Heiderich v. Commissioner

Arnold F. Heiderich and Irma L. Heiderich, Petitioners, v. Commissioner of Internal Revenue, Respondent. Henry A. Ramey and T. Lucille Ramey, Petitioners, v. Commissioner of Internal Revenue, Respondent Heiderich v. Commissioner Docket Nos. 34209, 34210 United States Tax Court 19 T.C. 382; 1952 U.S. Tax Ct. LEXIS 26; December 4, 1952, Promulgated *26 Decisions will be entered under Rule 50. In 1943 petitioners, sole stockholders of a corporation, received liquidating dividends on its dissolution and properly paid capital gains tax thereon. In 1947 petitioners, as transferees of the assets of the liquidated corporation, paid certain tax deficiencies which had been determined against the corporation. Held, that the 1947 payments must be treated as capital losses and not ordinary losses. Arrowsmith v. Commissioner, 344 U.S. 6. *27 David Beck, Esq., for the petitioners. John J. Hopkins, Esq., for the respondent. Hill, Judge. HILL *382 The respondent determined deficiencies in income tax against the petitioners as follows: Year Petitioner Deficiency [1947] Arnold F. and Irma L. Heiderich $ 5,855.54 [1947] Henry A. and T. Lucille Ramey 6,336.04 These cases were consolidated for hearing. The parties have entered into a stipulation with respect to certain adjustments made by the respondent in arriving at his determination. This stipulation will be given effect upon recomputation of any tax liability of the petitioners under Rule 50 of the Rules of Practice before The Tax Court of the United States. The only issue remaining for our decision is in fact an identical claim of overpayment presented in each petition and this issue concerns the question whether the petitioners are entitled to deduct from gross income as ordinary losses amounts paid by them during the taxable year in satisfaction of their respective liabilities as transferees of the assets of a liquidated corporation or whether such payments are to be treated as capital losses. FINDINGS OF FACT. The facts have been stipulated*28 and are so found. Only those necessary for an understanding of the issue presented are included herein. The petitioners, Arnold F. Heiderich and Irma L. Heiderich, are husband and wife who reside in Glen Ridge, New Jersey, and they duly filed their joint income tax return on the cash basis for the taxable year 1947 with the collector of internal revenue for the fifth district of New Jersey. *383 The petitioners, Henry A. Ramey and T. Lucille Ramey, are husband and wife who reside in West Orange, New Jersey, and they duly filed their joint income tax return on the cash basis for the calendar year 1947 with the collector of internal revenue for the fifth district of New Jersey. Prior to September 30, 1943, the petitioners herein were the sole owners of all the issued and outstanding stock of a New Jersey corporation, the U-Drive-It Co. of Newark. On September 30, 1943, pursuant to a resolution of the board of directors, the corporation was liquidated and dissolved and all of its assets (other than the lease of the premises then occupied by the corporation) were transferred and assigned to Arnold F. Heiderich and Henry A. Ramey, as tenants in common, each to the extent of an equal*29 undivided one-half share thereof. Thereafter on November 12, 1943, the lease was also assigned to them by the corporation. For the taxable year 1943, the petitioners duly reported as long term capital gains distributions which they received in liquidation of the corporation. On June 21, 1946, respondent determined deficiencies and penalties in income tax, declared value excess-profits tax, and excess profits tax against the corporation for the taxable years ended December 31, 1937, to December 31, 1942, and the taxable period January 1, 1943, to September 30, 1943, totaling $ 75,288.41, and on the same date he notified petitioners that they were liable for the amount of such deficiencies as transferees of the assets of the corporation. The parties involved filed petitions with The Tax Court of the United States. 1 Pursuant to stipulations of the parties, we entered decisions on October 31, 1947, wherein it was held that the total deficiency against the corporation was $ 14,913.45. In the year 1947 the petitioners made payment of this amount, together with interest amounting to $ 5,028.18, of which amount $ 3,595.07 covered the period from September 30, 1943, the date of liquidation, *30 through the date of payment, October 16, 1947. The parties have stipulated that this portion of the interest was fully deductible as interest by the transferees of the corporation in the amounts so paid by them. The parties also stipulated that the amounts of legal fees incurred in contesting the transferee liabilities are also fully deductible in 1947, the year in which they were paid. OPINION. Only one issue is before us and it involves the question whether there has been incurred an ordinary or a capital loss where persons who had received distributions on liquidation of a corporation (capital gains) in a later year were required to satisfy a liability of the corporation as transferees of its assets. *384 Applicable sections of the Code are set out in the footnote below. 2 *31 The Supreme Court in , affirming , reversing , held that any such loss resulting from satisfaction of transferee liability is a capital loss in the year of payment. We find no basis for a distinction between this case and the case before us. Accordingly, we hold that when the petitioners, as transferees of the assets of the liquidated corporation, paid the debt of the corporation, which included interest on the deficiency up to the date of liquidation, the tax consequence was a capital loss to the transferees in the year of payment. Decisions will be entered under Rule 50. Footnotes 1. Docket Nos. 12064, 12065, 12066, 12067, and 12068.↩ 2. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (b) Interest. -- All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from the taxes imposed by this chapter. * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * * * * * (g) Capital Losses. -- (1) Limitation. -- Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117. * * * * SEC. 115. DISTRIBUTIONS BY CORPORATIONS. (c) Distribution 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. * * * SEC. 117. CAPITAL GAINS AND LOSSES. (b) Percentage Taken Into Account. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: 100 per centum if the capital asset has been held for not more than 6 months; 50 per centum if the capital asset has been held for more than 6 months.↩