*122 Decision will be entered under Rule 50.
Stockholders of corporation received distributions in complete liquidation in 1941 and each reported his pro rata share in his income tax return for that year as a long term capital gain. In 1944 the stockholders paid their liability as transferees for deficiencies in tax which the Commissioner, in 1942, determined the corporation owed for the years 1940 and 1941. Held, losses sustained by stockholders as a result of payments made in 1944 are deductible in that year as ordinary losses and not as capital losses.
*121 The respondent determined deficiencies in the income tax of petitioners for the year 1944, as follows:
| Stanley Switlik | $ 15,421.45 |
| P. Wanda Switlik | 242.19 |
| Lottie Switlik | 4,164.37 |
| Walter Switlik | 76.01 |
| Richard Switlik | 4,106.97 |
The sole issue presented is whether the petitioners, other than P. Wanda Switlik, 1 are entitled to deduct from gross income, as ordinary losses, the amounts paid by them during the taxable year in satisfaction of their respective liabilities as transferees.
*124 *122 Another issue involving the deductibility by petitioners, other than P. Wanda Switlik, of their proportionate shares of rental payments of $ 3,955 made in 1944, has been conceded by the respondent and adjustment therefor will be made under Rule 50.
FINDINGS OF FACT.
The stipulated facts are found accordingly.
With the exception of P. Wanda Switlik, who resides at Cream Ridge, New Jersey, the petitioners are residents of Trenton, New Jersey. Their income tax returns for the year 1944 were filed with the collector of internal revenue for the first collection district of New Jersey, at Camden, New Jersey. These returns were made on the basis of cash receipts and disbursements.
Petitioners Stanley Switlik and P. Wanda Switlik are husband and wife. Petitioners Lottie Switlik and Richard Switlik are their adult children. Petitioner Walter Switlik is the brother of the petitioner Stanley Switlik.
The petitioners were stockholders in the Switlik Parachute & Equipment Co. (hereinafter referred to as the corporation), a New Jersey corporation, with its principal office and factory located at Hancock and Lalor Streets, Trenton, New Jersey. They owned, and had owned for a period*125 longer than twenty-four months prior to the dissolution of the corporation, all of the corporation's issued and outstanding common capital stock, comprising 1,100 shares, held individually as follows:
| Stanley Switlik | 694 |
| P. Wanda Switlik | 16 |
| Lottie Switlik | 193 |
| Walter Switlik | 4 |
| Richard Switlik | 193 |
*123 Common stock was the only class or type of stock the corporation had issued or outstanding.
The stockholders of the corporation on August 9, 1941, by resolution directed that the corporation immediately cease the transaction of any and all business except that necessary to completely liquidate the corporate affairs, and that said liquidation be final and complete within three years from August 9, 1941. The president and secretary of the company were authorized and directed to file a certificate of dissolution by unanimous consent of all stockholders with the Secretary of State of the State of New Jersey and to do all other things necessary to complete the dissolution.
The petitioners, on August 9, 1941, constituted the board of directors of the corporation and, upon adoption of the resolution authorizing complete liquidation, constituted the board of trustees in dissolution*126 (hereinafter referred to as trustees).
The officers of the corporation on August 9, 1941, were: Stanley Switlik, president and treasurer; Walter Switlik, vice president and assistant treasurer; and Richard Switlik, secretary.
A certified public accountant, who had been employed by the corporation over a period of approximately fifteen years, audited its books and records for the years 1940 and 1941, determined its tax liability for those years, and prepared the necessary corporate tax returns. The tax liability for the year 1941, as determined by him as of the date of liquidation, was taken into consideration in determining the amount of the liquidating dividend. The accountant, in conjunction with the corporation's attorney, also advised, interpreted, and guided the petitioners in respect to provisions of the Internal Revenue Code affecting the determination of income, invested capital, liquidating dividends, and other miscellaneous matters arising from the liquidation of the corporation.
The trustees on August 11, 1941, authorized the first liquidating dividend to the stockholders of the corporation, being a distribution in kind to the several stockholders of the corporation (the*127 petitioners) as of August 11, 1941, comprising the equity represented by the inventories at the close of business as of August 10, 1941, at the value of $ 494,706.70, less obligations due officers and stockholders in the amount of $ 11,086.45, and liability for 1941 corporate Federal income and excess profits taxes of $ 118,500, or the final net equity valuation of $ 365,120.25, the distribution being equivalent to $ 331.927 per share of common stock.
Petitioners received distributions in liquidation, their pro rata share of which they reported in their individual income tax returns for the taxable year 1941 as long term capital gains, of which 50 per cent was taken into account.
*124 The corporation filed its income tax return (Form 1120) and excess profits tax return (Form 1121) for the calendar year 1940 and paid total taxes of $ 56,788.62, comprising $ 38,439.99 of income tax, $ 2,683.34 of declared value excess profits tax, and $ 15,665.29 of excess profits tax.
The corporation filed its income tax return (Form 1120) and excess profits tax return (Form 1121) for the calendar year 1941 and paid total taxes of $ 117,905.65, comprising $ 50,651.31 of income tax and $ 67,254.34*128 of excess profits tax.
The respondent, on or about August 6, 1942, made a determination of deficiencies totaling $ 92,107.80, against the corporation in Federal taxes for the years 1940 and 1941, which deficiencies were appealed by the corporation.
The proposed deficiencies aggregating $ 92,107.80, by agreement between the corporation and the respondent, were settled for $ 35,125.93, comprising a deficiency of $ 12,291.11 for the year 1940 and $ 22,834.82 for the year 1941, exclusive of interest.
This Court on March 17, 1944, in accordance with a stipulation filed on or about March 1, 1944, determined that there were due from the corporation $ 12,291.11 of taxes for the year 1940 and $ 22,834.82 for the year 1941, plus statutory interest.
The adjustments as finally determined in the corporation's taxable net income for each of the years 1940 and 1941, resulting in the deficiencies, were principally reductions in rent and salary items and capitalization of films originally deducted as expense.
By reason of the dissolution of the corporation and the distribution on or about August 11, 1941, of substantially all of its assets to its stockholders in liquidation, the corporation was rendered*129 unable to pay the deficiencies in tax, and the petitioners, as its stockholders, became liable as transferees for the deficiencies, plus statutory interest.
By an agreement, dated March 6, 1944, petitioners Stanley Switlik, Walter Switlik, Lottie Switlik, and Richard Switlik mutually agreed to be liable as transferees for the deficiencies determined in the proceeding wherein the Switlik Parachute & Equipment Co. was the petitioner, and to pay their respective shares, plus interest, in the amounts respectively assumed by each in the agreement. Their respective shares were the percentage proportion of the total shares held by each of them to the total shares held by all of them, or Stanley Switlik, 64.02 per cent, Walter Switlik, 0.37 per cent, Lottie Switlik 17.80 1/2 per cent, and Richard Switlik, 17.80 1/2 per cent. Petitioner P. Wanda Switlik was not a party to the agreement.
The petitioners, except P. Wanda Switlik, claimed as deductions from gross income on their individual tax returns for the taxable year 1944, as "a loss incurred in a transaction entered into for profit," the sums paid as tranferees of the corporation, as follows: *125
| Petitioner | Tax | Interest to | Total |
| Aug. 10, 1941 | |||
| Lottie Switlik | $ 6,254.17 | $ 53.25 | $ 6,307.42 |
| Richard Switlik | 6,254.17 | 53.25 | 6,307.42 |
| Walter Switlik | 129.97 | 1.11 | 131.08 |
| Stanley Switlik | 22,487.62 | 191.46 | 22,679.08 |
| Total | 35,125.93 | 299.07 | 35,425.00 |
*130 Upon examination of the return of each petitioner for the year 1944 by the respondent, the losses were allowed as claimed, with the exception that, instead of being apportioned to the four petitioners as provided for in the agreement dated March 6, 1944, the respondent apportioned the loss to each of the petitioners on the basis of the shares of stock each held in the corporation on August 10, 1941, in relation to the total stock outstanding, as follows:
| Ratio | Loss allowed | |
| Stanley Switlik | 694/1100 | $ 29,145.93 |
| P. Wanda Switlik | 16/1100 | 671.92 |
| Lottie Switlik | 193/1100 | 8,105.41 |
| Walter Switlik | 4/1100 | 167.97 |
| Richard Switlik | 193/1100 | 8,105.41 |
| Total | 46,196.64 |
The total losses ($ 46,196.64) comprised the tax deficiencies of the corporation, all interest thereon, and cost of counsel.
On November 25, 1947, the Commissioner determined deficiencies in the income tax of each of the petitioners. In the notices of deficiency he allowed as ordinary loss deductions interest on the deficiencies in taxes subsequent to August 10, 1941, and the legal and accounting fees incurred in connection with the deficiencies. He determined, however, that petitioners were entitled *131 to deduct as a capital loss only 50 per cent of the amount of the deficiencies in income, declared value excess profits, and excess profits taxes of the Switlik Parachute & Equipment Co. for the years 1940 and 1941, plus interest thereon to August 10, 1941, which they paid in satisfaction of their liability as transferees.
OPINION
Petitioners contend that each of them is entitled to claim as an ordinary loss, deductible in full, the amount he or she paid in satisfaction of transferee liability. The respondent contends that the payment made by each petitioner grew out of, was related to, and took its character from a capital transaction, i. e., a long term capital gain, that it was in effect a reversal of this transaction, and, therefore, should be subjected to the same limitation as the original transaction. He concedes that each petitioner who contributed to the *126 satisfaction of the transferee liability is entitled to a deduction for a loss, but urges that the loss was a long term capital loss and not an ordinary loss.
Prior to the decision of the Supreme Court of the United States in ,*132 this Court, then the United States Board of Tax Appeals, held in cases involving facts similar to those in the instant proceeding that the corporate taxes paid by transferees in a year subsequent to the receipt of distributions in liquidation should be treated as reducing the amount of those distributions rather than as a loss in the year the corporate taxes were paid. ; . In the North American case the Supreme Court said that "if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent," and that if in a later year the taxpayer is obliged to refund profits received in a prior year he is entitled to a deduction from the profits of the later year, not from those of any earlier year. In , the Board pointed out that ,*133 overruled the Barker and O'Neal cases, and it held that a participant in a syndicate who reported his profits in 1928 and 1929 and was required to contribute in 1937 to pay taxes due from the syndicate was entitled to deduct the amount paid in 1937 as a loss under section 23 (e) (2) of the Revenue Act of 1936. The decision in the Furlong case was followed by this Court in (affirmed on other issues, ). In that case a corporation in 1933 received the assets of two corporations in taxable distributions and assumed liability to pay any tax deficiencies thereafter determined against the transferors. It also sold, in 1935, its stock in a third corporation, agreeing as a condition of the sale to pay any tax liability thereafter determined against such corporation for years prior to the year of sale. At the time of these transactions no tax liability on the part of any of the three corporations was known to exist. In later years, deficiencies were determined against the three corporations and transferee liabilities asserted against petitioner, which were determined in amount *134 and paid in 1938. We held that the amount of the deficiencies, with interest thereon, so paid by the corporation was deductible by it as a loss in 1938.
Respondent seeks to distinguish the Furlong case from the instant proceedings on the ground that the profits made by the petitioner therein were not long term capital gains from sales of capital assets held for more than two years, and the Koppers Co. case on the ground *127 that the transferee in that proceeding was a corporation to which the capital gain provisions did not apply. For reasons hereinafter set forth, however, we think that under the rationale of these two cases petitioners are entitled to deduct as ordinary losses the amounts paid by them in satisfaction of their liability as transferees.
The petitioners, as stockholders of the Switlik Parachute & Equipment Co., received distributions in complete liquidation of that corporation in 1941 under a claim of right and without restriction as to disposition. Under such circumstances they correctly reported the capital gain resulting from such distributions as income in 1941. These distributions became the property of petitioners and their inclusion in gross*135 income gave petitioners a basis for gain or loss. When, in 1944, Stanley Switlik, Lottie Switlik, Walter Switlik, and Richard Switlik satisfied their liability as transferees by payments that did not exceed the amount of the liquidating distribution received by each of them in 1941, they were entitled to loss deductions. The losses they sustained were not, however, capital losses, as they were not losses from the sale or exchange of capital assets (cf. ), and this is true even though the transferee liability which occasioned the losses arose out of distributions which resulted in capital gains in 1941. The sale or exchange of capital assets occurred in 1941 and not in 1944. The losses sustained by petitioners as a result of satisfaction of their liability as transferees in 1944 were, therefore, ordinary losses, and respondent erred in failing to allow the entire amount of the deficiencies plus interest to August 10, 1941, paid by each petitioner, as a deduction from gross income.
Decision will be entered under Rule 50.
Disney, J., dissenting: I can not agree that the payment of taxes in 1944 caused*136 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 *128 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*137 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. Becken, Jr., 5 T. C. 498.*138 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 *139 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">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.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: P. Wanda Switlik; Lottie Switlik; Walter Switlik; and Richard Switlik.↩
1. As to the relationship of P. Wanda Switlik to this litigation the stipulation of facts states:
"25. The petitioners claimed as deductions from gross income on their individual income tax returns for the taxable year 1944, as 'a loss incurred in a transaction entered into for profit' the sums so paid as transferees of Switlik Parachute and Equipment Company as follows:
Petitioner Tax Lottie Switlik $ 6,254.17 Richard Switlik 6,254.17 Walter Switlik 129.97 Stanley Switlik 22,487.62 plus each of said four petitioners' proportionate shares of $ 299.07, which was the amount of interest accrued on the deficiencies up to and including August 10, 1941.
"26. The petitioner P. Wanda Switlik claimed no such deductions on her return for the taxable year 1944.
"27. On a prior audit, the respondent issued a certificate of overassessment and made a refund in the amount of $ 483.78 to petitioner P. Wanda Switlik for the taxable year 1944. Such action was erroneous to the extent that it was based upon the assumption that the petitioner P. Wanda Switlik had paid what would have been her pro rata share of the deficiencies in taxes due from Switlik Parachute and Equipment Co.
"28. Such action by the respondent as set forth in paragraph 27 hereinabove has therefore affected the computation of the deficiencies in each of the proceedings herein. The parties therefore reserve for the computation under Rule 50 the correction of the mathematical calculations."↩