1941 BTA LEXIS 1427">*1427 Petitioner subscribed to shares of stock in a realty corporation. In 1935 the shareholders of the corporation voted to dissolve the corporation and appointed a liquidator. The liquidator transferred substantially all corporate property to mortgage creditors and in order to pay other creditors and liquidation expenses, and to place the shareholders upon an equal basis, made calls upon the subscribers for additional payments on their subscriptions. The subscribers whose subscriptions were not fully paid, including petitioner, received no distribution of physical assets. The liquidator canceled the amount unpaid on the subscriptions and issued releases from further liability on the subscription contracts. Held, the release from stockholder liability did not amount to a distribution in liquidation within the meaning of section 115(c) of the Revenue Act of 1934 and the loss due to worthlessness of the stock was deductible in the taxable year as an ordinary loss.
43 B.T.A. 960">*960 Respondent determined a deficiency in petitioner's income tax for the year 19351941 BTA LEXIS 1427">*1428 in the sum of $31,534.38. The issue before the Board is whether or not petitioner received a distribution in liquidation within the meaning of section 115(c) of the Revenue Act of 1934 so that his loss due to worthlessness of stock is limited by the provisions of section 117(d) of the Revenue Act of 1934. Other issues raised by the pleadings were abandoned by petitioner at the hearing. A majority of the facts were stipulated. Additional facts were adduced from evidence and exhibits presented at the hearing.
FINDINGS OF FACT.
Petitioner is an individual and resides in Detroit, Michigan. The Great Miami Realty Corporation, hereinafter referred to as the corporation, was incorporated April 25, 1929, under the laws of the State of Ohio.
Under the original articles of incorporation the amount of capital was set at $2,500, consisting of 25 shares of no par common stock, subscribed for as follows:
| Daniel C. Fisher | 1 share |
| Carl B. Tuttle | 12 shares |
| Marie E. Stier | 1 share |
| M. H. Bridge | 11 shares |
Bridge was vice president and legal counsel for the corporation.
43 B.T.A. 960">*961 On May 10, 1929, the corporation purchased lands in Montgomery County, Ohio, for1941 BTA LEXIS 1427">*1429 a total cash consideration of $27,130.50, and assumed mortgages to which the properties were subject in the aggregate amount of $157,704.39.
At a special meeting of the stockholders of the corporation held on May 16, 1929, the articles of incorporation were amended to provide for an increase of the authorized capital to 2,250 shares of common stock without par value. The price at which subscriptions for these shares would be received was fixed at $100 a share.
On May 27, 1929, petitioner and Tuttle entered into an "Underwriting Agreement", of which the following is material:
Now THEREFORE, we, the undersigned, each for himself severally and not jointly, do hereby agree to and with each other and with said Great Miami Realty Corporation, of Dayton, Ohio, to subscribe to, receive and pay for, the amount of common shares without par value of said Great Miami Realty Corporation, set opposite our respective signatures below, at the price of One Hundred Dollars ($100.00) for each share, as and when the same shall be called for by proper action of the Board of Directors of said Company.
We further agree to receive and pay for any smaller amount than that subscribed for which may1941 BTA LEXIS 1427">*1430 be allotted to us.
The conditions of this under-writing agreement are as follows:
1. This Agreement shall not be binding upon the undersigned unless the entire amount of -2,000- shares shall have been underwritten.
2. In the event that any of the stock of said Company is sold to persons other than those signatory hereto, said shares so sold shall reduce the liability of the under-writers, Messrs, Carl B. Tuttle and E. F. Johnson, equally and pro rata.
| Name | Address | Shares Underwritten. |
| Carl B. Tuttle | Detroit, Mich. | -1000- |
| E. F. Johnson | Detroit, Mich. | -1000- |
On the same day, May 27, 1929, the following subscriptions were received and accepted by the corporation:
| J. O. Walker | 60 shares |
| D. C. Fisher | 149 shares |
| H. W. Burdon | 75 shares |
| T. S. Merrill | 100 shares |
On May 29, 1929, a subscription of 50 shares from E. N. Johnson was received and accepted by the corporation. On January 13, 1930, petitioner and Tuttle jointly agreed to subscribe and pay for 60 of the 100 shares subscribed for by Merrill. By virtue of the underwriting agreement of May 27, 1929, and his assumption with Tuttle of 60 of Merrill's shares, petitioner subscribed1941 BTA LEXIS 1427">*1431 for a total number of 812 1/2 shares of the corporation's capital stock. Tuttle subscribed for a like number of shares.
43 B.T.A. 960">*962 The petitioner made cash payments to the corporation upon his stock subscription liability in the following sums:
| 1929 | $47,000 |
| 1930 | 12,000 |
| 1931 | 2,200 |
| 1932 | 5,800 |
| 1933 | 1,300 |
| Total | 68,300 |
For this amount the petitioner received 683 shares of stock, of which 671 shares were issued in his own name. Petitioner also paid for the 11 shares in the name of M. H. Bridge, and one share in the name of Marie E. Stier, certificates for which were endorsed in blank by those persons and delivered to petitioner.
On July 5, 1929, petitioner received a refund from the corporation in the sum of $3,600. Tuttle received a refund of $3,600 at the same time. On June 19, 1935, the shareholders unanimously authorized the officers of the corporation to dissolve the corporation. On the same day the board of directors of the corporation at a special meeting appointed Bridge liquidator by the following resolution:
Be It Resolved, that M. H. Bridge be and he hereby is appointed liquidator in pursuance of Section 8623-83 of the General Code of1941 BTA LEXIS 1427">*1432 Ohio, to liquidate and wind up the affairs of this Corporation, and he is hereby invested as such liquidator with all the powers and authority of this Board of Directors as enumerated in Section 8623-82 of the General Code of Ohio.
A certificate of dissolution of the corporation was filed with the Secretary of State of the State of Ohio on June 24, 1935. Thereafter, the liquidator effected settlements with all mortgage creditors of the corporation by deeding to them all of its real estate, and in addition assigning to them all of its outstanding contracts receivable thereon, in full satisfaction of their claims.
On June 24, 1935, the corporation had a cash balance of $193.20. The liquidator realized $1,889.83 in the liquidation of debts owing to the corporation other than on stock subscriptions. These amounts were insufficient to pay expenses incident to liquidation and the remaining debts of the corporation.
Bridge obtained funds to pay debts and expenses of liquidation by making a call on those subscribers to the capital stock of the corporation who had not paid their subscriptions in full. Subsequent to the date of dissolution, and in response to calls upon his subscription1941 BTA LEXIS 1427">*1433 by the liquidator, petitioner made the following payments to Bridge:
| August 21, 1935 | $1,600.00 |
| October 23, 1935 | 3,357.32 |
| November 20, 1935 | 525.00 |
| Total | 5,482.32 |
43 B.T.A. 960">*963 Bridge, as liquidator, received the following sums from other shareholders who had not paid their subscriptions in full:
| C. B. Tuttle, August 21, 1935 | $1,600.00 |
| Do October 22, 1935 | 3,397.32 |
| Do November 20, 1935 | 525.00 |
| 5,522.32 | |
| D. C. Fisher, October 26, 1935 | 741.62 |
| Harold W. Burdon, November 20, 1935 | 1 750.00 |
Petitioner received no money or physical assets from the liquidation of the corporation.
The final payment by petitioner to the liquidator was made on November 20, 1935, in the sum of $525. Upon receipt of that amount Bridge executed the following document:
WHEREAS under date of May 27, 1920, E. F. Johnson entered into an agreement with Great Miami Realty Corporation and its stockholders, by the terms of which he finally became obligated to purchase and pay for 782 1/2 shares of the Common Stock of said corporation at $100.00 per share, 1941 BTA LEXIS 1427">*1434 and
WHEREAS by appropriate action of the stockholders of said corporation a Certificate of Dissolution was filed in the office of the Secretary of State of Ohio, on the 24th day of June 1935, and
WHEREAS pursuant to the terms of said agreement at the time of the filing of said Certificate of Dissolution there had been issued to the said E. F. Johnson 653 shares of said stock for which he had paid at the rate aforesaid, and
WHEREAS since the filing of said Certificate of Dissolution he has made further payments toward his liability aggregating $4,957.32, and
WHEREAS at this date there are certain unliquidated liabilities of the corporation which have arisen during the course of liquidation requiring the further payment of $525.00,
Now THEREFORE in consideration of the payment this day by the said E. F. Johnson of the further sum of $525.00 to said Great Miami Realty Corporation, the receipt of which is hereby acknowledged, said the Great Miami Realty Corporation does hereby release and forever fully discharge the said E. F. Johnson from any and all further liability on account of said agreement dated the 27th day of May 1929.
In the general journal of the corporation the1941 BTA LEXIS 1427">*1435 capital stock account was credited with the sum of $23,183.74, with the following descriptive remarks:
To record releases given to C. B. Tuttle, E. F. Johnson, D. C. Fischer, H. W. Burdon for unpaid capital stock subscription - adjusted by distributive share of assets remaining after full and final discharge of obligations of the Corporation on liquidation.
On December 6, 1935, the liquidator made the following payments to the stockholders who had paid their subscriptions in full:
| J. O. Walker | $554.40 |
| Emily D. Johnson | 462.00 |
| T. S. Merrill | 369.60 |
43 B.T.A. 960">*964 Under date of December 11, 1935, Bridge wrote Emily D. Johnson a letter in which he stated:
Pursuant to action taken by the stockholders of Great Miami Realty Corporation under date of June 19, 1935, in which you participated, a Certificate of Dissolution was duly filed with the Secretary of State at Columbus, Ohio, on June 24, 1935. At the time of the filing of this Certificate of dissolution you were the owner of fifty shares of Common Stock of said Corporation which you acquired from the Estate of your husband and for which your husband paid the sum of $5,000.00, being the amount of his subscription1941 BTA LEXIS 1427">*1436 to the Capital Stock. Since that time all of the assets of said Corporation have been disposed of and all of its known debts have been satisfied and there is left for distribution to those stockholders who have paid their subscription in full a dividend of .0924%. Accordingly I am enclosing to you the Corporation's check for $462.00
On his income tax return for the year 1935 petitioner deducted as an ordinary loss the sum of $73,854.45, representing his loss on stock of the corporation. Respondent disallowed the deduction and treated the loss as sustained on the liquidation of a corporation within the pruview of section 115(c) of the Revenue Act of 1934. purview of section 115(c) of the Revenue Act of 1934.
VAN FOSSAN: The sole question before us is whether or not petitioner received a distribution in liquidation within the purview of section 115(c) of the Revenue Act of 1934. 1 If we should hold that petitioner received a liquidating dividend, petitioner's loss must be limited by the provisions of section 117(d) of the Revenue Act of 1934. 2 The parties agree that petitioner sustained a loss in the taxable year on his investment in the stock of the Great Miami Realty Corporation. 1941 BTA LEXIS 1427">*1437
1941 BTA LEXIS 1427">*1438 Petitioner contends that he sustained an ordinary loss due to the fact that his stock in the corporation became worthless in the taxable year. He maintains that he lost the total amount of his investment and received nothing in exchange. Respondent argues that petitioner 43 B.T.A. 960">*965 constructively received a distribution in liquidation within the meaning of section 115(c) by reason of the liquidator's release of the unpaid balance of petitioner's subscription or by application of the unpaid balance as an asset of the corporation against the debt which petitioner owed the corporation upon his subscription.
Respondent cites ; ; Cumberland Lumber Co. v. Clinton Hill Lumber Mfg. Co., 57 N.J.Eq. Eq. 627; ; and ; , as authorities that subscribers are legally liable to the corporation for unpaid subscriptions to capital stock. In each of these cases, however, it is indicated that where the corporation ceases to be a going concern or is in receivership liability on unpaid stock subscriptions is1941 BTA LEXIS 1427">*1439 limited to amounts necessary for payment of creditors, equalization of shareholders, and payment of liquidation expenses. Such is the prevailing rule.
Respondent contends that, since petitioner was liable to the corporation upon his subscription contract and was released from that liability by the liquidator, petitioner thereby received a dividend in liquidation. In support of this contention respondent relies upon ; . The Bracken case is no authority here. In that case the receivers of a corporation brought an action for unpaid subscription against of a corporation capital stock of the corporation. The defendant demurred to the complaint on the ground that it did not allege that the corporation was insolvent or that the collection of the subscription was necessary for payment of creditors of the corporation. The court held that the complaint stated a cause of action and hence was not demurrable. From this decision respondent argues that the liquidator could have enforced petitioner's liability for payment of his subscription even though the funds would not be necessary for payment of debts1941 BTA LEXIS 1427">*1440 or expenses of liquidation.
As indicated above, the question in the Bracken case arose on demurrer. It would be profitless to conjecture what the court would have held on the merits. In any event, that case did not involve the present question.
The problem here is somewhat analogous to that considered by the Circuit Court of Appeals for the Seventh Circuit in . There the taxpayer purchased real property for $29,000, paying $10,000 cash and assuming a mortgage of $19,000. In the taxable year the balance due on the mortgage was $15,000, while the value of the mortgaged property had depreciated to $8,000. The taxpayer offered to convey the property to the mortgagee in full payment of his debt. The mortgagee refused the offer and accepted $8,000 in full payment of the $15,000 due under the 43 B.T.A. 960">*966 mortgage. The Commissioner taxed the reduction of $7,000 in the mortgage indebtedness as income to the taxpayer. The court held that no income was realized because "petitioner received nothing of exchangeable value." Although we are not considering a question of income here, the analogy is close. 1941 BTA LEXIS 1427">*1441 Petitioner received nothing in exchange for the additional payments on his stock subscription. The payments were made in order that debts could be cleared, fully paid shareholders placed on an equal basis and liquidation expenses met. The total amount paid by petitioner was the cost of his investment. The release from the remainder of his subscription liability by the liquidator was "nothing of exchangeable value." The fact that petitioner received nothing in liquidation distinguishes this case from cases such as ; , and similar cases.
We are of the opinion that no amount was distributed to petitioner in liquidation of the Great Miami Realty Corporation within the meaning of section 115(c) of the Revenue Act of 1934. Accordingly, we hold that his loss due to worthlessness of stock of the corporation is deductible as an ordinary loss in the year 1935.
Reviewed by the Board.
Decision will be entered under Rule 50.
HILL, dissenting: I do not agree with the conclusion reached in the opinion of the majority. I think the facts show that the1941 BTA LEXIS 1427">*1442 petitioner got a liquidating distribution of somewhat greater value proportionately than did the paid-up stockholders and that the deduction of his stock investment loss was limited by the provixions of section 117(d) of the Revenue Act of 1934.
The facts show that of the total subscriptions for stock of the corporation there was unpaid $35,680 at the time of dissolution. This amount was due from only four of the seven stockholders. At that time there were secured and unsecured corporate debts outstanding. After all of the corporate assets other than the stock subscriptions had been applied toward the payment of the debts the amount of the debts remaining, plus expenses of liquidation, was $11,110.26, payment of which had to be made out of collections of unpaid subscriptions. The excess of such subscriptions over the remaining debts and liquidating expenses was $24,569.74. This amount represented corporate assets available for liquidating distributions to all of the stockholders. Every stockholder had a beneficial interest in these corporate assets proportionate to his amount of stock subscription, whether fully paid or not, and was entitled to a liquidating distribution to1941 BTA LEXIS 1427">*1443 the extent of such interest. Every share of stock had a liquidating value in the amount of its allocable share of the value of the corporate assets available 43 B.T.A. 960">*967 for distribution. Every share of stock had the same liquidating value as every other share. There was no worthless stock. Petitioner's stock had the same liquidating value per share as did the stock of the paid-up stockholders and he was entitled to the same proportionate liquidating distribution. On the basis of total stock subscriptions such distributable assets, if converted into cash at face value, would provide a liquidating distribution of approximately 12.28 percent.
Three of the stockholders had paid their subscriptions in full for a total of 150 shares. The total amount so paid was $15,000. The liquidator had the problem, first, of collecting subscriptions sufficient to pay the corporate debts and the liquidating expenses. After that was accomplished he must either collect the remaining unpaid subscriptions in full and distribute the proceeds among all of the stockholders proportionate to their stockholdings, or collect a sufficient amount to provide cash distributions to the paid-up stockholders1941 BTA LEXIS 1427">*1444 of their proportionate share of distributable assets and release the delinquent subscribers from further payments which, if made, would be substantially of the same amounts that would be returned to them as cash liquidating distributions. The latter method was employed. The liquidator determined that the distributable assets were of a value to provide a liquidating distribution of 9.24 percent to all of the stockholders. It was necessary to make cash distributions only to the three paid-up stockholders. The liquidator therefore collected $11,110.26 to pay debts and liquidating expenses, plus $1,386 for cash distributions of 9.24 percent on stock fully paid at $15,000, and released the subscribers from payment of their remaining subscription obligations in the total amount of $23,183.74.
The amount paid by petitioner under this method of liquidation distribution was $5,482.32 and the amount of his released obligation was $7,467.68. If petitioner had paid his subscription obligation in full he would have received a cash liquidating distribution of not less than $7,174.86, or 9.24 percent of $77,650, the amount of his subscription of $81,250 less the refund of $3,600 given him1941 BTA LEXIS 1427">*1445 on July 5, 1929. In fact his liquidating distribution would have been slightly in excess of $7,174.86 but somewhat less than $7,467.68, the amount of his released obligation.
It is held in the poinion of the majority that petitioner received nothing in liquidation and that the release from the remainder of his subscription liability was "nothing of exchangeable value." In my opinion that statement ignores the established facts in this proceeding and the legal principle applicable thereto. That petitioner was entitled to receive a proportionate share of the distributable assets of the corporation can not be denied. Nor can it be denied that he received a thing which had a value to him of $7,467.68 and that by such receipt the value of the distributable corporate assets was depleted in that 43 B.T.A. 960">*968 amount. The release from his obligation did not come to petitioner as a matter of grace. The liquidator had no power to make him a present of a corporate asset and did not do so. The release to petitioner did not operate as a rescission pro tanto of his subscription obligation, but was merely an acknowledgment of its fulfillment by offsetting against it his distributive share1941 BTA LEXIS 1427">*1446 of the corporate assets. The liquidator was legally bound to pay petitioner a liquidating distribution of at least 9.24 percent of his stock subscription and petitioner owed the liquidator a subscription obligation somewhat in excess of such distributive share. The one obligation was offset by the other. Without any money changing hands, petitioner got his liquidating distribution and the liquidator collected the subscription obligation. How can it be said, then, that petitioner received nothing in liquidation or that what he received had no exchangeagle value?
Assuming, however, as is held in the opinion of the majority, that the release of petitioner's corporate stock subscription was not tantamount to a distribution of a corporate asset to him and that such release eliminated such subscription obligation as a distributable corporate asset without any offsetting credit therefor to the liquidator or any offsetting benefit to the other stockholders, there still remained distributable corporate assets of $1,386 in cash. As a stockholder petitioner would be entitled to share proportionately with other stockholders in the distribution thereof and such right would not be extinguished1941 BTA LEXIS 1427">*1447 until he received such share or voluntarily relinquished his right thereto. Petitioner voluntarily relinquished his right to any distributive share of the cash in consideration of the release of his subscription obligation as hereinabove indicated.
It is, therefore, my opinion that petitioner received a distribution in liquidation within the meaning of section 115(c) of the Revenue Act of 1934 and that the deduction of his loss is limited by the provisions of section 117(d) of that act. ; .
Footnotes
1. (Settlement at the rate of 10 percent in compromise of subscription to 75 shares of stock at $100 a share.) ↩
1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * *
(c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income. In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation. ↩
2. SEC. 117. CAPITAL GAINS AND LOSSES.
* * *
(d) LIMITATION ON CAPITAL LOSSES. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. ↩