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C.I.R. v. Day & Zimmermann, 151 F.2d 517, 45-2 USTC P 9403, 34 A.F.T.R. 343

Facts

Day & Zimmermann, Inc., a Maryland corporation, owned significant shares in two other corporations, Victor Lynn Transportation Company and Red Star Lines, Inc. Both companies were in financial distress, leading Day & Zimmermann to initiate receivership proceedings. In December 1939, the taxpayer sold a portion of its stock in these companies at auction, which resulted in a claim for long-term capital losses in 1940. The Tax Court found that the losses occurred in 1940 and that the taxpayer's ownership of stock did not meet the 80% threshold required under Section 112(b)(6) for non-recognition of losses.

The taxpayer is a Maryland corporation with its principal office in Philadelphia, Pennsylvania. It is engaged in the business of construction, making investigations and reports and rendering management services.

Issue

Did Day & Zimmermann, Inc. own at least 80% of the voting stock of Victor and Red Star in 1940, thereby allowing it to claim the long-term capital losses under Section 112(b)(6) of the Internal Revenue Code?

The taxpayer argued below that because of its sale of Victor and Red Star preferred stock at the end of December 1939, it did not own at least 80% of the voting stock of those corporations in 1940 and therefore Section 112(b)(6) did not govern.

Rule

Section 112(b)(6) of the Internal Revenue Code states that no gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation if the receiving corporation owned at least 80% of the voting stock of the liquidating corporation at the time of liquidation.

‘(6) Property received by corporation on complete liquidation of another. No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation.’

Analysis

The court analyzed the facts surrounding the stock sales and the taxpayer's ownership percentages. It concluded that the sale of stock to Katz was legitimate and that the taxpayer did not own 80% of the preferred stock of either Victor or Red Star in 1940. The court emphasized that the bona fides of the transaction were evident and that the Tax Court's findings supported the recognition of the losses.

Despite the connection of Katz with Day & Zimmermann there is not the slightest reason arising from the agreed facts for any suspicious inference with respect to his purchase of the stock.

Conclusion

The appellate court affirmed the Tax Court's decision, recognizing the taxpayer's long-term capital losses for 1940, as the taxpayer did not meet the ownership requirement under Section 112(b)(6).

In thus agreeing with the decision of the Tax Court, but for a reason different from the one assigned by that tribunal, we are following the well-settled practice.

Who won?

Day & Zimmermann, Inc. prevailed in the case because the court found that the losses were recognizable despite the taxpayer's ownership percentage not meeting the 80% threshold.

Day & Zimmermann, Inc. prevailed in the case because the court found that the losses were recognizable despite the taxpayer's ownership percentage not meeting the 80% threshold.

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