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Hauk v. Huwe

MAY 28, 1937

Hauk v. Huwe

DATED MAY 28, 1937
DOCUMENT ATTRIBUTES
  • Case Name
    ETHEL M. HAUK, Plaintiff, v. LOUIS J. HUWE, COLLECTOR OF INTERNAL REVENUE, Defendant
  • Court
    United States District Court for the Southern District of Ohio
  • Docket
    No. 818
  • Judge
    NEVIN
  • Parallel Citation
    37-2 U.S. Tax Cas. (CCH) P9342
  • Language
    English
  • Tax Analysts Electronic Citation
    1937 LEX 89-786

Hauk v. Huwe

                UNITED STATES DISTRICT COURT, SOUTHERN

 

 

                  DISTRICT OF OHIO, WESTERN DIVISION

 

 

      May 28, 1937

 

 

     James & Coolidge, Dayton, Ohio, for plaintiff.

 

 

     Robert H. Jackson, Assistant Attorney General, for defendant.

 

 

     Francis C. Canny, United States Attorney. Andrew D. Sharpe,

 

Samuel E. Blackham, Special Assistants to the Attorney General.

 

 

NEVIN, District Judge:

On January 11, 1934, plaintiff filed her petition in this court, wherein she prays judgment against the defendant in the sum of $3,079.80, with interest thereon, which she claims represents an overpayment of income taxes for the calendar year 1929. The parties having agreed, in writing, to waive trial by jury, the cause was submitted to the court.

The question presented is whether 1,238 shares of stock of the Bay View Estates Corporation, owned by plaintiff, became worthless in 1929, thus entitling her to a deduction from 1929 income to the extent of the cost of that stock.

Bay View Estates Corporation was a Florida real estate corporation, organized in 1920, with headquarters in Miami, Florida. L. T. Cooper was one of the three original subscribers to its stock. He acquired in all 1250 shares at a cost price of upwards of $100.00 per share. In January, 1925, he transferred to his wife, plaintiff herein, 1238 of his 1250 shares. Owing to its real estate transactions, the book value of the stock appreciated.At the time of the transfer from Mr. Cooper to his wife, the stock was valued at approximately $590.00 per share as the basis for the imposition of the gift tax. Plaintiff never received from the company income or emoluments of any kind. She never disposed of any of her stock.

Counsel for the respective parties seem to agree as to the law applicable to the case. That is to say, they seem to agree that the applicable rule is that a taxpayer may deduct a loss arising from investment in capital stock of a corporation when there has been no final disposition, on showing some"identifiable event" by which the loss is clearly evidenced in the year in which the deduction is claimed.

At the beginning of the trial (Rec. P. 4) counsel for defendant stated:

MR. BLACKHAM: The issue, as it seems to be presented, Your Honor, is a very simple one, as to whether or not the loss which is attempted to be taken in the year 1929 was actually sustained in the year 1929 or whether it occurred in some prior year or after the year 1929. Now, as the law seems to be in the case of a loss, there must be some identifiable event which fixes a loss in a particular year in order for a taxpayer to take that loss in that particular year; that the income tax law is based upon a period of yearly accounting, and except insofar as the statutes themselves permit losses to be taken from one year into another, a particular taxable year is the unit within which these events must transpire in order to entitle a taxpayer to a particular loss. It is the Government's position here, if the court please, that there was nothing that transpired in the year 1929 which would fix this loss and entitle the taxpayer to take it in that particular year.

There is no doubt but what the rule of law applicable to the case is correctly stated by counsel. This has been determined by the Court of Appeals of this (Sixth) Circuit. In the case of Gowen v. Commissioner of Internal Revenue, 65 F. (2d) 923, at page 924, the court say:

(1-4) Losses are deductible from income for those years only in which the losses are sustained. In order that a loss arising from investment in the capital stock of a corporation may be regarded as "sustained" in any given year, it is ordinarily necessary either that there be a final disposition of the investment, as by sale or exchange, or that there be some "identifiable event" by which the loss is otherwise clearly evidenced. Howard v. Commissioner, 56 F. (2d) 781 (C. C. A. 6); Commissioner v. R. J. Darnell, Inc., 60 F. (2d) 82 (C. C. A. 6); Commissioner v. Cleveland Trinidad Paving Co., 62 F. (2d) 85 (C. C. A. 6). It is also true that instances may arise in which the value of the shares held has "become finally extinct" and in which the taxpayer is justified in claiming deduction. Royal Packing Co. v. Commissioner, 22 F. (2d) 536 (C. C. A. 9); DeLoss v. Commissioner, 28 F. (2d) 803 (C. C. A. 2); but we are of the opinion that the taxpayer is not required to ascertain at his peril the year in which such value may become extinct, provided the stock is still held and there may be some future value, and provided further that there is an absence of an identifiable event which has been brought to the taxpayer's knowledge and which clearly evidences the destruction, either then or theretofore, of value. On the other hand, where that event happens, as in bankruptcy, voluntary liquidation, actual cessation in the conduct of the business, or the like, and all reasonable hope and expectation of even a partial return of capital is gone, the taxpayer should not be permitted to delay taking the deduction simply because it is more advantageous to him to take it in a later, rather than the earlier, year.

To the same effect, see also--Squier, et al. v. Commissioner, 68 F. (2d) 25 (C. C. A. 2.). Cass v. Helvering, Commissioner, 83 F. (2d) 841 (C. C. A. 8).

The question then is was there an identifiable event (or events) which evidenced that plaintiff's Bay View Estates stock became worthless in 1929.

The court is of opinion from a review of the record that there was.

The record shows that there was a "boom" in Florida real estate through the years 1925 and 1926, and that while this subsided somewhat, beginning in September, 1926, due to a hurricane, it still continued--in perhaps a lesser degree--with large sums being spent to rehabilitate properties that had been damaged by the hurricane. Mr. Gibson, who had been an accountant for the corporation, and thereafter secretary and treasurer, testified (Rec. pp. 58-59):

     Q. Just a moment, Mr. Gibson. Let us get our dates fixed here.

 

Say starting with the end of--well, we will say 1927, what

 

conditions--I am not trying to point out to you what your

 

identifiable events are, but I would like you to get your signals

 

here, so we can understand at what periods you are talking about. A.

 

In 1927 we were able to carry on and meet our obligations. No one was

 

pressing us.

 

 

     Q. That was 1927? A. 1927.

 

 

     Q. How about 1928? A. 1928, the same situation obtained; in

 

fact, the matter looked so encouraging in 1928 that we paid taxes the

 

latter part of that year on the properties then owned.

 

 

     Q. What kind of taxes do you refer to? A. Real estate taxes,

 

taxes on real property.

 

 

     Q. Did you ever pay any after that? A. No, sir. In 1929 the

 

conditions of the banks were so precarious that we removed the funds

 

of our various companies from the banks in Miami and transferred them

 

to the northern banks.

 

 

And (Rec. pp. 57-58):

     Q. From 1929 on what happened to Bay View Estates Corporation?

 

A. Well, from 1929 on there was very little happening excepting a

 

matter of liquidation and what you might call possible abandonment

 

later. There was in 1930 some little income from a property which was

 

under foreclosure. The subsequent years there was no income.

 

 

     Q. And what did you say as to the abandonment of the company? A.

 

Why, I would say that possible abandonment of the company took place

 

in the subsequent year.

 

 

     Q. Why was the company never dissolved? A. Did not have funds to

 

dissolve. There wasn't anybody willing to advance them, and evidently

 

none of the creditors were anxious to do anything about it.

 

 

     Q. In the light of your knowledge of, familiarity with the

 

affairs of Bay View Estates Corporation and the conditions

 

surrounding its activities at the end of the year 1929, in your

 

opinion what, if any, value did the stock of that company have? A. In

 

my opinion the stock had no value.

 

 

That at the end of the year 1929, the corporation was hopelessly insolvent and the value of the stock entirely destroyed, appears to be admitted by all the parties. Atthe end of the year 1929, the company had (Rec. p. 43) assets of a "fair value" of$63,230.47, and at that time it had real, actual and known liabilities of (Rec. p. 57) "approximately $232,800."

It is defendant's position (as stated in his brief, page 17) that "Whatever may be said about its insolvency at that time (December 31, 1929) was equally true as of December 31, 1928, and quite probably was true as of December 31, 1927."

The court cannot agree that the record bears out this claim upon the part of defendant. It was in 1929 (Rec. p. 55) for the first time that it became evident to the company that as a result of the checking of its income tax returns for the years 1924, 1925, 1926, 1927 and 1928, it would be required by that Department to pay additional taxes in the sum of$111,014.65. These taxes (Rec. p. 52) were for additional assessments made for the years 1924, 1925 and 1926, no additional assessments having been made for the years 1927 and 1928. The sum just mentioned does not include interest.

Mr. Gibson testified (Rec. p. 55):

     Q. Well, when did it become evident, when did it first become

 

evident to you that you were going to have to pay the taxes that were

 

being discussed? A. In 1929.

 

 

Later on (Rec. p. 56), to-wit, on March 22, 1930, an offer in compromise of these taxes was made, and on March 20, 1931, it was accepted.

It is a matter of common knowledge that the crash on the stock market with its resulting effect on all stocks took place in the Fall of 1929. The claim that the stock was of no value during the years prior to 1929, or during the year 1928 and probably 1927, was, for the first time, asserted by counsel for defendant upon the trial of this cause. Prior to that time the claim had been asserted by the Treasury Department at Washington, through the Commissioner of Internal Revenue, that the stock did have value even as late as and up to and including the year 1929.

On April 22, 1932 (Plaintiff's Exhibit 6), the Commissioner wrote to plaintiff as follows:

Further reference is made to your tax liability for the year 1929 as disclosed in the notice of deficiency mailed you under date of March 18, 1932. * * * After careful consideration of detailed information submitted under date of April 4, 1932, by the agent in charge relative to the value in 1929 of stock of the Bay View Estates Corporation it appears that the stock possessed considerable value in 1929 and, therefore, no deduction is allowable in that year based upon the theory that the stock was worthless.

Subsequently (Plaintiff's Exhibit 8), the Commissioner again wrote:

Reference is made to your claim filed for the refund of$3,079.80 income tax for the calendar year 1929. The claim is based on the contention that a loss of $123,800.00, representing cost of 1,238 shares of Bay View Estates Corporation stock, should be allowed as a deduction on your 1929 return inasmuch as this stock became worthless during 1929. Information on file in this office and also furnished by the internal revenue agent in charge at Cincinnati, Ohio indicates that the Bay View Estates Corporation is still in existence and that the stock had some value in the year 1929. Inasmuch as no evidence was submitted showing that this corporation was insolvent during 1929, your claim will be rejected.

It will be noted from the foregoing that the Commissioner stated that the claim would be rejected because there was no evidence submitted "showing that this corporation was insolvent during 1929."

As heretofore stated, in the instant proceedings not only was its insolvency in the year 1929 shown, but it is not disputed.

In their brief (Page 17), counsel for defendant state (referring to the exhibits just above cited):

     In those letters the reasons set forth for the denial of the

 

claim for refund were that the corporation was still in existence and

 

the stock had some value in the year 1929. This appears to be

 

inconsistent with the position of the defendant assumed at the trial.

 

* * * The defense, however, while perhaps inconsistent with the

 

reasons ascribed for the denial of the claim for refund, is entirely

 

consistent with the determination of the Commissioner, which was that

 

the plaintiff had suffered no loss in 1929 by reason of her ownership

 

of the stock. The reasons given appear to be incorrect in view of the

 

evidence at the trial, * * * but that evidence conclusively shows

 

that the Commissioner achieved the correct result, however much in

 

error his reasons might have been. Having achieved the correct

 

result, his determination should be sustained.

 

 

Counsel state that the Commissioner did not have before him all of the evidence appearing at the trial. Assuming this to be true, nevertheless (as stated) the very evidence which the Commissioner said was lacking, to-wit, evidence "showing that this corporation was insolvent during 1929" and the absence of which led him to reject the claim, is now in the record and before the court.

The court agrees that if the Commissioner had achieved the correct result, his determination should not be set aside because of errors in the reasons which he ascribed for arriving at his conclusion. In other words, if the result is correct, the reasons are not material. In the instant case, however, the court cannot agree that the Commissioner "achieved the correct result."

The burden of proving that the stock, the cost of which she is seeking to deduct, became worthless during the taxable year1929 is upon the plaintiff.Squier v. Commissioner, 68 F. (2d) 25.

The court is of opinion that plaintiff in the instant case has maintained the burden thus imposed upon her.

The evidence shows that (Rec. P. 43) prior to 1929, the stock had some value; that (Rec. P. 59) in 1927 and 1928, it was able to carry on and meet its obligations, and that the situation was so encouraging that (Rec. P. 59) during the latter part of 1928 it paid its real estate taxes. It was because of events occurring during the year 1929 (Rec. P. 58) that the stock became totally worthless. The insolvency of the company and the events occurring in 1929, which produced that condition, are the "identifiable event" (or events) which evidenced that the loss was "sustained" in the year 1929, within the meaning of the rule announced in Gowen v. Commissioner, supra.

At the close of plaintiff's evidence (Rec. P. 77), defendant filed a motion to dismiss upon certain grounds (Rec. P. 78) set forth in the record. At the conclusion of the taking of all the evidence (Rec. P. 82) this motion was renewed.

The court at the time overruled the motion, stating, however, that it would pass finally upon it "when I pass on the case ultimately." The motion is overruled.

Subsequently, but upon request made at the trial, to-wit, on May 23, 1936, defendant filed a motion wherein he"moves the court for judgment" for the reasons set forth in said motion. This motion for judgment on behalf of defendant is also overruled.

During the progress of the trial objections were made from time to time by counsel representing each of the parties, respectively. In some instances the court stated that it would"overrule the objection at this time," but determine as to the validity of the objection later.

Whatever rulings were made by the court during the progress of the trial as shown by the record, are now and here adhered to and confirmed.

Counsel for plaintiff attached to their reply brief a document entitled "Certificate of Payment of Inheritance Tax," and in their reply brief ask the court to reopen the case in order that the certificate of the Probate Court of Montgomery County, Ohio, might be inserted in the record.

After the court had corresponded by letter with counsel representing both parties, counsel for plaintiff withdrew its request to have the case re-opened. The certificate just referred to and attached to the reply brief and its contents were not, therefore, considered by the court in arriving at its conclusion.

The court finds upon the law and the evidence that plaintiff is entitled to the relief prayed for in her petition, and an order may be drawn accordingly.

DOCUMENT ATTRIBUTES
  • Case Name
    ETHEL M. HAUK, Plaintiff, v. LOUIS J. HUWE, COLLECTOR OF INTERNAL REVENUE, Defendant
  • Court
    United States District Court for the Southern District of Ohio
  • Docket
    No. 818
  • Judge
    NEVIN
  • Parallel Citation
    37-2 U.S. Tax Cas. (CCH) P9342
  • Language
    English
  • Tax Analysts Electronic Citation
    1937 LEX 89-786
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