Covington Nat'l Bank v. Commissioner , 13 B.T.A. 108 ( 1928 )

COVINGTON NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Covington Nat'l Bank v. Commissioner

Docket No. 12834.

United States Board of Tax Appeals

13 B.T.A. 108; 1928 BTA LEXIS 3312;

July 27, 1928, Promulgated

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Exchange of bonds of one corporation for capital stock of another, which was a reorganization company, on a 40 per cent basis, where neither bonds nor stock had any readily realizable market value, held not to entitle one to deduct as a loss the difference between the debt represented by the bonds, and the par value of the stock.

D. E. Mountcastle, for the petitioner.

P. A. Bayer, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income taxes asserted by the respondent for the year 1921. The deficiency amounts to $134.21. It arises from the disallowance, by the respondent, of a deduction claimed as a loss on exchange of bonds for corporate stock.

FINDINGS OF FACT.

The petitioner is a national bank located at Covington, Va. About 1902 or 1903 it loaned to an individual the sum of $9,000, taking as collateral security bonds of the par value of $18,000 issued by a corporation known as the Rich Patch Iron & Ore Co. The borrower died penniless in 1918. No interest was ever paid on the bonds. The company became insolvent and ceased operations. To avert a receivership of the Ore Company, a new corporation, the Rich Patch Land Co., was organized in 1921. The holders of bonds of the Ore Company were given stock in the Land Company on the basis of 40 per cent of their holdings. The petitioner received such stock to the amount, at par, of $7,200 for its debt of $9,000. The exchange was made in July or August of 1921.

No dividends have been paid on the stock of the Land Company. It leased its property to the Lowmoor Iron Co. on a mining basis. The Lowmoor Co. has now ceased to operate and the Land Company is not in operation.

The petitioner, prior to 1921, made repeated efforts to sell the bonds of the Ore Company which it held, but was unable to dispose of them. In making its tax return for 1921 it deducted from income the sum of $1,800 claimed as a loss in exchanging its bonds of the Ore Company for $7,200 of Land Company stock. The respondent has disallowed this deduction.

OPINION.

MARQUETTE: The facts in this proceeding seem to fall squarely within the provisions of section 202(c)(2) of the Revenue Act of 1921.

SEC. 202. (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -

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(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. * * *

No doubt the petitioner sustained a loss - greater even than has been claimed in its tax return. But it is not such a loss as, under the 1921 Revenue Act, can be deducted from income. The determination of the respondent is, therefore, sustained.

Judgment will be entered for the respondent.