Schiller Piano Co. v. Commissioner

SCHILLER PIANO COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schiller Piano Co. v. Commissioner Docket No. 31172. United States Board of Tax Appeals 23 B.T.A. 376; 1931 BTA LEXIS 1885; May 21, 1931, Promulgated *1885 Petitioner sustained no deductible loss upon an exchange of stock of, and accounts against, another corporation, for certain shares of its own capital stock. Houston Brothers Co.,21 B.T.A. 804, followed. Frank E. Seidman, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. LOVE *376 This proceeding is for the redetermination of a deficiency in income tax for the year 1924, in the amount of $4,533.29. A deficiency in the amount of $249.58 for the year 1925 is not contested. Petitioner asserts error in the respondent's disallowance of a deduction in the amount of $32,907.24, alleged to represent a loss sustained on the sale of certain assets. FINDINGS OF FACT. The proceeding was submitted upon the following stipulation of facts: * * * * * * that for the purpose of this appeal the Board may find the following as true and correct facts: 1. That the petitioner is an Illinois corporation engaged in the manufacture and sale of pianos, with its principal office and place of business at Oregon, Illinois. 2. That the Thiery Piano and Phonograph Company was incorporated March, 1923, under the laws of*1886 the State of Wisconsin, with an authorized capital stock of 500 shares of a par value of $100 each. From incorporation to March 11, 1924, the Schiller Piano Company owned all of the outstanding capital stock of the Thiery Piano & Phonograph Company. 3. That Mr. G. H. Jones was the president of the Schiller Piano Company up to January 8, 1924. Up to that date he owned 972 shares of common stock in the company out of a total of 4,167 shares. Up to that date he was the largest single stockholder in the company. 4. That in March, 1923, petitioner acquired 472 shares of stock of the Thiery Piano and Phonograph Company at a cost of $47,516.65. 5. That the Thiery Piano and Phonograph Company was a sales outlet for the petitioner and the petitioner sold pianos on open account to the said Thiery Piano and Phonograph Company; and that early in 1924 it became apparent that the Thiery Piano and Phonograph Company was a losing proposition to the petitioner. 6. That the petitioner and G. H. Jones entered into an agreement in 1924 whereby petitioner sold and transferred to G. H. Jones 472 shares of the Thiery Piano and Phonograph Co. owned by the petitioner, and also sold and *1887 *377 transferred to G. H. Jones an open account against the Thiery Piano & Phonograph Co. due the petitioner in the amount of, and costing petitioner, $20,390.59. The petitioner received in exchange, and G. H. Jones surrendered on March 11, 1924, 350 shares of the outstanding capital stock of the Schiller Piano Co. The fair market value of said 350 shares of capital stock at the time of said sale and exchange was $35,000. 7. That the transaction was recorded on the books by debits to Treasury Stock Account of $35,000, and to Profit and Loss Account of $32,907.24, and credits to Securities Account of $47,516.65 and to Thiery Piano & Phonograph Company account of $20,390.59. 8. That the attached Exhibit "A" is a true copy of the minutes of the Special Meeting of Directors held January 25, 1924, in respect of the above transaction. 9. That the petitioner deducted in its return for the year 1924 as a loss under the heading of "Bad Debts" the $32,907.24. 10. That in the audit of the return for the year 1924, the Commissioner of Internal Revenue disallowed the loss of $32,907.24 and increased taxable income in the said amount (plus other adjustments not in dispute). *1888 11. That the petitioner and Thiery Piano & Phonograph Co. did not file consolidated returns for the years 1923 and 1924. * * * EXHIBIT A SCHILLER PIANO CO. - ROCKFORD, ILLINOIS SPECIAL MEETING OF DIRECTORS - JANUARY 25, 1924. A special meeting of the directors of the Schiller Piano Company was held in the office of the President January 25th, 1924, at 3:30 P.M. Meeting was called to order by President E. B. Jones. Roll call showed the following present: W. C. Scott F. M. Hood C. D. Etnyre E. B. Jones C. F. Jones B. F. Shelly President E. B. Jones reported that pursuant to motion made by Mr. W. C. Scott at meeting of January 8th, 1924, he had further investigated the Milwaukee store known as the Thiery Piano and Phonograph Company and recommended that the business be disposed of by accepting the offer of G. H. Jones. in consideration of the loss that had incurred from month to month in the operation of the business. Mr. Hood offered the following resolution and moved its adoption: Resolved, That the Schiller Piano Company sell to G. H. Jones their entire interest in the Thiery Piano & Phonograph Co. of Milwaukee, Wis., for 350 shares of the capital*1889 stock of the Schiller Piano Company held in the name of G. H. Jones, said stock to be put in the treasury stock account. This transaction to cancel all indebtedness of the Thiery Piano & Phonograph Company to the Schiller Piano Company, and that President E. B. Jones and Secretary B. F. Shelly are hereby authorized to consummate the arrangements mentioned and are to enter upon the books of the Schiller Piano Company a discount of $32,907.24. This offer being considered the best possible disposition of the business. C. F. Jones seconds the motion. Motion carried. *378 OPINION. LOVE: Petitioner asserts that it sustained a deductible loss in the amount of $32,907.24 upon the transaction set out in our findings. The respondent has denied the deduction upon the theory that a corporation can realize neither gain nor loss in the purchase of its own capital stock. As authority for its contention, petitioner cites ; ; *1890 ; and . In , we distinguished the Callanan and Cedarburg cases, supra, and expressly disapproved our decisions in the Behlow Estate Co. and New Jersey Porcelain Co. cases, supra. We think the instant case is governed by , and upon authority of that case, petitioner must fail. See also . Reviewed by the Board. Judgment will be entered for the respondent. ARUNDELL ARUNDELL, dissenting: For the reasons set forth in my dissenting opinions in the cases of Houston Brothers Co.,21 B.T.A. 804, and S. A. Woods Machine Co.,21 B.T.A. 818, I disagree with the conclusion reached by the majority in this case. SMITH agrees with this dissent.