1933 BTA LEXIS 1020">*1020 1. The sale by the petitioner of common stock and bonds of a corporation for cash and preferred stock of the same corporation, thereafter to be authorized and issued to the purchaser, or of its successor if such successor were organized, neither the corporation nor its successor being parties to the transaction, was not an exchange in pursuance of a plan of reorganization, within the meaning of section 203(b)(2) and (f) of the Revenue Act of 1924, and the loss sustained upon the sale of the securities is to be recognized, under section 203(a), in computing taxable net income.
2. Held, that, while the aforementioned sale was not completed and closed in 1924, identifiable events of that year established a loss reasonably certain in fact and ascertainable in amount, and that the loss is a proper deduction in computing taxable net income for that year.
3. Held, further, that the petitioner sustained a loss of $2,850 in 1925 as the result of his payment of that amount, pursuant to the terms of the aforementioned sale, in settlement of a suit against the corporation whose securities he disposed of, which is deductible in computing taxable net income of that year.
4. 1933 BTA LEXIS 1020">*1021 Held, further, upon authority of Burnet v. Clark,287 U.S. 410">287 U.S. 410, that the losses sustained in 1924 and 1926 upon the aforementioned sale and the loss sustained in 1926 upon the sale of other securities in another corporation were not losses attributable to the operation of a trade or business regularly carried on by the petitioner; and that the securities which were the subject matter of the sales did not constitute petitioner's stock in trade or other property of a kind which would properly be included in his inventory if on hand at the close of those years, or property held by the petitioner primarily for sale in the course of his trade or business.
5. Held, further, that the two-year period mentioned in section 208(a)(8) of the Revenue Acts of 1924 and 1926, which is determinative of whether the securities sold are capital or noncapital assets, begins to run from the date of petitioner's acquisition of those securities, and not from the date of payment therefor or the date when additional costs in respect thereof were incurred.
6. Held, further, that, in view of the limitations imposed by section 206(a)(1) and (2) of the Revenue Acts of 19241933 BTA LEXIS 1020">*1022 and 1926, upon deductions for capital losses and losses not attributable to the operation of a trade or business regularly carried on by the petitioner, in computing statutory net losses, the losses sustained in 1924 and 1926 upon the aforementioned sales did not create statutory net losses for those yars which are to be taken into account in computing taxable net income for subsequent years.
28 B.T.A. 1294">*1294 The respondent determined deficiencies in income taxes for 1924, 1925, 1927, and 1928, in the respective amounts of $7,366.29, $4,503.53, 28 B.T.A. 1294">*1295 $1,455.60, and $57. The petitioner assails that determination, alleging that respondent erred (1) in disallowing deductions of $344,882.62 and $2,850 from income of 1924 and 1925, respectively, representing losses sustained in connection with the sale of his interest in the Louisville Herald Co.; (2) in failing to allow a 1924 statutory net loss, arising in whole or in part from the disposition of his interest in the Louisville Herald Co., as a deduction in computing net income1933 BTA LEXIS 1020">*1023 of 1925; and (3) in failing to allow a 1926 statutory net loss, arising in whole or in part from the disposition of a claim against the purchaser of his interest in the Louisville Herald Co. and from the disposition of his interest in the Denver Publishing Co., as a deduction in computing net income of 1927 and, to the extent of the excess of such net loss over the net income for 1927, as a deduction in computing net income of 1928. The proceedings were consolidated for hearing and have been submitted upon a written stipulation of facts.
FINDINGS OF FACT.
Petitioner, an individual, is a resident of Evanston, Illinois.
From 1901 to 1928, inclusive, petitioner was engaged in the business of editing and publishing newspapers, conducting that business through the medium of several corporations which he owned and controlled. During those years, he was editor and publisher of the Chicago Evening Post, directing and controlling that publication through the medium of the Chicago Evening Post Co., of which company's stock he owned 2,800 of a total of 3,000 shares outstanding. From 1910 to the early part of 1924, he was editor and publisher of the Louisville Herald, directing and1933 BTA LEXIS 1020">*1024 controlling that publication through the medium of the Louisville Herald Co., of which company's stock he owned 2,346 of a total of 2,500 shares outstanding. From 1913 to November 22, 1926, he was editor and publisher of the Denver Times and the Rocky Mountain News, directing and controlling those publications through the medium of the Denver Publishing Co., all of which company's capital stock was owned by him. From 1921 to the end of 1928, he was editor and publisher of the Indianapolis Star, the Muncie Star and the Terre Haute Star, directing and controlling those publications through the medium of the Star Publishing Co., all of which company's capital stock was owned by him.
I.The Louisville Herald Co., a New Jersey corporation, was incorporated in 1910 with an authorized capital stock of $250,000, consisting of 2,500 common shares of the par value of $100 each. Upon incorporation of that company, petitioner, in connection with the 28 B.T.A. 1294">*1296 business regularly carried on by him and for the purpose of financing the publication of the Louisville Herald, acquired 2,346 shares of its common stock, at a cost of $239,580. The fair market value of the 2,346 shares, as of1933 BTA LEXIS 1020">*1025 March 1, 1913, was equal to the cost thereof to the petitioner.
In connection with the business regularly carried on by him and for the purpose of financing the publication of the Louisville Herald, the petitioner, at various times during the period 1911 to 1915, inclusive, made cash advances to the Louisville Herald Co. out of his personal funds, in the aggregate amount of $326,594.25. These advances were evidenced by the Louisville Herald Co.'s notes. On June 1, 1915, June 7, 1922, and December 22, 1923, petitioner, without any consideration therefor, canceled notes of the Louisville Herald Co. upon which he had made such advances, of the aggregate face amounts of $100,000, $128,742, and $42,390.80, respectively, and surrendered the notes to that company. The details of the advances, showing dates, form, repayments and renewals, and lists of the notes canceled and surrendered are set forth in the stipulation and are incorporated herein by reference.
For several years prior to March 1, 1918, the petitioner conducted a sole-proprietorship grain business under the trade name of "J. C. Shaffer and Company." In connection with the business regularly carried on by him and for1933 BTA LEXIS 1020">*1026 the purpose of financing the publication of the Louisville Herald, the petitioner, at various times during the period 1915 to 1918, inclusive, made cash advances to the Louisville Herald Co. out of the funds of the sole proprietorship, in the aggregate amount of $90,350, of which $28,500 had been repaid on March 1, 1918, leaving a balance due on that date of $61,850. These advances were evidenced by the Louisville Herald Co.'s notes. The details of the advances, showing dates, form, repayments, and renewals, are set forth in the stipulation and are incorporated herein by reference. In 1920, the sole proprietorship was incorporated under the name of "J. C. Shaffer Grain Company", and the unpaid notes of the Louisville Herald Co., in the face amount of $61,850, became the property of that corporation. These latter notes were eventually paid by the petitioner, as will hereinafter more fully appear.
For the purpose of financing the publication of the Louisville Herald, the petitioner, at various times during the period 1921 to 1923, inclusive, caused cash advances to be made to the Louisville Herald Co. by the Star Publishing Co., on the notes of the former payable to the latter, 1933 BTA LEXIS 1020">*1027 in the aggregate amount of $105,434.47. A list of these notes, showing dates and amounts, is set forth in the stipulation and is incorporated herein by reference. These notes were 28 B.T.A. 1294">*1297 subsequently paid by the petitioner, as will hereinafter more fully appear.
As the result of financial transactions between petitioner and D. E. Towne, the latter asserted a claim to an interest in the 2,346 shares of the capital stock of the Louisville Herald Co., of which the petitioner was the record owner. In December 1923, petitioner agreed to and did thereafter pay $39,000 to Towne in consideration of the latter's abandonment of his claim to an interest in the shares.
In financing the publication of the Louisville Herald, the petitioner, prior to 1920, acquired certain bonds of the Louisville Herald Co., a portion of which he disposed of, so that on January 10, 1924, he still owned $111,000 principal amount of such bonds which had cost him $90,250. Between January 12, 1924, and January 19, 1924, both dates inclusive, petitioner acquired an additional amount of such bonds, in the principal amount of $64,000, at a cost of $53,900. A list of petitioner's acquisitions and dispositions1933 BTA LEXIS 1020">*1028 f the Louisville Herald Co. bonds, showing dates thereof, principal amounts of bonds involved and costs, is set forth in the stipulation and is incorfporated herein by reference.
On January 10, 1924, petitioner entered into an agreement with James B. Brown, whereby he agreed "to obtain and cause to be transferred and delivered, and does hereby sell" to the said Brown, "all of the issued and outstanding capital stock of said The Louisville Herald Company" and "all of the outstanding bonds of The Louisville Herald Company" for the sum of $600,000. The purchase price was to be paid as follows: $100,000 on the date of the agreement; $300,000 on January 17, 1924, less an amount equal to the face value of the Louisville Herald Co. bonds not delivered by petitioner on that date, said amount to be retained by Brown until the remaining bonds were delivered; and $200,000 par value cumulative preferred stock, with dividends payable thereon semiannually at the rate of 7 percent per annum, of the Louisville Herald Co. or its successor if such successor were organized, which Brown was to deliver to petitioner not later than March 30, 1924, provided that petitioner had theretofore delivered to1933 BTA LEXIS 1020">*1029 Brown all of the 2,500 shares of the outstanding common stock of the Louisville Herald Co. The agreement further provided that Brown would cause to be embraced in any amended or new articles of incorporation executed and filed for the purpose of creating said preferred stock, a provision that if any dividend in excess of 7 percent were paid on the common stock of the Louisville Herald Co. or its successor, a further dividend equaling such excess should be paid on the preferred stock; that the preferred stock might be retired at the discretion of the board of directors of the Louisville Herald Co. or its successor at any dividend-paying 28 B.T.A. 1294">*1298 date by the payment of par and all accumulated and unpaid dividends thereon; that the preferred stock should have no voting power for any purpose connected with the management or control of the business, except in case of failure to pay four consecutive semiannual dividends thereon; that, should sums received in collection of accounts receivable of the Louisville Herald Co. outstanding on January 17, 1924, not equal the sums to be paid by Brown or the Louisville Herald Co. or its successor in liquidation of accounts owing by the Louisville1933 BTA LEXIS 1020">*1030 Herald Co. as of the same date, petitioner would pay to Brown or the Louisville Herald Co. or its successor, a sum equal to the deficiency; and that petitioner would hold Brown and the Louisville Herald Co. or its successor harmless against any suit in law or in equity then pending or thereafter instituted against the Louisville Herald or its successor by reason of any act or publication on the part of the Louisville Herald or Louisville Herald Co. prior to January 17, 1924, causing any such suit to be defended at his own expense, and paying any judgment that might be awarded against the Louisville Herald Co. and all expenses attaching thereto. The agreement is set forth in full in the stipulation and is incorporated herein by reference.
In negotiating and procuring the execution and performance of the above mentioned agreement, the petitioner incurred expenses in the aggregate amount of $15,000.
Pursuant to the above mentioned agreement, the petitioner, in January 1924, transferred to Brown the 2,346 shares of the common stock of the Louisville Herald Co., which he then owned and $175,000 face value of the bonds of that company. He also paid the notes of the Louisville Herald1933 BTA LEXIS 1020">*1031 Co., then in the hands of the J. C. Shaffer Grain Co. and the Star Publishing Co., in the total face amounts of $61,850 and $105,434.47, respectively, payment thereof being made out of his personal funds. He also purchased additional bonds of the Louisville Herald Co., with interest coupons attached, at a cost of $5,869.81, and delivered them to Brown. Also, in 1924, and in pursuance of this agreement, he paid, out of his personal funds, various items of indebtedness of the Louisville Herald Co. in the net aggregate amount of $62,865.54.
The aggregate cost to petitioner of his interest in the Louisville Herald Co. which he disposed of in the above mentioned agreement was $929,882.62, made up as follows: Original cost of 2,346 shares of stock, $239,580; cash advances on notes canceled, $271,132.80; payment of notes held by J. C. Shaffer Grain Co., $61,850; payment of notes held by Star Publishing Co., $105,434.47; payment to Towne in settlement of claim to an interest in the 2,346 shares, $39,000; cost of bonds acquired to January 19, 1924, $144,150; cost of bonds with 28 B.T.A. 1294">*1299 interest coupons attached, subsequently acquired in 1924, $5,869.81, and payment of company's indebtedness, 1933 BTA LEXIS 1020">*1032 $62,865.54; which, together with the $15,000 expenses incurred in connection with the agreement, makes a total of $944,882.62.
In January 1924, petitioner received $400,000 cash from Brown. The latter, however, withheld delivery of the $200,000 par value of preferred stock which under the terms of the agreement he was to deliver to the petitioner, because of the petitioner's inability to procure the transfer to him of the minority stockholdings, 154 shares, in the Louisville Herald Co.
In February 1924, Brown, together with Richard C. Knott, Lewis G. Humphrey, and Benjamin Seelig Washer, caused to be incorporated "The Herald-Post Company", for the purpose of taking over the properties of the Louisville Herald Co. and the Louisville Post Co., a corporation. In the course of the readjustment proposed, Brown transferred to the Herald-Post Co. all of the capital stock of the Louisville Herald Co. which he acquired from the petitioner. In exchange therefor Brown was to receive from the Herald-Post Co. 6,000 shares of its common stock and 2,000 shares of its preferred stock, such shares to be issued to such persons as Brown might direct. The Herald-Post Co. subsequently took over1933 BTA LEXIS 1020">*1033 all of the assets of the Louisville Herald Co. and the latter was dissolved.
Up to 1926, the petitioner had been unable to deliver to Brown the minority stockholdings, 154 shares, in the Louisville Herald Co., and Brown had refused to deliver to him the 2,000 preferred shares mentioned in the agreement. For the purpose of adjusting their differences under the agreement, the petitioner and Brown, in 1926, modified that agreement, as the result of which the petitioner received $100,000 cash from Brown in lieu of the $200,000 par value of preferred stock of the reorganized company and was released from his obligation to deliver the balance of the Louisville Herald Co. stock to Brown. In effecting this settlement, a certificate for 2,000 shares of the preferred stock of the reorganized company was issued in the name of the petitioner and was immediately endorsed by him in blank and delivered to Brown.
The respondent, in the deficiency notice, determined petitioner's 1924 taxable net income to be $85,387.72. In determining the net income and deficiency for that year, the respondent did not allow any deduction from income in respect of any loss which the petitioner sustained in1933 BTA LEXIS 1020">*1034 connection with the disposition of his interest in the Louisville Herald Co. It is stipulated that the respondent's determination for that year is otherwise correct.
In 1924, Badger and Gorham asserted a claim against the Louisville Herald Co. as to which the latter denied any liability. Suit was instituted on that claim and it was resisted by the petitioner 28 B.T.A. 1294">*1300 pursuant to the aforementioned agreement with Brown. In 1925, a settlement of that suit was agreed upon and as a result thereof the petitioner then paid $2,850 to Badger and Gorham.
II.In October 1913, the petitioner entered into a contract for the purchase of three separate newspaper publications, the Denver Times, the Rocky Mountain News, and the Republican, at an aggregate cost of $730,000, payable $150,000 in cash and $580,000 in the bonds of a new corporation to be formed to take over the assets of these publications. The petitioner made the $150,000 cash payment required by the contract. He then caused to be organized the Denver Publishing Co., a Wyoming corporation, with an authorized capital stock of 7,500 shares, par value $100 per share, all of which was issued to the petitioner. He caused1933 BTA LEXIS 1020">*1035 the assets of the aforesaid publications to be vested in the Denver Publishing Co.; and he caused that company to issue to the vendors of the three publications its bonds in the amount of $580,000, as provided for in the aforementioned contract.
For the purpose of financing the aforesaid publications the petitioner, during the period December 1, 1913, to October 15, 1926, made cash advances to the Denver Publishing Co. of $326,041.88 on open account, $98,101.56 on that company's notes and $170,000 on its bonds, a total of $594,143.44. Of these advances, the Denver Publishing Co. repaid to the petitioner, to November 22, 1926, $238,882.85, as follows: $183,770.45 advances on the on notes and $22,000 on bonds, leaving net unrepaid advances on the last mentioned date of $142,271.43 on open account, $64,989.16 on notes and $148,000 on bonds, a total of $355,260.59. A list of the cash advances and repayments, showing dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference.
On June 7, 1922, the petitioner, without any consideration therefor, voluntarily reduced his claim against the Denver Publishing Co., in respect of the unrepaid cash1933 BTA LEXIS 1020">*1036 advances to that company, by the amount of $129,000, which reduction was applied as follows: $69,010.84 to advances on open account, and $59,989.16 to advances on notes. After such reduction, the balance due the petitioner on unrepaid advances amounted to $226,260.59, represented by $73,260.59 advances on open account, $5,000 advances on notes, and $148,000 advances on bonds.
Between December 29, 1916, and January 9, 1926, funds advanced by the petitioner to the Denver Publishing Co. were from time to time applied by the latter in part to the redemption of interest coupons on its bonds held by others than the petitioner. The coupons 28 B.T.A. 1294">*1301 so redeemed were delivered to the petitioner uncanceled, and the petitioner's open account on the books of the Denver Publishing Co. was charged with the disbursements, amounting to $50,190.55, incurred in redeeming the coupons. These charges are included in the repayments of advances mentioned in the second preceding paragraph. A list of the disbursements, showing dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference.
At various times between December 30, 1916, and November 30, 1917, the1933 BTA LEXIS 1020">*1037 petitioner made cash advances out of funds carried on the books of his sole proprietorship grain business, J. C. Shaffer & Co., to the Denver Publishing Co., in the aggregate amount of $86,690.75, of which $15,000 had been repaid on November 30, 1917, leaving a balance due on that date of $71,690.75. These advances were evidenced by the Denver Publishing Co.'s notes. A list of the advances and repayments, showing the dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference. When the sole proprietorship was incorporated in 1920 under the name of "J. C. Shaffer Grain Company" the unpaid notes of the Denver Publishing Co., in the face amount of $71,690.75, became the property of that corporation.
For the purpose of financing the publication of the Denver Times and the Rocky Mountain News, the petitioner at various times in 1922 caused cash advances to be made to the Denver Publishing Co. by the Chicago Evening Post Co., on the notes of the former payable to the latter, in the aggregate amount of $27,500. A list of the notes, showing dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference.
In1933 BTA LEXIS 1020">*1038 March 1924, the petitioner caused to be organized the Illinois Building Co., a Delaware corporation, with an authorized capital stock of 1,000 shares no par value common, all of which was issued to and paid for by the petitioner. For the purpose of financing the publication of the Denver Times and the Rocky Mountain News, the petitioner, during the period October 7 to November 13, 1924, caused cash advances to be made by the Illinois Building Co. to the Denver Publishing Co., on the latter's notes made payable to the former, in the aggregate amount of $22,500. A list of the notes, showing dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference.
In January 1923, the petitioner caused to be organized the Maryland Securities Corporation, a Delaware corporation, with an authorized capital stock of 15,010 shares no par value common, all of which was issued to and paid for by the petitioner. For the purpose of financing the publication of the Denver Times and the Rocky Mountain News, the petitioner, during the period March 11 to June 3, 28 B.T.A. 1294">*1302 1926, caused cash advances to be made by the Maryland Securities Corporation to the Denver1933 BTA LEXIS 1020">*1039 Publishing Co., on the latter's notes made payable to the former, in the aggregate amount of $15,000. A list of the notes, showing dates and amounts thereof, is set forth in the stipulation and is incorporated herein by reference.
In financing the publication of the Denver Times and the Rocky Mountain News, the petitioner, during the period December 28, 1914, to January 5, 1926, acquired certain bonds of the Denver Publishing Co., a portion of which he disposed of, so that on November 22, 1926, he still owned $405,000 principal amount of such bonds which had cost him $282,000. Of the bonds so owned by him on the last mentioned date, all but $231,000 principal amount, costing $140,500, had been acquired by the petitioner more than two years previously. A list of the petitionerhs acquisitions and dispositions of the Denver Publishing Co. bonds, showing dates thereof, principal amounts of bonds involved and costs, is set forth in the stipulation and is incorporated herein by reference.
On November 20, 1926, the petitioner, therein called the seller, and the Robert P. Scripps Co., therein called the buyer, executed a written contract which sets forth that "The Seller hereby sells, 1933 BTA LEXIS 1020">*1040 assigns and delivers to the Buyer Seven Thousand Five Hundred (7,500) shares of the capital stock, par value $100.00 a share, of Denver Publishing Company * * *", and "The Buyer agrees to pay the Seller Three Hundred Thousand ($300,000) Dollars in cash upon execution of this agreement and delivery of said Seven Thousand Five Hundred (7,500) shares opf common capital stock of Denver Publishing Company, endorsed in blank for transfer." Among other things, the contract provided that the petitioner would deliver to the Denver Publishing Co., for cancellation, $258,000 of a total of $708,000 principal amount of that company's bonds with all interest coupons attached; that the petitioner would procure and deliver to the Denver Publishing Co. all unpaid interest coupons attached to $450,000 principal amount of that company's bonds which were to continue outstanding, and would pay to that company an amount equal to the interest on such bonds for the period July 1, to November 23, 1926; and that, should sums received in collection of accounts receivable of the Denver Publishing Co. outstanding on the date of the transfer not equal the total of amounts owing by that company, as of the same date, 1933 BTA LEXIS 1020">*1041 petitioner would reimburse the buyer for any excess the company or the buyer might be compelled to pay.
In negotiating and procuring the execution and performance of the above mentioned contract, the petitioner incurred expenses in the aggregate amount of $3,756.33.
28 B.T.A. 1294">*1303 Pursuant to the above mentioned contract, the petitioner in November 1926 transferred to the Robert P. Scripps Co. the 7,500 shares of capital stock of the Denver Publishing Co. which he had acquired in 1913; he canceled the indebtedness of the Denver Publishing Co. to him for $73,260.59 cash advances he had made on open account and $5,000 cash advances he had made on the company's notes and also canceled the $50,190.55 interest coupons previously delivered to him by that company in partial repayment of his advances; he paid the notes of the Denver Publishing Co. of the face amounts of $71,690.75, $27500, $22,500, and $15,000 then held by the J. C. Shaffer Grain Co., the Chicago Evening Post Co., the Illinois Building Co., and the Maryland Securities Corporation, respectively; he delivered to the Denver Publishing Co. and effected the cancellation of, $258,000 principal amount of that company's bonds1933 BTA LEXIS 1020">*1042 which had cost him $208,500, of which bonds $120,000 principal amount was acquired by him within two years from the date of the contract, at a cost of $85,000; he purchased, at an aggregate cost of $17,075Additional bond interest coupons of the Denver Publishing Co. and surrendered them to that company for cancellation; and he paid miscellaneous items of indebtedness of the Denver Publishing Co., in the net aggregate amount of $1,582.26.
The aggregate cost to petitioner of his interest in the Denver Publishing Co. which he disposed of in the above mentioned contract, was $771,299.15, made up as follows: Original cost of 7,500 shares of stock, $150,000; indebtedness on notes and open accounts for cash advances canceled and interest coupons canceled, $257,451; payment of notes held by the J. C. Shaffer Grain Co., Chicago Evening Post Co., Illinois Building Co., and Maryland Securities Corporation, $136,690.75; cost of bonds surrendered for cancellation, $208,500; cost of interest coupons surrendered for cancellation, $17,075; and payment of company's indebtedness, $1,582.26; which, together with the $3,756.33 expenses incurred in connection with the contract, makes a total of $775,055.48.
1933 BTA LEXIS 1020">*1043 On November 22, 1926, the petitioner received, pursuant to the terms of the contract, $300,000 cash from the R. P. Scripps Co.
III.The respondent, in the deficiency notice, determined petitioner's 1925 taxable net income to be $66,923.16. In determining the net income and deficiency for that year, the respondent did not allow any deduction from income in respect of the petitioner's payment to Badger and Gorham, or any deduction in respect of any statutory net loss which the petitioner may have sustained in 1924. It is stipulated that the respondent's determination for 1925 is otherwise correct.
28 B.T.A. 1294">*1304 In 1926, petitioner, pursuant to the aforementioned agreement with Brown, paid additional sums in the aggregate amount of $6,948.88, out of personal funds.
For 1926, the petitioner had gross profits in respect of items not here in dispute, in the aggregate amount of $259,408.07; he realized capital net gains in respect of items not here in dispute, in the aggregate amount of $23,691.57; and he paid interest and taxes, the deductibility of which is not in dispute, in the aggregate amount of $82,355.51.
The respondent, in the deficiency notice, determined petitioner's1933 BTA LEXIS 1020">*1044 1927 taxable net income to be $111,654.70. In determining the net income and deficiency for that year, the respondent did not allow any deduction in respect of any statutory net loss which the petitioner may have sustained in 1926. It is stipulated that the respondent's determination for 1927 is otherwise correct.
The respondent, in the deficiency notice, determined petitioner's 1928 taxable net income to be $198,793.79. In determining the net income and deficiency for that year, the respondent did not allow any deduction in respect of any statutory net loss which the petitioner may have sustained in 1926. It is stipulated that the respondent's determination for 1928 is otherwise correct.
OPINION.
I.ARUNDELL: The petitioner contends that he sustained a deductible loss of $344,882.62 in 1924 upon the disposition of his interest in the Louisville Herald Co. to Brown; that, as a result of that loss, he sustained a statutory net loss for 1924, within the meaning of section 206(e) of the Revenue Act of 1926, which is deductible in computing net income for 1925; that he sustained a further loss in 1925, in connection with the disposition, by reason of his payment of $2,8501933 BTA LEXIS 1020">*1045 to Badger and Gorham in settlement of the suit against the Louisville Herald Co., which loss is properly deductible in computing net income for that year; that in the settlement effected with Brown in 1926 by which he accepted $100,000 cash in lieu of $200,000 par value of preferred stock of the reorganized company, he sustained a further loss of $100,000 in that year; that he sustained an additional loss in 1926, in connection with the disposition, by reason of his payment in that year of additional sums aggregating $6,948.88; and that, as the result of said losses in 1926 and other losses of that year hereinafter to be considered, he sustained a statutory net loss for that year, within the meaning of section 206(a) of the Revenue Act of 1926, which is deductible in computing net income for 1927 28 B.T.A. 1294">*1305 and, to the extent of the excess of the net loss over the net income of 1927, in computing net income for 1928.
The respondent contends that the transaction by which petitioner disposed of his interest in the Louisville Herald Co. to Brown was not completed and closed in 1924 or 1925 and, consequently, any losses in connection therewith were not sustained in those years; that, 1933 BTA LEXIS 1020">*1046 even if such losses were sustained in 1924 and 1925, they resulted from an exchange, in pursuance of a plan of reorganization, of securities in a corporation a party to the reorganization for securities in another corporation a party to the reorganization and money, and, therefore, by section 203(f) of the Revenue Acts of 1924 and 1926, such losses could not be recognized for income tax purposes; and that the losses sustained by petitioner in 1924 and 1926, if any, in connection with this disposition, were in part capital losses, within the meaning of sections 206(a)(2) of the 1924 and 1926 Acts, which, by those statutory provisions, are to be deducted, in computing statutory net losses, only to the extent of the capital gains, and, by reason of such limitations, no statutory net losses were sustained in either of the aforementioned years.
The stipulation does not disclose the basis upon which the petitioner kept his accounts and computed taxable net income.
We will consider first the respondent's contention that the transaction between the petitioner and Brown involved an exchange in pursuance of a plan of reorganization, the result of which, by section 203(f) of the applicable1933 BTA LEXIS 1020">*1047 statutes, is not to be recognized for the purposes of the tax. Section 203 provides, inter alia, that "(a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section." There follows in separate subdivisions of that section an enumeration of the exceptions referred to. The provisions of section 203 indicate that "it is the exceptional case alone in which gain or loss is not to be recognized," ; and that "it is necessary that the given transaction come clearly within the exceptions set out in the statute," .
Subdivision (f) of section 203, upon which the respondent relies, reads: "If an exchange would be within the provisions of paragraph (1), (2), (3), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized." And paragraph (2) of1933 BTA LEXIS 1020">*1048 subdivision (b) reads: "No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance 28 B.T.A. 1294">*1306 of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization."
We need not go into the question as to whether there was a reorganization of the Louisville Herald Co. within the meaning of subdivision (h)(1) of section 203, which, of course, is a major premise of respondent's contention. We may, for the sake of argument, assume that to be the case; although it is evident that when the sale agreement was entered into the assumed reorganization could have been but a mere conception in the mind of Brown. But in order that the transaction may be brought within the exception of subdivision (f), the exchange must be "in pursuance of the plan of reorganization." In other words, the exchange contemplated by subdivisions (b)(2) and (f) is one in which there is, as an integral and essential part of the plan or scheme of reorganization, a substitution for the taxpayer's interest in the merged or consolidated company of a substantially similar interest1933 BTA LEXIS 1020">*1049 in the surviving or new company, or, at least, a continuation of his interest based upon the new capitalization of the existing company; and we apprehend that generally it is to be effected by direct exchange between the corporate parties to the reorganization and their security holders. This requirement of subdivision (f) is not met by the facts of this case.
When the petitioner sold his security holdings to Brown for cash and new securities of that company or its successor if such successor were organized, no plan of reorganization had been adopted. Whatever securities he eventually would receive from Brown would come to him not by virtue of any interest which he held in the Louisville Herald Co. that would entitle him to participate in any reorganization, but as part of the purchase price of that interest. In any plan of reorganization of the Louisville Herald Co. it would be Brown and not the petitioner who would be entitled to exchange that interest for a similar interest in the reorganized company; and it was only by virtue of Brown's right in that respect that he could expect to deliver the new securities in part payment of the purchase price. The respondent's contention1933 BTA LEXIS 1020">*1050 that the transaction is within the provisions of subdivision (f) of section 203 is without merit.
The next question to be considered is whether the petitioner sustained losses in 1924 and 1925 in connection with the aforementioned transaction which may be deducted in computing taxable net income of those years. The amount of the petitioner's total loss from the transaction is not in dispute; it is merely a question as to when the loss was sustained.
By section 214(a) of the Revenue Acts of 1924 and 1926 there are to be allowed as deductions in computing net income: "(4) Losses 28 B.T.A. 1294">*1307 sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;" and "(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 * * *."
In general, the statute is concerned only with realized losses, ; though "exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their1933 BTA LEXIS 1020">*1051 deduction, in certain circumstances, before they are absolutely realized," . They must be fixed by identifiable events, ; and, as a rule, evidenced by closed and completed transactions, art. 141, Reg. 65 and 69; and ; certiorari denied, .
By the close of 1924, petitioner, pursuant to his agreement with Brown, had delivered all but 154 shares of the outstanding capital stock of the Louisville Herald Co. and all of the outstanding bonds of that company, and he had paid $230,150.01 of a total of $239,948.89 indebtedness of that company that he was called upon to pay under the agreement. Delivery of the 154 shares and payment of an additional indebtedness, including the claim of Badger and Gorham, of $9,798.88, of which $2,850 was paid in 1925 and $6,948.88 in 1926, represented the extent of his remaining obligations under the agreement. As to Brown, he had made the cash payments to petitioner, totaling $400,000, as provided in the agreement, and it remained1933 BTA LEXIS 1020">*1052 for him to deliver the $200,000 par value of preferred stock of the successor company which had been organized. To the close of the year, the petitioner had incurred costs, in the acquisition of his investments in the Louisville Herald Co. and in carrying out his agreement with Brown, totaling $929,882.62, which together with the selling expenses he incurred, represented a total outlay of $944,882.62. For the investment represented by that cash outlay he was to receive a maximum consideration of $400,000 cash and $200,000 par value of preferred stock, the fair market value of which, as of the date of delivery, in view of the provisions of the sale agreement governing the issuance of that stock, could not, in our opinion, exceed its par value. Thus, identifiable events of 1924 and 1925 established, before the transaction was entirely closed, losses, "certain in fact and ascertainable in amount," of $344,882.62 and $2,850, respectively; and these losses could not be reduced one iota by any future events contemplated by the agreement. As it turned out, the petitioner sustained a further substantial loss in 1926, when the parties effected a final settlement under their agreement. We1933 BTA LEXIS 1020">*1053 28 B.T.A. 1294">*1308 hold that the petitioner is entitled to deduct the losses of $344,882.62 and $2,850 in computing taxable net income of 1924 and 1925, respectively.
The next question is whether the losses sustained by petitioner in 1924 and 1926 in the aforementioned transaction may be deducted from income in computing the statutory net losses of those years.
Section 206(a) of the 1924 and 1926 Acts defines the term "net loss" as "the excess of the deductions allowed by section 214 * * * over the gross income, with the following exceptions and limitations: (1) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business; (2) In the case of a taxpayer other than a corporation, deductions for capital losses otherwise allowed by law shall be allowed only to the extent of the capital gains * * *." Section 208(a) of the same acts defines the term "capital loss" as "(2) * * * deductible loss resulting from the sale or exchange of capital assets;" and the term "capital assets" is defined as "(8) * * * property1933 BTA LEXIS 1020">*1054 held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business."
At the time the petitioner entered into the agreement with Brown he owned 2,346 shares of the capital stock of the Louisville Herald Co. and $111,000 face amount of that company's bonds. He had acquired these shares in 1910, and the bonds prior to 1920. He was not a dealer in securities; and he was not engaged in buying and selling newspaper publishing corporations as a business. The stipulation states that the petitioner "was engaged in the trade or business of editing and publishing newspapers through the medium of several corporations which he owned and controlled." There is no element of buying and selling in that business, and inventories are foreign to it. His security holdings in the Louisville Herald Co. were merely the medium through which he exercised control of the business, and not his "stock1933 BTA LEXIS 1020">*1055 in trade * * * or other property of a kind which would properly be included in the inventory * * *, or property held * * * primarily for sale in the course of his trade or business." The aforementioned securities were capital assets within the meaning of section 208(a)(8) of the applicable statutes, and the loss sustained from the disposition thereof is deductible, under section 206(a)(2), only to the extent of the capital gains.
28 B.T.A. 1294">*1309 The petitioner argues, however, that the ultimate loss which he sustained upon the transaction was attributable wholly to expenditures and voluntary cancellation of indebtedness of the Louisville Herald Co. within two years of the sale, and, consequently, that the loss was not a capital loss. Asuming, as petitioner contends, that these expenditures and canceled indebtedness constitute, at least in part, additional cost of the 2,346 shares, the fact that they were incurred or canceled within two years of the sale is of no significance; the controlling factor, and the thing which stamps the loss, so far as attributable to additional costs of said shares, as a capital loss, is that the shares to which such expenditures relate were held by him1933 BTA LEXIS 1020">*1056 for more than two years. In other words, the two-year period mentioned in section 208(a)(8) begins to run from the date of petitioner's acquisition of the property, and not from the date of payment therefor or the date when additional costs in respect thereof were incurred.
The petitioner, relying upon , and , further contends that the payments be made in 1924, in pursuance of the sale agreement, in liquidation of the indebtedness of the Louisville Herald Co., namely, $61,850 to the J. C. Shaffer Grain Co., $105,434.47 to the Star Publishing Co., and $62,865.54 of miscellaneous accounts, a total of $230,150.01, and $6,948.88 of miscellaneous accounts in 1926, were not connected with any sale or exchange and, consequently, are not capital losses. Neither of the cases relied upon appears to have any bearing whatever upon the proposition so advanced. We are of the opinion that the loss suffered by petitioner in piecemeal in 1924, 1925, and 1926 was attributable to the sale of capital and noncapital assets. The petitioner agreed to sell to Brown all of the outstanding capital stock1933 BTA LEXIS 1020">*1057 and bonds of the Louisville Herald Co., for $600,000, but he also agreed to pay a portion of the indebtedness of that company and to save it and Brown harmless against any claim or suit arising out of acts committed prior to January 17, 1924, and these latter undertakings eventually cost him in the neighborhood of $240,000. Had Brown assumed those undertakings himself, unquestionably the consideration mentioned in the sale agreement would have been correspondingly less and, in that event, there would have been no question whatever that the loss was sustained upon the sale of the shares and bonds of the Louisville Herald Co. We do not believe that the ultimate loss is any the less attributable to that source because of the form of the agreement and the manner in which the transaction was carried out. The sale of the securities and the petitioner's payment of the indebtedness of and claim against that company were one and not separate transactions, and 28 B.T.A. 1294">*1310 whatever loss was incurred was incident to the sale of the securities. Of those securities we have already held that the 2,346 shares and $111,000 face amount of bonds were capital assets; and as to the remaining approximately1933 BTA LEXIS 1020">*1058 $70,000 face amount of bonds, they were noncapital assets, since they were acquired at or about the date of the sale agreement.
However, even if the losses represented by the aforesaid payments in 1924, 1925, and 1926 were not attributable to a sale or exchange of property, but constitute, as petitioner contends, ordinary losses, still they could not be deducted in computing the statutory net losses, unless attributable to the operation of a trade or business, or to a transaction entered into for profit. We hold, upon authority of , that the losses were not sustained in the operation of a trade or business regularly carried on by the petitioner; and the circumstances under which the payments were made indicate clearly that they were not made for profit. Hence, it is only by reason of the fact that the payments were linked with and, therefore, constituted losses upon the sale of petitioner's security holdings in the Louisville Herald Co. that they can be given any consideration at all under the net loss provisions of the applicable statutes.
The stipulation sets forth that in 1926 the petitioner realized capital net gains in1933 BTA LEXIS 1020">*1059 respect of items not here in dispute, but it is silent as to any capital gains for 1924. We must assume, therefore, that there were no capital gains for 1924, and, accordingly, hold that in computing the statutory net loss of that year no part of the loss of $344,882.62 sustained by the petitioner upon the sale of his interest in the Louisville Herald Co. that may be attributable to the sale of capital assets may be deducted. As to that part of the loss attributable to the sale of noncapital assets, the amount thereof has not been stipulated, and if it is determinable at all under the stipulated facts, it must be on the theory that it bears the same ratio to the total loss ($344,882.62) as the cost of those assets ($59,769.81) bears to the total cost of the capital and noncapital assets ($944,882.62). The only other possible conclusion under the stipulated facts is that the noncapital assets, having been purchased by the petitioner within 10 days of the sale agreement, are represented in the selling price at an amount equal to cost of acquisition to the petitioner, and that the entire loss, therefore, is attributable to the capital assets. Any deduction for noncapital loss, computed1933 BTA LEXIS 1020">*1060 as above indicated, would not produce a statutory net loss for 1924.
II.The next question is whether, as the result of a further loss sustained in 1926 in connection with the disposition of his interest in 28 B.T.A. 1294">*1311 the Louisville Herald Co. in the amount of $106,948.88 and a loss of $475,055.48 also sustained in that year in connection with the disposition of his interest in the Denver Publishing Co., the petitioner sustained a statutory net loss for 1926 which may be deducted in computing taxable net income for 1927 and 1928.
The transaction involving the petitioner's interest in the Denver Publishing Co. apparently was completed and closed in 1926; and the pending question is whether the loss sustained by the petitioner in that transaction may be deducted from income in computing the statutory net loss of that year. In its important aspects, the transaction is substantially similar to the one in which petitioner disposed of his interest in the Louisville Herald Co.; and the same principles of law and same reasoning as were applied in the disposition of the earlier transaction apply with equal force to the one now under consideration. In this transaction the petitioner1933 BTA LEXIS 1020">*1061 disposed of his interest in the Denver Publishing Co. at a loss of $475,055.48. The loss was not sustained in the operation of a trade or business, but was directly attributable to the disposition of his security holdings in the Denver Publishing Co. The greater part of the securities so disposed of had been held by the petitioner for more than two years, while the remainder had been held for a lesser period of time. These securities were not his "stock in trade * * * or other property of a kind which would properly be included in the inventory * * *, or property held * * * primarily for sale in the course of his trade or business." Consequently, as to the major part of the securities, they were capital assets; and the loss sustained in connection with their disposition is deductible, in computing the statutory net loss for 1926, only to the extent of the capital gains for that year. The parties have stipulated that the petitioner realized capital net gians in 1926 of $23,691.57. The allowance of a deduction in the latter amount, for capital loss, would not create a statutory net loss for 1926; and, since under section 206(a)(1) deductions otherwise allowed by law not attributable1933 BTA LEXIS 1020">*1062 to the operation of a trade or business may, in computing the statutory net loss, be allowed only to the extent of the amount of the gross income not derived from trade or business, it is apparent that any deduction for the portion of the loss attributable to noncapital assets could not create a statutory net loss for that year. A like conclusion must be made in respect of the further loss of $106,948.88 sustained in 1926 in connection with the petitioner's disposition of his interest in the Louisville Herald Co.
Decision will be entered under Rule 50.