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LACY v. UNITED STATES

July 24, 1952

LACY ET UX.
v.
UNITED STATES.



The opinion of the court was delivered by: Perry, District Judge.

The sole issue of fact and law presented by the pleadings and evidence is whether 500 shares of Class A stock in Van Schaack Bros. Chemical Works, Inc., purchased by plaintiff, Kenneth B. Lacy, for $10,000 in 1926, became worthless during 1944. If the stock did become worthless, then under the provisions of Section 23(e)(2) and (g)(2), Internal Revenue Code, 26 U.S.C.A. § 23(e)(2), (g)(2), plaintiffs are entitled to a deduction of $1,000 for that year and for each succeeding year through 1948, as a capital loss carry-over permitted by Section 117 Internal Revenue Code, 26 U.S.C.A. § 117(e). If not, judgment should be for the defendant.

The Government contends that a series of events had occurred prior to 1944, when the last asset consisting of improved industrial realty was sold, which established the worthlessness of the plaintiff's stock. These alleged identifiable events may be summarized as follows:

1. The audit of September 30, 1935, filed by the debtor corporation, disclosing that the corporation had not paid taxes for the preceding four years, that it has operated at a loss of $89,646.43 for the preceding nine months, and that working capital had decreased from $51,608.05 from April 30, 1935, when the petition for reorganization was filed under 77B of the Bankruptcy Act, 11 U.S.C.A. § 207 to $23,348.53 on September 30, 1935.

2. The stipulation by the debtor corporation of June 7, 1937, that (a) no feasible plan of reorganization of the debtor could be proposed or accepted, (b) that the estate and assets of the debtor should be liquidated, and (c) that it should be adjudicated bankrupt.

3. The cessation of business operations in 1937.

4. The Court order of June 16, 1937, confirming the finding of the Special Master that the aggregate value of the corporation assets was less than the total amount of its liabilities, and that the corporation was unable to submit a fair and feasible plan of reorganization, and further adjudicating the corporation bankrupt.

5. The Court order of June 16, 1937, appointing a trustee to take possession of the bankrupt's property for purposes of liquidation.

6. The sworn statement of the bankrupt's treasurer of July 23, 1937, listing liabilities at that time as $360,000 and the only substantial assets as real estate, plants and equipment of the bankrupt in Chicago, Illinois, and Heath, Ohio.

7. The appraisal by three appointees of the Court in the bankruptcy proceeding, filed April 18, 1938, reporting the Chicago property at a fair market value of only $204,706 and the appraisal of May 23, 1938, reporting the property in Heath, Ohio, at a market value of $5,100.

8. The sale of the Heath property of the bankrupt on September 23, 1938 for $1,725.

9. The order of April 18, 1938, authorizing private sale of the Chicago property because no bids had been received by the trustee at public sale.

10. The trustee's report of October 30, 1939, showing his inability to obtain a purchaser for the Chicago property at private sale and the expiration of the contract of the brokers who were employed to obtain a purchaser.

11. The sale of July 22, 1940, of three parcels of the Chicago land with six buildings, together with furniture and machinery, for $7,500, subject to $30,000 of tax liens, leaving but 316,000 square feet.

12. The petition of the trustee of October 20, 1941, to pay the costs of unsuccessfully advertising the remaining 316,000 feet of property at 35ยข per square foot, which, if sold at the ...


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