Carter Hotel Co. v. Commissioner

CARTER HOTEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Carter Hotel Co. v. Commissioner Docket No. 41186. United States Board of Tax Appeals 25 B.T.A. 933; 1932 BTA LEXIS 1453; March 21, 1932, Promulgated *1453 Where a corporation sells its preferred stock at 75 per cent of par value and fails to exercise an option agreement providing for the repurchase of the stock at any time within two years of the sale, such corporation may not deduct from its gross income of the year in which the option expired the difference between the par value and the selling price of the stock as a loss sustained within the year. C. R. McAtee, Esq., for the petitioner. O. W. Swecker, Esq., for the respondent. SMITH *933 This is a proceeding for the redetermination of a deficiency in income tax for 1926 of $1,102.33. The issue presented by this proceeding is whether a corporation which sells preferred stock at 75 per cent of the par value, and fails to exercise an option agreement providing for the repurchase of the stock at any time within two years of the sale, may deduct as a loss in the year the option expired the difference between the par value and the selling price of the stock. FINDINGS OF FACT. The petitioner is a West Virginia corporation, with its principal office at Welch. Under its charter it was authorized to issue 8 per cent cumulative preferred stock. *1454 Its charter also provided: * * * In the event of the dissolution, liquidation or winding up, whether voluntary or involuntary, of the corporation or the business or affairs thereof, the holders of the Preferred Stock shall have priority over the Common Stockholders and shall be entitled to be paid in full, both the principal amount of their shares and the unpaid dividends, including interest, before any amount whatever shall be paid to the holders of the Common Stock and after the payment to the holders of the Preferred Stock of the amount of the principal of said stock and the unpaid accrued dividends thereon including interest thereon, the remaining assets and funds shall be divided between and paid to the holders of the Common Stock, according to their respective holdings of shares. *934 The holders of the preferred stock had equal voting rights and powers with the holders of the common stock. Needing a substantial amount of money and being unable to sell or dispose of its common or preferred stock or to borrow money, petitioner met the situation by adoption, on May 4, 1924, of a resolution of its directors for the issue of its paid-up preferred stock at par to stockholders*1455 and other persons as provided by said resolution. The resolution referred to provided in part: Out of the preferred stock of the company, unissued, they will offer to issue not exceeding forty-one thousand five hundred dollars ($41,500) worth of the same par value, to persons applying therefor at 75 per cent of par, and take and receive from the applicant therefor cash on that basis. The said stock will be held by the applicant for not exceeding two years from this date, May 6th, 1924, during which time and while the applicant holds the same, or any part of it, the applicant shall receive on the part so held by him dividends on 75 per cent of said stock so held at the rate of 8 per centum per annum, payable semi-annually August 1st and February 1st, and at any time during the said two years the company may purchase or sell said stock, or any of it, at not less than par, and redeem the same from the applicant by returning to him 75 per centum of par plus 8 per centum dividends accumulated. Any of said stock, not so purchased or redeemed by the company within two years shall be and become the absolute property of the applicant or holder, and be entitled to have and receive dividends*1456 on the whole thereof as other preferred stock of the company. At the expiration of the two-year period named in the resolution, petitioner was unable to redeem the stock so issued. Under the provisions of the resolution the company issued $40,933.33 par value of its preferred stock and received therefor $30,700. In its income-tax return for 1926 the petitioner deducted from gross income $10,233.33 as a loss sustained by the petitioner in 1926, which amount represents the difference between the par value of the preferred stock issued ($40,933.33), and the amount received therefor ($30,700). The respondent disallowed the deduction of this loss in the determination of the deficiency involved herein. OPINION. SMITH: Petitioner argues that it sustained a loss in the year 1926 of $10,233.33 by reason of its inability to repurchase from its preferred stockholders for $30,700 preferred stock of a par value of $40,933.33 issued in 1924. The respondent disallowed the deduction of the loss claimed in the determination of the deficiency, under article 543 of Regulations 69, which provides in part: * * * The proceeds from the original sale by a corporation of its shares of capital*1457 stock, whether such proceeds are in excess of or less than the par value of the stock issued, constitute the capital of the company. If the stock *935 is sold at a premium, the premium is not income. Likewise, if the stock is sold at a discount, the amount of the discount is not a loss deductible from gross income. * * * This Board has many times held that a corporation sustains no deductible loss when it sells it shares of capital stock at less than par value. In , we said: We think it is perfectly clear that the amount received by a corporation in excess of the par value of its stock is not income to the corporation, but is in fact a paid-in surplus, and that the converse is equally true, that when stock is sold for less than its par value the corporation has not suffered a loss. * * * Cf. ; ; ; *1458 ; certiorari denied, ; ; ; . The petitioner does not contend, however, that it sustained any loss in 1924 upon the sale of its preferred stock, but that it sustained a loss in 1926 by reason of its inability to redeem the stock at the issued price. We fail to see, however, how the petitioner sustained any loss in 1926. The corporation was not indebted to its stockholders for the shares of stock held by them. The stockholders simply invested a certain amount of money in the corporation. Upon the liquidation of a corporation for any reason whatever the stockholders are entitled to receive distributions of the assets after the debts are paid. The mere fact that the common stock holders might upon such liquidation receive less than they would have received if the preferred stock had not been issued is no ground for a claim that the corporation sustained a loss by failure to redeem the preferred stock at*1459 the issue price. The contention of the petitioner upon this point is not sustained. Judgment will be entered for the respondent.