Snyder v. Commissioner, 1945 Tax Ct. Memo 191

Section 23(g) of the Internal Revenue Code limits the deductibility of losses resulting from worthless securities that are capital assets, even if such losses might otherwise be deductible under section 23(e).

Summary

The petitioner, president of a bank, sought to deduct the full cost of his worthless bank stock as a loss under Section 23(e) of the Internal Revenue Code. The Commissioner argued that the loss was a capital loss subject to the limitations of Section 117, allowing only one-half of the loss to be deducted. The Tax Court agreed with the Commissioner, holding that Section 23(g) specifically addresses worthless securities that are capital assets and thus limits the deduction, even if Section 23(e) might otherwise allow a full deduction. The court emphasized the broad definition of “capital assets” and found the stock met this definition.

Facts

The petitioner was the president and trust officer of the Lamberton National Bank. He owned 2,771 shares of the bank’s stock. In December 1941, the Federal Deposit Insurance Corporation took over the bank for liquidation due to its failing financial condition. The petitioner’s stock became entirely worthless in 1941. He claimed a deduction of $72,016, representing the cost of his shares, on his 1941 tax return.

Procedural History

The Commissioner determined a deficiency in the petitioner’s income tax, reducing the basis for calculating the loss on the stock and allowing only one-half of the reduced loss to be deducted due to capital loss limitations. The petitioner then challenged the Commissioner’s decision in the Tax Court.

Issue(s)

Whether the loss sustained by the petitioner due to the worthlessness of his bank stock is deductible in full under Section 23(e) of the Internal Revenue Code, or whether it is a capital loss subject to the limitations of Section 23(g) and Section 117.

Holding

No, because Section 23(g) specifically addresses losses from worthless securities that are capital assets and thus limits the deduction, even if Section 23(e) might otherwise allow a full deduction.

Court’s Reasoning

The court reasoned that Section 23(g) modifies Section 23(e) in instances where securities, generally considered capital assets, become worthless. The court rejected the petitioner’s argument that Section 23(g) does not limit Section 23(e). Section 23(e) allows for deduction of losses incurred in a trade or business or in transactions entered into for profit. Section 23(g) provides that losses resulting from the worthlessness of a security which is a capital asset shall be considered a loss from the sale or exchange of a capital asset and limited to the extent provided in section 117. The court emphasized the broad definition of “capital assets” under Section 117(a)(1), which includes “property held by the taxpayer (whether or not connected with his trade or business),” excluding certain specific types of property like inventory or depreciable business assets. The court found that the bank stock fell within this broad definition of a capital asset and did not fall under any of the exceptions. Therefore, the limitations of Section 23(g) applied.

Practical Implications

This case reinforces the principle that losses from worthless securities are generally treated as capital losses, subject to limitations on deductibility. It clarifies the interaction between Section 23(e) and Section 23(g) of the Internal Revenue Code (now codified in similar provisions). Taxpayers holding stock or other securities that become worthless must recognize that their losses will likely be subject to capital loss limitations, impacting their overall tax liability. This case informs how tax advisors should counsel clients holding potentially worthless securities. Later cases have consistently applied the principle that specific provisions governing capital assets take precedence over general loss deduction rules.