Peter Doelger Brewing Co. v. Commissioner

*1176 This proceeding arises upon a determination by the respondent of a deficiency in petitioner's income tax for the calendar year 1923, of $37,776.53. The sole issue in controversy is the disallowance as a deduction from gross income of the sum of $402,519.92 as a loss based on the difference between the value of certain stock when acquired in 1915, in exchange for other stock, and the price at which it was sold in 1923, plus the sum of $458.92, expended by the petitioner in procuring the sale of the stock at auction. In its brief petitioner claims a loss of only $379,965.92. The gist of the petitioner's contention is that the sale of stock at auction in 1923 measures its actual loss; or failing that, determines the practical worthlessness of the stock as of the date of sale. The respondent contends that the stock became worthless prior to the year 1923.

FINDINGS OF FACT.

The petitioner is a corporation organized and existing under the laws of New York, with its*2002 principal office at 407 East Fifty-fifth Street, New York City.

*1177 On June 2, 1915, petitioner owned 4,201 shares of preferred stock of the Interborough Metropolitan Corporation and 3,321.285 shares of common stock of the same corporation which had been acquired by it on June 1, 1913. On June 1, 1915, the petitioner acquired .715 of a share of common stock of this corporation for $12.87, making 3,322 shares of common stock held by petitioner.

On June 2, 1915, pursuant to the consolidation agreement between the Interborough Metropolitan and the Finance & Holding Corporation of April 23, 1915, the petitioner and other stockholders of the Interborough Metropolitan Corporation, together with the stockholders of the Finance & Holding Corporation, exchanged their preferred and common shares of Interborough Metropolitan Corporation stock for shares of Interborough Consolidated corporation stock, share for share. Holders of cumulative preferred stock of the Interborough Metropolitan Corporation and of the preferred stock of the Finance & Holding Corporation received in exchange for their respective shares, share for share, noncumulative preferred stock of Interborough Consolidated*2003 Corporation, par value $100 each; and holders of common stock received, share for share, common stock, without par value, of Interborough Consolidated Corporation.

The market quotations of Interborough Metropolitan preferred and Interborough Metropolitan transfer certificates (representing common stock) as quoted on the New York Stock Exchange on June 1, and reported in the New York Times on June 2, 1915, were as follows:

On the next day, June 2, the New York Stock Exchange quotations on Interborough Metropolitan preferred and transfer certificates were:

The fair market value of Interborough Metropolitan common on June 2, 1915, was $22 per share and the fair market value of Interborough Metropolitan preferred was $73 per share. *2004 The cost of the *1178 Interborough Consolidated Corporation stock to the petitioner was the fair market value on the date of exchange of the Interborough Metropolitan Corporation stock given in exchange.

On April 25, 1919, a trustee in bankruptcy was named to take charge of the Interborough Consolidated Corporation, and on June 27, 1919, he took over the bankrupt's assets. On May 20, 1924, he filed his final report as trustee with the United States District Court for the Southern District of New York. A substantial amount of the bankrupt's assets was sold by the trustee pursuant to court order of December 14, 1922, and the remainder, apparently, of salable assets was sold by court order on June 27, 1923. On June 29, 1923, the general creditors' claims were finally determined and allowed by court order in an amount in excess of the proceeds of the assets.

The preferred and common stock of the Interborough Consolidated Corporation had a low but still a realizable value through December, 1922. It was actively traded in on the New York Stock Exchange. For the last two weeks of December, Interborough Consolidated Corporation common fluctuated between 12 1/2 cents and*2005 about 40 cents a share, and Interborough Consolidated Corporation preferred between 40 cents and about 65 cents a share. On the last trading day of the year 1922, 5,000 shares of common stock were sold at 25 cents per share and on the same day, 1,900 shares of preferred stock were sold at 40 cents per share. On the basis of these quotations petitioner's stock had a value of $2,510.90 ($830.50, common; $1,880.40, preferred) at the close of 1922.

The committee of the stock list, New York Stock Exchange, which has charge of admitting and withdrawing stock from trading on the exchange, entered in its records the following minute for April 9, 1923:

H. M. Fisher, Secretary, Interborough Consolidated Corporation, by letter of April 2, 1923, advises that Interborough Rapid Transit Company stock held as collateral under Interborough Metropolitan 4 1/2% Bonds was sold at foreclosure on October 11, 1922 for the sum of $1,750,000, and the amount of any deficiency judgment resulting from this sale undoubtedly would be far in excess of the value of the remaining assets of the Interborough Consolidated Corporation;

The Committee recommended that Preferred and Common Stocks of Interborough*2006 Consolidated Corporation be stricken from the list.

Thereupon the committee struck from the list Interborough Consolidated Corporation preferred stock and its common stock without nominal or par value. The last day it was traded in on the exchange was April 9, 1923.

The fact that a company is in bankruptcy is not in itself sufficient to induce the stock list committee of the New York Stock, Exchange to strike it from its list.

*1179 On November 22, 1923, E. F. Hutton & Company, of 61 Broadway, New York City, wrote to Adrian H. Muller & Son, 55 William Street, New York City, as follows:

Will you kindly sell at public auction, Wednesday, November 28th, for the account of Peter Doelger Brewing Company, 4,201 shares of preferred stock and 3,322 shares of common stock of the Interborough Consolidated Corporation.

No limitation of price was fixed by the petitioner as seller, and no direct communication was had by the auction firm with the petitioner. The entire transaction was handled through E. F. Hutton & Company, which is one of the largest firms of stockholders in the city. Adrian H. Muller & Son is an old and well established firm, having been founded in 1837, *2007 and is the only stock and bond auction firm in New York City. It holds regular auction sales every Wednesday. & Company, which is one of the largest firms of stockbrokers in the

Notice of sale of many lots of stocks, including 4,201 shares of Interborough Consolidated Corporation preferred and 3,322 shares of the same company's stock, common, to take place at the Muller firm's exchange salesroom, 14-16 Vesey Street, at 12.30 p.m., November 28, 1923, was published in the New York Tribune for November 24 and 28, and in the Wall Street Journal for November 28. The sale took place as advertised on November 28, 1923, and the petitioner's shares were disposed of. At least 100 persons attended this sale.

All of petitioner's stock offered for sale on November 28, 1923, was bought by R. C. Miller for the sum of $260, $100 for the 4,201 shares of preferred and $160 for the 3,322 shares of common. Miller was then and had been for 22 years connected with the Hutton firm and was manager of its bond and unlisted department. Miller gave the Muller firm his check for $260 in payment for this stock on December 5, 1923, and on December 7, the Muller firm paid the petitioner the same*2008 amount.

The expenses of the sale were in all $458.92, itemized as follows:

This amount was duly paid by petitioner to the Muller firm by check, December 29, 1923.

In 1924, R. C. Miller, who had bought the Interborough Consolidated Corporation stock on his own account and having been unable to find a market for it "in the Street," resold it to the petitioner. The amount paid Miller by the petitioner for the stock was sufficient for Miller to realize a profit on the transaction of at least $303.

*1180 OPINION.

MATTHEWS: The Revenue Act of 1921 provides:

SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

* * *

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period. No deduction shall be allowed for any loss claimed to have been sustained in any sale or other*2009 disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, unless such claim is made by a dealer in stock or securities, and with respect to a transaction made in the ordinary course of its business. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. * * *

SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; * * *

Prior to the effective date of the Revenue Act of 1918 (see section 202(b) thereof) an exchange of securities upon a corporate reorganization, under circumstances here present, resulted in a realized gain or loss, the measure of the gain or loss being the difference between the*2010 cost of the old securities and the market value of the new securities received in exchange. ; . The exchange here took place on June 2, 1915. No evidence was offered as to the market value of the shares received in exchange. Since the petitioner exchanged his shares, both common and preferred, in the old corporation for shares of a like nature, share for share, in the new corporation, the market value of the old securities at the time of the exchange must be taken as fixing the cost of the new securities. ; ; ; ; ; ; ; ; ; *2011 ; cf. .

From the evidence presented we have found that the fair market value of Interborough Metropolitan Corporation stock at the date of exchange, June 2, 1915, was $22 a share for common and $73 a *1181 share for preferred, or a value of $73,084 for the 3,322 shares of Interborough Metropolitan Corporation common, and $306,673 for the 4,201 shares of Interborough Metropolitan Corporation preferred held by petitioner. These amounts represent the cost of the Interborough Consolidated Corporation stock received in exchange under the consolidation plan, the total cost being $379,757.

The preferred and common stock of the Interborough Consolidated Corporation was actively traded in on the New York Stock Exchange through 1922. In December of that year the tradings in this stock, both preferred and common, on the exchange, as reported in the New York Times, show that during that month large sales were made; and that at this time the stock had some value. When a stock has a ready market value on the New York Stock Exchange, although that value is low, and is freely*2012 traded on the exchange, it can not be said that the stock is altogether worthless.

On April 10, 1923, however, the stock list committee of the New York Stock Exchange removed the Interborough Consolidated Corporation stock from its list and it was no longer traded on the exchange after April 9. This was done on the advice of the secretary of the corporation itself, which was then, and had been since April 25, 1919, in bankruptcy, for the reason that certain stock held as collateral under Interborough Metropolitan Corporation bonds had been sold at foreclosure and the resulting deficiency judgment would exceed the remaining assets of the Interborough Consolidated Corporation. The remaining assets were sold in June, 1923, and the amount of the general creditors' claims determined and allowed on June 29, 1923, was far in excess of the proceeds of the assets. The stock was, therefore, worthless.

The fact that the Interborough Consolidated Corporation was in bankruptcy is relied upon by the respondent to support his contention that the petitioner's stock in this corporation became worthless before 1923. But the fact of the corporation being in bankruptcy or receivership is not*2013 enough alone to establish the worthlessness of its stock. ; . Moreover, it was not until June, 1923, that the remainder of the corporation's assets was sold and the claims of general creditors allowed by court order, as appears from the final report of the trustee in bankruptcy. We believe that these facts, together with the ready market which the corporation's shares had at the close of 1922, sufficiently answer this contention.

Although we are convinced that the sale of the stock at auction on November 28, 1923, was bona fide, we do not think it fixed the amount of petitioner's loss. Inasmuch as the stock was worthless in June, 1923, the act of petitioner in selling the shares at auction *1182 in November of that year was unnecessary in order to establish his loss. The doctrine that gain or loss on a security of fluctuating value can only be determined by a sale has no application here, because the value of these shares could no longer fluctuate - it was extinct. *2014 ; affirmed in .

It follows, therefore, that the measure of petitioner's loss in 1923 was the cost of his Interborough Consolidated Corporation stock on June 2, 1915, $379,757. The excess of the expense incurred in the auction sale over the proceeds is not deductible.

Judgment will be entered under Rule 50.