Cir v. Fink, 483 U.S. 89 (1987)

Commissioner of Internal Revenue v. Fink

No. 86-511

Argued April 27, 1987
Decided June 22, 1987
483 U.S. 89

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

Syllabus

In an unsuccessful effort to increase the attractiveness of their financially troubled corporation to outside investors, respondents voluntarily surrendered some of their shares to the corporation, thereby reducing their combined percentage ownership from 72.5 percent to 68.5 percent. Respondents received no consideration for the surrendered shares, and no other shareholders surrendered any stock. The corporation eventually was liquidated. On their 1976 and 1977 joint federal income tax returns, respondents claimed ordinary loss deductions for the full amount of their adjusted basis in the surrendered shares. The Commissioner of Internal Revenue disallowed the deductions, concluding that the surrendered stock was a contribution to the corporation’s capital, and that, accordingly, the surrender resulted in no immediate tax consequences, and respondents’ basis in the surrendered shares should be added to the basis of their remaining shares. The Tax Court sustained the Commissioner’s determination, but the Court of Appeals reversed, ruling that respondents were entitled to deduct their basis in the surrendered shares immediately as an ordinary loss, less any resulting increase in the value of their remaining shares.

Held: A dominant shareholder who voluntarily surrenders a portion of his shares to the corporation, but who retains control of the corporation, does not sustain an immediate loss deductible for income tax purposes. Rather, the rule applicable to contributions to capital applies, so that the surrendering shareholder must reallocate his basis in the surrendered shares to the shares he retains, and deduct his loss, if any, when he disposes of the remaining shares. This rule is not rendered inapplicable simply because a stock surrender is not a contribution to capital in the strict accounting sense, or because, unlike a typical contribution to capital, a surrender reduces the shareholder’s proportionate interest in the corporation. Where, as here, a closely held corporation’s shares are not traded on an open market, a stock surrender to that corporation often will not meet the requirement that an immediately deductible loss must be actually sustained during the taxable year, since there will be no reliable method of determining whether the surrender has resulted in a loss until the shareholder disposes of his remaining shares. Moreover, treating stock surrenders as ordinary losses might encourage shareholders in failing corporations to convert potential capital losses to ordinary losses by voluntarily surrendering their shares before the corporation fails, thereby avoiding the consequences of the rule requiring capital loss treatment for stock that becomes worthless. Similarly, shareholders might be encouraged to transfer corporate stock rather than other property to the corporation in order to realize a current loss. Pp. 95-100.

789 F.2d 427, reversed.

POWELL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, WHITE, MARSHALL, and O’CONNOR, JJ., joined. WHITE, J., filed a concurring opinion, post p. 100. SCALIA, J., filed an opinion concurring in the judgment, post p. 100. BLACKMUN, J., concurred in the result. STEVENS, J., filed a dissenting opinion, post p. 101.