Callanan Road Improvement Co. v. Commissioner

CALLANAN ROAD IMPROVEMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Callanan Road Improvement Co. v. Commissioner Docket No. 13303. United States Board of Tax Appeals 12 B.T.A. 1109; 1928 BTA LEXIS 3401; July 3, 1928, Promulgated *3401 A corporation declared a dividend of $12,000 and paid such dividend to its stockholders by the delivery to them of Liberty bonds which cost it $12,000 but which had a fair market value of $10,636.80 at the date of delivery and by the payment of $1,363.20 cash. Held, the corporation sustained a loss of $1,363.20. William O'Brien, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. SIEFKIN *1109 This is a proceeding for the redetermination of a deficiency in income tax for 1921 of $4,055.27. The errors alleged are as to (1) the deduction for depreciation; (2) a deduction as a loss on the sale of Liberty bonds; (3) the deduction for depletion; (4) an inventory adjustment, and (5) the specific corporation credit. The amount of *1110 (1) and (3) were stipulated, (4) was abandoned by the petitioner at the hearing, and (5) depends upon whether the net income as the result of our decision exceeds $25,000. FINDINGS OF FACT. The petitioner is a New York corporation with its principal office at South Bethlehem. During the year 1921 the petitioner was the owner of and used in its business buildings, machinery*3402 and equipment upon which the total allowable depreciation for purposes of the Federal income tax was $17,829.94. During the same year it produced 168,853 tons of crushed stone from its quarries upon which the proper rate of depletion was 1 cent per ton. The respondent properly increased income of the petitioner for 1921 by $2,337.80 because of an inventory adjustment. The minutes of a meeting of the board of directors of the petitioner on February 14, 1921, show the following: Mr. J. R. Callanan moved that this Company sell the $12,000 par value Liberty Bonds which it now holds in the Treasury at the prevailing market price. This motion was duly seconded and carried. Mr. Buell C. Andrews moved that providing unanimous consent of all the stockholders could be gained a dividend of $12,000 be declared payable immediately to the various stockholders as follows: H. E. Battin $1922 B. R. Babcock [1922] M. C. Babcock H. C. Callanan [1922] J. R. Callanan [1922] E. M. Callanan (Administratrix) [2390] Buell C. Andrews Buell C. Andrews [1922] The Callanan Road Improvement Co Mrs. H. C. Callanan seconded this motion. The President called for a roll call on this*3403 motion which resulted as follows - unanimously carried. The provisions of the first paragraph of the minutes above were not carried out as stated. Instead the bonds were appraised at their market value at that date and were delivered to stockholders at that amount in part payment of the cash dividend declared and the remainder of the cash dividend was paid by cash from the treasury of the petitioner. The bonds were purchased by the petitioner for $12,000 and had a fair market value on February 14, 1921, of $10,636.80. The petitioner deducted the difference, or $1,363.20, as a loss in 1921. The respondent disallowed the deduction. *1111 OPINION. dividend in property which cost it more than the value at the time dividend in property which cost in more than the value at the mine of payment to the stockholders? If the corporation had sold the bonds in question at the market price on February 14, 1921, there would be no question as to the deductibility of the loss. Instead of selling the bonds, however, it discharged an obligation of $10,636.80 with bonds of that market value. That there was a legal obligation as soon as the dividend was declared out of surplus*3404 see paragraph 3653, Fletcher Cyclopedia of Corporations and cases cited; also, . The situation is not governed by the principles involved in those cases in which we have decided, as in , that a corporation does not realize taxable income or a loss from the purchase or sale of its own bonds. Here we have a realization of the loss through complete disposition of certain assets of the corporation. The position of the stockholders as to whose stock dividend is voted is no different from that of general creditors. When the dividend of $12,000 was declared, the corporation could not satisfy the legal demands of the stockholders by the delivery to them of $10,636.80 worth of Liberty bonds. The corporation thus parted with assets which cost it $12,000 and discharged its obligation for $10,636.80. We do not believe that , announces a rule of law that is inconsistent with our holding, as we do, that a loss was sustained. That decision holds that no income resulted on discharge of indebtedness in a*3405 case where the entire transaction resulted in a loss. In this proceeding the loss was no less real because the disposition was made to stockholders. Reviewed by the Board. Judgment will be entered under Rule 50.