Lincoln v. Commissioner , 24 T.C. 669 ( 1955 )

Joseph C. Lincoln and Lesghinka Lincoln, et al., ¹ Petitioners, v. Commissioner of Internal Revenue, Respondent

Lincoln v. Commissioner

Docket Nos. 38869, 38876, 39055, 39159, 39160

United States Tax Court

24 T.C. 669; 1955 U.S. Tax Ct. LEXIS 139;

July 18, 1955, Filed

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">*139 Decisions will be entered under Rule 50.

1. A hotel corporation operated at a loss for several years. In 1949 the stockholders adopted a plan whereby all of the preferred stock was surrendered to the corporation and canceled and all of the common stock was sold for $ 1 a share. An individual, the son of one of the Lincoln family stockholders, who was not a stockholder before adoption of the plan, paid $ 100,000 new capital to the corporation for which he received 1,000 shares of new preferred stock; and a certificate for 487 1/2 shares of common stock, out of 750 shares, was issued to him. A certificate for 262 1/2 shares of common stock was issued to the new hotel manager. Upon the facts, held, that the old preferred and common stock did not become worthless at any time in 1949; held, further, that loss deductions by the Lincoln petitioners from their sales of common stock are not precluded by sec. 24 (b) (1) (A), 1939 Code.

2. On July 14, 1949, Macklin, a partner in Macklin Company, died. His death terminated the partnership which was engaged in selling securities. The surviving partner, Lincoln, through procedures allowed under Ohio law, elected in the Probate">*140 Court to purchase the deceased partner's interest in the partnership assets at their appraised value. Distribution of all partnership assets was made to Lincoln by court order. Lincoln applied the assets to pay partnership debts to creditors including himself. Also, Lincoln received $ 10,000 from insurance on Macklin's life pursuant to an agreement executed when the partnership was formed but which expired before Macklin's death. Upon the facts, held, that Lincoln purchased, as surviving partner, the deceased partner's interest. Since the application of securities (assets) in payment of debts was effected by Lincoln as the purchaser of the deceased partner's interest in liquidation of the partnership, and since stock in the hotel corporation, supra, owned by the partnership was not worthless before July 14, 1949, the partnership did not sustain net loss in its last taxable period but realized a gain.

">*141 Charles D. Leist, Esq., William H. Fleming, Esq., and Glen O. Smith, Esq., for the petitioners.

James A. Scott, Esq., for the respondent.

Harron, Judge.

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HARRON

">*670 The Commissioner determined deficiencies for 1949 in the income tax liability of Joseph C. and Lesghinka Lincoln, Lillian C. Lincoln, and John C. and Helen C. Lincoln, in the amounts set forth below. The Commissioner determined a deficiency in the income tax liability of Gordon S. Macklin, deceased, for the taxable period January 1, 1949, to July 14, 1949, the date of his death. Gordon S. Macklin, deceased, was a member of a partnership. In his income tax return for 1947, Gordon S. Macklin claimed a net operating loss carry-back">*142 from 1949, representing his share of an alleged net operating loss for the partnership for the year 1949. The Commissioner has determined that the partnership did not have a net operating loss for the year 1949, and, therefore, he disallowed the deduction of a net operating loss carry-back which was taken in the income tax return for 1947 of Gordon S. Macklin, deceased. The deficiencies in income tax determined by the Commissioner are as follows:

Docket No.	Taxpayer	Year	Deficiency
38869	J. and L. Lincoln	1949	$ 6,753.13
38876	Lillian Lincoln	1949	6,753.12
39055	John and Helen Lincoln	1949	35,783.07
39159	G. S. Macklin Estate	1947	8,965.55
39160	G. S. Macklin Estate	1949	9,991.17

In Docket Nos. 38869 and 38876, the petitioners claim that there is overpayment of income tax for 1949 in the amounts of $ 971.51 and $ 1,637.74, respectively.

In Docket No. 39055, petitioners have abandoned issues relating to a bad debt loss and a farm loss. In Docket Nos. 38869, 38876, and 39055, respondent has conceded the issue relating to distributions of Wade Park Manor Corporation to petitioners. The parties have agreed that the issue relating to a net operating loss">*143 carry-back, in Docket No. 39159, and the issue relating to deduction for medical expense, in Docket No. 39160, will be disposed of under a Rule 50 recomputation. Effect will be given under Rule 50 to stipulations of the parties. Some of respondent's determinations are not contested.

One of the issues relates to a corporation, Flamingo Hotel Company. John, Helen, Joseph, and Lillian Lincoln, Gordon S. Macklin, deceased, and Gordon Macklin & Company owned stock of Flamingo Hotel Company. One question to be decided is whether the preferred ">*671 and common stock of Flamingo Hotel Company became worthless in 1949. As of September 15, 1949, there was a transaction which involved all of the common stock of Flamingo Hotel Company, and John, Helen, Joseph, and Lillian Lincoln sold their common stock. If it is held that Flamingo Hotel Company stock did not become worthless in 1949, it is necessary to decide whether long-term capital loss deductions claimed by the Lincoln petitioners are not allowable because of the provisions of section 24 (b) (1) (A) of the 1939 Code.

Another issue relates to the partnership, Gordon Macklin & Company. John C. Lincoln and Gordon S. Macklin, deceased, ">*144 were the only members of the partnership. The death of Macklin on July 14, 1949, terminated the partnership. The questions to be decided are whether John C. Lincoln, the surviving partner, sold his interest in the partnership and sustained a long-term capital loss, or whether Lincoln purchased the interest of his deceased partner in the partnership.

FINDINGS OF FACT.

The stipulated facts are found accordingly. The stipulations, together with the attached exhibits, are incorporated herein by this reference.

Joseph C. and Lesghinka Lincoln filed a joint return. John C. and Helen Lincoln filed a joint return. Lillian C. Lincoln filed an individual return. All are residents of Arizona, but they have a mailing address, in care of their attorneys, in Cleveland, Ohio, and they filed their returns for 1949 with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

Gordon S. Macklin died on July 14, 1949, a resident of Cleveland, Ohio. He was survived by his wife, Evelyn B. Macklin. Glen O. Smith and Evelyn B. Macklin are the duly appointed executors of the Estate of Gordon S. Macklin, Deceased. Gordon S. and Evelyn B. Macklin filed a joint return for">*145 1947. An amended return for 1947 was filed after Macklin's death. An individual return was filed for Macklin for the taxable period beginning on January 1, 1949, and ending on July 14, 1949. All of the returns were filed with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

John C. and Helen Lincoln are the parents of Joseph C. Lincoln, Lillian C. Lincoln, and David C. Lincoln. David Lincoln was 24 years of age in 1949. Although John and Helen Lincoln have lived in Arizona for about 20 years, they have substantial investments and property interests in the vicinity of Cleveland, Ohio, as do their children, also.

Gordon S. Macklin, deceased, and Evelyn Macklin had three children, Gordon, Jr., John, and Virginia. The children, as well as Evelyn Macklin, survived Gordon S. Macklin.

">*672 Macklin Operated, Inc., was an Ohio corporation of which Gordon Macklin was president and the majority stockholder. Among the directors of Macklin Operated, Inc., were John C. Lincoln and William H. Bemis, an attorney and a partner in the law firm, Baker, Hostetler & Patterson, of Cleveland. C. B. Whitcomb was an officer of Macklin Operated; he became president">*146 after Macklin's death. The firm of Baker, Hostetler & Patterson rendered services in the organization of Macklin Operated in 1944. The corporation was dissolved in 1951. The business of Macklin Operated consisted chiefly of services in the supervision of various properties in which the Lincoln family had controlling interests. Among the properties in Cleveland which Macklin Operated administered and supervised were Wade Park Manor Hotel, Deshler Hotel, Sovereign Hotel, Auditorium Hotel, LeVeque-Lincoln Tower Building, and Bulkley Building.

John C. Lincoln was the founder of the Lincoln Electric Company in Cleveland. He has had various business interests, in addition, among which are investments in hotel properties. For many years the Lincoln family has had very substantial interests in hotel properties. John Lincoln built the Camelback Inn in Phoenix, Arizona, in the 1930's. He has lived in Phoenix, Arizona, since then.

William H. Bemis has represented members of the Lincoln family since the early 1940's, and he became their personal counsel on about July 15, 1949. He was a director of several corporations which operated hotel properties in which the Lincoln family owned ">*147 interests. Bemis, in his practice, represents individuals who have interests in a substantial amount of property in Cleveland.

Gordon S. Macklin, for a great many years, was an associate of John Lincoln, and he represented the Lincoln family in investment matters.

In 1940, Gordon Macklin and John Lincoln formed a partnership, Gordon S. Macklin & Company, in Cleveland, in which they were the only partners. The business of Macklin & Company was purchasing, selling, and dealing in securities both for its own account and for the accounts of customers.

Alice M. Bemis is the wife of William H. Bemis.

Flamingo Hotel Company: The Flamingo Hotel is a resort hotel located in the City of Miami Beach, Florida, at 1500 Bay Road on the shore of Alton Beach Bay, which is part of Biscayne Bay. It is located in an area which is described as the bay side of the city of Miami Beach, which is distinguished from the ocean side of the city. The main building of the hotel was constructed in 1920; cottages were built in 1920; the annex was built in 1922; the servants' quarters were built in 1922; other improvements were made in 1922 and 1929. The property covers an area of 13 1/2 acres and has a ">*148 frontage on Biscayne Bay.

">*673 The Flamingo Hotel was owned and operated by Carl G. Fisher Corporation for many years. However, after 1941, the United States Army leased the property until the end of 1943, after which occupancy the Navy leased the property until sometime in 1946. The Fisher Corporation sold the property in July 1946.

On July 18, 1946, an agreement for the sale of the Flamingo Hotel property was entered into by the Fisher Corporation and Gordon Macklin & Company.

On July 31, 1946, the Flamingo Hotel Company was organized under the laws of Ohio for the purpose of owning and operating hotels and conducting a hotel business. Its authorized capital stock consisted of 4,000 shares of preferred stock of a par value of $ 100 per share, and 6,000 shares of common stock of a par value of $ 1 per share.

The officers and directors of the Flamingo corporation were as follows: John Lincoln, chairman of the board and director; Gordon Macklin, president and director; Edgar F. Bennett, vice president and director; Lawrence Stanley, secretary and director; Gordon Macklin, treasurer; E. L. Ryder, assistant secretary; and William H. Bemis, director.

In 1946, the Flamingo Company">*149 issued 2,000 shares of preferred stock, and 750 shares of common stock. Both classes of stock were issued for a subscription price of $ 100 per share.

On August 30, 1946, the agreement to purchase the Flamingo Hotel was assigned to the Flamingo corporation by Macklin & Company.

As of the end of 1946, the stockholders of the Flamingo Hotel Company, and the cost or other basis to each, of the shares held, were as follows:

			Cost or
Stockholder	Common	Preferred	other basis
	shares	shares	to stockholder
A. W. Hutton	37 1/2	100	$ 13,750
Gordon S. Macklin	225	395	62,000
John C. Lincoln	150	0	15,000
Lawrence Stanley	150	400	55,000
Alice M. Bemis	30	80	11,000
Gordon Macklin & Co	7 1/2	47 1/2	5,500
Macklin Operated, Inc	37 1/2	237 1/2	27,500
Evelyn B. Macklin		1 20	2,000
John Lee Macklin		1 10	1,000
Virginia Macklin		1 5	500
Gordon S. Macklin, Jr		1 5	500
Joseph C. Lincoln	37 1/2	233	27,050
Lillian Lincoln	37 1/2	233	27,050
Helen Lincoln	37 1/2	234	27,150
Totals	750	2,000	$ 275,000

">*150 In the group which owned all of the outstanding stock of the hotel corporation at the end of 1946, Hutton, Stanley, and Bemis were not related to each other or to any members of the Lincoln or Macklin families; and members of the Macklin family were not related to ">*674 members of the Lincoln family. The controlling interest in Macklin Operated, Inc., an Ohio corporation, was owned by Macklin, and, later, by his estate.

No additional stock of Flamingo Hotel Company was issued prior to September 15, 1949.

In 1947, Macklin sold all of his Flamingo preferred stock (395 shares) to Gordon Macklin & Company for $ 37,525, at $ 95 a share.

Upon the death of Macklin in July 1949, his Flamingo common stock (225 shares) was acquired by his estate, and the Flamingo stock owned by the partnership (7 1/2 shares of common and 442 1/2 shares of preferred) was transferred to John C. Lincoln, the surviving partner.

There were no other changes in the ownership of Flamingo stock between the end of 1946 and the beginning of August 1949.

The following were directors of the Flamingo Hotel corporation for the periods indicated:

Gordon S. Macklin	August 9, 1946 to July 14, 1949
John C. Lincoln	August 9, 1946 to September 7, 1949
Edgar F. Bennett	August 9, 1946 to September 27, 1947
Lawrence Stanley	August 9, 1946 to August 17, 1949
William H. Bemis	August 9, 1946 to date
C. B. Whitcomb	September 6, 1949 to date
Stephen C. Thayer	September 6, 1949 to date
A. W. Hutton	September 27, 1947 to September 7, 1949

">*151 Macklin was president and treasurer from its organization until his death.

In September 1946, the Flamingo Hotel Company purchased the hotel property, including land, buildings, furniture, china, glassware, silver, linens, carpets, and various equipment, for $ 1,500,000, of which amount $ 425,000 was paid in cash by September 3, 1946, and $ 900,000 was borrowed from Acacia Mutual Life Insurance Company. The Fisher Corporation took a purchase money second mortgage, for the balance, $ 175,000. Acacia Life Insurance Company took the first mortgage to secure its loan.

Prior to making the mortgage loan, Acacia had appraisals made of the Flamingo Hotel property by two appraisers who were not its employees or agents, and it also obtained other opinions about the value of the property for the purposes of a loan and mortgage.

The Flamingo Company gave its note to Acacia, dated September 27, 1946, for $ 900,000, and 4 per cent interest per annum. The note was payable in monthly installments of $ 5,859, for principal and interest, beginning on October 27, 1946, to August 27, 1964, over a period of 18 years. The note was secured by a first mortgage.

The Flamingo Company gave the Fisher Corporation">*152 6 serially numbered notes, which were in approximately equal amounts, aggregating ">*675 $ 175,000. Each note was for $ 29,166.66 or $ 29,166.67, and bore 4 1/2 per cent per annum interest. One note was payable each year on September 7; interest was payable semiannually. The notes were dated September 7, 1946. The first note was due September 7, 1947, one year after its date. Notes numbered 2, 3, 4, 5, and 6, matured 2, 3, 4, 5, and 6 years after September 7, 1946, respectively. The notes were secured by a second mortgage.

The Flamingo Company has operated the Flamingo Hotel from the time of acquisition until the present. The hotel is operated only during the winter season as a restricted resort hotel. The operating season covers 5 months, December, January, February, March, and April. The first season of operations began on December 1, 1946, and ended April 30, 1947.

The Flamingo Company keeps its books on an accrual basis and for a fiscal year beginning on December 1 and ending on November 30. It realizes income almost solely from operating the hotel, and it receives income only during the operating season.

The Flamingo Company, hereinafter called Flamingo, began business">*153 in 1946 with paid-in capital in the amount of $ 275,000, plus borrowed funds in the amount of $ 275,000.

Flamingo borrowed $ 200,000 at 2 1/2 per cent interest from the Cleveland Trust Company on August 31, 1946, before it purchased the hotel property. Three stockholders, John Lincoln, Gordon Macklin, and Lawrence Stanley, applied for the loan, and they jointly and severally guaranteed repayment of principal and interest at the maturity of the loan. Also, they pledged with and assigned to the bank, the securities listed in a loan agreement as collateral security for the guaranteed repayment. They executed an agreement guaranteeing repayment of the loan. The note of Flamingo was dated August 31, 1946, and was due on September 1, 1947. It was unsecured insofar as the assets of Flamingo were concerned.

On October 3, 1946, Flamingo borrowed $ 75,000 from five of its stockholders at 4 per cent interest. The stockholders and the amounts of their respective loans were as follows:

John Lincoln	$ 18,475
Gordon Macklin	21,225
Lawrence Stanley	10,550
A. W. Hutton	13,750
Alice Bemis	11,000
Total	$ 75,000

At the time these loans were made, Flamingo did not give notes to">*154 the lenders, or any security.

">*676 On Flamingo's books, as of November 30, 1946, Flamingo's fixed assets were carried at $ 1,513,629, representing cost of $ 1,500,000, plus settlement charges. The cost of the fixed assets was apportioned as follows:

Land	$ 129,026
Buildings	1,030,445
Furniture and equipment	354,158
Total	$ 1,513,629

Flamingo's original funded indebtedness, its note and loans payable, and its paid-in capital were as follows in 1946:

Funded indebtedness:
First mortgage loan	$ 900,000
Second mortgage loan	175,000
	$ 1,075,000
Note and loans:
Cleveland Trust Co	$ 200,000
Loans	75,000
	$ 275,000
Paid-in capital:
2,000 shs. pfd. stock	$ 200,000
750 shs. com. stock	75,000
	$ 275,000

In December 1946, Flamingo entered into an agreement with Macklin Operated, Inc., engaging it as supervising manager for 1 year for a fee of 3 per cent of the gross receipts of the hotel. The agreement was renewed each year until it was canceled by mutual consent on August 31, 1949. Macklin Operated hired a managing director of the hotel. At all times the managing director was a person of outstanding ability, experience, and reputation. ">*155 His compensation was paid by Macklin Operated. James Farrell was the managing director of the hotel during the operating seasons of 1947-1948 and 1948-1949. For the second season, Flamingo agreed to pay Farrell additional compensation of not less than $ 2,500.

The Flamingo Hotel, when it was acquired in 1946, comprised the following: An 11-story main building containing 140 guest rooms, lobbies, shops, dining room, solaria, and other facilities for guests; a 4-story annex containing 59 guest rooms; and 11 cottages containing 35 guest rooms. Other facilities consisted of servants' quarters, service shops, miscellaneous buildings, tennis courts, boat docks, and a ">*677 swimming pool. The grounds were attractively landscaped, and had concrete walks and paved roads. There is no other hotel in the city of Miami Beach having larger grounds. The construction of the main building is monolithic reinforced concrete; of the annex, concrete block; and of the cottages, concrete block or stucco. The plumbing fixtures, bathroom fixtures, and elevators are the same age as the buildings in which they are located. Flamingo Company did not make any substantial additions to or improvements">*156 of the hotel buildings or properties prior to November 30, 1949.

For the fiscal years ended November 30, 1947, 1948, and 1949, Flamingo corporation realized net operating profit before interest and after operating expenses, taxes, and insurance, in the amounts of $ 42,492, $ 94,859, and $ 52,566, respectively. After interest, profit amounted to $ 10, $ 45,121, and $ 10,239, for each of the above-stated years, as is shown by the following schedule:

Receipts and expenses	11/30/47	11/30/48	11/30/49
Gross income	2 $ 630,301	1 $ 618,798	1 $ 490,241
Operating expenses	549,899	473,161	395,133
Gross operating profit	$ 80,402	$ 145,637	$ 95,108
Less taxes and insurance	37,910	50,778	42,542
Profit before interest	$ 42,492	$ 94,859	$ 52,566
Interest	42,482	49,121	42,327
Profit before depreciation	$ 10	$ 45,738	$ 10,239
Depreciation	83,048	84,259	84,892
Net operating loss	($ 83,038)	($ 38,521)	($ 74,653)

The corporation sustained the following adjusted net losses, after all expenses, interest, and depreciation, for its">*157 fiscal years ending on November 30 in 1946, 1947, 1948, and 1949:

Fiscal year	Net loss
1946	$ 33,424.25
1947	96,353.70
1948	47,840.72
1949	74,653.50
Total deficit	$ 252,272.17

However, the corporation's net operating losses for the periods December 1, 1948, to April 30, 1949, and to June 30, 1949, were $ 31,090 and $ 55,660, respectively, so that as of April 30, 1949, and June 30, 1949, the total deficit sustained since incorporation amounted to $ 208,708 and $ 233,279, respectively.

">*678 Profit and loss (cents omitted) for 1947, 1948, and 1949, as shown by the books of Flamingo and audit reports made available to stockholders, are as follows:

	Fiscal year	Fiscal year	Fiscal year
Item	ended	ended	ended
	11/30/47	11/30/48	11/30/49
Net sales and other income	$ 630,301	$ 624,991	$ 490,241
Cost of sales	328,292	328,952	248,810
Gross operating income	$ 302,008	$ 296,039	$ 241,430
Deductions	221,606	150,401	146,322
Gross operating profit	$ 80,402	$ 145,637	$ 95,108
Taxes and insurance	37,910	50,778	42,542
Profit before interest and depreciation	$ 42,492	$ 94,859	$ 52,566
Interest and depreciation	125,530	133,380	127,219
Net operating loss	($ 83,038)	($ 38,521)	($ 74,653)
Hurricane damage		11,879
Net loss per audit statements	($ 83,037)	($ 50,401)	($ 74,653)
Post-audit adjustments	(13,315)	2,560
Net loss	($ 96,353)	($ 47,840)	($ 74,653)

">*158 The Flamingo Hotel Company did not declare or pay any dividends on either its preferred or its common stock during the years 1946 through 1949.

At all times prior and subsequent to September 15, 1949, the Flamingo corporation made timely payment of the monthly installments required by the terms of the first mortgage loan of Acacia Insurance Company. With respect to the second mortgage held by the Fisher Corporation, further principal payments totaling $ 68,333.32 were made prior to April 30, 1953.

The corporation did not make any principal payments prior to July 1, 1949, on its indebtedness to the Cleveland Trust Company. Its original note to the bank was due September 1, 1947. The bank accepted successive renewals of the note which were guaranteed by stockholders; the last such renewal executed prior to July 1, 1949, was dated February 28, 1949, and was due October 1, 1949.

None of the loans made to the corporation by stockholders was repaid, and no interest on the loans was accrued on the corporation's books prior to July 1, 1949.

The management fee due Macklin Operated, Inc., $ 14,686, and the additional compensation due Farrell, $ 2,500, for the 1948-1949 operating season were">*159 not paid by the corporation during its fiscal year ended November 30, 1949.

In June 1949, the corporation was advised that Farrell was resigning as managing director of the Flamingo Hotel. Farrell subsequently submitted his resignation effective as of July 31, 1949.

">*679 The following schedule is a summary of the assets, liabilities, and capital of the Flamingo Hotel Company as shown by its books as of November 30, 1948, April 30, 1949, June 30, 1949, and November 30, 1949 (cents omitted):

		11/30/48	4/30/49	6/30/49	11/30/49
ASSETS
Current assets:
	Cash	$ 16,938	$ 25,688	$ 9,667	$ 72,249
	Other	27,342	19,900	19,048	29,306
	Totals	$ 44,280	$ 45,589	$ 28,715	$ 101,555
Fixed and operating
assets (less
depreciation reserve)		$ 1,356,594	$ 1,278,674	$ 1,277,518	$ 1,280,875
Other assets		37,017	5,585	5,964	110,581
	Total assets	$ 1,437,893	$ 1,329,849	$ 1,312,198	$ 1,493,011
LIABILITIES AND CAPITAL
Current liabilities:
	Notes, Cleveland
	Trust	$ 200,000	$ 200,000	$ 200,000
	Loans, stockholders	75,000	75,000	75,000
	Management fee		14,682	14,686	$ 14,683
	Other	131,094	52,625	65,926	75,354
	Totals	$ 406,094	$ 342,307	$ 355,613	$ 90,037
Funded indebtedness:
	1st mortgage	$ 820,311	$ 804,583	$ 798,197	$ 782,121
	2nd mortgage	116,666	116,666	116,666	116,666
	Notes, Cleveland
	Trust				200,000
	Stockholders' notes				75,000
	Other				2,904
	Totals	$ 936,978	$ 921,250	$ 914,864	$ 1,176,691
Capital:
	Preferred	$ 200,000	$ 200,000	$ 200,000	$ 100,000
	Common	75,000	75,000	75,000	1 750
	(Deficit)	(180,179)	(208,708)	(233,279)	21,977
	Totals	$ 94,820	$ 66,291	$ 41,720	$ 122,727
	Total liabilities
	and capital	$ 1,437,893	$ 1,329,849	$ 1,312,198	$ 1,391,456

">*160

The totals set forth above for current liabilities as of April 30, 1949, and June 30, 1949, do not include the principal amount of first and second mortgage obligations due and payable by the corporation during the remainder of its fiscal year ended November 30, 1949.

The city of Miami Beach, Florida, for local real estate tax purposes uses an assessed value for land in its jurisdiction which runs 40 and 50 per cent of sales price or fair market value. One of petitioners' valuation witnesses does the appraising for the city of Miami Beach, appraises for eminent domain and zoning purposes, and was employed in 1948 by the city in its land equalization program. In a joint appraisal with another witness, he allocated $ 175,000 to the Flamingo land. The following schedule shows the assessed valuation by the city of Miami Beach of the Flamingo Hotel properties, real and personal, for the local tax years indicated, together with the approximate ">*680 fair market value in those years (based on assessed values of from 40 to 50 per cent of fair market value):

		1946	1947	1948	1949
LAND
Assessed value		$ 77,150	$ 154,300	$ 210,000	$ 210,000
Fair market value:
	Assessed at 50%	154,300	308,600	420,000	420,000
	Assessed at 40%	192,875	385,750	525,000	525,000
IMPROVEMENTS
Assessed value		208,800	417,600	477,800	477,800
Fair market value:
	Assessed at 50%	417,600	835,200	955,600	955,600
	Assessed at 40%	522,000	1,044,000	1,194,500	1,194,500
PERSONAL PROPERTY
Assessed value		44,850	188,700	194,500	281,800
Fair market value:
	Assessed at 50%	89,700	377,400	389,000	563,600
	Assessed at 40%	112,125	471,750	486,250	704,500
Fair market value all hotel property:
	Assessed at 50%	661,600	1,521,200	1,764,600	1,939,200
	Assessed at 40%	827,000	1,901,500	2,205,750	2,424,000

">*161

		1950	1951	1952
LAND
Assessed value		$ 210,000	$ 210,000	$ 210,000
Fair market value:
	Assessed at 50%	420,000	420,000	420,000
	Assessed at 40%	525,000	525,000	525,000
IMPROVEMENTS
Assessed value		458,700	458,700	458,700
Fair market value:
	Assessed at 50%	917,400	917,400	917,400
	Assessed at 40%	1,146,750	1,146,750	1,146,750
PERSONAL PROPERTY
Assessed value		281,500	285,400	305,550
Fair market value:
	Assessed at 50%	563,000	570,800	611,100
	Assessed at 40%	703,750	713,500	763,875
Fair market value all hotel property:
	Assessed at 50%	1,900,400	1,908,200	1,948,500
	Assessed at 40%	2,375,500	2,385,250	2,435,625

The following schedule shows the assessed value of the Flamingo Hotel properties, real and personal, for the purpose of Dade County taxes for the local tax years indicated (without regard to ratios to fair market value):

	Assessed value
Year	land and improvements
1946	$ 483,050
1947	615,000
1948	800,000
1949	792,400
1950	744,700
1951	744,700
1952	744,700

">*681

	Assessed value
Year	personal property
1946	$ 72,000
1947	148,500
1948	148,500
1949	145,500
1950	144,000
1951	144,470
1952	144,000

">*162

Year	Total assessed value
1946	$ 555,050
1947	763,500
1948	948,500
1949	937,900
1950	888,700
1951	889,170
1952	888,700

The following schedule shows the amount of insurance coverage carried by the Flamingo Hotel Company against property damage to its fixed and operating assets (exclusive of land) for the fiscal years indicated:

Fiscal year	Fire	Windstorm
ended Nov. 30	insurance	insurance
1948	$ 1,245,306.40	$ 663,926.73
1949	1,186,774.90	638,761.96
1950	1,186,774.90	638,805.59
1951	1,165,006.40	639,164.66
1952	2,000,000.00
1953	2,000,000.00

The Flamingo Hotel Company was in financial difficulty as of July 1, 1949. The corporation then needed approximately $ 82,000 to pay its fixed charges and expenses for the balance of the fiscal year, a period during which it would not receive any operating income, and approximately $ 40,000 to defray the expense of reopening the hotel for the season beginning in December 1949. Beginning in July 1949, Macklin Operated, Inc., began to advance the corporation funds with which to meet its first mortgage payments and maintenance expenses.

On August 9, 1949, the Flamingo Hotel Company addressed">*163 a letter to all stockholders in which the problems confronting the corporation were reviewed. The stockholders were advised that, since July 1, 1949, Macklin Operated, Inc., had been advancing the corporation the money required for first mortgage payments and maintenance expenses under a temporary arrangement. The opinion was expressed in the letter that, in view of the poor earnings record of the hotel for the preceding 3 seasons, it would not be possible to interest anyone in purchasing the hotel, and that, eliminating the possibility of a sale, two alternative courses of action remained: (1) To abandon the hotel property ">*682 to the mortgagees, or (2) to secure new capital and continue operations. The latter alternative was recommended in the letter. The letter suggested that the stockholders adopt the following plan "as a means of working out some salvage for all of the parties concerned, at least to the extent of their direct or indirect interest in Flamingo's unsecured debt": (1) The holders of the preferred stock would surrender the shares to the corporation for cancellation. (2) A member of the Lincoln family, who had no present interest in the corporation, would">*164 be solicited to pay into the corporation $ 100,000, for which he would receive 1,000 shares of new preferred stock. (3) The members of the Lincoln family, who held about 35 per cent of the common stock, would sell their common shares for $ 1 a share to James B. Smith who, in turn, would enter into a 5-year contract with the corporation to manage the hotel. (4) The other common stockholders would sell their shares for $ 1 a share to the member of the Lincoln family who purchased the new preferred shares. (5) The corporation would enter into a 5-year management contract with James B. Smith, under the terms of which Smith would receive a maximum salary of $ 5,000 a year, contingent upon the hotel earning $ 80,000 a season after taxes and insurance. (6) The existing debt structure of the corporation would remain unchanged except for rescheduling and postponing payments on the second mortgage and on the unsecured obligations of the corporation for a period of approximately 2 years. The letter closed with the following paragraph:

If you are willing to surrender the shares of preferred stock which you hold to the Company for cancellation and retirement, and if you are willing to sell">*165 the shares of common stock which you hold at the price of $ 1.00 per share, please forward your certificates endorsed in blank, together with the enclosed transmittal letter. Such certificates will be held for disposition in accordance with the plan as outlined herein, and if such plan cannot be worked out the certificates will be returned.

The plan outlined in the corporation's letter of August 9, 1949, was accepted by all the stockholders. The plan was carried out in August and September 1949, and as executed, was ratified by resolutions adopted by the directors of the corporation.

During the period August 10 to August 26, 1949, 1,960 of the 2,000 shares of preferred stock outstanding, including the shares held by the petitioners, were surrendered to the corporation and canceled. On September 15, 1949, the remaining 40 shares of preferred stock, which were held by Macklin's minor children, were surrendered to the corporation and canceled. At the time the preferred shares were surrendered to the corporation, the Lincoln petitioners owned 1,142 1/2 out of the 2,000 shares outstanding, including the 442 1/2 shares of preferred which were acquired by John C. Lincoln upon the dissolution">*166 of the Gordon Macklin & Company partnership.

">*683 As of September 15, 1949, the certificates representing all of the outstanding common stock of Flamingo corporation had been transmitted to Stephen C. Thayer, assistant secretary of Flamingo, who acted as the transfer agent for the transferors and the transferees. Prior to the transmittal of the common stock certificates, John, Joseph, Helen, and Lillian Lincoln owned an aggregate of 262 1/2 shares of common stock (excluding 7 1/2 shares standing in the name of Gordon Macklin & Company which were acquired by John C. Lincoln on August 26, 1949, as surviving partner, see facts under Issue 2, infra); the estate of Gordon S. Macklin owned 225 shares; Lawrence D. Stanley owned 150 shares; Alice Bemis owned 30 shares; Macklin Operated, Inc., owned 37 1/2 shares; A. W. Hutton owned 37 1/2 shares; and 7 1/2 shares stood in the name of Gordon Macklin & Company. On September 15, 1949, all of the common stock was sold for $ 1 per share, and 2 new certificates were issued. One certificate for 487 1/2 shares of common stock was issued to David Lincoln, and 1 certificate for 262 1/2 shares was issued to James B. Smith.

John, Joseph, ">*167 Helen, and Lillian Lincoln sold their shares of common stock to James B. Smith:

Seller	Shares	Purchaser
John C. Lincoln	150	J. B. Smith
Helen C. Lincoln	37 1/2	J. B. Smith
Joseph C. Lincoln	37 1/2	J. B. Smith
Lillian C. Lincoln	37 1/2	J. B. Smith
Total	262 1/2

David Lincoln purchased 487 1/2 shares of common stock from the following:

Seller	Shares	Purchaser
A. W. Hutton	37 1/2	David Lincoln
Estate of G. Macklin	225	David Lincoln
Alice Bemis	30	David Lincoln
L. D. Stanley	150	David Lincoln
Macklin Operated	37 1/2	David Lincoln
John Lincoln	7 1/2	David Lincoln
Total	487 1/2

James B. Smith is not a member of the Lincoln family. He is not related to any member of the Lincoln family or to any of the former owners of Flamingo common and preferred stock.

David Lincoln paid $ 100,000 to the Flamingo corporation on September 15, 1949, for which he received 1,000 shares of new preferred stock, at $ 100 per share. As of September 15, 1949, David Lincoln owned all of the issued and outstanding preferred stock.

">*684 Since about 1942, a Cleveland law firm, Baker, Hostetler & Patterson, was employed from time to time by various members of ">*168 the Lincoln family, namely, John, Joseph, David, Helen, and Lillian Lincoln, and, also, by Gordon S. Macklin. The same law firm organized Macklin Operated, Inc., and acted as its counsel thereafter. One of the members of the law firm, William H. Bemis, was an officer of Macklin Operated, Inc., from the time of its organization in 1944 until 1950 or 1951. The same law firm organized the Flamingo Hotel corporation. Bemis was one of the original directors, and his wife, Alice, was one of the original stockholders. Bemis has been president of Flamingo corporation since 1949.

Bemis was a director of the Flamingo corporation at the time the plan for refinancing, as set forth in the letter of August 9, 1949, to the stockholders, was under consideration. With respect to the suggested manner in which transfers of common stock were to be made, i. e., that common stock held by members of the Lincoln family would be transferred to James B. Smith, whereas the rest of the outstanding common stock would be transferred to David Lincoln, consideration was given to sections of the Internal Revenue Code applying to intrafamily transactions, and to means for obviating any possible construction of">*169 the handling of the transfers of the common stock as coming within such provisions of the Code.

Prior to September 15, 1949, the Flamingo Hotel Company received an extension of time, until April 1, 1951, within which to make second mortgage payments, due in September 1949 and 1950, aggregating $ 58,333. Also, the Cleveland Trust Company, which held a note of the corporation for $ 200,000, accepted a renewal note payable April 1, 1951; and Macklin Operated, Inc., agreed to defer payment on its advances to the corporation, totaling $ 36,179, until April 1, 1951. Similarly, the five original stockholders who had loaned the corporation $ 75,000 agreed to defer payment of the obligations until April 1, 1951.

Also, prior to September 15, 1949, and as part of the plan proposed in the letter of August 9, 1949, James B. Smith entered into an agreement with the corporation to manage the hotel for a period of 5 years under the terms set forth in the letter.

All the original stockholders who were members of the board of directors of the corporation resigned prior to September 15, 1949. Thereafter, the corporation continued operations with new officers, a substantially new directorate, and ">*170 new management.

During the period from July 31, 1946, to September 18, 1949, the minutes of the formal meetings of the board of directors of Flamingo do not show that any consideration was given to the possibility of dissolving or liquidating the corporation.

">*685 The Flamingo Hotel Company has never been placed in receivership or bankruptcy. The Flamingo Company has continued to operate the hotel properties in Miami Beach. The books and records of the corporation reflect the following net profit or loss for the periods set forth below:

Fiscal year ended	Net profit
November 30	(or loss)
1950	($ 98,452)
1951	4,080
1952	(58,774)

For the period December 1, 1952, to April 30, 1953, the corporation realized a net profit of $ 24,378.

On August 7, 1950, the corporation issued preferred stock in satisfaction of the following unsecured obligations:

		No. of
	Amount	preferred
	of	shares
Creditor	indebtedness	issued
Estate of Gordon S. Macklin	$ 17,990	180
John C. Lincoln	18,475	185
Lawrence D. Stanley	10,550	106
Alice M. Bemis	11,000	110
A. W. Hutton	13,750	138
Macklin Operated, Inc	36,179	362
James J. Farrell	2,500	25
Totals	$ 110,444	1,106

">*171 On November 24, 1950, the corporation issued preferred and common stock at a subscription price of $ 100 a share for preferred and $ 1 a share for common, as follows:

			Amount
	No. of shares		received
Subscriber	Pfd.	Com.	by corporation
James B. Smith	150	300	$ 15,300
David C. Lincoln	150	150	15,150
Joseph C. Lincoln	300	300	30,300
Lillian C. Lincoln	300	300	30,300
Alice M. Bemis	100	100	10,100
Totals	1,000	1,150	$ 101,150

On October 22, 1952, the same individuals invested a total of $ 19,190 in the corporation for which they received from the corporation a total of 190 shares of preferred stock and 190 shares of common stock for the same prices per share as set forth above.

The Lincoln petitioners, in their respective income tax returns for 1949, claimed deductions for long-term capital losses upon the sales ">*686 of all of their Flamingo Hotel Company common stock. In computing the amounts of the capital losses claimed in the returns, the Lincoln petitioners added to the cost basis of the common shares, the cost basis of the preferred shares which they surrendered to the corporation. The cost basis to each of the Lincoln petitioners">*172 of the preferred and common stock, the amount received by each upon the sale of common stock, the amount of the long-term capital loss claimed by each, and the amount (50 per cent) of the loss taken into account were as follows:

	Shares		Cost
					Proceeds
Petitioner					from sales
					of common
	Pfd.	Com.	Pfd.	Com.
J. & H. Lincoln	1 234	187 1/2	$ 23,400	$ 18,750	$ 187.50
J. & L. Lincoln	233	37 1/2	23,300	3,750	37.50
L. Lincoln	233	37 1/2	23,300	3,750	37.50

	L.-t. capital
Petitioner	loss claimed	50% l.-t. loss
J. & H. Lincoln	$ 41,962.50	$ 20,981.25
J. & L. Lincoln	27,012.50	13,506.25
L. Lincoln	27,012.50	13,506.25

John C. Lincoln did not claim in his return a capital loss deduction with respect to 7 1/2 shares of common stock which he acquired upon the dissolution of the partnership, Gordon Macklin & Company.

The Commissioner disallowed the capital loss deductions claimed by the Lincoln petitioners for loss sustained upon sales of Flamingo common stock. He gave the following">*173 reason for his determination:

The capital loss deduction claimed * * * upon the sale of stock of the Flamingo Hotel Company has been disallowed in accordance with the provisions of section 24 (b) of the Internal Revenue Code [of 1939].

The preferred and common stock of Flamingo Hotel Company did not become worthless in 1949, either before July 14, or at any other time.

Facts relating to partnership: Gordon S. Macklin and John C. Lincoln executed an agreement on June 29, 1940, which created a limited partnership with Macklin as the general partner and Lincoln as the limited partner. The partnership was formed for the purpose of engaging in the securities brokerage business in Cleveland, Ohio. Macklin and Lincoln each contributed $ 10,000 to the capital of the partnership.

The partnership agreement, which is incorporated herein by this reference, provided, among other things, as follows: Macklin was to ">*687 manage the partnership and was to devote his full time to the business, for which services he was to receive a salary not to exceed $ 9,000 a year. Lincoln was not required to devote any of his time to the business of the partnership, and he was to be paid interest at">*174 the rate of 8 per cent a year on his capital investment of $ 10,000. After the payment of a salary to Macklin and interest to Lincoln on his capital investment, the remaining net income of the partnership was to be divided 75 per cent to Macklin, and 25 per cent to Lincoln. In addition to the provisions contained in the agreement relating to the sharing of profits, there was an understanding between the partners that Lincoln's share of partnership profits was to be determined without regard to net earnings attributable to fees, commissions, and other amounts paid by members of the Lincoln family for investment counsel and other services rendered by the partnership. The agreement did not contain any provision defining the manner in which net losses of the partnership were to be shared by the partners.

The partnership agreement also contained a provision whereby Macklin agreed to "cause an insurance policy to be placed upon his life in the amount of Ten Thousand ($ 10,000) Dollars, to be made payable to * * * Trustee, under a trust agreement whereby upon the death of said Gordon Macklin said trustee will pay the said sum * * * to John C. Lincoln, his heirs, executor or administrator, ">*175 in full of all interest of John C. Lincoln * * * in said partnership."

In order to implement the aforementioned provision of the partnership agreement, Macklin and Lincoln executed a "Partnership Insurance Agreement" on August 23, 1940. The partnership insurance agreement, referred to hereinafter as the insurance agreement, is incorporated herein by this reference.

The insurance agreement recited that it was the desire of the parties that the partnership be liquidated and that the investment of Lincoln in the partnership be immediately repaid in the event of the death of Macklin. To this end, the insurance agreement provided, among other things, as follows: That Macklin agrees that he has procured a policy of insurance upon his life in the amount of $ 15,000; that Macklin has designated Glen O. Smith, Trustee, as the beneficiary of the policy and that he agrees not to change the beneficiary without the consent of Lincoln; and that, in the event of Macklin's death, the trustee is to collect the proceeds of the policy and is to pay therefrom $ 10,000 to Lincoln, which payment is to be "in full of all interest of * * * Lincoln in the partnership."

The insurance agreement also obligated">*176 Macklin to execute a will in which he was to expressly ratify the provisions of the agreement. This provision was inserted in the agreement for the purpose of ">*688 accomplishing the results anticipated by section 8092 of the Ohio General Code.

The insurance agreement also provided that it "shall be construed to fix the price and value of John C. Lincoln's interest in the partnership and its assets in the event of the death of Gordon Macklin." The insurance agreement by its terms was to continue in effect for a period of 4 years from June 29, 1940, unless sooner terminated by agreement of the parties. The insurance agreement was not renewed and extended in 1944 by express agreement of the parties as was the partnership agreement. By its terms the agreement expired on June 29, 1944.

Macklin's will, which was duly admitted for probate in the Probate Court of Cuyahoga County, Ohio, did not contain any provisions relating to the insurance agreement of August 23, 1940.

The policy of insurance referred to herein was in force on the date of Macklin's death. The designation of Glen O. Smith, Trustee, as beneficiary of the policy was not changed. Subsequent to Macklin's death, the">*177 proceeds of the policy were paid by the insurer to Glen O. Smith. On September 22, 1949, Smith paid $ 10,000 of the proceeds of the policy to John C. Lincoln. Smith's letter of transmittal addressed to Lincoln in care of his attorney, stated as follows:

Enclosed please find check No. 1 payable to your order in the sum of $ 10,000 and signed by me as Trustee, pursuant to a certain partnership insurance agreement by and between Gordon Macklin, John C. Lincoln and Glen O. Smith, dated the 23rd day of August, 1940.

Said $ 10,000 is being paid to you out of the proceeds of insurance policy No. 4842068 with the Mutual Insurance Company of New York upon the life of Gordon Macklin, and according to said partnership insurance agreement payment to you is in full for your whole interest in the partnership of Gordon Macklin & Company of which you were a special partner.

The payment was acknowledged by Lincoln's attorney as having been made pursuant to the provisions of the insurance agreement.

Under the partnership agreement, the partnership was to continue for a term of 4 years from June 29, 1940, unless sooner terminated by notice, consent, or operation of law.

On June 15, 1944, a memorandum">*178 agreement was executed by Macklin and Lincoln which renewed the provisions of the partnership agreement and extended the term of the partnership for an additional 5 years until June 29, 1949.

A limited partnership certificate as required by the law of Ohio was duly made, acknowledged, recorded, and published by the partners for the Gordon Macklin partnership in both 1940 and 1944.

The limited partnership agreement expired on June 29, 1949, without the partners taking any action to extend or renew the agreement. The partners did not make, acknowledge, record, and publish a limited ">*689 partnership certificate for any period subsequent to June 29, 1949. The Gordon Macklin partnership continued operations subsequent to June 29, 1949, and it thereafter became a general partnership under the law of Ohio.

Gordon Macklin & Company engaged in business as a dealer in securities from June 29, 1940, until July 14, 1949, on which date the partnership was terminated by the death of Macklin. The business of the partnership consisted of purchasing and selling securities, both for its own account and for the accounts of customers, and of acting as an agent for others, including the members">*179 of the Lincoln family, in the management of investment portfolios. The business of the partnership was managed by Macklin.

The partnership maintained its books, and filed its partnership returns of income on a calendar year-accrual basis. The partnership, in its books of account and in its returns of income, regularly valued its inventories as a dealer in securities at cost, with the exception of the return which was filed for the final period of operations.

The partnership included in its inventories of securities for the period January 1 to July 14, 1949, and for prior years, 442 1/2 shares of preferred stock and 7 1/2 shares of common stock of the Flamingo Hotel Company. The 442 1/2 shares of preferred stock had a cost basis to the partnership of $ 42,275, and the 7 1/2 shares of common stock had a cost basis to it of $ 750.

The balance in the respective capital accounts of the partners, as of January 1, 1949, was as follows: Macklin, $ 10,000, and Lincoln, $ 20,698.38. The balance of Macklin's capital account represented his original capital contribution; the balance in Lincoln's capital account consisted of his original capital contribution of $ 10,000 and unwithdrawn profits">*180 from prior years in the amount of $ 10,698.38. During the period January 1 to July 14, 1949, Macklin withdrew from the partnership a total of $ 20,227.42; the total consisted of salary, $ 4,875, an insurance premium, $ 489.36, and other withdrawals totaling $ 14,863.06. During the same period, Lincoln's only withdrawal from the partnership consisted of interest on his capital investment in the amount of $ 200.

The Gordon Macklin & Company partnership became a general partnership by operation of law from and after June 29, 1949. The partnership was terminated by the death of Macklin on July 14, 1949.

The cost basis to the partnership of its securities inventory as of January 1, 1949, and July 14, 1949, was $ 103,586.62 and $ 87,163.46, respectively.

As of July 14, 1949, the partnership had cash assets in the amount of $ 384,801.30. On the same date, the credit balances in customers ">*690 accounts totaled $ 441,758.74. "Free credit balances" were owed by the partnership to the following customers in the amounts indicated:

Customer	Amount
Mrs. Marion Q. Davis	$ 127.50
Mrs. Veronica Kovacic	56.13
John C. Lincoln, Jr	495.70
Edna R. Pulse	28.00
Helen C. Lincoln	45,863.50
John C. Lincoln	52,848.87
David C. Lincoln	119,309.31
Joseph C. Lincoln	108,856.14
Lillian C. Lincoln	114,173.59
Total	$ 441,758.74

">*181 The free credit balances resulted from the receipt by the partnership as a broker of the proceeds from the sale of securities owned by its customers.

As substantially all of the free credit balances owed by the partnership to customers were owed to members of the Lincoln family, John Lincoln was anxious to expedite liquidation of the partnership and payment of its creditors. Lincoln was advised by his attorneys that, under the law of Ohio, liquidation of the partnership could be accomplished in one of two ways, namely, he could cause a receivership to be established by the Probate Court of Cuyahoga County, Ohio, or, as surviving partner and with the consent of the representatives of Macklin's estate, he could make application to the Probate Court to purchase the interest of the deceased partner in the partnership assets at the appraised value, in which event he would assume the partnership's liabilities and could then proceed to effect a liquidation of the partnership. Lincoln chose the latter alternative.

On August 23, 1949, Lincoln, with the consent of the representatives of Macklin's estate, filed an application in the Probate Court of Cuyahoga County, Ohio, as surviving partner">*182 of Gordon Macklin & Company for an appraisement of the assets of the partnership and a determination of its debts and liabilities. The application was filed pursuant to section 8085 of the Ohio General Code. Pursuant to the application, the court appointed three appraisers to make an inventory and appraisement of the assets and liabilities of the partnership as of July 14, 1949. The appraisers thereafter rendered under oath their inventory and appraisement of the assets and liabilities of Gordon Macklin & Company as of July 14, 1949.

The report of the appraisers was delivered to Lincoln and was filed by him with the court, as was required by law, on August 26, 1949. On the same date, the court entered an order approving and confirming the report.

">*691 The following schedule is a summary of the assets and liabilities of the partnership on July 14, 1949, as set forth in the report of the appraisers:

Assets
Cash		$ 384,801.30
Accounts receivable:
Gordon S. Macklin Estate	$ 14,863.06
Others	4,476.33
		19,339.39
Inventory of securities		27,476.51
Office furniture, fixtures and equipment		1,321.50
Other assets		2,251.88
Total assets		$ 435,190.58
Liabilities
Accounts payable:
Customers' free credit balances		$ 441,758.74
Due customers on purchase of securities		2,860.71
Miscellaneous accounts payable		1,475.67
Other liabilites:
John C. Lincoln -- interest on capital	$ 233.34
Payroll taxes	227.74
		461.08
Total liabilities		$ 446,556.20

">*183 The 7 1/2 shares of common and the 442 1/2 shares of preferred stock of the Flamingo Hotel Company which were owned and inventoried by the partnership and which had a cost basis to it as of July 14, 1949, of $ 43,025, were listed in the report of inventory and appraisement as having no market value on July 14, 1949.

The report of the appraisers disclosed that on the basis of the values therein determined for the assets of the partnership, the liabilities of the partnership on July 14, 1949, exceeded its assets by $ 11,355.60.

Also on August 26, 1949, Lincoln, with the consent of the representatives of Macklin's estate, filed with the Probate Court his election as surviving partner to purchase the interest of the deceased partner (Macklin) in the assets of the partnership at the appraised value. Lincoln's election to purchase the interest of the deceased partner was made pursuant to section 8089 of the Ohio General Code. The court, on the same date, entered its order approving the election made by Lincoln as surviving partner and directing that the property of the partnership be delivered to Lincoln without any compensatory payment to Macklin's estate. The court order required Lincoln">*184 to post bond in the amount of $ 5,000 as surety for the payment by him of all debts and liabilities of the firm.

">*692 The business formerly conducted by the partnership was not continued by Lincoln at any time subsequent to July 14, 1949. After the Probate Court entered its orders on August 26, 1949, Lincoln proceeded to collect the assets and to pay the debts and liabilities of the partnership and to wind up its affairs. As of October 13, 1949, Lincoln had paid all the debts of the partnership, except the amount owed to him personally. The total amount paid by Lincoln to creditors of the partnership (other than himself) was $ 393,457.94. ² In order to pay the partnership creditors (other than himself), Lincoln used the cash obtained from the partnership, $ 384,801.30, the proceeds from the sale of certain partnership property amounting to $ 3,906.53, and approximately $ 4,750 of his personal funds.

">*185 The assets of the former partnership which remained after payment of the partnership liabilities owed to others than John Lincoln were retained by John Lincoln for his own account. The assets retained by Lincoln included the securities which were inventoried by the partnership, with one exception not here material. The securities which were retained by Lincoln included the 7 1/2 shares of common and the 442 1/2 shares of preferred stock af the Flamingo Hotel Company.

On November 15, 1949, Lincoln filed a claim against the estate of Gordon S. Macklin in the amount of $ 26,218.68. The claim consisted of two items: One, the sum of $ 14,863.06 which was reflected in the inventory and appraisement of partnership assets and liabilities as an account receivable due the partnership from Macklin; and two, the sum of $ 11,355.62 which was the amount by which the liabilities of the partnership as of July 14, 1949, exceeded its assets as reported in the inventory and appraisement. The full amount of the claim was paid to Lincoln by the executors of Macklin's estate on January 21, 1953.

On October 4, 1949, a partnership return of income was filed for Gordon Macklin & Company covering its final">*186 period of operations, namely January 1 to July 14, 1949. In the return, the partnership's opening inventory of securities was valued at cost, $ 103,586.62, which was the method of inventory valuation adopted by the partnership in prior years, whereas the closing inventory of securities was valued at the alleged market value of $ 27,476.51. The return reported an ordinary net loss of $ 37,539.13 for the partnership's final period of operations. The reported loss was due entirely to the change in the method of valuing the partnership's closing inventory. The return also disclosed that Macklin's distributive share of the reported loss was ">*693 75 per cent, or $ 28,154.35, and that Lincoln's distributive share was 25 per cent, or $ 9,384.78. In computing the partners' distributive shares of the reported loss, no consideration was given to the understanding between the partners that Lincoln was not to share in any income of the partnership which was attributable to transactions with members of the Lincoln family.

In the individual income tax return which was filed on behalf of Macklin for the short taxable period ended with his death on July 14, 1949, and in the joint income ">*187 tax return which was filed by John and Helen Lincoln for the year 1949, each of the former partners reported, as his distributive share of the alleged ordinary net loss of the partnership, the amount attributed to him in the partnership return of income, that is, $ 28,154.35 and $ 9,384.78, respectively.

The respondent, upon audit of the partnership return of income for the period January 1 to July 14, 1949, made one adjustment: he valued the closing inventory of the partnership at its cost to the partnership of $ 87,183.46. As a result of this adjustment, respondent determined that the partnership realized net income of $ 22,167.82 in its final period of operations. In addition, respondent determined that the partners' distributive shares of the corrected partnership net income were as follows: Macklin, $ 19,327.16, and Lincoln, $ 2,840.66. In the determination of the partners' distributive shares of the corrected partnership net income, respondent gave effect to the understanding between the partners that Lincoln was not to share in any net income of the partnership which was attributable to transactions with members of the Lincoln family.

In determining the deficiency in Docket">*188 No. 39160, Estate of Gordon S. Macklin, Deceased, the respondent (in addition to other adjustments) increased partnership income in the amount of $ 47,481.51. He gave the following explanation for the adjustment:

you reported $ 28,154.35 as representing the decedent's share of the loss from the Gordon Macklin & Company partnership. The decedent's distributive share of the net income from the partnership has been determined to be $ 19,327.16. The income has accordingly been increased in the amount of $ 47,481.51.

In determining the deficiency in Docket No. 39055, John and Helen Lincoln, the respondent (in addition to other adjustments) increased partnership income in the amount of $ 12,025.44. He gave the following explanation for the adjustment:

The amount of $ 9,384.78 reported as your share of the operating loss of the partnership * * * has been adjusted to a profit of $ 2,640.66 resulting in an increase in your net income of $ 12,025.44.

The difference of $ 200 between Lincoln's distributive share of partnership net income as determined by respondent upon his audit of the ">*694 partnership return, $ 2,840.66, and the amount determined by respondent in his notice of">*189 deficiency, $ 2,640.66, is not explained in the record. ³

The assets of the Gordon Macklin & Company partnership were not transferred, as of July 14, 1949, to John Lincoln in payment of partnership debts.

The Gordon Macklin & Company partnership realized a net profit for the period January 1 to July 14, 1949, in the amount of $ 22,167.82, of which the distributive shares of the partners, Gordon S. Macklin, deceased, and John Lincoln, were $ 19,327.16 and $ 2,840.66, respectively.

OPINION.

Issue 1. -- Flamingo Hotel Company.

The first question is whether the preferred and common stock of Flamingo Hotel Company became worthless in 1949, prior to July 14, or prior to September 15, when the common stock was sold for $ 1 a share. This ">*190 question was raised for the first time by the pleadings. Deductions for worthless stock are claimed under sections 23 (e) and (g), as limited by section 117, Internal Revenue Code of 1939.

The second question, which is presented only in the petitions of members of the Lincoln family, is whether sales of Flamingo common stock were made directly or indirectly between members of a family within the scope of the provisions of section 24 (b) (1) (A), Internal Revenue Code of 1939.

Worthlessness of Flamingo stock: Whether property becomes worthless in a particular taxable period is a question of fact. John B. Marsh, 38 B. T. A. 878, 902; Cooley Butler, 45 B. T. A. 593, 600. The question is to be determined from a practical common sense consideration of all the evidence. Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, 280 U.S. 445">449; Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287; Miami Beach Bay Shore Co. v. Commissioner, 136 F.2d 408, 409; John B. Marsh, supra.The burden of proof is upon the taxpayer to establish">*191 in a convincing manner that the stock has in fact become worthless in the taxable period in which the loss deduction is claimed. Mahler v. Commissioner, 119 F.2d 869, 872; Cooley Butler, supra.Where the time of the loss is not fixed by a closed and completed transaction, the date is to be determined by reference to "identifiable events" which evidence the destruction of value both actual and potential in the period in which the loss is claimed. As was observed by this Court in Sterling Morton, 38 B. T. A. 1270, affd. 112 F.2d 320, at page 1278:

">*695 The ultimate value of stock, and conversely its worthlessness will depend not only on its current liquidating value, but also on what value it may acquire in the future through the foreseeable operations of the corporation. Both factors of value must be wiped out before we can definitely fix the loss. If the assets of the corporation exceed its liabilities, the stock has a liquidating value. If its assets are less than its liabilities but there is a reasonable hope and expectation that the assets will">*192 exceed the liabilities of the corporation in the future, its stock, while having no liquidating value, has a potential value and can not be said to be worthless. The loss of potential value, if it exists, can be established ordinarily with satisfaction only by some "identifiable event" in the corporation's life which puts an end to such hope and expectation.

Petitioners contend that the common and the preferred stock of Flamingo Hotel Company had neither liquidating nor potential value as of July 14, 1949. They argue that the corporation was insolvent as of June 30, 1949, and that a series of events which occurred in the forepart of 1949 destroyed any reasonable basis for hope or expectation that the shares then outstanding would acquire any value in the foreseeable future through continued operations of the company.

The question whether the stock became worthless in 1949, prior to September 15, 1949 (the date on which the common stock was sold for a nominal consideration pursuant to a plan of financial readjustment), is important (1) in determining the net income or loss of the partnership for its final period of operations ended July 14, 1949; and (2) in determining whether the">*193 Lincoln petitioners are entitled to loss deductions from worthlessness of stock rather than from sales of the common stock, the respondent having determined that section 24 (b) precludes the allowance to them of loss deductions from sales of stock. The partnership would be entitled to a loss deduction with respect to the stock only in the event that it is held that the stock became worthless during its final period of operations since the partnership was terminated before the preferred stock was surrendered to the corporation for cancellation and the common stock was sold for a nominal consideration.

The petitioners seek to establish that the corporation was insolvent and that the stock was without liquidating value, through expert testimony. They claim that, although the balance sheet of the corporation as of June 30, 1949, showed an excess of assets over liabilities in the amount of $ 41,720, the assets, specifically the Flamingo Hotel property, were not worth book value. The Flamingo Hotel property had a book value on June 30, 1949, of $ 1,277,518.

Two expert witnesses, E. C. Keefer and S. Z. Bennett, made a joint appraisal of the hotel property in April 1952. They each expressed">*194 the opinion that on or about July 1, 1949, the fair market value of the Flamingo Hotel, including real and personal property, was $ 850,000. Also, William H. Bemis, a director and general counsel of the ">*696 company since its organization, testified that in his opinion the fair market value of the property on July 1, 1949, was not more than $ 1,000,000. Bemis' testimony concerning the value of the property was based upon his general knowledge of hotel property and management, and upon his familiarity with the property in question since its acquisition by the corporation.

The testimony of the expert witnesses about the fair market value of the property in question has been carefully considered. However, their opinions about value are, under the issue before us, only one element to be considered in determining whether the stock of Flamingo corporation was worthless in 1949 before July 14, or September 15. If we were to give their testimony a great deal of weight, their testimony, at best, would tend to support a conclusion that the stock was without liquidating value on or about the critical dates. But that fact, of itself, would not be sufficient to establish that the stock">*195 was worthless.

Furthermore, if we were to assume for purposes of argument that both classes of Flamingo stock were without liquidating value on the critical dates, there remains the question whether the stock, on those dates, had potential value. Sterling Morton, supra.The absence of liquidating value of itself is insufficient to establish worthlessness. Anthony P. Miller, Inc., 7 T.C. 725, 745, affirmed on this point 164 F.2d 268, certiorari denied 333 U.S. 861">333 U.S. 861; Estate of C. L. Hayne, 22 T.C. 113, 118.

The evidence does not establish that, in spite of the existence of recurring net operating losses aggregating $ 233,279 as of June 30, 1949, impairment of capital, and a distressed financial condition, there was no hope or expectation on the part of the officers and directors of the Flamingo corporation in the early part of 1949 and on or about July 14, 1949, that continued operations of the hotel property could not be carried on, or that continued operations would not eventually result in creating an equity for the stockholders. ">*196 In Anthony P. Miller, Inc., supra, p. 747, it was pointed out that

It has frequently been held that such factors as deficits, operating losses, lack of working funds, poor business conditions, and similar circumstances are insufficient in themselves to establish the worthlessness of stock. * * *

Macklin Operated, Inc., a stockholder and the supervising agent of the hotel, advanced funds to the Flamingo corporation between July 1 and September 15, 1949, to meet fixed charges and incidental expenses. Flamingo corporation was not in default in its first mortgage payments (and never was in default); it was able to secure, in the summer of 1949, a rescheduling of its second mortgage payments; it also obtained from Cleveland Trust Company a renewal of the note evidencing its indebtedness to that bank. The corporation was not ">*697 placed in receivership either before, during, or after 1949. It did not cease operations. Upon consideration of all of the evidence, it must be concluded that the petitioners have failed to establish that the potential value of the Flamingo stock must be deemed to have been destroyed in 1949.

One of the cases cited by petitioners, ">*197 Henry Adamson, 17 B. T. A. 17, is clearly distinguishable on its facts. In the Adamson case, the stockholders authorized and actively sought a sale of the corporation's assets in the year in which it was claimed that stock became worthless, and the evidence showed that the price at which the stockholders endeavored to sell the assets would be insufficient, if realized, to satisfy the corporation's debts. In these proceedings, similar evidence is lacking.

Petitioners cite and rely upon Jeffery v. Commissioner, 62 F.2d 661, and Homer M. Preston, 7 B. T. A. 414. These cases are distinguished on the facts from the case at bar. In the Jeffery case, the corporation was adjudged a bankrupt in the year in which the loss deduction for worthless stock was claimed. In the Preston case, the evidence established that the financial and commercial position of the corporation was hopeless in the year in which the loss deduction for worthless stock was claimed, although the corporation continued in business for several years thereafter.

Petitioners point with emphasis to the fact that ">*198 the plan of financial readjustment which was outlined in the corporation's letter to stockholders, dated August 9, 1949, was accepted by all the stockholders and was carried out by them. Pursuant to the plan, all the preferred shareholders surrendered their stock to the corporation for cancellation between August 10 and September 15, 1949, and all the holders of the common shares sold their stock for $ 1 a share on September 15, 1949. With the exception of the 7 1/2 shares of common stock which were acquired by John Lincoln upon liquidation of the Gordon Macklin & Company partnership, the Lincoln petitioners sold their common stock to Smith, who, as part of the plan, entered into a 5-year contract with the corporation to manage the hotel. Smith, who had wide experience in the management of resort hotels, demanded an equity in the corporation before he would accept a contract to manage the hotel. The other holders of common stock sold their shares to David Lincoln, who, as part of the plan, purchased 1,000 shares of new preferred stock from the corporation for $ 100,000. Petitioners argue that the stockholders, by accepting the plan of financial readjustment, in effect confirmed">*199 the fact that the preferred and the common stock were then worthless. We do not agree.

In the first place, the plan of financial readjustment was not formally proposed to the stockholders until subsequent to the termination ">*698 of the Gordon Macklin & Company partnership. Hence, even if we were to regard the acceptance of the plan by the stockholders as an identifiable event in the life of the corporation which effectively destroyed the potential value of the stock, the partnership would not be entitled to a loss deduction for worthless stock in its final period of operations.

Furthermore, the acceptance of the plan by the stockholders evidences at most that the stockholders were, at the time, either unwilling or unable to provide the corporation with the needed working capital, and that they had lost faith in the future prospects of the corporation. We note, however, that their apparent lack of faith in the future of the corporation was not shared by David Lincoln, who, as part of the plan, invested $ 100,000 in the corporation, nor by Smith, who, as part of the plan, agreed to devote his time and ability to managing the hotel for a period of 5 years. Finally, the fact ">*200 that all the common stock was sold for a nominal consideration after the old preferred shares had been surrendered to the corporation for cancellation does not of itself establish that the common stock was then worthless. It has been held that the sale of stock for a nominal consideration does not establish the prior worthlessness of the stock. Cf. Raoul H. Fleishmann, 40 B. T. A. 672, Elliott R. Corbett, 28 B. T. A. 46.

It is held that petitioners have failed to prove that the common and the preferred stock of Flamingo Hotel Company became worthless during the period January 1 to July 14, 1949, or at any time in 1949 prior to the surrender by the stockholders of the preferred shares for cancellation and the sale by them of the common shares for a nominal consideration.

Sales of common stock: Section 24 (b) (1) (A), Internal Revenue Code of 1939, provides that in computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly, between members of a family, as defined in subparagraph (2) (D).

The respondent contends that section 24 (b) (1)">*201 (A) applies to the Lincoln petitioners' sales of Flamingo common stock. He relies upon McWilliams v. Commissioner, 331 U.S. 694">331 U.S. 694. Respondent does not question the amounts of the losses for which the Lincoln petitioners claim deductions.

On or before September 15, 1949, all of the holders of Flamingo common stock transmitted their shares, a total of 750, to Flamingo corporation, and on September 15, each stockholder received $ 1 a share for the surrendered stock. David Lincoln received a certificate for 487 1/2 shares of common, for which he paid $ 487.50, and James B. ">*699 Smith received a certificate for 262 1/2 shares of common, for which he paid $ 262.50. The members of the Lincoln family owned a total of 270 shares of common, of which 7 1/2 shares are not involved under this question. David Lincoln is a member of the Lincoln family, and he comes within the definition of "the family of an individual" set forth in section 24 (b) (2) (D).

Petitioners contend that there was no sale or exchange of the common stock between members of the Lincoln family, either directly or indirectly, within the scope of section 24 (b) (1) (A), and that 331 U.S. 694">McWilliams v. Commissioner, supra,">*202 does not apply here. It is the respondent's view that the sales of stock by six stockholders, who are not related to any member of the Lincoln family, should be disregarded, and that the entire transaction involved indirect sales by members of the Lincoln family to David Lincoln.

We conclude that the respondent's view involves distortion of the facts and must be rejected. The sales of the common stock were part of a plan of readjustment following the death of Gordon Macklin, and of refinancing which was the outgrowth of business necessity. The plan was not conceived and carried out for the primary purpose of establishing tax losses for the stockholders. We find no basis for injecting an element of suspicion into the transactions, or for construing them as a tax avoidance device. The evidence shows that James B. Smith wanted to purchase stock in Flamingo and that part of the consideration for his agreement to become the new manager of the hotel was the right to purchase common stock. The evidence shows that one group of stockholders, the non-Lincoln group, were unwilling to invest more capital in the Flamingo enterprise. Since business needs and purposes provided the reasons">*203 for the sales of the common stock, they should not be construed to be anything other than what they were. That is to say, there were no sales, directly or indirectly, by any member of the Lincoln family to David Lincoln. We are satisfied that James B. Smith was, in fact, the actual and bona fide purchaser of the 262 1/2 shares of common stock which were held by members of the Lincoln family. He did not resell any of the 262 1/2 shares, later, to any member of the Lincoln family. He not only retained the 262 1/2 shares which he purchased in September 1949, but he also, later, purchased additional shares of common stock, namely 300 shares, on November 24, 1950.

The facts here are wholly different from the facts in McWilliams, and we therefore hold that the provisions of section 24 (b) (1) (A) do not preclude deductions by the Lincoln petitioners for the losses which they sustained upon their sales of their respective lots of common stock to James B. Smith.

">*700 Issue 2. -- Gordon Macklin Partnership.

The question is whether John S. Lincoln, as surviving partner, purchased the interest of his deceased partner in Gordon Macklin & Company. Decision of this question determines">*204 whether the partnership realized net gain from operations during its last taxable period, as respondent has determined, and whether John S. Lincoln's contention that he sold his partnership interest to Macklin's estate (rather than bought Macklin's interest) is sound.

The partnership was terminated by Macklin's death on July 14, 1949. It was engaged in the security brokerage business; it acquired for its own account securities which it inventoried. Prior to the period in question, the partnership adopted the cost method of inventory valuation; it never obtained the Commissioner's consent to change from this method. In the partnership return of income for January 1 to July 14, 1949, the opening inventory of securities was valued at cost, whereas the closing inventory was not valued at cost but was purportedly valued at market. Because of the change in the method of valuing the closing inventory the partnership return reflected a net loss of $ 37,539.13 for the period. The Commissioner adjusted the closing inventory to cost, resulting in a net profit of $ 22,167.12. Respondent also determined, giving effect to the understanding between the partners that Lincoln was not to share">*205 in partnership income attributable to dealings with the Lincoln family, that Macklin's distributive share of the partnership income was $ 19,327.16, and that Lincoln's distributive share was $ 2,840.66. Petitioners agree that this determination is correct.

The petitioners concede that the closing inventory of securities should have been reported at cost. However, petitioners now claim that the partnership sustained an ordinary net loss in its last period of operations for reasons which are set forth hereinafter. The petitioners contend that the partnership sustained an ordinary net loss in the amount of either $ 37,539.13 or $ 20,857.18.

An ordinary net loss of $ 20,857.18 was sustained by the partnership if the preferred and common stock of the Flamingo Hotel Company, which the partnership held in its inventory as of July 14, 1949, became worthless at some time during 1949, before July 14. Our finding that the Flamingo stock did not become worthless at any time in 1949 disposes of this contention.

The other contention, that the partnership sustained an ordinary net loss of $ 37,539.13, requires a more lengthy explanation. In support of this contention, the petitioners advance">*206 the theory that the partnership's closing inventory was transferred to creditors in payment of debts of the partnership, resulting in a loss of $ 59,706.95, the difference between the cost basis to the partnership of the closing inventory ">*701 and an alleged market value thereof. If the petitioners' theory is correct, the partnership sustained in its last period of operations a net loss of $ 37,539.13.

For the purpose of considering this contention, it may be assumed, without deciding, that $ 59,706.95 was the difference between cost and the true market value of the closing inventory on July 14, 1949.

Respondent does not agree that the market value of the closing inventory on July 14, 1949, was less than cost to the extent of $ 59,706.95, or any other amount.

The evidence is clear that the partnership as such did not enter into any transaction (such as a sale or exchange) involving the transfer of any of its assets to creditors in payment of debts upon which loss or gain can be predicated. Briefly, what actually happened, as is set forth in the Findings of Fact, was as follows:

On August 26, 1949, after Macklin's death, Lincoln, with the consent of Macklin's estate, filed">*207 an application in the Probate Court, as surviving partner, to purchase the interest of the deceased partner in the partnership assets, at their appraised value, in accordance with the provisions of section 8089 of the Ohio General Code. The court approved Lincoln's application. Lincoln, under Ohio law, had a right to make such election. If he had not made such election, the executors of Macklin's estate would have had to petition the court for the appointment of a receiver for the partnership. Sec. 8091, Ohio General Code.

Lincoln's first step prior to making the election was to petition the court to appoint appraisers to make an inventory and appraisment of the assets and liabilities of the partnership. Appraisers were appointed and their report was approved by the court. Their report of inventory and appraisement showed that, as of July 14, 1949, the partnership's liabilities exceeded its assets by $ 11,355.60. Accordingly, Lincoln, as surviving partner, acquired the interest of the deceased partner in the assets of the partnership without paying any consideration to Macklin's estate; he acquired all of the assets of the partnership and assumed all of its liabilities as the">*208 surviving partner.

Having made the election to acquire the interest of the deceased partner and having thereby acquired all of the partnership assets, Lincoln proceeded to collect the assets and pay the debts of the dissolved partnership. His conduct in winding up the affairs of the dissolved partnership was in strict compliance with Ohio law. ⁴ Debts of the partnership were paid in the following way: Lincoln used cash of the partnership in the amount of $ 384,801.30, plus $ 3,906.53, the proceeds from the sale of certain partnership assets, plus approximately $ 4,700 from his personal funds, or a total of $ 393,457 (in ">*702 round figures) to pay the claims of all of the creditors of the partnership other than himself. The remaining assets of the partnership, consisting chiefly of the closing inventory of securities, were retained by Lincoln in satisfaction of his claim against the partnership as a creditor.

The fact that Lincoln was a subordinate ">*209 creditor of the partnership to the extent of his free credit balance in addition to being the surviving partner does not change the legal effect of his election to acquire his deceased partner's interest. Having made that election, he thereafter acquired the partnership assets as the surviving partner and not as a creditor of the partnership. Our determination of the question presented is governed by what Lincoln did in accordance with the applicable Ohio law. Petitioners have not cited any authority in support of their theory that "the partnership assets (including the inventory of securities) must be deemed to have been transferred to Lincoln as of July 14, 1949, in payment of partnership indebtedness," and we have found none.

It is concluded that Lincoln, as surviving partner, purchased his deceased partner's interest in the partnership assets.

The action of the trustee of Macklin's insurance in paying Lincoln $ 10,000 from insurance proceeds according to the terms of the 1940 agreements has been considered; it does not prevent or militate against the above conclusion. Both the limited partnership agreement and the insurance agreement by their terms were to expire on June">*210 29, 1944. However, the limited partnership agreement was extended for a period of 5 years, from June 29, 1944, to June 29, 1949. The insurance agreement was not renewed or extended. Nevertheless, the insurance on Macklin's life remained in effect and the designation in the policy of a trustee to receive the proceeds and to pay $ 10,000 therefrom to Lincoln was not changed. After Macklin's death, the trustee collected the proceeds of the insurance, and on September 22, 1949, he paid $ 10,000 to Lincoln therefrom.

The theory that Lincoln sold his partnership interest is directly opposed to Lincoln's election as the surviving partner to purchase his deceased partner's interest and is rejected. Furthermore, this theory fails to take into account facts relating to Lincoln's share of unwithdrawn profits, and treats the payment of $ 10,000 as consideration for such share as well as the original contribution of $ 10,000. We think the effect which respondent has given to Lincoln's receipt of $ 10,000 out of the insurance proceeds, i. e., decreasing Lincoln's capital account by $ 10,000, realistically reflects what was done.

Under all of the facts, it cannot be held that the partnership">*211 entered into a transaction (such as a sale or exchange) whereby its closing inventory of securities was transferred to creditors, or disposed of in any other way, at a loss of $ 59,706.95, or any other amount, during ">*703 its last period of operations. We must reject petitioners' contention. It follows that the partnership had a closing inventory of securities which had to be taken into account in computing the ordinary net income of the partnership for its last period of operations.

It is admitted that inventories of securities were an important income-computing factor. That being so, "It follows that no accurate computation of the partnership income for the period in question, and hence of petitioners' distributive share thereof, could be made without taking account of the closing inventory for the period." Louis Karsch, 8 T.C. 1327, 1333. Petitioners' theory is an attempt improperly to relate back to the partnership's final period of operations, the transactions entered into by Lincoln, after he acquired the partnership assets as the surviving partner, in winding up the affairs of the dissolved partnership. Cf. First National Bank of Mobile v. Commissioner, 183 F.2d 172,">*212 certiorari denied 340 U.S. 911">340 U.S. 911.

With respect to the assets which Lincoln retained after paying the claims of all creditors other than himself, the fact of the matter is that he took them as the surviving partner and not as a creditor of the dissolved partnership. With respect to the dissolution of the partnership and the winding up of its affairs, we must consider the question presented in the light of the election made by Lincoln, i. e., in the light of what was done rather than what might have been done (such as having a receiver appointed), which might have had other results.

In view of our conclusions under the first general issue and under this issue, it follows that the partnership realized ordinary net income in its last period of operations in the amount of $ 22,167.82.

Decisions will be entered under Rule 50.

---

Footnotes

• 1. The following proceedings have been consolidated herein: Lillian C. Lincoln, Docket No. 38876; John C. Lincoln and Helen C. Lincoln, Docket No. 39055; Estate of Gordon S. Macklin, Deceased, Glen O. Smith, Co-Executor, and Evelyn B. Macklin, Surviving Spouse, Docket No. 39159; Estate of Gordon S. Macklin, Deceased, Glen O. Smith and Evelyn B. Macklin, Executors, Docket No. 39160.↩

• 1. Shares acquired by gift from Gordon S. Macklin, deceased, during his lifetime.↩

• 2. Figures taken from petitioners' brief.↩

• 1. Figures taken from audit reports, Exhibits 2 and 3.↩

• 1. Donated surplus.↩

• 1. Excluding 442 1/2 shs. pfd. and 7 1/2 shs. common acquired by John Lincoln upon dissolution of G. Macklin & Co. partnership.↩

• 2. The difference of $ 16.05 between the total of partnership liabilities to others than John Lincoln as disclosed by the appraisers' report, $ 393.478.99, and the total amount paid to others than John Lincoln, $ 393,457.94, is due to a reduction in the amount of one liability owed by the partnership.↩

• 3. The difference may represent interest of $ 200 which Lincoln received on his capital investment in the partnership during the period in question, which sum Lincoln may have included in his reported gross income as interest; or the discrepancy may represent a typographical error.↩

• 4. Secs. 8085, 8088, 8089, and 8091, Ohio General Code.↩