Opinion
Docket Nos. 24393 24394.
1950-12-14
FREDERICK R. BAUER AND RUTH R. BAUER, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARY STEWART VIVIAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George R. Sheriff, Esq., for the petitioners. Rigmor O. Carlsen, Esq., for the respondent.
Petitioners received distributions in liquidation from a corporation and paid the amount of a judgment against the corporation in a later year. Held, the amounts so paid are ordinary and not capital losses to petitioners in the year of payment. Stanley Switlik, 13 T.C. 121. George R. Sheriff, Esq., for the petitioners. Rigmor O. Carlsen, Esq., for the respondent.
The respondent determined deficiencies in the petitioners' income tax liabilities for the year 1944 as follows:
+------------------------------------------------------+ ¦Docket No. ¦Petitioner ¦Amount ¦ +------------+------------------------------+----------¦ ¦24393 ¦Frederick R. and Ruth R. Bauer¦$14,251.41¦ +------------+------------------------------+----------¦ ¦24394 ¦Mary Stewart Vivian ¦8,057.10 ¦ +------------------------------------------------------+
The issue is whether a judgment paid by petitioners for a liquidated corporation, of which they were transferees, was a capital loss or an ordinary loss to them in the year of payment.
The proceedings were consolidated and submitted on a stipulation of facts, with exhibits attached. The stipulated facts are so found and are incorporated herein by this reference.
FINDINGS OF FACT.
Petitioner, Mary Stewart Vivian, is an individual residing in Plainfield, New Jersey, and her income tax return for the year 1944 was filed with the collector of internal revenue for the second district of New York. She was the wife of Davenport Pogue, who died on September 17, 1937. She married Leslie L. Vivian some time subsequent to 1940.
Petitioners, Frederick R. Bauer and Ruth R. Bauer, are husband and wife, residing at Lakeville, Connecticut. Their joint return for the year 1944 was filed with the collector of internal revenue for the second district of New York.
A corporation, known as Bauer, Pogue & Co. Inc., was organized in April 1933 under the laws of the State of Delaware. One-half of the stock of the corporation was issued to Frederick R. Bauer, and one-half to Davenport Pogue. Upon the death of Davenport Pogue on September 17, 1937, one F. Donald Arrowsmith was appointed executor of his will and the 50 per cent share of the stock of the corporation belonging to Pogue was transferred to his estate.
The corporation began the first of a series of distributions in complete liquidation on or about December 15, 1937, and made further distributions in liquidation in the years 1938, 1939, and 1940. The last of the distributions in complete liquidation was made in 1940. All such distributions were made as follows: one-half thereof to Frederick R. Bauer, petitioner herein, and the other one-half, representing the shares formerly owned by Davenport Pogue, was distributed in 1937 and 1938 to the Estate of Davenport Pogue, deceased, and in 1939 and 1940 to his widow, Mary Stewart Pogue (now Vivian), petitioner herein, as heir of the Pogue estate.
In the case of the 50 per cent interest formerly owned by Davenport Pogue, no report of the liquidating dividend for 1937 was shown in the return of the Estate of the Davenport Pogue, deceased, for the year, but the distribution for the year 1938 was reflected in the income tax return of the Estate of Davenport Pogue, deceased, for that year. For the years 1939 and 1940 the liquidating dividends representing the Pogue interests paid to Mary Stewart Pogue (now Vivian) were reflected in her income tax returns.
The total liquidating distributions paid to each of the petitioners Vivian and Bauer, during the years 1937 to 1940, inclusive, exceeded the sum of $47,963.25.
On or about June 8, 1939, an action was commenced in the Supreme Court of the State of New York by Adele D. Trounstine as Ancillary Executrix of the Last Will and Testament of one Norman S. Goldberger as plaintiff, against Bauer, Pogue & Co., Inc., Frederick R. Bauer, and F. Donald Arrowsmith as Executor of the Last Will and Testament of Davenport Pogue, as defendants. This proceeding was transferred to the District Court of the United States for the Southern District of New York because of diversity of citizenship. The suit resulted in a judgment in favor of the plaintiff therein, which decision was subsequently affirmed on appeal by the Circuit Court of Appeals in and for the Second Circuit. Trounstine v. Bauer, Pogue & Co., 144 Fed.(2d) 379. Certiorari was thereafter applied for and denied. Bauer, Pogue & Co., v. Trounstine, 323 U.S. 777.
Thereafter, on December 11, 1944, after the judgment in the above proceeding had become final, each of the petitioners herein, Vivian and Bauer, was required to, and did, pay one-half of the judgment. The net amount of the judgment, after certain credits and adjustments, was in the amount of $95,926.52, inclusive of interests and costs.
The distributions of liquidating dividends of the corporation to petitioner Frederick R. Bauer were reflected in his income tax returns for the years 1937, 1938, 1939, and 1940 as capital transactions.
The distributions of liquidating dividends of the corporation to the Estate of Davenport Pogue, deceased, in 1938, and to Mary Stewart Pogue (now Vivian) in 1939 and 1940, were reflected in the income tax returns of each of the distributees of said years, respectively, as capital transactions.
Petitioners in each case deducted the payment by each of the sum of $47,963.25 as an ordinary loss in their respective income tax returns for the calendar year 1944.
Respondent determined that the payment by each petitioner of the sum of $47,963.25 represented a capital loss deductible as provided by section 117 of the Internal Revenue Code.
OPINION.
VAN FOSSAN, Judge:
The issue is whether the judgment paid by petitioners for the corporation, of which they were transferees, was a capital loss or an ordinary loss to them in the year of payment.
The respondent contends that the payment of the judgment ‘grew out of, was related to, and took its character from a capital transactions, namely a long-term capital gain * * * .‘
The respondent is aware that the case of Stanley Switlik
appears contrary to his position her but he contends that the case is distinguishable. The Switlik case and others preceding it were concerned with the payment by transferees of the transferor's taxes, whereas here, the transferees paid the amount of a judgment against their transferor. The respondent does not argue that the case is on that ground so distinguishable nor do we think so. Respondent attempts, however, to distinguish the Switlik case on the basis of circumstances surrounding the payment of the judgment. He points out that the petitioners were aware of the liquidation, that the payments of the resulting judgment might have been made before the last dividend in liquidation was paid and concludes that the judgment payments ‘cannot be disassociated in their ultimate character from the distributions in liquidation which such payments would have served to diminish.‘ We fail to see a difference in principle between knowledge by transferees that they would be held on a judgment against their transferor and knowledge that a tax deficiency might be assessable against them.
13 T.C. 121, affd. (CA-3), 184 Fed.(2d) 299.The stockholders of a corporation received distributions in complete liquidation in 1941 and each reported his pro rate 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 year 1940 and 1941. It was held that the losses sustained by the stockholders as a result of payments made in 1944 were deductible in that year as ordinary losses and not as capital losses.
Respondent contends further that the liquidation dividends were charged with a trust in favor of creditors and petitioners did not receive them ‘under claim of right and without restriction‘ as in the Switlik case. This trust fund theory lends no support to respondent's position. Insolvency, rather than knowledge of liquidation, is, by the general rule, the basis for the application of the trust fund doctrine, Mertens, The Law of Federal Income Taxation, Section 53.37, and insolvency of the transferor is not an element in this case. The respondent states that the petitioners as transferees ‘made no attempt to provide for this liability‘ and that a complete liquidation was made ‘leaving no assets in the hands of the corporation with which to meet the obligation‘ for the judgment. The petitioner points out that under the provisions of section 115(c) as its existed prior to the 1942 Act, the distributions could not be postponed but must be completed in 2 years in order to qualify as capital gains.
The respondent's remaining contentions reiterate his premise that the payment of the judgment was such a part of the capital transaction that it should not be regarded as an ordinary loss. Unless we regard the payment of a judgment as different in principle from a payment of taxes, this argument is to no avail and the issue is disposed of by the Switlik case. We see no need to revive or repeat the arguments raised therein since we are of the opinion that the case is not distinguishable. Any other view would multiply gossamer distinctions and ignore the harmonizing principle. Cf. Roberta Pittman, 14 T.C. 449, and Seth M. Milliken, 15 T.C. 243.
We hold that the payment by petitioners of the amount of a judgment against a corporation of which they were transferees was an ordinary loss to them in the year of payment.
Decisions will be entered under Rule 50.