1949 U.S. Tax Ct. LEXIS 122">*122
Stockholders of corporation received distributions in complete liquidation in 1941 and each reported his pro rata share in his income tax return for that year as a long term capital gain. In 1944 the stockholders paid their liability as transferees for deficiencies in tax which the Commissioner, in 1942, determined the corporation owed for the years 1940 and 1941.
13 T.C. 121">*121 The respondent determined deficiencies in the income tax of petitioners for the year 1944, as follows:
Stanley Switlik | $ 15,421.45 |
P. Wanda Switlik | 242.19 |
Lottie Switlik | 4,164.37 |
Walter Switlik | 76.01 |
Richard Switlik | 4,106.97 |
The sole issue presented is whether the petitioners, other than P. Wanda Switlik, 1 are entitled to deduct from gross income, as ordinary losses, the amounts paid by them during the taxable year in satisfaction of their respective liabilities as transferees.
1949 U.S. Tax Ct. LEXIS 122">*124 13 T.C. 121">*122 Another issue involving the deductibility by petitioners, other than P. Wanda Switlik, of their proportionate shares of rental payments of $ 3,955 made in 1944, has been conceded by the respondent and adjustment therefor will be made under Rule 50.
FINDINGS OF FACT.
The stipulated facts are found accordingly.
With the exception of P. Wanda Switlik, who resides at Cream Ridge, New Jersey, the petitioners are residents of Trenton, New Jersey. Their income tax returns for the year 1944 were filed with the collector of internal revenue for the first collection district of New Jersey, at Camden, New Jersey. These returns were made on the basis of cash receipts and disbursements.
Petitioners Stanley Switlik and P. Wanda Switlik are husband and wife. Petitioners Lottie Switlik and Richard Switlik are their adult children. Petitioner Walter Switlik is the brother of the petitioner Stanley Switlik.
The petitioners were stockholders in the Switlik Parachute & Equipment Co. (hereinafter referred to as the corporation), a New Jersey corporation, with its principal office and factory located at Hancock and Lalor Streets, Trenton, New Jersey. They owned, and had owned for a period1949 U.S. Tax Ct. LEXIS 122">*125 longer than twenty-four months prior to the dissolution of the corporation, all of the corporation's issued and outstanding common capital stock, comprising 1,100 shares, held individually as follows:
Stanley Switlik | 694 |
P. Wanda Switlik | 16 |
Lottie Switlik | 193 |
Walter Switlik | 4 |
Richard Switlik | 193 |
13 T.C. 121">*123 Common stock was the only class or type of stock the corporation had issued or outstanding.
The stockholders of the corporation on August 9, 1941, by resolution directed that the corporation immediately cease the transaction of any and all business except that necessary to completely liquidate the corporate affairs, and that said liquidation be final and complete within three years from August 9, 1941. The president and secretary of the company were authorized and directed to file a certificate of dissolution by unanimous consent of all stockholders with the Secretary of State of the State of New Jersey and to do all other things necessary to complete the dissolution.
The petitioners, on August 9, 1941, constituted the board of directors of the corporation and, upon adoption of the resolution authorizing complete liquidation, constituted the board of trustees in dissolution1949 U.S. Tax Ct. LEXIS 122">*126 (hereinafter referred to as trustees).
The officers of the corporation on August 9, 1941, were: Stanley Switlik, president and treasurer; Walter Switlik, vice president and assistant treasurer; and Richard Switlik, secretary.
A certified public accountant, who had been employed by the corporation over a period of approximately fifteen years, audited its books and records for the years 1940 and 1941, determined its tax liability for those years, and prepared the necessary corporate tax returns. The tax liability for the year 1941, as determined by him as of the date of liquidation, was taken into consideration in determining the amount of the liquidating dividend. The accountant, in conjunction with the corporation's attorney, also advised, interpreted, and guided the petitioners in respect to provisions of the Internal Revenue Code affecting the determination of income, invested capital, liquidating dividends, and other miscellaneous matters arising from the liquidation of the corporation.
The trustees on August 11, 1941, authorized the first liquidating dividend to the stockholders of the corporation, being a distribution in kind to the several stockholders of the corporation (the1949 U.S. Tax Ct. LEXIS 122">*127 petitioners) as of August 11, 1941, comprising the equity represented by the inventories at the close of business as of August 10, 1941, at the value of $ 494,706.70, less obligations due officers and stockholders in the amount of $ 11,086.45, and liability for 1941 corporate Federal income and excess profits taxes of $ 118,500, or the final net equity valuation of $ 365,120.25, the distribution being equivalent to $ 331.927 per share of common stock.
Petitioners received distributions in liquidation, their pro rata share of which they reported in their individual income tax returns for the taxable year 1941 as long term capital gains, of which 50 per cent was taken into account.
13 T.C. 121">*124 The corporation filed its income tax return (Form 1120) and excess profits tax return (Form 1121) for the calendar year 1940 and paid total taxes of $ 56,788.62, comprising $ 38,439.99 of income tax, $ 2,683.34 of declared value excess profits tax, and $ 15,665.29 of excess profits tax.
The corporation filed its income tax return (Form 1120) and excess profits tax return (Form 1121) for the calendar year 1941 and paid total taxes of $ 117,905.65, comprising $ 50,651.31 of income tax and $ 67,254.341949 U.S. Tax Ct. LEXIS 122">*128 of excess profits tax.
The respondent, on or about August 6, 1942, made a determination of deficiencies totaling $ 92,107.80, against the corporation in Federal taxes for the years 1940 and 1941, which deficiencies were appealed by the corporation.
The proposed deficiencies aggregating $ 92,107.80, by agreement between the corporation and the respondent, were settled for $ 35,125.93, comprising a deficiency of $ 12,291.11 for the year 1940 and $ 22,834.82 for the year 1941, exclusive of interest.
This Court on March 17, 1944, in accordance with a stipulation filed on or about March 1, 1944, determined that there were due from the corporation $ 12,291.11 of taxes for the year 1940 and $ 22,834.82 for the year 1941, plus statutory interest.
The adjustments as finally determined in the corporation's taxable net income for each of the years 1940 and 1941, resulting in the deficiencies, were principally reductions in rent and salary items and capitalization of films originally deducted as expense.
By reason of the dissolution of the corporation and the distribution on or about August 11, 1941, of substantially all of its assets to its stockholders in liquidation, the corporation was rendered1949 U.S. Tax Ct. LEXIS 122">*129 unable to pay the deficiencies in tax, and the petitioners, as its stockholders, became liable as transferees for the deficiencies, plus statutory interest.
By an agreement, dated March 6, 1944, petitioners Stanley Switlik, Walter Switlik, Lottie Switlik, and Richard Switlik mutually agreed to be liable as transferees for the deficiencies determined in the proceeding wherein the Switlik Parachute & Equipment Co. was the petitioner, and to pay their respective shares, plus interest, in the amounts respectively assumed by each in the agreement. Their respective shares were the percentage proportion of the total shares held by each of them to the total shares held by all of them, or Stanley Switlik, 64.02 per cent, Walter Switlik, 0.37 per cent, Lottie Switlik 17.80 1/2 per cent, and Richard Switlik, 17.80 1/2 per cent. Petitioner P. Wanda Switlik was not a party to the agreement.
The petitioners, except P. Wanda Switlik, claimed as deductions from gross income on their individual tax returns for the taxable year 1944, as "a loss incurred in a transaction entered into for profit," the sums paid as tranferees of the corporation, as follows: 13 T.C. 121">*125
Petitioner | Tax | Interest to | Total |
Aug. 10, 1941 | |||
Lottie Switlik | $ 6,254.17 | $ 53.25 | $ 6,307.42 |
Richard Switlik | 6,254.17 | 53.25 | 6,307.42 |
Walter Switlik | 129.97 | 1.11 | 131.08 |
Stanley Switlik | 22,487.62 | 191.46 | 22,679.08 |
Total | 35,125.93 | 299.07 | 35,425.00 |
1949 U.S. Tax Ct. LEXIS 122">*130 Upon examination of the return of each petitioner for the year 1944 by the respondent, the losses were allowed as claimed, with the exception that, instead of being apportioned to the four petitioners as provided for in the agreement dated March 6, 1944, the respondent apportioned the loss to each of the petitioners on the basis of the shares of stock each held in the corporation on August 10, 1941, in relation to the total stock outstanding, as follows:
Ratio | Loss allowed | |
Stanley Switlik | 694/1100 | $ 29,145.93 |
P. Wanda Switlik | 16/1100 | 671.92 |
Lottie Switlik | 193/1100 | 8,105.41 |
Walter Switlik | 4/1100 | 167.97 |
Richard Switlik | 193/1100 | 8,105.41 |
Total | 46,196.64 |
The total losses ($ 46,196.64) comprised the tax deficiencies of the corporation, all interest thereon, and cost of counsel.
On November 25, 1947, the Commissioner determined deficiencies in the income tax of each of the petitioners. In the notices of deficiency he allowed as ordinary loss deductions interest on the deficiencies in taxes subsequent to August 10, 1941, and the legal and accounting fees incurred in connection with the deficiencies. He determined, however, that petitioners were entitled 1949 U.S. Tax Ct. LEXIS 122">*131 to deduct as a capital loss only 50 per cent of the amount of the deficiencies in income, declared value excess profits, and excess profits taxes of the Switlik Parachute & Equipment Co. for the years 1940 and 1941, plus interest thereon to August 10, 1941, which they paid in satisfaction of their liability as transferees.
OPINION
Petitioners contend that each of them is entitled to claim as an ordinary loss, deductible in full, the amount he or she paid in satisfaction of transferee liability. The respondent contends that the payment made by each petitioner grew out of, was related to, and took its character from a capital transaction, i. e., a long term capital gain, that it was in effect a reversal of this transaction, and, therefore, should be subjected to the same limitation as the original transaction. He concedes that each petitioner who contributed to the 13 T.C. 121">*126 satisfaction of the transferee liability is entitled to a deduction for a loss, but urges that the loss was a long term capital loss and not an ordinary loss.
Prior to the decision of the Supreme Court of the United States in ,1949 U.S. Tax Ct. LEXIS 122">*132 this Court, then the United States Board of Tax Appeals, held in cases involving facts similar to those in the instant proceeding that the corporate taxes paid by transferees in a year subsequent to the receipt of distributions in liquidation should be treated as reducing the amount of those distributions rather than as a loss in the year the corporate taxes were paid. ; . In the
Respondent seeks to distinguish the
The petitioners, as stockholders of the Switlik Parachute & Equipment Co., received distributions in complete liquidation of that corporation in 1941 under a claim of right and without restriction as to disposition. Under such circumstances they correctly reported the capital gain resulting from such distributions as income in 1941. These distributions became the property of petitioners and their inclusion in gross1949 U.S. Tax Ct. LEXIS 122">*135 income gave petitioners a basis for gain or loss. When, in 1944, Stanley Switlik, Lottie Switlik, Walter Switlik, and Richard Switlik satisfied their liability as transferees by payments that did not exceed the amount of the liquidating distribution received by each of them in 1941, they were entitled to loss deductions. The losses they sustained were not, however, capital losses, as they were not losses from the sale or exchange of capital assets (cf. ), and this is true even though the transferee liability which occasioned the losses arose out of distributions which resulted in capital gains in 1941. The sale or exchange of capital assets occurred in 1941 and not in 1944. The losses sustained by petitioners as a result of satisfaction of their liability as transferees in 1944 were, therefore, ordinary losses, and respondent erred in failing to allow the entire amount of the deficiencies plus interest to August 10, 1941, paid by each petitioner, as a deduction from gross income.
Disney,
*. Proceedings of the following petitioners are consolidated herewith: P. Wanda Switlik; Lottie Switlik; Walter Switlik; and Richard Switlik.↩
1. As to the relationship of P. Wanda Switlik to this litigation the stipulation of facts states:
"25. The petitioners claimed as deductions from gross income on their individual income tax returns for the taxable year 1944, as 'a loss incurred in a transaction entered into for profit' the sums so paid as transferees of Switlik Parachute and Equipment Company as follows:
Petitioner | Tax |
Lottie Switlik | $ 6,254.17 |
Richard Switlik | 6,254.17 |
Walter Switlik | 129.97 |
Stanley Switlik | 22,487.62 |
plus each of said four petitioners' proportionate shares of $ 299.07, which was the amount of interest accrued on the deficiencies up to and including August 10, 1941.
"26. The petitioner P. Wanda Switlik claimed no such deductions on her return for the taxable year 1944.
"27. On a prior audit, the respondent issued a certificate of overassessment and made a refund in the amount of $ 483.78 to petitioner P. Wanda Switlik for the taxable year 1944. Such action was erroneous to the extent that it was based upon the assumption that the petitioner P. Wanda Switlik had paid what would have been her pro rata share of the deficiencies in taxes due from Switlik Parachute and Equipment Co.
"28. Such action by the respondent as set forth in paragraph 27 hereinabove has therefore affected the computation of the deficiencies in each of the proceedings herein. The parties therefore reserve for the computation under Rule 50 the correction of the mathematical calculations."↩