sky Law in the sale. It seems clear that there was no such intimate relation between original transaction and later payment of tax as is here involved. I would not sustain the deduction as an ordinary loss.