Company v. Middle West Utilities Company, Equity 11654, and in the bankruptcy and reorganization proceedings entitled In the Matter of Middle West Utilities Company.
41. On November 17, 1939, plaintiff filed with the defendant a refund claim.
42. On January 4, 1940, the Commissioner of Internal Revenue mailed to plaintiff a notice of disallowance of said refund claim.
This is a suit by plaintiff to recover Federal income and excess profits taxes for the year 1936 which plaintiff claims were overpaid by it and erroneously and illegally collected by defendant.
The main controversy involves the question of worthlessness of the common and perferred stock of Middle West Utilities Company.
Prior to 1932 plaintiff acquired perferred and common stock in Middle West Utilities Company. In 1932 Middle West Utilities Company was placed in receivership where it remained until it went into reorganization pursuant to Section 77B of the Bankruptcy Act in 1934. Pursuant to the plan of reorganization in which those proceedings culminated, plaintiff in 1936 received in exchange for its stock in the old company 973.01 shares of stock and 973.01 warrants to purchase stock of the successor corporation, the Middle West Corporation. In the same year, 1936, plaintiff sold all the warrants and 873.01 shares of the new stock and deducted as a loss on its income tax return for 1936 the difference between the proceeds received from the stock and warrants sold and the cost of the old stock surrendered in acquiring said stock and warrants. The Internal Revenue Agent in Charge disallowed the deduction for said loss claimed by plaintiff on the ground that the preferred and common stock of Middle West Utilities Company had become worthless prior to 1936, and asserted a deficiency in income and excess profits taxes arising solely from the disallowance of said loss. Plaintiff paid the additional tax to the defendant and filed a claim for refund, which was rejected by the Commissioner of Internal Revenue. Plaintiff now brings this suit to recover said additional income and excess profits taxes paid to defendant.
The questions presented are:
Whether plaintiff sustained a loss upon the sale of its Middle West Utilities stock in 1936, as claimed by it, or whether the loss was sustained in some prior year as determined by the Commissioner?
Whether events transpiring subsequent to the sale of the stock in question are admissible in determining when the loss in question was sustained?
Mahler v. Commissioner
, Peabody v. Commissioner
, and Horning v. Commissioner
do not dispose of the issue in the instant case
nor are they stare decisis but they are entitled to great weight because they presented the identical question of loss on a similar statement of facts.
The Commissioner of Internal Revenue has determined that the stock in question became worthless prior to 1936 and G. E. Employees Securities Corporation was not entitled to the claimed deduction in 1936. This determination is presumed to be correct and the burden of proof is upon the plaintiff to establish its right to the deduction it claims.
G. E. Employees Securities Corporation must prove that the particular loss was sustained by it in the year 1936, the year in which it was deducted.
This rule has been applied in cases where as in this case, the stock was subsequently sold for a nominal amount after the loss had been sustained.
The worthlessness should be established by some "identifiable event", the test to the applied is one of a practical not a legal nature and it consists in ascertaining when an "identificable event" occurred that fixes the date on which an asset became worthless
are elements indicating worthlessness, and are "identifiable events" determining the deductibility of worthless stock.Each played a part in the history of Middle West Utilities Company prior to 1936, and they are stated not in limitation but as events.
Plaintiff argues, that certain facts in Exhibit P-1 which contains an enumeration of events transpiring subsequent to the date of sales of stock in question, are admissible for the purpose of determining whether or nor a loss was sustained by it on the date of the sale of the stock in question or some year prior thereto. Such events have no bearing upon the determination of worthlessness of the stock in question. It is well settled
that a loss will not be postponed to some indefinite period to ascertain more precisely whether the final outcome of the period of a given transaction will be a loss or a gain. If plaintiff's argument proceeded to its logical conclusion, taxpayers would be permitted to delay making a final accounting if they though that something was going to happen later on that may determine whether a particular transaction was a gain or loss. The Supreme Court had before it a similar problem in the case of Ithaca Trust Co. v. United States
, involving the value of the life estate of a widow who died within the year granted by the statute in which to file an estate tax return. Taxpayer contended that the value should be determined in the light of the future, but the Court said (279 U.S. at page 155, 49 S. Ct. at page 291, 73 L. Ed. 647):
"The question is whether the amount of the diminution, that is, the length of the postponement, is to be determined by the event as it turned out, of the widow's death within six months, or by mortality tables showing the probabilities as they stood on the day when the testator died. The first impression is that it is absurd to resort to statistical probabilities when you know the fact. But this is due to inaccurate tainking. The estate so far as may be is settled as of the date of the testator's death. * * * Therefore the value of the thing to be taxed must be estimated as of the time when the act is done. But the value of property at a given time depends upon the relative intensity of the social desire for it at that time, expressed in the money that it would bring in the market. See International Harvester Co. v. Kentucky, 234 U.S. 216, 222, 34 S. Ct. 853, 58 L. Ed. 1284. Like all values, as the word is used by the law, it depends largely on more or less certain prophecies of the future, and the value is no less real at that time if later the prophecy turns out false than when it comes out true. See Lewellyn v. Electric Reduction Co., 275 U.S. 243, 247, 48 S. Ct. 63, 72 L. Ed. 262; New York v. Sage, 239 U.S. 57, 61, 36 S. Ct. 25, 60 L. Ed. 143. Tempting as it is to correct uncertain probabilities by the now certain fact, we are of opinion that it cannot be done, but that the value of the wife's life interest must be estimated by the mortality tables. * * *"
Conclusions of Law.
The preferred and common stock of Middle West Utilities Company was worthless "so far as human foresight could go" prior to 1936, and when the plaintiff received stock in the new company at the end of the year 1935 for old stock in Middle West Utilities Company, the new stock took on the value of the old.
The plaintiff has failed to sustain the burden of proof and judgment is in favor of the defendant.