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J. R. Clem v. Commissioner. Susie A. Clem v. Commissioner.Clem v. CommissionerDocket Nos. 24863, 24864.
United States Tax Court 1951 Tax Ct. Memo LEXIS 2; 10 T.C.M. (CCH) 1248; T.C.M. (RIA) 51345;December 29, 1951 *2 S. L. Mayo, Esq., for the petitioners. John P. Higgins, Esq., for the respondent.JOHNSONMemorandum Findings of Fact and Opinion
JOHNSON, Judge: Respondent determined deficiencies in income tax for the year 1944 in the amount of $2,416.65 in Docket No. 24863, and $2,416.64 in Docket No. 24864. By amended answer respondent requested increased deficiencies in the amount of $816.04 in Docket No. 24863, and $816.05 in Docket No. 24864, making a total deficiency in the amount of $3,232.69 for each petitioner.
The issues presented for our determination are:
(1) What was the fair market value on March 1, 1913, of shares of stock held by petitioners in the Clem Lumber Company?
(2) Are petitioners entitled to a deduction in 1944 of $2,687.22 either as a business or nonbusiness expense, or as a loss on the abandonment of an invention?
In an amended petition it is alleged that in 1940 petitioners owned 948 3/4 shares of Clem Lumber Company stock which had a basis of $111.40 per share; that in a settlement of income taxes due upon the sale or surrender of 513 3/4 shares of stock in 1940, respondent allowed a basis of $70 per share, or the aggregate amount of $35,962.50, *3 leaving as a basis for the 435 shares here in issue the sum of $113,208.25 rather than $48,459 as alleged in the original petition.
Respondent, in an amended answer, alleges that he erred in favor of the petitioners by understating their tax liability for the year ended December 31, 1944, in that the basis for the 435 shares of stock was $66,974.35 rather than $73,930, as determined by respondent in the notice of deficiency.
Petitioners concede the propriety of disallowance of a $10 Federal use tax on their personal automobile, and that their medical expense deduction, if any, is conditioned upon the final determination.
The proceedings were consolidated for hearing and were submitted on a stipulation of facts, oral and documentary evidence.
Findings of Fact
Petitioners, husband and wife, during the taxable year 1944, were residents of Dallas, Texas, and filed separate income tax returns for that year with the collector of internal revenue for the second district of Texas, reporting income and deductions on the community property basis. The case of petitioner Susie A. Clem is here solely because of her community property status with her husband and, therefore, for the sake*4 of convenience, petitioner J. R. Clem will hereinafter sometimes be referred to as petitioner.
Petitioner entered the lumber business in 1894 as a member of a partnership which started in a small northeast Texas city, Pecan Gap, and expanded by installing branch yards in other cities of northeast Texas and in Oklahoma in what was the old Indian Territory. In 1907 the Clem Lumber Company, a Texas corporation with principal offices in Dallas, was organized to acquire the Oklahoma yards and the partnership yards in Texas. Petitioner received stock in the new corporation for his interest in the partnership, making additional capital contributions by cash.
The Clem Lumber Company (hereinafter sometimes referred to as the Company), weathered the 1907 depression, making profits during and after that period. It grew steadily from 1910 through 1913, at which time petitioner owned about one-third of the stock of the Company, being one of 30 to 40 stockholders.
On December 31, 1944, the Company liquidated and dissolved. At that time petitioner owned 1,522 shares of stock in the Company, for which he received the sum of $94,102.50 in the liquidation. Of the 1,522 shares, all of which had*5 been held by petitioner for more than six months at the time of liquidation, 1,087 shares had been acquired at a cost basis of $40 per share, or an aggregate cost basis of $43,480, as to which there is no controversy. The remaining 435 of the 1,522 shares were owned by petitioner on March 1, 1913. It is the basis of these shares of stock which is here in controversy.
The Clem Lumber Company was a closely held corporation. No sales of stock in the Company were made on or near March 1, 1913. In his deficiency notice respondent allows a cost basis to petitioners of the 1,522 shares of no more than $73,930 arrived at as follows:
1,087 shares at a cost of $40 per share $43,480 435 shares with a basis of $70 per share 30,450 1,522 shares Basis $73,930 In the years between 1913 and 1944, the Company several times increased and decreased its authorized capital stock. The parties agree that the 1944 basis of each of 435 shares of stock derived from shares held since on or before March 1, 1913, is the sum of $7.93 plus 38.46 per cent of the March 1, 1913, fair market value of each share then authorized.
At March 1, 1913, the authorized capital stock of the Company*6 was $200,000 consisting of 2,000 shares, each of $100 par value. The surplus at that time amounted to $39,654.35.
The Company paid cash dividends of $8,750 on January 7, 1913, and of $26,250 on January 28, 1913. It declared a stock dividend of $25,000 on February 15, 1913. One-sixth of its $87,891.98 profits of 1913 is $14,648.66.
The book value of the Company on March 1, 1913, was $239,654.35 representing 2,000 shares of stock at $119.82 a share. The yearly income of the Company from 1908 to 1913 was as follows:
