KAUFMAN v. COMMISSIONER OF INTERNAL REVENUE

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Docket Number

No. 9705.

Attorney(S)

A. Calder Mackay, Arthur McGregor, and Howard W. Reynolds, all of Los Angeles, Cal., for petitioner. Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Arnold Raum, and Samuel H. Levy, Sp. Assts. to Atty. Gen., for respondent.

Judges

Clifton Mathews

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Smart Summary

Factual and Procedural Background

This is a petition by Albert A. Kaufman to review a decision of the United States Board of Tax Appeals redetermining a claimed deficiency in his income tax for 1936. Petitioner, a California resident, organized a California corporation on May 6, 1923, called the Albert A. Kaufman Investment Company. The corporation had 1,000 authorized shares, nearly all issued to petitioner without consideration, transacted no business, and served primarily as a mask for petitioner in some transactions. On May 8, 1929, petitioner entered into a contract with Rodeo Land Water Company to buy Lot 3 of Tract 7954 in Beverly Hills for $25,000, evidenced by two instruments—one in petitioner's personal name and one in the corporate name. The corporation was dissolved on August 30, 1932, and its assets (which in reality were petitioner's) were distributed to him. Only $20,500 of the $25,000 purchase price was ever paid; on September 16, 1936, petitioner surrendered the contract and was released from the remaining $4,500 obligation, resulting in an economic loss of $20,500. In computing 1936 net income petitioner deducted the entire $20,500 loss. The Commissioner treated the loss as a capital loss within the meaning of § 117 of the Revenue Act of 1934 and allowed the deduction only to the extent permitted by § 117(d) (namely $2,000); the Board of Tax Appeals upheld the Commissioner's determination. Petitioner sought reversal in the Ninth Circuit.

Legal Issues Presented

Whether the $20,500 loss sustained by petitioner in connection with the cancelled real estate purchase contract is a loss from the sale or exchange of a capital asset within the meaning of § 117 of the Revenue Act of 1934 (thus subject to the limitations of § 117(d)), or instead an ordinary loss deductible in full under § 23(e) of the Revenue Act of 1934.

Arguments of the Parties

Petitioner's Arguments

Petitioner contended that the loss was not a loss from the sale or exchange of a capital asset under § 117 but was an ordinary loss deductible in full under § 23(e) of the Revenue Act of 1934.

Respondent's Arguments

The Commissioner treated the transaction as a capital loss within the meaning of § 117 and allowed the deduction only to the extent provided in § 117(d) (specifically $2,000). The Board of Tax Appeals sustained that treatment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Rogers v. Commissioner, 9 Cir., 103 F.2d 790, 792	Rejection of a similar contention that a loss of this character was an ordinary loss rather than a capital loss under § 117.	The court stated that Rogers rejected a similar contention, found the facts there not materially different, declared the Rogers decision correct, and reaffirmed it in this case.
Pender v. Commissioner, 4 Cir., 110 F.2d 477, 478	Cited as an additional supporting authority.	Listed by the court as a supporting authority for the proposition applied, without extended discussion.
Wieboldt v. Commissioner, 7 Cir., 113 F.2d 384, 385	Cited as an additional supporting authority.	Listed by the court as a supporting authority for the proposition applied, without extended discussion.
C.L. Grandsen Co. v. Commissioner, 6 Cir., 117 F.2d 80, 82	Cited as an additional supporting authority.	Listed by the court as a supporting authority for the proposition applied, without extended discussion.

Court's Reasoning and Analysis

The court recited the operative facts: formation of a corporation whose shares were issued without consideration and which transacted no business, occasional use of the corporate name by petitioner as a mask, the purchase contract evidenced in both petitioner's name and the corporate name, dissolution of the corporation with distribution of its assets to petitioner, partial payment on the purchase price, and cancellation/release in 1936 resulting in a $20,500 loss.

The Commissioner classified the loss as a capital loss under § 117 of the Revenue Act of 1934 and limited the allowable deduction under § 117(d) (to $2,000). The Board of Tax Appeals sustained that classification. Petitioner argued the loss was an ordinary loss deductible under § 23(e). The court relied on precedent, specifically Rogers v. Commissioner, where a similar contention was rejected and which involved facts not materially different from those before the court. The court explicitly reaffirmed Rogers and cited additional circuit decisions as supporting authorities. Based on those authorities and the similarity of facts, the court concluded that the loss was properly treated as a capital loss subject to the limitations of § 117.

Holding and Implications

Decision affirmed.

The Ninth Circuit affirmed the Board of Tax Appeals' determination that petitioner's loss was a capital loss within the meaning of § 117 of the Revenue Act of 1934 and therefore deductible only to the extent permitted by § 117(d) (notably, the Commissioner allowed $2,000). The immediate consequence is that petitioner may not deduct the entire $20,500 as an ordinary loss for 1936; the deduction is limited consistent with the capital-loss rules applied by the Commissioner and sustained by the Board and this court. The court reaffirmed the Rogers decision as controlling authority; the opinion does not announce a new departure from existing precedent.

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KAUFMAN v. COMMISSIONER OF INTERNAL REVENUE.

MATHEWS, Circuit Judge.

Petitioner, Albert A. Kaufman, a resident of California, seeks reversal of a decision of the Board of Tax Appeals redetermining a claimed deficiency in respect of his income tax for 1936.

On May 6, 1923, petitioner organized a California corporation called Albert A. Kaufman Investment Company having an authorized capital of 1,000 shares, all of which, except three qualifying shares, were issued to petitioner. All the shares were issued without consideration. The corporation never transacted any business. Petitioner, however, in transacting his business, sometimes used the corporation's name instead of his own. Thus, on occasion, the corporation served as a mask to conceal petitioner's identity. That appears to have been its sole function.

On May 8, 1929, petitioner and Rodeo Land Water Company, a California corporation (hereafter called Rodeo), made a contract whereby Rodeo agreed to sell and petitioner agreed to buy Lot 3 of Tract 7954 in Beverly Hills, California, for $25,000, payable in instalments. The contract was evidenced by two written instruments. Both were executed by petitioner. In one petitioner called himself by his right name. In the other he used his corporate sobriquet, "Albert A. Kaufman Investment Company."

On August 30, 1932, petitioner's corporation (Albert A. Kaufman Investment Company) was dissolved, and all its assets — which always, in reality, were petitioner's assets — were distributed to petitioner.

Of the $25,000 which petitioner agreed to pay for the property mentioned, only $20,500 was ever paid. On September 16, 1936, petitioner surrendered the contract for cancellation, and Rodeo released petitioner from his obligation to pay the balance ($4,500) of the purchase price. Thus, in effect, petitioner received $4,500 for property which had cost him $25,000, thereby sustaining a loss of $20,500.

In computing his net income for 1936, petitioner deducted the entire amount of his loss. Respondent, the Commissioner of Internal Revenue, held this was a loss from the sale or exchange of a capital asset, within the meaning of § 117 of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 707, and so allowed the deduction only to the extent provided in § 117(d), namely, to the extent of $2,000 and no more. Respondent's action was upheld by the Board.

Act of May 10, 1934, c. 277, 48 Stat. 680-772.

Petitioner contends that this was not a loss from the sale or exchange of a capital asset, within the meaning of § 117, but was an ordinary loss the full amount of which was deductible under § 23(e) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 672. We rejected a similar contention in Rogers v. Commissioner, 9 Cir., 103 F.2d 790, 792, the facts of which did not differ materially from the facts of this case. The Rogers decision was right and is now reaffirmed.

See, also, Pender v. Commissioner, 4 Cir., 110 F.2d 477, 478; Wieboldt v. Commissioner, 7 Cir., 113 F.2d 384, 385; C.L. Grandsen Co. v. Commissioner, 6 Cir., 117 F.2d 80, 82.

Decision affirmed.