Raymond v. Commissioner

E. P. RAYMOND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Raymond v. Commissioner Docket No. 86251. United States Board of Tax Appeals 37 B.T.A. 423; 1938 BTA LEXIS 1039; February 25, 1938, Promulgated *1039 The petitioner exchanged shares of stock for rights, unlimited as to time, to purchase shares in a new corporation, pursuant to a plan of reorganization, which rights he recognized had value after such exchange and were sold by him in the year following. Held, such rights were "securities" within the meaning of section 112(b)(3) of the Revenue Act of 1932; therefore, having been received in a nontaxable reorganization, the exchange was not such an "identificable event" as would give rise to worthlessness, entitling the petitioner to a deduction therefor in the year of such exchange. Howard C. Beck, C.P.A., for the petitioner. E. C. Adams, Esq, for the respondent. ARNOLD *423 The respondent having determined a deficiency in income tax of $737.45 for the taxable year 1933, the petitioner brings this proceeding for the redetermination thereof, alleging error because he was denied the right to deduct the cost of certain corporate stock as worthless in the computation of his net taxable income. *424 FINDINGS OF FACT. The petitioner is an individual, a resident of Washington, D.C. In 1929 the petitioner purchased 100 shares of*1040 the capital stock of Investment Co. of America, a Michigan corporation, sometimes referred to as the trust, paying $78 a share, $7,800, therefor, which stock he continued to hold until a certain "Plan of Capital Readjustment and Reorganization" of that company was effected in 1933. This plan entailed the formation of a new company of the same name under the laws of the State of Delaware to receive the properties of the old company and assume its debentures and other liabilities. It provided for: * * * The issuance and delivery by the New Corporation to the Trust, for delivery to holders of outstanding shares and options to purchase shares of the Trust, whose holdings will be satisfied and extinguished, of securities of the New Corporation as follows: (a) For each outstanding Preferred Share of the Trust, a Common Share of the New Corporation; (b) For each outstanding Common Share of the Trust, an option to purchase a Common Share of the New Corporation for $115.00 at any time (without limit); (c) For each outstanding option to purchase a Common Share of the Trust, an option to purchase a Common Share of the New Corporation for $155.00 on or before December 31, 1942. The*1041 petitioner received for his 100 shares an option to purchase 100 shares in the new company, which he sold through the First National Bank of Detroit for $107 on December 28, 1934. The balance sheet, as it appeared in the "Plan of Capital Readjustment and Reorganization" of the old company at June 30, 1933, showed assets of $3,786,344.73, composed of investments in securities having a book value of $1,883,013.16 (market value $2,163,953.04); cash on hand and on time, $1,804,073.53; cash in closed banks, $78,285.90; and dividends and accrued interest receivable, $20,972.14. The liabilities side of its balance sheet was made up of $57,258 shares of no par preferred stock, $752,580; 137,827 shares of no par common stock, $137,827; debentures, $2,618,000; discount on bonds in treasury, $50,974.72; other liabilities, $55,575.40; and capital surplus, $351,387.61. The balance sheet of the new company at December 31, 1933, giving effect to changes in capital structure due to reorganization, showed total assets of $4,718,406.88, composed of cash and demand deposits, $913,940.63; cash in closed banks, $37,639.35; dividends unpaid and accrued interest receivable, $19,168.05; investments*1042 at book value, $3,746,926.35 (market value, $3,818,258.39); and deferred charges, $1,032.50. Its liabilities were debentures, $2,539,000; other liabilities, $122,941.37; capital stock common par value, $10, $980,890; capital surplus *425 less organization expense paid or reserved, $1,069,669.88; and earned surplus from December 6 to December 31, 1933, $5,905.63. Exhibit 1, which purports to be a financial statement of December 31, 1933, sets forth a comparison of the old company with the new, from which it appears that the net worth of the old company as of December 31, 1932, was $1,045,117, and the net worth of the new company as of December 31, 1933, was $2,126,765. In preparing his income tax return for 1933 the petitioner claimed a loss deduction of $7,700 - $100 less than the cost - because he considered his investment aforesaid to be "practically worthless." It is the disallowance of this deduction which accounts for the present deficiency determination. OPINION. ARNOLD: In order for the petitioner to meet the requirements of the statute the loss must have actually been "sustained." Section 23(e) of the Revenue Act of 1932; *1043 ; . This requires proof of disposition by sale or exchange, or of some "identifiable event" establishing worthlessness. ; ; ; ; certiorari denied, . Proof of mere shrinkage in value will not suffice. . Petitioner argues that the common stock owned by him in the old company had no value on August 25, 1933, that under the plan of reorganization the common stock was wiped out and the only thing he received in place of the stock was an option to purchase an equivalent number of shares of the new corporation at $115 per share, and that said option is not "securities" within the intent or meaning of that word as used in section 112(b)(3) of the Revenue Act of 1932. 1 The parties at the hearing conceded there was a reorganization. *1044 We are satisfied that the transaction by which the petitioner surrendered his stock in the old company and received rights or options to purchase stock in the new company was a "reorganization" within the meaning of the statute. Counsel's opening remarks at the hearing and the petitioner's exhibits indicate that there was a statutory reorganization. The petitioner, however, argues that the provisions of section 112(b)(3) are inapplicable because his option to purchase shares in the new corporation does not fall within the statutory term "securities." *426 With this we are unable to agree. The books are replete with definitions more than broad enough to include the right which petitioner received within the meaning of the word "securities." The definition of a security in Webster's New International Dictionary is, "An evidence of debt or of property, as a bond, stock certificate, or other instrument, etc.; a document giving the holder the right to demand and receive property not in his possession." This petitioner exchanged stock in the old corporation pursuant to the plan of reorganization which was introduced in evidence as Exhibit 2. An integral part of said plan is*1045 the section thereof entitled "Issuance and Distribution of New Securities", which specifically provided for the issuance of (a) common shares of the new corporation, (b) options to purchase common shares of the new corporation for $115 at any time (without limit), and (c) options to purchase common shares of the new corporation for $155 on or before December 31, 1942. The aforesaid securities, as denominated by the plan of reorganization, were to be exchanged for the outstanding preferred and common stock of the old company and options to purchase stock in the old corporation. In view of these circumstances we are of the opinion that the right or option which petitioner acquired in exchange for his stock falls squarely within the accepted definition of "securities" and also within the spirit and intendment of the reorganization provisions of the statute. Cf. ; affd., ; certiorari denied, . As was said by the court in ; certiorari denied, *1046 , "The word, 'securities' was used [in 203(e)] so as not to defeat the exemption in cases where the interest of the transferor was carried over to the new corporation in some form." The "form" in which this petitioner's right "was carried over to the new corporation" was the right, unlimited as to time, to demand the issuance to him of 100 shares of stock of the new corporation at $115 a share, a right which we have already said yielded him $107 in the following year. This case is distinguishable from , and the case of , as in each of those cases the old stock was found and determined to be worthless in the taxable year and the right to participate in the new corporation was found to be without value. Such is not the case here. In addition to the foregoing considerations we are of the opinion that we would be forced to the same conclusion because of the prima facie presumption of correctness that attaches to the respondent's determination. In order to overcome this presumption of correctness the petitioner must adduce evidence showing the worthlessness*1047 of his investment. Petitioner testified that he considered his investment *427 only "practically" worthless in the taxable year; he did not testify that his investment was worthless. He alleges in his petition that he sold his rights in 1934 for $107, which is certainly adverse to his contention that the rights were worthless in 1933. Furthermore, petitioner submitted no evidence that the balance sheets in his exhibits fail properly to reflect the financial condition of the old and new company. In our opinion these exhibits substantiate the respondent's determination that the petitioner's investment had some value during the taxable year. For the above and foregoing reasons we are of the opinion that the respondent's determination must be approved. Judgment will be entered for the respondent. Footnotes 1. SEC. 112(b)(3). * * * No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩