The opinion
RUDOLPH BERGFELD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CAROLINA BERGFELD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bergfeld v. Commissioner
Docket Nos. 26458, 26459.
United States Board of Tax Appeals
19 B.T.A. 312 ; 1930 BTA LEXIS 2423 ;
March 19, 1930 , Promulgated
*2423 1. Upon the facts, held that a newly incorporated company acquired certain assets by purchase rather than through a reorganization of the company which had formerly owned the assets.
2. In August, 1913, A purchased stock in a corporation then just created. In 1922 all of the company's assets were sold under a deed of trust given to secure creditors, and the company was dissolved. None of its stock was redeemed. Held, A sustained a deductible loss in 1922, measured by the amount he had paid for his stock.
A. C. Upleger, C.P.A., for the petitioners.
O. J. Tall, Esq., and R. B. Cannon, Esq., for the respondent.
MARQUETTE
*312 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax asserted by the respondent for the year 1922. The amount of the deficiency is $562.50 as to each petitioner, and it arises in each instance from the respondent's disallowance of a claimed deduction of $4,500 representing a loss on stock of the Mineola Cotton Oil Co. A plea of the statute of limitations was abandoned at the hearing.
FINDINGS OF FACT.
In August, 1913, the Mineola Cotton *2424 Oil Co. was incorporated under the laws of Texas, with its principal place of business at Mineola, Tex. The petitioner Rudolph Bergfeld was one of the incorporators and original stockholders. He paid par value, $9,000, for his stock in the company. Both petitioners reside in Texas, and are husband and wife.
The company was prosperous until the year 1919, when it suffered some losses. From that time until its dissolution in 1922 it did not make any profit.
During the year 1921 the company lacked funds necessary to meet its obligations. There were then seventeen stockholders and the secretary-treasurer of the company requested them to put in additional *313 money in amounts equal to 50 per cent of their respective holdings. Some refused, but others, including Rudolph Bergfeld, loaned to the company amounts aggregating $21,750. Bergfeld's loan amounted to $4,500 and in addition the company owed him $4,600 for unpaid salary as president. For all this indebtedness the company gave its notes, due December 1, 1921. At the same time the company was indebted to several banks in amounts aggregating nearly $49,000, which was secured by the endorsement, or separate guaranty, *2425 of some of the company's stockholders.
The company was unable to pay its notes when due and on December 5, 1921, the board of directors authorized a deed of trust to be executed conveying all of the company's assets to a trustee to secure the creditors, except the banks. On March 7, 1922, the trustee offered for sale at public auction all of the property so conveyed to him. The property was bought in by the creditors for $20,000 and the trustee duly conveyed the property to them in March, 1922. On May 31, 1922, the Mineola Cotton Oil Co. was declared dissolved by the Secretary of State. The outstanding stock of the company was never redeemed, but became a total loss to the stockholders.
On the 14th of June, 1922, the Wood County Cotton Oil Co. was incorporated under the laws of Texas by the petitioner, Rudolph Bergfeld, and others. All the former stockholders of the Mineola company were invited to take stock in the Wood County Company, but only seven of them did so. Each of the seven had loaned money to the Mineola company, but two others who had also loaned to the old corporation declined to take stock in the new one, and one of the stockholders of the Wood County company *2426 had not been a stockholder in, nor creditor of, the Mineola company.
In July, 1922, the Mineola company's creditors who had bought in its property at the trustee's sale conveyed a portion of the same property to the Wood County Cotton Oil Co. and conveyed the remainder of that property to the Mutual Gin Co. The latter company was organized at about the same time as the Wood County Cotton Oil Co. and the stockholders in the two companies were approximately the same persons. Rudolph Bergfeld received capital stock of the Wood County Cotton Oil Co. and of the Mutual Gin Co. for his proportionate share of the property conveyed as above described to those corporations. The sum of his holdings in the two companies equaled the amount of the Mineola company's indebtedness to him for money loaned, salary, etc., but did not include any part of his Mineola company stock.
The petitioner Rudolph Bergfeld charged off on his books the par value of his stock in the Mineola company in 1922. In their respective income-tax returns for 1922 each of the present petitioners *314 claimed a deduction of $4,500 as a loss on the Mineola company stock. These deductions were disallowed by the *2427 respondent on the ground that the company had been reorganized and new stock issued.
OPINION.
MARQUETTE: The present petitioners, who are husband and wife, reside in Texas, in which State the law of community property prevails.
In their income-tax returns for the year 1922 the petitioners sought to deduct from gross income, as a loss, the $9,000 invested in Mineola company stock which Bergfeld had charged off on his books during that year. The respondent disallowed the deduction on the ground that the Mineola company had been reorganized, and restored the $9,000 to taxable income, resulting in the deficiency which is here contested.
In arriving at his determination the respondent relied upon article 293 of Regulations 62, relating to the Revenue Act of 1921. The portion of the article so relied upon reads as follows:
Amounts to be assessed and paid under an agreement between bondholders or stockholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in returns of income.
This regulation has particular reference to section 215(a)(3) of the 1921 Revenue Act, viz:
SEC. 215. (a) That *2428 in computing net income no deduction shall in any case be allowed in respect of
* * *
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
In our opinion the facts in these proceedings do not sustain the respondent in his determination. Clearly, there was no reorganization of the Mineola company. That corporation sold its assets to certain of its creditors, at public auction, and the corporation then took the necessary steps for its dissolution. There was no exchange of stock or assets of the Mineola company for stock in the new corporations. The stock of the latter was subscribed for by about one-third of those who had been stockholders of the old company. It is true that these subscribers paid for their stock in the new companies with property which they had purchased at public sale, and which was owned at one time by the Mineola company, but that company had ceased to own the property and had ceased to exist before the new companies were incorporated. See *2429 .
*315 Section 214(a)(5) of the Revenue Act of 1921 provides:
SEC. 214 (a) That in computing net income there shall be allowed as deductions:
* * *
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
The facts before us clearly show that Bergfeld's stock in the Mineola company cost him $9,000 after February 28, 1913; and that this stock became utterly valueless in 1922, the taxable year here involved.
Under the section of the statute above quoted, therefore, the $9,000 constituted a loss sustained during the taxable year and its deduction should be allowed.
Judgment will be entered under Rule 50.