Hartmann v. Commissioner

Deduction allowed of loss sustained upon the sale of certain shares of stock in the year 1923.

Robert P. Smith, Esq., and Hobart Richey, Esq., for the petitioner.

R. H. Ritterbush, Esq., for the respondent.

SMITH: This proceeding is for the redetermination of a deficiency of $1,655.91 in income tax for
the year 1923. The petitioner contends that the respondent erred in not allowing the deduction in
that year of an alleged loss upon the sale of certain shares of stock. Instead of allowing the
loss claimed by the petitioner the respondent has increased petitioner's income by the amount of
$45, representing gain derived from the sale of the stock.

The facts are that the petitioner purchased, in November, 1919, 1,000 shares, par value $10 per
share, of stock in the Boger Oil Corporation for a consideration of $10,000. The Boger Oil
Corporation was organized and financed by Otis & Co. and Hallgarten & Co., brokers of Cleveland,
Ohio, and New York, respectively. During the year 1920 the Boger Oil Corporation was placed in
the hands of a receiver. The receivership was instituted by the sponsors of the company and was
said to have been for the protection of the stockholders. One of the reasons for the sponsors
desiring the receivership was that they wished to relieve the company of the management of one of
its officers who had a five-year contract with the company and whose management had proved
unsatisfactory. The petitioner as one of the stockholders was notified prior to the receivership
, by a representative of Otis & Co., that the Boger Oil Corporation would be placed in
receivership for the purpose of reorganization and that the investments of the stockholders would
not be jeopardized. The petitioner was further advised that the Boger Oil Corporation would be
reorganized and that he would receive share for share of stock in the new corporation in exchange
for his stock in the Boger Oil Corporation. Like notice was also given to the other stockholders
of the Boger Oil Corporation.

At a receivership sale the assets of the Boger Oil Corporation were purchased by representatives
of the said company or its sponsors for an amount less than the company's liabilities and were
all paid into a new corporation known as the Crystal Oil Corporation. The stock of the Crystal
Oil Corporation was issued share for share to the stockholders of the Boger Oil Corporation. The
stock of the Crystal Oil Corporation was of the same par value of that of the Boger Oil
Corporation.

In purchasing his shares of stock of the Boger Oil Corporation in 1919, the petitioner paid to
George W. Baron & Co., representatives of Otis & Co., of Cleveland, $1,500 in cash and his note
for $5,000, which was later paid. He also secured a release from George W. Baron & Co. of 500
shares of said stock which he used as collateral for a loan of $3,500 with the Bank of Cameron,
of Cameron, West Virginia. This loan was carried by the Bank of Cameron until April or May in the
year 1923, when it was paid by the petitioner. The Bank of Cameron was informed in the year 1920
of the receivership of the Boger Oil Corporation and the organization of the Crystal Oil
Corporation and agreed to accept, share for share, stock of the Crystal Oil Corporation instead
of stock of the Boger Oil Corporation as collateral on the loan. In the year 1922 the Bank of
Cameron called upon the petitioner for additional collateral which was furnished by the
petitioner.

During the year 1923 the Crystal Oil Corporation proved a business failure and the petitioner
sold his shares of stock in the company for $45.

The evidence clearly establishes that the petitioner received shares of stock of the Crystal Oil
Corporation in exchange for his shares of stock in the Boger Oil Corporation and not as a gift as
the respondent contends. There is nothing to indicate that the shares of stock of the Crystal
Oil Corporation had any greater or lesser value than the shares of stock of the Boger Oil
Corporation. The petitioner sustained his loss in the year 1923 when he sold the shares of stock
of the Crystal Oil Corporation and is entitled to deduct this loss in that year.

Judgment of no deficiency will be entered for the petitioner.