Lincoln
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Jul 18, 1955
24 T.C. 669 (U.S.T.C. 1955)

Docket Nos. 38869 38876 39055 39159 39160.

1955-07-18

JOSEPH C. LINCOLN AND LESGHINKA LINCOLN, et AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Charles D. Leist, Esq., William H. Fleming, Esq., and Glen O. Smith, Esq., for the petitioners. James A. Scott, Esq., for the respondent.


1. A hotel corporation operated at a loss for several years. In 1949 the stockholders adopted a plan whereby all of the preferred stock was surrendered to the corporation and canceled and all of the common stock was sold for $1 a share. An individual, the son of one of the Lincoln family stockholders, who was not a stockholder before adoption of the plan, paid $100,000 new capital to the corporation for which he received 1,000 shares of new preferred stock; and a certificate for 487 1/2 shares of common stock, out of 750 shares, was issued to him. A certificate for 262 1/2 shares of common stock was issued to the new hotel manager. Upon the facts, held, that the old preferred and common stock did not become worthless at any time in 1949; held, further, that loss deductions by the Lincoln petitioners from their sales of common stock are not precluded by sec. 24(b)(1)(A), 1939 Code.

2. On July 14, 1949, Macklin, a partner in Macklin Company, died. His death terminated the partnership which was engaged in selling securities. The surviving partner, Lincoln, through procedures allowed under Ohio law, elected in the Probate Court to purchase the deceased partner's interest in the partnership assets at their appraised value. Distribution of all partnership assets was made to Lincoln by court order. Lincoln applied the assets to pay partnership debts to creditors including himself. Also, Lincoln received $10,000 from insurance on Macklin's life pursuant to an agreement executed when the partnership was formed but which expired before Macklin's death. Upon the facts, held, that Lincoln purchased, as surviving partner, the deceased partner's interest. Since the application of securities (assets) in payment of debts was effected by Lincoln as the purchaser of the deceased partner's interest in liquidation of the partnership, and since stock in the hotel corporation, supra, owned by the partnership was not worthless before July 14, 1949, the partnership did not sustain net loss in its last taxable period but realized a gain. Charles D. Leist, Esq., William H. Fleming, Esq., and Glen O. Smith, Esq., for the petitioners. James A. Scott, Esq., for the respondent.

The Commissioner determined deficiencies for 1949 in the income tax liability of Joseph C. and Lesghinka Lincoln, Lillian C. Lincoln, and John C. and Helen C. Lincoln, in the amounts set forth below. The Commissioner determined a deficiency in the income tax liability of Gordon S. Macklin, deceased, for the taxable period January 1, 1949, to July 14, 1949, the date of his death. Gordon S. Macklin, deceased, was a member of a partnership. In his income tax return for 1947, Gordon S. Macklin claimed a net operating loss carry-back from 1949, representing his share of an alleged net operating loss for the partnership for the year 1949. The Commissioner has determined that the partnership did not have a net operating loss for the year 1949, and, therefore, he disallowed the deduction of a net operating loss carry-back which was taken in the income tax return for 1947 of Gordon S. Macklin, deceased. The deficiencies in income tax determined by the Commissioner are as follows:

+-------------------------------------------------+ ¦Docket No.¦Taxpayer ¦Year¦Deficiency¦ +----------+----------------------+----+----------¦ ¦ ¦ ¦ ¦ ¦ +----------+----------------------+----+----------¦ ¦38869 ¦J. and L. Lincoln ¦1949¦$6,753.13 ¦ +----------+----------------------+----+----------¦ ¦38876 ¦Lillian Lincoln ¦1949¦6,753.12 ¦ +----------+----------------------+----+----------¦ ¦39055 ¦John and Helen Lincoln¦1949¦35,783.07 ¦ +----------+----------------------+----+----------¦ ¦39159 ¦G. S. Macklin Estate ¦1947¦8,965.55 ¦ +----------+----------------------+----+----------¦ ¦39160 ¦G. S. Macklin Estate ¦1949¦9,991.17 ¦ +----------+----------------------+----+----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------------+

In Docket Nos. 38869 and 38876, the petitioners claim that there is overpayment of income tax for 1949 in the amounts of $971.51 and $1,637.74, respectively.

In Docket No. 39055, petitioners have abandoned issues relating to a bad debt loss and a farm loss. In Docket Nos. 38869, 38876, and 39055, respondent has conceded the issue relating to distributions of Wade Park Manor Corporation to petitioners. The parties have agreed that the issue relating to a net operating loss carry-back, in Docket No. 39159, and the issue relating to deduction for medical expense, in Docket No. 39160, will be disposed of under a Rule 50 recomputation. Effect will be given under Rule 50 to stipulations of the parties. Some of respondent's determinations are not contested.

One of the issues relates to a corporation, Flamingo Hotel Company. John, Helen, Joseph, and Lillian Lincoln, Gordon S. Macklin, deceased, and Gordon Macklin & Company owned stock of Flamingo Hotel Company. One question to be decided is whether the preferred and common stock of Flamingo Hotel Company became worthless in 1949. As of September 15, 1949, there was a transaction which involved all of the common stock of Flamingo Hotel Company, and John, Helen, Joseph, and Lillian Lincoln sold their common stock. If it is held that Flamingo Hotel Company stock did not become worthless in 1949, it is necessary to decide whether long-term capital loss deductions claimed by the Lincoln petitioners are not allowable because of the provisions of section 24(b)(1)(A) of the 1939 Code.

Another issue relates to the partnership, Gordon Macklin & Company. John C. Lincoln and Gordon S. Macklin, deceased, were the only members of the partnership. The death of Macklin on July 14, 1949, terminated the partnership. The questions to be decided are whether John C. Lincoln, the surviving partner, sold his interest in the partnership and sustained a long-term capital loss, or whether Lincoln purchased the interest of his deceased partner in the partnership.

FINDINGS OF FACT.

The stipulated facts are found accordingly. The stipulations, together with the attached exhibits, are incorporated herein by this reference.

Joseph C. and Lesghinka Lincoln filed a joint return. John C. and Helen Lincoln filed a joint return. Lillian C. Lincoln filed an individual return. All are residents of Arizona, but they have a mailing address, in care of their attorneys, in Cleveland, Ohio, and they filed their returns for 1949 with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

Gordon S. Macklin died on July 14, 1949, a resident of Cleveland, Ohio. He was survived by his wife, Evelyn B. Macklin. Glen O. Smith and Evelyn B. Macklin are the duly appointed executors of the Estate of Gordon S. Macklin, Deceased. Gordon S. and Evelyn B. Macklin filed a joint return for 1947. An amended return for 1947 was filed after Macklin's death. An individual return was filed for Macklin for the taxable period beginning on January 1, 1949, and ending on July 14, 1949. All of the returns were filed with the collector of internal revenue for the eighteenth district of Ohio, in Cleveland.

John C. and Helen Lincoln are the parents of Joseph C. Lincoln, Lillian C. Lincoln, and David C. Lincoln. David Lincoln was 24 years of age in 1949. Although John and Helen Lincoln have lived in Arizona for about 20 years, they have substantial investments and property interests in the vicinity of Cleveland, Ohio, as do their children, also.

Gordon S. Macklin, deceased, and Evelyn Macklin had three children, Gordon, Jr., John, and Virginia. The children, as well as Evelyn Macklin, survived Gordon S. Macklin.

Macklin Operated, Inc., was an Ohio corporation of which Gordon Macklin was president and the majority stockholder. Among the directors of Macklin Operated, Inc., were John C. Lincoln and William H. Bemis, an attorney and a partner in the law firm, Baker, Hostetler & Patterson, of Cleveland. C. B. Whitcomb was an officer of Macklin Operated; he became president after Macklin's death. The firm of Baker, Hostetler & Patterson rendered services in the organization of Macklin Operated in 1944. The corporation was dissolved in 1951. The business of Macklin Operated consisted chiefly of services in the supervision of various properties in which the Lincoln family had controlling interests. Among the properties in Cleveland which Macklin Operated administered and supervised were Wade Park Manor Hotel, Deshler Hotel, Sovereign Hotel, Auditorium Hotel, LeVeque-Lincoln Tower Building, and Bulkley Building.

John C. Lincoln was the founder of the Lincoln Electric Company in Cleveland. He has had various business interests, in addition, among which are investments in hotel properties. For many years the Lincoln family has had very substantial interests in hotel properties. John Lincoln built the Camelback Inn in Phoenix, Arizona, in the 1930's. He has lived in Phoenix, Arizona, since then.

William H. Bemis has represented members of the Lincoln family since the early 1940's, and he became their personal counsel on about July 15, 1949. He was a director of several corporations which operated hotel properties in which the Lincoln family owned interests. Bemis, in his practice, represents individuals who have interests in a substantial amount of property in Cleveland.

Gordon S. Macklin, for a great many years, was an associate of John Lincoln, and he represented the Lincoln family in investment matters.

In 1940, Gordon Macklin and John Lincoln formed a partnership, Gordon S. Macklin & Company, in Cleveland, in which they were the only partners. The business of Macklin & Company was purchasing, selling, and dealing in securities both for its own account and for the accounts of customers.

Alice M. Bemis is the wife of William H. Bemis.

Flamingo Hotel Company: The Flamingo Hotel is a resort hotel located in the City of Miami Beach, Florida, at 1500 Bay Road on the short of Alton Beach Bay, which is part of Biscayne Bay. It is located in an area which is described as the bay side of the city of Miami Beach, which is distinguished from the ocean side of the city. The main building of the hotel was constructed in 1920; cottages were built in 1920; the annex was built in 1922; the servants' quarters were built in 1922; other improvements were made in 1922 and 1929. The property covers an area of 13 1/2 acres and has a frontage on Biscayne Bay.

The Flamingo Hotel was owned and operated by Carl G. Fisher Corporation for many years. However, after 1941, the United States Army leased the property until the end of 1943, after which occupancy the Navy leased the property until sometime in 1946. The Fisher Corporation sold the property in July 1946.

On July 18, 1946, an agreement for the sale of the Flamingo Hotel property was entered into by the Fisher Corporation and Gordon Macklin & Company.

On July 31, 1946, the Flamingo Hotel Company was organized under the laws of Ohio for the purpose of owning and operating hotels and conducting a hotel business. Its authorized capital stock consisted of 4,000 shares of preferred stock of a par value of $100 per share, and 6,000 shares of common stock of a par value of $1 per share.

The officers and directors of the Flamingo corporation were as follows: John Lincoln, chairman of the board and director; Gordon Macklin, president and director; Edgar F. Bennett, vice president and director; Lawrence Stanley secretary and director; Gordon Macklin, treasurer; E. L. Ryder, assistant secretary; and William H. Bemis, director.

In 1946, the Flamingo Company issued 2,000 shares of preferred stock, and 750 shares of common stock. Both classes of stock were issued for a subscription price of $100 per share.

On August 30, 1946, the agreement to purchase the Flamingo Hotel was assigned to the Flamingo corporation by Macklin & Company.

As of the end of 1946, the stockholders of the Flamingo Hotel Company, and the cost or other basis to each, of the shares held, were as follows:

+-----------------------------------------------------+ ¦ ¦ ¦ ¦Cost or ¦ +---------------------+------+---------+--------------¦ ¦ ¦Common¦Preferred¦other basis ¦ +---------------------+------+---------+--------------¦ ¦Stockholder ¦shares¦shares ¦to stockholder¦ +---------------------+------+---------+--------------¦ ¦A. W. Hutton ¦37 1/2¦100 ¦$13,750 ¦ +---------------------+------+---------+--------------¦ ¦Gordon S. Macklin ¦225 ¦395 ¦62,000 ¦ +---------------------+------+---------+--------------¦ ¦John C. Lincoln ¦150 ¦0 ¦15,000 ¦ +---------------------+------+---------+--------------¦ ¦Lawrence Stanley ¦150 ¦400 ¦55,000 ¦ +---------------------+------+---------+--------------¦ ¦Alice M. Bemis ¦30 ¦80 ¦11,000 ¦ +---------------------+------+---------+--------------¦ ¦Gordon Macklin & Co ¦7 1/2 ¦47 1/2 ¦5,500 ¦ +---------------------+------+---------+--------------¦ ¦Macklin Operated, Inc¦37 1/2¦237 1/2 ¦27,500 ¦ +---------------------+------+---------+--------------¦ ¦Evelyn B. Macklin ¦ ¦1 20 ¦2,000 ¦ +---------------------+------+---------+--------------¦ ¦John Lee Macklin ¦ ¦1 10 ¦1,000 ¦ +---------------------+------+---------+--------------¦ ¦Virginia Macklin ¦ ¦1 5 ¦500 ¦ +---------------------+------+---------+--------------¦ ¦Gordon S. Macklin, Jr¦ ¦1 5 ¦500 ¦ +---------------------+------+---------+--------------¦ ¦Joseph C. Lincoln ¦37 1/2¦233 ¦27,050 ¦ +---------------------+------+---------+--------------¦ ¦Lillian Lincoln ¦37 1/2¦233 ¦27,050 ¦ +---------------------+------+---------+--------------¦ ¦Helen Lincoln ¦37 1/2¦234 ¦27,150 ¦ +---------------------+------+---------+--------------¦ ¦Totals ¦750 ¦2,000 ¦$275,000 ¦ +-----------------------------------------------------+

In the group which owned all of the outstanding stock of the hotel corporation at the end of 1946, Hutton, Stanley, and Bemis were not related to each other or to any members of the Lincoln or Macklin families; and members of the Macklin family were not related to members of the Lincoln family. The controlling interest in Macklin Operated, Inc., an Ohio corporation, was owned by Macklin, and, later, by his estate.

No additional stock of Flamingo Hotel Company was issued prior to September 15, 1949.

In 1947, Macklin sold all of his Flamingo preferred stock (395 shares) to Gordon Macklin & Company for $37,525, at $95 a share.

Upon the death of Macklin in July 1949, his Flamingo common stock (225 shares) was acquired by his estate, and the Flamingo stock owned by the partnership (7 1/2 shares of common and 442 1/2 shares of preferred) was transferred to John C. Lincoln, the surviving partner.

There were no other changes in the ownership of Flamingo stock between the end of 1946 and the beginning of August 1949.

The following were directors of the Flamingo Hotel corporation for the periods indicated:

+---------------------------------------------------------+ ¦Gordon S. Macklin¦August 9, 1946 to July 14, 1949 ¦ +-----------------+---------------------------------------¦ ¦John C. Lincoln ¦August 9, 1946 to September 7, 1949 ¦ +-----------------+---------------------------------------¦ ¦Edgar F. Bennett ¦August 9, 1946 to September 27, 1949 ¦ +-----------------+---------------------------------------¦ ¦Lawrence Stanley ¦August 9, 1946 to August 17, 1949 ¦ +-----------------+---------------------------------------¦ ¦William H. Bemis ¦August 9, 1946 to date ¦ +-----------------+---------------------------------------¦ ¦C. B. Whitcomb ¦September 6, 1949 to date ¦ +-----------------+---------------------------------------¦ ¦Stephen C. Thayer¦September 6, 1949 to date ¦ +-----------------+---------------------------------------¦ ¦A. W. Hutton ¦September 27, 1947 to September 7, 1949¦ +---------------------------------------------------------+

Macklin was president and treasurer from its organization until his death.

In September 1946, the Flamingo Hotel Company purchased the hotel property, including land, buildings, furniture, china, glassware, silver, linens, carpets, and various equipment, for $1,500,000, of which amount $425,000 was paid in cash by September 3, 1946, and $900,000 was borrowed from Acacia Mutual Life Insurance Company. The Fisher Corporation took a purchase money second mortgage, for the balance, $175,000. Acacia Life Insurance Company took the first mortgage to secure its loan.

Prior to making the mortgage loan, Acacia had appraisals made of the Flamingo Hotel property by two appraisers who were not its employees or agents, and it also obtained other opinions about the value of the property for the purposes of a loan and mortgage.

The Flamingo Company gave its note to Acacia, dated September 27, 1946, for $900,000, and 4 per cent interest per annum. The note was payable in monthly installments of $5,859, for principal and interest, beginning on October 27, 1946, to August 27, 1964, over a period of 18 years. The note was secured by a first mortgage.

The Flamingo Company gave the Fisher Corporation 6 serially numbered notes, which were in approximately equal amounts, aggregating $175,000. Each note was for $29,166.66 or $29,166.67, and bore 4 1/2 per cent per annum interest. One note was payable each year on September 7; interest was payable semiannually. The notes were dated September 7, 1946. The first note was due September 7, 1947, one year after its date. Notes numbered 2, 3, 4, 5, and 6, matured 2, 3, 4, 5, and 6 years after September 7, 1946, respectively. The notes were secured by a second mortgage.

The Flamingo Company has operated the Flamingo Hotel from the time of acquisition until the present. The hotel is operated only during the winter season as a restricted resort hotel. The operating season covers 5 months, December, January, February, March, and April. The first season of operations began on December 1, 1946, and ended April 30, 1947.

The Flamingo Company keeps its books on an accrual basis and for a fiscal year beginning on December 1 and ending on November 30. It realizes income almost solely from operating the hotel, and it receives income only during the operating season.

The Flamingo Company, hereinafter called Flamingo, began business in 1946 with paid-in capital in the amount of $275,000, plus borrowed funds in the amount of $275,000.

Flamingo borrowed $200,000 at 2 1/2 per cent interest from the Cleveland Trust Company on August 31, 1946, before it purchased the hotel property. Three stockholders, John Lincoln, Gordon Macklin, and Lawrence Stanley, applied for the loan, and they jointly and severally guaranteed repayment of principal and interest at the maturity of the loan. Also, they pledged with and assigned to the bank, the securities listed in a loan agreement as collateral security for the guaranteed repayment. They executed an agreement guaranteeing repayment of the loan. The note of Flamingo was dated August 31, 1946, and was due on September 1, 1947. It was unsecured insofar as the assets of Flamingo were concerned.

On October 3, 1946, Flamingo borrowed $75,000 from five of its stockholders at 4 per cent interest. The stockholders and the amounts of their respective loans were as follows:

+-------------------------+ ¦John Lincoln ¦$18,475¦ +-----------------+-------¦ ¦Gordon Macklin ¦21,225 ¦ +-----------------+-------¦ ¦Lawrence Stanley ¦10,550 ¦ +-----------------+-------¦ ¦A. W. Hutton ¦13,750 ¦ +-----------------+-------¦ ¦Alice Bemis ¦11,000 ¦ +-----------------+-------¦ ¦Total ¦$75,000¦ +-------------------------+

At the time these loans were made, Flamingo did not give notes to the lenders, or any security.

On Flamingo's books, as of November 30, 1946, Flamingo's fixed assets were carried at $1,513,629, representing cost of $1,500,000, plus settlement charges. The cost of the fixed assets was apportioned as follows:

+----------------------------------+ ¦Land ¦$129,026 ¦ +-----------------------+----------¦ ¦Buildings ¦1,030,455 ¦ +-----------------------+----------¦ ¦Furniture and equipment¦354.158 ¦ +-----------------------+----------¦ ¦Total ¦$1,513.629¦ +----------------------------------+

Flamingo's original funded indebtedness, its note and loans payable and its paid-in capital were as follows in 1946:

+--------------------------------+ ¦Funded indebtedness: ¦ ¦ +---------------------+----------¦ ¦First mortgage loan ¦$900,00 ¦ +---------------------+----------¦ ¦Second mortgage loan ¦175,000 ¦ +---------------------+----------¦ ¦ ¦$1,075,000¦ +---------------------+----------¦ ¦Notes and loans: ¦ ¦ +---------------------+----------¦ ¦Cleveland Trust Co ¦$200,000 ¦ +---------------------+----------¦ ¦Loans ¦75,000 ¦ +---------------------+----------¦ ¦ ¦$275,000 ¦ +---------------------+----------¦ ¦Paid-in capital: ¦ ¦ +---------------------+----------¦ ¦2,000 shs. pfd. stock¦$200,000 ¦ +---------------------+----------¦ ¦750 shs. com. stock ¦75,000 ¦ +---------------------+----------¦ ¦ ¦$275,000 ¦ +--------------------------------+

In December 1946, Flamingo entered into an agreement with Macklin Operated, Inc., engaging it as supervising manager for 1 year for a fee of 3 per cent of the gross receipts of the hotel. The agreement was renewed each year until it was canceled by mutual consent on August 31, 1949. Macklin Operated hired a managing director of the hotel. At all times the managing director was a person of outstanding ability, experience, and reputation. His compensation was paid by Macklin Operated. James Farrell was the managing director of the hotel during the operating seasons of 1947-1948 and 1948-1949. For the second season, Flamingo agreed to pay Farrell additional compensation of not less than $2,500.

The Flamingo Hotel, when it was acquired in 1946, comprised the following: An 11-story main building containing 140 guest rooms, lobbies, shops, dining room, solaria, and other facilities for guests; a 4-story annex containing 59 guest rooms; and 11 cottages containing 35 guest rooms. Other facilities consisted of servants' quarters, service shops, miscellaneous buildings, tennis courts, boat docks, and a swimming pool. The grounds were attractively landscaped, and had concrete walks and paved roads. There is no other hotel in the city of Miami Beach having larger grounds. The construction of the main building is monolithic reinforced concrete; of the annex, concrete block; and of the cottages, concrete block or stucco. The plumbing fixtures, bathroom fixtures, and elevators are the same age as the buildings in which they are located. Flamingo Company did not make any substantial additions to or improvements of the hotel buildings or properties prior to November 30, 1949.

For the fiscal years ended November 30, 1947, 1948, and 1949, Flamingo corporation realized net operating profit before interest and after operating expenses, taxes, and insurance, in the amounts of $42,492, $94,859, and $52,566, respectively. After interest, profit amounted to $10, $45,121, and $10,239, for each of the above-stated years, as is shown by the following schedule:

+-----------------------------------------------------------------+ ¦Receipts and expenses ¦11/30/47 ¦11/30/48 ¦11/30/49 ¦ +--------------------------+------------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------+------------+------------+------------¦ ¦Gross income ¦2 $630,301¦1 $618,798¦1 $490,241¦ +--------------------------+------------+------------+------------¦ ¦Operating expenses ¦549,899 ¦473,161 ¦395,133 ¦ +--------------------------+------------+------------+------------¦ ¦Gross operating profit ¦$80,402 ¦$145,637 ¦$95,108 ¦ +--------------------------+------------+------------+------------¦ ¦Less taxes and insurance ¦37,910 ¦50,778 ¦42,542 ¦ +--------------------------+------------+------------+------------¦ ¦Profit before interest ¦$42,492 ¦$94,859 ¦$52,566 ¦ +--------------------------+------------+------------+------------¦ ¦Interest ¦42,482 ¦49,121 ¦42,327 ¦ +--------------------------+------------+------------+------------¦ ¦Profit before depreciation¦$10 ¦$45,738 ¦$10,239 ¦ +--------------------------+------------+------------+------------¦ ¦Depreciation ¦83,048 ¦84,259 ¦84,892 ¦ +--------------------------+------------+------------+------------¦ ¦Net operating loss ¦($83,038) ¦($38,521) ¦($74,653) ¦ +--------------------------+------------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------+

The corporation sustained the following adjusted net losses, after all expenses, interest, and depreciation, for its fiscal years ending on November 30 in 1946, 1947, 1948, and 1949:

+--------------------------+ ¦Fiscal year ¦Net loss ¦ +--------------+-----------¦ ¦1946 ¦$33,424.25 ¦ +--------------+-----------¦ ¦1947 ¦96,353.70 ¦ +--------------+-----------¦ ¦1948 ¦47,840.72 ¦ +--------------+-----------¦ ¦1949 ¦74,653.50 ¦ +--------------+-----------¦ ¦Total deficit ¦$252,272.17¦ +--------------------------+

However, the corporation's net operating losses for the periods December 1, 1948, to April 30, 1949, and to June 30, 1949, were $31,090 and.$55,660, respectively, so that as of April 30, 1949, and June 30, 1949, the total deficit sustained since incorporation amounted to $208,708 and $233,279, respectively.

Profit and loss (cents omitted) for 1947, 1948, and 1949, as shown by the books of Flamingo and audit reports made available to stockholders, are as follows:

+---------------------------------------------------------------------------+ ¦ ¦Fiscal year¦Fiscal year¦Fiscal year¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Item ¦ended ¦ended ¦ended ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦ ¦11/30/47 ¦11/30/48 ¦11/30/49 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Net sales and other income ¦$630,301 ¦$624,991 ¦$490,241 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Cost of sales ¦328,292 ¦328,952 ¦248,810 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Gross operating income ¦$302,008 ¦$296,039 ¦$241,430 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Deductions ¦221,606 ¦150,401 ¦146,322 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Gross operating profit ¦$80,402 ¦$145,637 ¦$95,108 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Taxes and insurance ¦37,910 ¦50,778 ¦42,542 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Profit before interest and depreciation¦$42,492 ¦$94,859 ¦$52,566 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Interest and depreciation ¦125,530 ¦133,380 ¦127,219 ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Net operating loss ¦($83,038) ¦($38,521) ¦($74,653) ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Hurricane damage ¦ ¦11,879 ¦ ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Net loss per audit statements ¦($83,037) ¦($50,401) ¦($74,653) ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Post-audit adjustments ¦(13,315) ¦2,560 ¦ ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦Net loss ¦($96,353) ¦($47,840) ¦($74,653) ¦ +---------------------------------------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------------------+

The Flamingo Hotel Company did not declare or pay any dividends on either its preferred or its common stock during the years 1946 through 1949.

At all times prior and subsequent to September 15, 1949, the Flamingo corporation made timely payment of the monthly installments required by the terms of the first mortgage loan of Acacia Insurance Company. With respect to the second mortgage held by the Fisher Corporation, further principal payments totaling $68,333.32 were made prior to April 30, 1953.

The corporation did not make any principal payments prior to July 1, 1949, on its indebtedness to the Cleveland Trust Company. Its original not to the bank was due September 1, 1947. The bank accepted successive renewals of the note which were guaranteed by stockholders; the last such renewal executed prior to July 1, 1949, was dated February 28, 1949, and was due October 1, 1949.

None of the loans made to the corporation by stockholders was repaid, and no interest on the loans was accrued on the corporation's books prior to July 1, 1949.

The management fee due Macklin Operated, Inc., was $14,686, and the additional compensation due Farrell, $2,500, for the 1948-1949 operating season were not paid by the corporation during its fiscal year ended November 30, 1949.

In June 1949, the corporation was advised that Farrel was resigning as managing director of The flamingo Hotel. Farrell subsequently submitted his resignation effective as of July 31, 1949.

The following schedule is a summary of the assets, liabilities, and capital of the Flamingo Hotel Company as shown by its books as of November 30, 1948, April 30, 1949, June 30, 1949, and November 30, 1949 (cents omitted):

+----------------------------------+ ¦¦11/30/48¦4/30/49¦6/30/49¦11/30/49¦ ++--------+-------+-------+--------¦ ¦¦ ¦ ¦ ¦ ¦ +----------------------------------+

ASSETS Current assets: Cash $16,938 $25,688 $9,667 $72,249 Other 27,342 19,900 19,048 29,306 Totals $44,280 $45,589 $28,715 $101,555 Fixed and operating assets (less depreciation reserve) $1,356,594 $1,278,674 $1,277,518 $1,280,875 Other assets 37,017 5,585 5,964 110,581 Total assets $1,437,893 $1,329,849 $1,312,198 $1,493,011

LIABILITIES AND CAPITAL Current liabilities: Notes, Cleveland Trust $200,000 $200,000 $200,000 Loans, stockholders 75,000 75,000 75,000 Management fee 14,682 14,686 $14,683 Other 131,094 52,625 65,926 75,354 Totals $406,094 $342,307 $355,613 $90,037 Funded indebtedness: 1st mortgage $820,311 $804,583 $798,197 $782,121 2nd mortgage 116,666 116,666 116,666 116,666 Notes, Cleveland Trust 200,000 Stockholders' notes 75,000 Other 2,904 Totals $936,978 $921,250 $914,864 $1,176,691 Capital: Preferred $200,000 $200,000 $200,000 $100,000 Common 75,000 75,000 75,000 1 750 (Deficit) (180,179) (208,708) (233,279) 21,977 Totals $94,820 $66,291 $41,720 $122,727 Total liabilities and capital $1,437,893 $1,329,849 $1,312,198 $1,391,456

Shares acquired by gift from Gordon S. Macklin, deceased, during s his lifetime.

1Donated surplus.

The totals set forth above for current liabilities as of April 30, 1949, and June 30, 1949, do not include the principal amount of first and second mortgage obligations due and payable by the corporation during the remainder of its fiscal year ended November 30, 1949.

The city of Miami Beach, Florida, for local real estate tax purposes uses an assessed value for land in its jurisdiction which runs 40 and 50 per cent of sales price or fair market value. One of petitioners' valuation witnesses does the appraising for the city of Miami Beach, appraises for eminent domain and zoning purposes, and was employed in 1948 by the city in its land equalization program. In a joint appraisal with another witness, he allocated $175,000 to the Flamingo land. The following schedule shows the assessed valuation by the city of Miami Beach of the Flamingo Hotel properties, real and personal, for the local tax years indicated, together with the approximate fair market value in those years (based on assessed values of from 40 to 50 per cent of fair market value):

+--------------------+ ¦¦1946¦1947¦1948¦1949¦ ++----+----+----+----¦ ¦¦ ¦ ¦ ¦ ¦ +--------------------+

LAND Assessed value $77,150 $154,300 $210,000 $210,000 Fair market value: Assessed at 50% 154,300 308,600 420,000 420,000 Assessed at 40% 192,875 385,750 525,000 525,000

IMPROVEMENTS Assessed value 208,800 417,600 477,800 477,800 Fair market value: Assessed at 50% 417,600 835,200 955,600 955,600 Assessed at 40% 522,000 1,044,000 1,194,500 1,194,500

PERSONAL PROPERTY Assessed value 44,850 188,700 194,500 281,800 Fair market value: Assessed at 50% 89,700 377,400 389,000 563,600 Assessed at 40% 112,125 471,750 486,250 704,500 Fair market value all hotel property: Assessed at 50% 661,600 1,521,200 1,764,600 1,939,200 Assessed at 40% 827,000 1,901,500 2,205,750 2,424,000

1950 1951 1952 LAND Assessed value $210,000 $210,000 $210,000 Fair market value: Assessed at 50% 420,000 420,000 420,000 Assessed at 40% 525,000 525,000 525,000

IMPROVEMENTS Assessed value 458,700 458,700 458,700 Fair market value: Assessed at 50% 917,400 917,400 917,400 Assessed at 40% 1,146,750 1,146,750 1,146,750

PERSONAL PROPERTY Assessed value 281,500 285,400 305,550 Fair market value: Assessed at 50% 563,000 570,800 611,100 Assessed at 40% 703,750 713,500 763,875 Fair market value all hotel property: Assessed at 50% 1,900,400 1,908,200 1,948,500 Assessed at 40% 2,375,500 2,385,250 2,435,625

The following schedule shows the assessed value of the Flamingo Hotel properties, real and personal, for the purpose of Dade County taxes for the local tax years indicated (without regard to ratios to fair market value):

+---------------------------+ ¦ ¦Assessed value ¦ +----+----------------------¦ ¦Year¦land and improvements ¦ +----+----------------------¦ ¦1946¦$483,050 ¦ +----+----------------------¦ ¦1947¦615,000 ¦ +----+----------------------¦ ¦1948¦800,000 ¦ +----+----------------------¦ ¦1949¦792,400 ¦ +----+----------------------¦ ¦1950¦744,700 ¦ +----+----------------------¦ ¦1951¦744,700 ¦ +----+----------------------¦ ¦1952¦744,700 ¦ +---------------------------+

+-----------------------+ ¦ ¦Assessed value ¦ +----+------------------¦ ¦Year¦personal property ¦ +----+------------------¦ ¦1946¦$72,000 ¦ +----+------------------¦ ¦1947¦148,500 ¦ +----+------------------¦ ¦1948¦148,500 ¦ +----+------------------¦ ¦1949¦145,500 ¦ +----+------------------¦ ¦1950¦144,000 ¦ +----+------------------¦ ¦1951¦144,470 ¦ +----+------------------¦ ¦1952¦144,000 ¦ +----+------------------¦ ¦ ¦ ¦ +-----------------------+

Year Total assessed value 1946 $555,050 1947 763,500 1948 948,500 1949 937,900 1950 888,700 1951 889,170 1952 888,700

The following schedule shows the amount of insurance coverage carried by the Flamingo Hotel Company against property damage to its fixed and operating assets (exclusive of land) for the fiscal years indicated:

+---------------------------------------+ ¦Fiscal year ¦Fire ¦Windstorm ¦ +-------------+-------------+-----------¦ ¦ended Nov. 30¦insurance ¦insurance ¦ +-------------+-------------+-----------¦ ¦1948 ¦$1,245,306.40¦$663,926.73¦ +-------------+-------------+-----------¦ ¦1949 ¦1,186,774.90 ¦638,761.96 ¦ +-------------+-------------+-----------¦ ¦1950 ¦1,186,774.90 ¦638,805.59 ¦ +-------------+-------------+-----------¦ ¦1951 ¦1,165,006.40 ¦639,164.66 ¦ +-------------+-------------+-----------¦ ¦1952 ¦2,000,000.00 ¦ ¦ +-------------+-------------+-----------¦ ¦1953 ¦2,000,000.00 ¦ ¦ +---------------------------------------+

The Flamingo Hotel Company was in financial difficulty as of July 1, 1949. The corporation then needed approximately $82,000 to pay its fixed charges and expenses for the balance of the fiscal year, a period during which it would not receive any operating income, and approximately $40,000 to defray the expense of reopening the hotel for the season beginning in December 1949. Beginning in July 1949, Macklin Operated, Inc., began to advance the corporation funds with which to meet its first mortgage payments and maintenance expenses.

On August 9, 1949, the Flamingo Hotel Company addressed a letter to all stockholders in which the problems confronting the corporation were reviewed. The stockholders were advised that, since July 1, 1949, Macklin Operated, Inc., had been advancing the corporation the money required for first mortgage payments and maintenance expenses under a temporary arrangement. The opinion was expressed in the letter that in view of the poor earnings record of the hotel for the preceding 3 seasons, it would not be possible to interest anyone in purchasing the hotel, and that, eliminating the possibility of a sale, two alternative courses of action remained: (1) To abandon the hotel property to the mortgagees, or (2) to secure new capital and continue operations. The latter alternative was recommended in the letter. The letter suggested that the stockholders adopt the following plan ‘as a means of working out some salvage for all of the parties concerned, at least to the extent of their direct or indirect interest in Flamingo's unsecured debt’: (1) The holders of the preferred stock would surrender the shares to the corporation for cancellation. (2) A member of the Lincoln family, who had no present interest in the corporation, would be solicited to pay into the corporation $100,000, for which he would receive 1,000 shares of new preferred stock. (3) The members of the Lincoln family, who held about 35 per cent of the common stock, would sell their common shares for $1 a share to James B. Smith who, in turn, would enter into a 5-year contract with the corporation to manage the hotel. (4) The other common stockholders would sell their shares for $1 a share to the member of the Lincoln family who purchased the new preferred shares. (5) The corporation would enter into a 5-year management contract with James B. Smith, under the terms of which Smith would receive a maximum salary of $5,000 a year, contingent upon the hotel earning $80,000 a season after taxes and insurance. (6) The existing debt structure of the corporation would remain unchanged except for rescheduling and postponing payments on the second mortgage and on the unsecured obligations of the corporation for a period of approximately 2 years. The letter closed with the following paragraph:

If you are willing to surrender the shares of preferred stock which you hold to the Company for cancellation and retirement, and if you are willing to sell the shares of common stock which you hold at the price of $1.00 per share, please forward your certificates endorsed in blank, together with the enclosed transmittal letter. Such certificates will be held for disposition in accordance with the plan as outlined herein, and if such plan cannot be worked out the certificates will be returned.

The plan outlined in the corporation's letter of August 9, 1949, was accepted by all the stockholders. The plan was carried out in August and September 1949, and as executed, was ratified by resolutions adopted by the directors of the corporation.

During the period August 10 to August 26, 1949, 1,960 of the 2,000 shares of preferred stock outstanding, including the shares held by the petitioners, were surrendered to the corporation and canceled. On September 15, 1949, the remaining 40 shares of preferred stock, which were held by Macklin's minor children, were surrendered to the corporation and canceled. At the time the preferred shares were surrendered to the corporation, the Lincoln petitioners owned 1,142 1/2 out of the 2,000 shares outstanding, including the 442 1/2 shares of preferred which were acquired by John C. Lincoln upon the dissolution of the Gordon Macklin & Company partnership.

As of September 15, 1949, the certificates representing all of the outstanding common stock of Flamingo corporation had been transmitted to Stephen C. Thayer, assistant secretary of Flamingo, who acted as the transfer agent for the transferors and the transferees. Prior to the transmittal of the common stock certificates, John, Joseph, Helen, and Lillian Lincoln owned an aggregate of 262 1/2 shares of common stock (excluding 7 1/2 shares standing in the name of Gordon Macklin & Company which were acquired by John C. Lincoln on August 26, 1949, as surviving partner, see facts under Issue 2, infra); the estate of Gordon S. Macklin owned 225 shares; Lawrence D. Stanley owned 150 shares; Alice Bemis owned 30 shares; Macklin Operated, Inc., owned 37 1/2 shares; A. W. Hutton owned 37 1/2 shares; and 7 1/2 shares stood in the name of Gordon Macklin & Company. On September 15, 1949, all of the common stock was sold for $1 per share, and 2 new certificates were issued. One certificate for 487 1/2 shares of common stock was issued to David Lincoln, and 1 certificate for 262 1/2 shares was issued to James B. Smith.

John, Joseph, Helen, and Lillian Lincoln sold their shares of common stock to James B. Smith:

+-------------------------------------+ ¦Seller ¦Shares ¦Purchaser ¦ +------------------+-------+----------¦ ¦John C. Lincoln ¦150 ¦J.B. Smith¦ +------------------+-------+----------¦ ¦Helen C. Lincoln ¦37 1/2 ¦J.B. Smith¦ +------------------+-------+----------¦ ¦Joseph C. Lincoln ¦37 1/2 ¦J.B. Smith¦ +------------------+-------+----------¦ ¦Lillian C. Lincoln¦37 1/2 ¦J.B. Smith¦ +------------------+-------+----------¦ ¦Total ¦262 1/2¦ ¦ +-------------------------------------+

David Lincoln purchased 487 1/2 shares of common stock from the following:

+------------------------------------------+ ¦Seller ¦Shares ¦Purchaser ¦ +--------------------+-------+-------------¦ ¦A.W. Hutton ¦37 1/2 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦Estate of G. Macklin¦225 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦Alice Bemis ¦30 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦L.D. Stanley ¦150 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦Macklin Operated ¦37 1/2 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦John Lincoln ¦7 1/2 ¦David Lincoln¦ +--------------------+-------+-------------¦ ¦Total ¦487 1/2¦ ¦ +------------------------------------------+

James B. Smith is not a member of the Lincoln family. He is not related to any member of the Lincoln family or to any of the former owners of Flamingo common and preferred stock.

David Lincoln paid $100,000 to the Flamingo corporation on September 15, 1949, for which he received 1,000 shares of new preferred stock, at $100 per share. As of September 15, 1949, David Lincoln owned all of the issued and outstanding preferred stock.

Since about 1942, a Cleveland law firm, Baker, Hostetler & Patterson, was employed from time to time by various members of the Lincoln family, namely, John, Joseph, David, Helen, and Lillian Lincoln, and, also, by Gordon S. Macklin. The same law firm organized Macklin Operated, Inc., and acted as its counsel thereafter. One of the members of the law firm, William H. Bemis, was an officer of Macklin Operated, Inc., from the time of its organization in 1944 until 1950 or 1951. The same law firm organized the Flamingo Hotel corporation. Bemis was one of the original directors, and his wife, Alice, was one of the original stockholders. Bemis has been president of Flamingo corporation since 1949.

Bemis was a director of the Flamingo corporation at the time the plan for refinancing, as set forth in the letter of August 9, 1949, to the stockholders, was under consideration. With respect to the suggested manner in which transfers of common stock were to be made, i.e., that common stock held by members of the Lincoln family would be transferred to James B. Smith, whereas the rest of the outstanding common stock would be transferred to David Lincoln, consideration was given to sections of the Internal Revenue Code applying to intra-family transactions, and to means for obviating any possible construction of the handling of the transfers of the common stock as coming within such provisions of the Code.

Prior to September 15, 1949, the Flamingo Hotel Company received an extension of time, until April 1, 1951, within which to make second mortgage payments, due in September 1949 and 1950, aggregating $58,333. Also, the Cleveland Trust Company, which held a note of the corporation for $200,000, accepted a renewal note payable April 1, 1951; and Macklin Operated, Inc., agreed to defer payment of its advances to the corporation, totaling $36,179, until April 1, 1951. Similarly, the five original stockholders who had loaned the corporation $75,000 agreed to defer payment of the obligations until April 1, 1951.

Also, prior to September 15, 1949, and as part of the plan proposed in the letter of August 9, 1949, James B. Smith entered into an agreement with the corporation to manage the hotel for a period of 5 years under the terms set forth in the letter.

All the original stockholders who were members of the board of directors of the corporation resigned prior to September 15, 1949. Thereafter, the corporation continued operations with new officers, a substantially new directorate, and new management.

During the period from July 31, 1946, to September 18, 1949, the minutes of the formal meetings of the board of directors of Flamingo do not show that any consideration was given to the possibility of dissolving or liquidating the corporation.

The Flamingo Hotel Company has never been placed in receivership or bankruptcy. The Flamingo Company has continued to operate the hotel properties in Miami Beach. The books and records of the corporation reflect the following net profit or loss for the periods set forth below:

+--------------------------------+ ¦Fiscal year ended ¦Net profit ¦ +-------------------+------------¦ ¦November 30 ¦(or loss) ¦ +-------------------+------------¦ ¦1950 ¦($98,452) ¦ +-------------------+------------¦ ¦1951 ¦4,080 ¦ +-------------------+------------¦ ¦1952 ¦(58,774) ¦ +--------------------------------+

For the period December 1, 1952, to April 30, 1953, the corporation realized a net profit of $24,378.

On August 7, 1950, the corporation issued preferred stock in satisfaction of the following unsecured obligations:

+------------------------------------------------------+ ¦ ¦ ¦No. of ¦ +---------------------------+--------------+-----------¦ ¦ ¦Amount ¦preferred ¦ +---------------------------+--------------+-----------¦ ¦ ¦of ¦shares ¦ +---------------------------+--------------+-----------¦ ¦Creditor ¦indebtedness ¦issued ¦ +---------------------------+--------------+-----------¦ ¦Estate of Gordon S. Macklin¦$17,990 ¦180 ¦ +---------------------------+--------------+-----------¦ ¦John C. Lincoln ¦18,475 ¦185 ¦ +---------------------------+--------------+-----------¦ ¦Lawrence D. Stanley ¦10,550 ¦106 ¦ +---------------------------+--------------+-----------¦ ¦Alice M. Bemis ¦11,000 ¦110 ¦ +---------------------------+--------------+-----------¦ ¦A. W. Hutton ¦13,750 ¦138 ¦ +---------------------------+--------------+-----------¦ ¦Macklin Operated, Inc ¦36,179 ¦362 ¦ +---------------------------+--------------+-----------¦ ¦James J. Farrell ¦2,500 ¦25 ¦ +---------------------------+--------------+-----------¦ ¦Totals ¦$110,444 ¦1,106 ¦ +------------------------------------------------------+

On November 24, 1950, the corporation issued preferred and common stock at a subscription price of $100 a share for preferred and $1 a share for common, as follows:

+------------------------------------------------+ ¦ ¦ ¦ ¦Amount ¦ +------------------+-------+-------+-------------¦ ¦ ¦ ¦ ¦received ¦ +------------------+---------------+-------------¦ ¦ ¦No. of shares ¦by ¦ +------------------+---------------+-------------¦ ¦Subscriber ¦Pfd. ¦Com. ¦corporation ¦ +------------------+-------+-------+-------------¦ ¦James B. Smith ¦150 ¦300 ¦$15,300 ¦ +------------------+-------+-------+-------------¦ ¦David C. Lincoln ¦150 ¦150 ¦15,150 ¦ +------------------+-------+-------+-------------¦ ¦Joseph C. Lincoln ¦300 ¦300 ¦30,300 ¦ +------------------+-------+-------+-------------¦ ¦Lillian C. Lincoln¦300 ¦300 ¦30,300 ¦ +------------------+-------+-------+-------------¦ ¦Alice M. Bemis ¦100 ¦100 ¦10,100 ¦ +------------------+-------+-------+-------------¦ ¦Totals ¦1,000 ¦1,150 ¦$101,150 ¦ +------------------------------------------------+

On October 22, 1952, the same individuals invested a total of $19,190 in the corporation for which they received from the corporation a total of 190 shares of preferred stock and 190 shares of common stock for the same prices per share as set forth above.

The Lincoln petitioners, in their respective income tax returns for 1949, claimed deductions for long-term capital losses upon the sales of all of their Flamingo Hotel Company common stock. In computing the amounts of the capital losses claimed in the returns, the Lincoln petitioners added to the cost basis of the common shares, the cost basis of the preferred shares which they surrendered to the corporation. The cost basis to each of the Lincoln petitioners of the preferred and common stock, the amount received by each upon the sale of common stock, the amount of the long-term capital loss claimed by each, and the amount (50 per cent) of the loss taken into account were as follows:

+----------------------------------------------------------+ ¦ ¦Shares ¦Costs ¦Proceeds ¦ +---------------+-------------------------------+----------¦ ¦Petitioner ¦ ¦from sales¦ +---------------+-------------------------------+----------¦ ¦ ¦Pfd. ¦Com. ¦Pfd. ¦Com. ¦of common ¦ +---------------+-------+-------+-------+-------+----------¦ ¦J. & H. Lincoln¦1 234¦187 1/2¦$23,400¦$18,750¦$187.50 ¦ +---------------+-------+-------+-------+-------+----------¦ ¦J. & L. Lincoln¦233 ¦37 1/2 ¦23,300 ¦3,750 ¦37.50 ¦ +---------------+-------+-------+-------+-------+----------¦ ¦L. Lincoln ¦233 ¦37 1/2 ¦23,300 ¦3,750 ¦37.50 ¦ +----------------------------------------------------------+ 1Excluding 442 1/2 shs. pfd. and 7 1/2 shs. common acquired by John Lincoln upon dissolution of G. Macklin & Co. partnership.

+------------------------------------------------+ ¦ ¦L.-t. capital ¦ ¦ +---------------+---------------+----------------¦ ¦Petitioner ¦loss claimed ¦50% l.-t. loss ¦ +---------------+---------------+----------------¦ ¦ ¦ ¦ ¦ +---------------+---------------+----------------¦ ¦J. & H. Lincoln¦$41,962.50 ¦$20,981.25 ¦ +---------------+---------------+----------------¦ ¦J. & L. Lincoln¦27,012.50 ¦13,506.25 ¦ +---------------+---------------+----------------¦ ¦L. Lincoln ¦27,012.50 ¦13,506.25 ¦ +------------------------------------------------+

John C. Lincoln did not claim in his return a capita loss deduction with respect to 7 1/2 shares of common stock which he acquired upon the dissolution of the partnership, Gordon Macklin & Company.

The Commissioner disallowed the capital loss deductions claimed by the Lincoln petitioners for loss sustained upon sales of Flamingo common stock. He gave the following reason for his determination:

The capital loss deduction claimed * * * upon the sale of stock of the Flamingo Hotel Company has been disallowed in accordance with the provisions of section 24(b) of the Internal Revenue Code (or 1939).

The preferred and common stock of Flamingo Hotel Company did not become worthless in 1949, either before July 14, or at any other time.

Facts relating to partnership: Gordon S. Macklin and John C. Lincoln executed an agreement on June 29, 1940, which created a limited partnership with Macklin as the general partner and Lincoln as the limited partner. The partnership was formed for the purpose of engaging in the securities brokerage business in Cleveland, Ohio. Macklin and Lincoln each contributed $10,000 to the capital of the partnership.

The partnership agreement, which is incorporated herein by this reference, provided, among other things, as follows: Mackin was to manage the partnership and was to devote his full time to the business, for which services he was to receive a salary not to exceed $9,000 a year. Lincoln was not required to devote any of his time to the business of the partnership, and he was to be paid interest at the rate of 8 per cent a year on his capital investment of $10,000. After the payment of a salary to Macklin and interest to Lincoln on his capital investment, the remaining net income of the partnership was to be divided 75 per cent to Macklin, and 25 per cent to Lincoln. In addition to the provisions contained in the agreement relating to the sharing of profits, there was an understanding between the partners that Lincoln's share of partnership profits was to be determined without regard to net earnings attributable to fees, commissions, and other amounts paid by members of the Lincoln family for investment counsel and other services rendered by the partnership. The agreement did not contain any provision defining the manner in which net losses of the partnership were to be shared by the partners.

The partnership agreement also contained a provision whereby Macklin agreed to ‘cause an insurance policy to be placed upon his life in the amount of Ten Thousand ($10,000) Dollars, to be made payable to * * * Trustee, under a trust agreement whereby upon the death of said Gordon Macklin said trustee will pay the said sum * * * to John C. Lincoln, his heirs, executor or administrator, in full of all interest of John C. Lincoln * * * in said partnership.’

In order to implement the aforementioned provision of the partnership agreement, Macklin and Lincoln executed a ‘Partnership Insurance Agreement’ on August 23, 1940. The partnership insurance agreement, referred to hereinafter as the insurance agreement, is incorporated herein by this reference.

The insurance agreement recited that it was the desire of the parties that the partnership be liquidated and that the investment of Lincoln in the partnership be immediately repaid in the event of the death of Macklin. To this end, the insurance agreement provided, among other things, as follows: That Macklin agrees that he has procured a policy of insurance upon his life in the amount of $15,000; that Macklin has designed Glen O. Smith, Trustee, as the beneficiary of the policy and that he agrees not to change the beneficiary without the consent of Lincoln; and that, in the event of Macklin's death, the trustee is to collect the proceeds of the policy and is to pay therefrom $10,000 to Lincoln, which payment is to be ‘in full of all interest of * * * Lincoln in the partnership.’

The insurance agreement also obligated Macklin to execute a will in which he was to expressly ratify the provisions of the agreement. This provision was inserted in the agreement for the purpose of accomplishing the results anticipated by section 8092 of the Ohio General Code.

The insurance agreement also provided that it ‘shall be construed to fix the price and value of John C. Lincoln's interest in the partnership and its assets in the event of the death of Gordon Macklin.’ The insurance agreement by its terms was to continue in effect for a period of 4 years from June 29, 1940, unless sooner terminated by agreement of the parties. The insurance agreement was not renewed and extended in 1944 by express agreement of the parties as was the partnership agreement. By its terms the agreement expired on June 29, 1944.

Macklin's will, which was duly admitted for probate in the Probate Court of Cuyahoga County, Ohio, did not contain any provisions relating to the insurance agreement of August 23, 1940.

The policy of insurance referred to herein was in force on the date of Macklin's death. The designation of Glen O. Smith, Trustee, as beneficiary of the policy was not changed. Subsequent to Macklin's death, the proceeds of the policy were paid by the insurer to Glen O. Smith. On September 22, 1949, Smith paid $10,000 of the proceeds of the policy to John C. Lincoln. Smith's letter of transmittal addressed to Lincoln in care of his attorney, stated as follows:

Enclosed please find check No. 1 payable to your order in the sum of $10,000 and signed by me as Trustee, pursuant to a certain partnership insurance agreement by and between Gordon Macklin, John C. Lincoln and Glen O. Smith, dated the 23rd day of August, 1940.

Said $10,000 is being paid to you out of the proceeds of insurance policy No. 4842068 with the Mutual Insurance Company of New York upon the life of Gordon Macklin, and according to said partnership insurance agreement payment to you is in full for your whole interest in the partnership of Gordon Macklin & Company of which you were a special partner.

The payment was acknowledged by Lincoln's attorney as having been made pursuant to the provisions of the insurance agreement.

Under the partnership agreement, the partnership was to continue for a term of 4 years from June 29, 1940, unless sooner terminated by notice, consent, or operation of law.

On June 15, 1944, a memorandum agreement was executed by Macklin and Lincoln which renewed the provisions of the partnership agreement and extended the term of the partnership for an additional 5 years until June 29, 1949.

A limited partnership certificate as required by the law of Ohio was duly made, acknowledged, recorded, and published by the partners for the Gordon Macklin Partnership in both 1940 and 1944.

The limited partnership agreement expired on June 29, 1949, without the partners taking any action to extend or renew the agreement. The partners did not make, acknowledge, record, and publish a limited partnership certificate for any period subsequent to June 29, 1949. The Gordon Macklin partnership continued operations subsequent to June 29, 1949, and it thereafter became a general partnership under the law of Ohio.

Gordon Macklin & Company engaged in business as a dealer in securities from June 29, 1940, until July 14, 1949, on which date the partnership was terminated by the death of Macklin. The business of the partnership consisted of purchasing and selling securities, both for its own account and for the accounts of customers, and of acting as an agent for others, including the members of the Lincoln family, in the management of investment portfolios. The business of the partnership was managed by Macklin.

The partnership maintained its books, and filed its partnership returns of income on a calendar year-accrual basis. The partnership, in its books of account and in its returns of income, regularly valued its inventories as a dealer in securities at cost, with the exception of the return which was filed for the final period of operations.

The partnership included in its inventories of securities for the period January 1 to July 14, 1949, and for prior years, 442 1/2 shares of preferred stock and 7 1/2 shares of common stock of the Flamingo Hotel Company. The 442 1/2 shares of preferred stock had a cost basis to the partnership of $42,275, and the 7 1/2 shares of common stock had a cost basis to it of $750.

The balance in the respective capital accounts of the partners, as of January 1, 1949, was as follows: Macklin, $10,000, and Lincoln, $20,698.38. The balance of Macklin's capital account represented his original capital contribution; the balance in Lincoln's capital account consisted of his original capital contribution of $10,000 and unwithdrawn profits from prior years in the amount of $10,698.38. During the period January 1 to July 14, 1949, Macklin withdrew from the partnership a total of $20,227.42; the total consisted of salary, $4,875, an insurance premium, $489,36, and other withdrawals totaling $14,863.06. During the same period, Lincoln's only withdrawal from the partnership consisted of interest on his capital investment in the amount of $200.

The Gordon Macklin & Company partnership became a general partnership by operation of law from and after June 29, 1949. The partnership was terminated by the death of Macklin on July 14, 1949.

The cost basis to the partnership of its securities inventory as of January 1, 1949, and July 14, 1949, was $103,586.62 and $87,163.46, respectively.

As of July 14, 1949, the partnership had cash assets in the amount of $384,801.30. On the same date, the credit balances in customers accounts totaled $441.758.74. ‘Free credit balances' were owed by the partnership to the following customers in the amounts indicated:

+---------------------------------+ ¦Customer ¦Amount ¦ +---------------------+-----------¦ ¦Mrs. Marion Q. Davis ¦$127.50 ¦ +---------------------+-----------¦ ¦Mrs. Veronica Kovacic¦56.13 ¦ +---------------------+-----------¦ ¦John C. Lincoln, Jr ¦495.70 ¦ +---------------------+-----------¦ ¦Edna R. Pulse ¦28.00 ¦ +---------------------+-----------¦ ¦Helen C. Lincoln ¦45,863.50 ¦ +---------------------+-----------¦ ¦John C. Lincoln ¦52,848.87 ¦ +---------------------+-----------¦ ¦David C. Lincoln ¦119,309.31 ¦ +---------------------+-----------¦ ¦Joseph C. Lincoln ¦108,856.14 ¦ +---------------------+-----------¦ ¦Lillian C. Lincoln ¦114,173.59 ¦ +---------------------+-----------¦ ¦Total ¦$441,758.74¦ +---------------------------------+

The free credit balances resulted from the receipt by the partnership as a broker of the proceeds from the sale of securities owned by its customers.

As substantially all of the free credit balances owed by the partnership to customers were owed to members of the Lincoln family, John Lincoln was anxious to expedite liquidation of the partnership and payment of its creditors. Lincoln was advised by his attorneys that, under the law of Ohio, liquidation of the partnership could be accomplished in one of two ways, namely, he could cause a receivership to be established by the Probate Court of Cuyahoga County, Ohio, or, as surviving partner and with the consent of the representatives of Macklin's estate, he could make application to the Probate Court to purchase the interest of the deceased partner in the partnership assets at tye appraised value, in which event he would assume the partnership's liabilities and could then proceed to effect a liquidation of the partnership. Lincoln chose the latter alternative.

On August 23, 1949, Lincoln, with the consent of the representatives of Macklin's estate, filed an application in the Probate Court of Cuyahoga County, Ohio, as surviving partner of Gordon Macklin & Company for an appraisement of the assets of the partnership and a determination of its debts and liabilities. The application was filed pursuant to section 8085 of the Ohio General Code. Pursuant to the application, the court appointed three appraisers to make an inventory and appraisement of the assets and liabilities of the partnership as of July 14, 1949. The appraisers thereafter rendered under oath their inventory and appraisement of the assets and liabilities of Gordon Macklin & Company as of July 14, 1949.

The report of the appraisers was delivered to Lincoln and was filed by him with the court, as was required by law, on August 26, 1949. On the dame date, the court entered an order approving and confirming the report.

The following schedule is a summary of the assets and liabilities of the partnership on July 14, 1949, as set forth in the report of the appraisers:

+---------------------------------------------------------------+ ¦Assets ¦ +---------------------------------------------------------------¦ ¦Cash ¦ ¦$384,801.30¦ +----------------------------------------+----------+-----------¦ ¦Accounts receivable: ¦ ¦ ¦ +----------------------------------------+----------+-----------¦ ¦Gordon S. Macklin Estate ¦$14,863.06¦ ¦ +----------------------------------------+----------+-----------¦ ¦Others ¦4,476.33 ¦ ¦ +----------------------------------------+----------+-----------¦ ¦ ¦_ ¦19,339.39 ¦ +----------------------------------------+----------+-----------¦ ¦Inventory of securities ¦ ¦27,476.51 ¦ +----------------------------------------+----------+-----------¦ ¦Office furniture, fixtures and equipment¦ ¦1,321.50 ¦ +----------------------------------------+----------+-----------¦ ¦Other assets ¦ ¦2,251.88 ¦ +----------------------------------------+----------+-----------¦ ¦Total assets ¦ ¦$435,190.58¦ +----------------------------------------+----------+-----------¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------+

Liabilities Accounts payable: Customers' free credit balances $441,758.74 Due customers on purchase of securities 2,860.71 Miscellaneous accounts payable 1,475.67 Other liabilities: John C. Lincoln--interest on capital $233.34 Payroll taxes 227.74 461.08 Total liabilities $446,556.20

The 7 1/2 shares of common and the 442 1/2 shares of preferred stock of the Flamingo Hotel Company which were owned and inventoried by the partnership and which had a cost basis to it as of July 14, 1949, of $43,025, were listed in the report of inventory and appraisement as having no market value on July 14, 1949.

The report of the appraisers disclosed that on the basis of the values therein determined for the assets of the partnership, the liabilities of the partnership on July 14, 1949, exceeded its assets by $11,355.60.

Also on August 26, 1949, Lincoln, with the consent of the representatives of Macklin's estate, filed with the Probate Court his election as surviving partner to purchase the interest of the deceased partner (Macklin) in the assets of the partnership at the appraised value. Lincoln's election to purchase the interest of the deceased partner was made pursuant to section 8089 of the Ohio General Code. The court, on the same date, entered its order approving the election made by Lincoln as surviving partner and directing that the property of the partnership be delivered to Lincoln without any compensatory payment to Macklin's estate. The court order required Lincoln to post bond in the amount of $5,000 as surety for the payment by him of all debts and liabilities of the firm.

OPINION.

HARRON, Judge:

Issue 1.— Flamingo Hotel Company.

The first question is whether the preferred and common stock of Flamingo Hotel Company became worthless in 1949, prior to July 14, or prior to September 15, when the common stock was sold for $1 a share. This question was raised for the first time by the pleadings. Deductions for worthless stock are claimed under sections 23(e) and (h), as limited by section 117, Internal Revenue Code of 1939.

The second question, which is presented only in the petitions of members of the Lincoln family, is whether sales of Flamingo common stock were made directly or indirectly between members of a family within the scope of the provisions of section 24(b)(1)(A), Internal Revenue Code of 1939.

Worthlessness of Flamingo stock: Whether property becomes worthless in a particular taxable period is a question of fact. John B. Marsh, 38 B.T.A. 878, 902; Cooley Butler, 45 B.T.A. 593, 600. The question is to be determined from a practical common sense consideration of all the evidence. Lucas v. American Code Co., 280 U.S. 445, 449; Boehm v. Commissioner, 326 U.S. 287; Miami Beach Bay Shore Co. v. Commissioner, 136 F.2d 408, 409; John B. Marsh, supra. The burden of proof is upon the taxpayer to establish in a convincing manner that the stock has in fact become worthless in the taxable period in which the loss deduction is claimed. Mahler v. Commissioner, 119 F.2d 869, 872; Cooley Butler, supra. Where the time of the loss is not fixed by a closed and completed transaction, the date is to be determined by reference to ‘identifiable events' which evidence the destruction of value both actual and potential in the period in which the loss is claimed. As was observed by this Court in Sterling Morton, 38 B.T.A. 1270, affd. 112 F.2d 320, at page 1278:

The ultimate value of stock, and conversely its worthlessness will depend not only on its current liquidating value, but also on what value it may acquire in the future through the foreseeable operations of the corporation. Both factors of value must be wiped out before we can definitely fix the loss. If the assets of the corporation exceed its liabilities, the stock has a liquidating value. If its assets are less than its liabilities but there is a reasonable hope and expectation that the assets will exceed the liabilities of the corporation in the future, its stock, while having no liquidating value, has a potential value and can not be said to be worthless. The loss of potential value, if it exists, can be established ordinarily with satisfaction only by some ‘identifiable event’ in the corporation's life which puts an end to such hope and expectation.

Petitioners contend that the common and the preferred stock of Flamingo Hotel Company had neither liquidating nor potential value as of July 14, 1949. They argue that the corporation was insolvent as of June 30, 1949, and that a series of events which occurred in the forepart of 1949 destroyed any reasonable basis for hope or expectation that the shares then outstanding would acquire any value in the foreseeable future through continued operations of the company.

The question whether the stock became worthless in 1949, prior to September 15, 1949 (the date on which the common stock was sold for a nominal consideration pursuant to a plan of financial readjustment), is important (1) in determining the net income or loss of the partnership for its final period of operations ended July 14, 1949; and (2) in determining whether the Lincoln petitioners are entitled to loss deductions from worthlessness of stock rather than from sales of the common stock, the respondent having determined that section 24(b) precludes the allowance to them of loss deductions from sales of stock. The partnership would be entitled to a loss deduction with respect to the stock only in the event that it is held that the stock became worthless during its final period of operations since the partnership was terminated before the preferred stock was surrendered to the corporation for cancellation and the common stock was sold for a nominal consideration.

The petitioners seek to establish that the corporation was insolvent and that the stock was without liquidating value, through expert testimony. They claim that, although the balance sheet of the corporation as of June 30, 1949, showed an excess of assets over liabilities in the amount of $41,720, the assets, specifically the Flamingo Hotel property, were not worth book value. The Flamingo Hotel property had a book value on June 30, 1949, of $1,277,518.

Two expert witnesses, E. C. Keefer and S. Z. Bennett, made a joint appraisal of the hotel property in April 1952. They each expressed the opinion that on or about July 1, 1949, the fair market value of the Flamingo Hotel, including real and personal property, was $850,000. Also, William H. Bemis, a director and general counsel of the company since its organization, testified that in his opinion the fair market value of the property on July 1, 1949, was not more than $1,000,000. Bemis' testimony concerning the value of the property was based upon his general knowledge of hotel property and management, and upon his familiarity with the property in question since its acquisition by the corporation.

The testimony of the expert witnesses about the fair market value of the property in question has been carefully considered. However, their opinions about value are, under the issue before us, only one element to be considered in determining whether the stock of Flamingo corporation was worthless in 1949 before July 14, or September 15. If we were to give their testimony a great deal of weight, their testimony, at best, would tend to support a conclusion that the stock was without liquidating value on or about the critical dates. But that fact, of itself, would not be sufficient to establish that the stock was worthless.

Furthermore, if we were to assume for purposes of argument that both classes of Flamingo stock were without liquidating value on the critical dates, there remains the question whether the stock, on those dates, had potential value. Sterling Morton, supra. The absence of liquidating value of itself is insufficient to establish worthlessness. Anthony P. Miller, Inc., 7 T.C. 725, 745, affirmed on this point 164 F.2d 268, certiorari denied 333 U.S. 861; Estate of C. L. Hayne, 22 T.C. 113, 118.

The evidence does not establish that, in spite of the existence of recurring net operating losses aggregating $233,279 as of June 30, 1949, impairment of capital, and a distressed financial condition, there was no hope or expectation on the part of the officers and directors of the Flamingo corporation in the early part of 1949 and on or about July 14, 1949, that continued operations of the hotel property could not be carried on, or that continued operations would not eventually result in creating an equity for the stockholders. In Anthony P. Miller, Inc., supra, p. 747, it was pointed out that

It has frequently been held that such factors as deficits, operating losses, lack of working funds, poor business conditions, and similar circumstances are insufficient in themselves to establish the worthlessness of stock. * * *

Macklin Operated, Inc., a stockholder and the supervising agent of the hotel, advanced funds to the Flamingo corporation between July 1 and September 15, 1949, to meet fixed charges and incidental expenses. Flamingo corporation was not in default in its first mortgage payments (and never was in default); it was able to secure, in the summer of 1949, a rescheduling of its second mortgage payments; it also obtained from Cleveland Trust Company a renewal of the note evidencing its indebtedness to that bank. The corporation was not placed in receivership either before, during, or after 1949. It did not cease operations. Upon consideration of all of the evidence, it must be concluded that the petitioners have failed to establish that the potential value of the Flamingo stock must be deemed to have been destroyed in 1949.

One of the cases cited by petitioners, Henry Adamson, 17 B.T.A. 17, is clearly distinguishable on its facts. In the Adamson case, the stockholders authorized and actively sought a sale of the corporation's assets in the year in which it was claimed that stock became worthless, and the evidence showed that the price at which the stockholders endeavored to sell the assets would be insufficient, if realized, to satisfy the corporation's debts. In these proceedings, similar evidence is lacking.

Petitioners cite and rely upon Jeffery v. Commissioner, 62 F.2d 661, and Homer M. Preston, 7 B.T.A. 414. These cases are distinguished on the facts from the case at bar. In the Jeffery case, the corporation was adjudged a bankrupt in the year in which the loss deduction for worthless stock was claimed. In the Preston case, the evidence established that the financial and commercial position of the corporation was hopeless in the year in which the loss deduction for worthless stock was claimed, although the corporation continued in business for several years thereafter.

Petitioners point with emphasis to the fact that the plan of financial readjustment which was outlined in the corporation's letter to stockholders, dated August 9, 1949, was accepted by all the stockholders and was carried out by them. Pursuant to the plan, all the preferred shareholders surrendered their stock to the corporation for cancellation between August 10 and September 15, 1949, and all the holders of the common shares sold their stock for $1 a share on September 15, 1949. With the exception of the 7 1/2 shares of common stock which were acquired by John Lincoln upon liquidation of the Gordon Macklin & Company partnership, the Lincoln petitioners sold their common stock to Smith, who, as part of the plan, entered into a 5-year contract with the corporation to manage the hotel. Smith, who had wide experience in the management of resort hotels, demanded an equity in the corporation before he would accept a contract to manage the hotel. The other holders of common stock sold their shares to David Lincoln, who, as part of the plan, purchased 1,000 shares of new preferred stock from the corporation for $100,000. Petitioners argue that the stockholders, by accepting the plan of financial readjustment, in effect confirmed the fact that the preferred and the common stock were then worthless. We do not agree.

In the first place, the plan of financial readjustment was not formally proposed to the stockholders until subsequent to the termination of the Gordon Macklin & Company partnership. Hence, even if we were to regard the acceptance of the plan by the stockholders as an identifiable event in the life of the corporation which effectively destroyed the potential value of the stock, the partnership would not be entitled to a loss deduction for worthless stock in its final period of operations.

Furthermore, the acceptance of the plan by the stockholders evidences at most that the stockholders were, at the time, either unwilling or unable to provide the corporation with the needed working capital, and that they had lost faith in the future prospects of the corporation. We note, however, that their apparent lack of faith in the future of the corporation was not shared by David Lincoln, who, as part of the plan, invested $100,000 in the corporation, nor by Smith, who, as part of the plan, agreed to devote his time and ability to managing the hotel for a period of 5 years. Finally, the fact that all the common stock was sold for a nominal consideration after the old preferred shares had been surrendered to the corporation for cancellation does not of itself establish that the common stock was then worthless. It has been held that the sale of stock for a nominal consideration does not establish the prior worthlessness of the stock. Cf. Raoul H. Fleishmann, 40 B.T.A. 672, Elliott R. Corbett, 28 B.T.A. 46.

It is held that petitioners have failed to prove that the common and the preferred stock of Flamingo Hotel Company became worthless during the period January 1 to July 14, 1949, or at any time in 1949 prior to the surrender by the stockholders of the preferred shares for cancellation and the sale by them of the common shares for a nominal consideration.

Sales of common stock: Section 24(b)(1)(A), Internal Revenue Code of 1939, provides that in computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly, between members of a family, as defined in subparagraph (2)(D).

The respondent contends that section 24(b)(1)(A) applies to the Lincoln petitioners' sales of Flamingo common stock. He relies upon McWilliams v. Commissioner, 331 U.S. 694. Respondent does not question the amounts of the losses for which the Lincoln petitioners claim deductions.

On or before September 15, 1949, all of the holders of Flamingo common stock transmitted their shares, a total of 750, to Flamingo corporation, and on September 15, each stockholder received $1 a share for the surrendered stock. David Lincoln received a certificate for 487 1/2 shares of common, for which he paid $487.50, and James B. Smith received a certificate for 262 1/2 shares of common, for which he paid $262.50. The members of the Lincoln family owned a total of 270 shares of common, of which 7 1/2 shares are not involved under this question. David Lincoln is a member of the Lincoln family, and he comes within the definition of ‘the family of an individual’ set forth in section 24(b)(2)(D).

Petitioners contend that there was no sale or exchange of the common stock between members of the Lincoln family, either directly or indirectly, within the scope of section 24(b)(1)(A), and that McWilliams v. Commissioner, supra, does not apply here. It is the respondent's view that the sales of stock by six stockholders, who are not related to any member of the Lincoln family, should be disregarded, and that the entire transaction involved indirect sales by members of the Lincoln family to David Lincoln.

We conclude that the respondent's view involves distortion of the facts and must be rejected. The sales of the common stock were part of a plan of readjustment following the death of Gordon Macklin, and of refinancing which was the outgrowth of business necessity. The plan was not conceived and carried out for the primary purpose of establishing tax losses for the stockholders. We find no basis for injecting an element of suspicion into the transactions, or for construing them as a tax avoidance device. The evidence shows that James B. Smith wanted to purchase stock in Flamingo and that part of the consideration for his agreement to become the new manager of the hotel was the right to purchase common stock. The evidence shows that one group of stockholders, the non-Lincoln group, were unwilling to invest more capital in the Flamingo enterprise. Since business needs and purposes provided the reasons for the sales of the common stock, they should not be construed to be anything other than what they were. That is to say, there were no sales, directly or indirectly, by any member of the Lincoln family to David Lincoln. We are satisfied that James B. Smith was, in fact, the actual and bona fide purchaser of the 262 1/2 shares of common stock which were held by members of the Lincoln family. He did not resell any of the 262 1/2 shares, later, to any member of the Lincoln family. He not only retained the 262 1/2 shares which he purchased in September 1949, but he also, later, purchased additional shares of common stock, namely 300 shares, on November 24, 1950.

The facts here are wholly different from the facts in McWilliams, and we therefore hold that the provisions of section 24(b)(1)(A) do not preclude deductions by the Lincoln petitioners for the losses which they sustained upon their sales of their respective lots of common stock to James B. Smith.

Issue 2.— Gordon Macklin Partnership.

The question is whether John S. Lincoln, as surviving partner, purchased the interest of his deceased partner in Gordon Macklin & Company. Decision of this question determines whether the partnership realized net gain from operations during its last taxable period, as respondent has determined, and whether John S. Lincoln's contention that he sold his partnership interest to Macklin's estate (rather than bought Macklin's interest) is sound.

The partnership was terminated by Macklin's death on July 14, 1949. It was engaged in the security brokerage business; it acquired for its own account securities which it inventoried. Prior to the period in question, the partnership adopted the cost method of inventory valuation; it never obtained the Commissioner's consent to change from this method. In the partnership return of income for January 1 to July 14, 1949, the opening inventory of securities was valued at cost, whereas the closing inventory was not valued at cost but was purportedly valued at market. Because of the change in the method of valuing the closing inventory the partnership return reflected a net loss of $37,539.13 for the period. The Commissioner adjusted the closing inventory to cost, resulting in a net profit of $22,167.12. Respondent also determined, giving effect to the understanding between the partners that Lincoln was not to share in partnership income attributable to dealings with the Lincoln family, that Macklin's distributive share of the partnership income was $19,327.16, and that Lincoln's distributive share was $2,840.66. Petitioners agree that this determination is correct.

The petitioners concede that the closing inventory of securities should have been reported at cost. However, petitioners now claim that the partnership sustained an ordinary net loss in its last period of operations for reasons which are set forth hereinafter. The petitioners contend that the partnership sustained an ordinary net loss in the amount of either $37,539.13 or $20,857.18.

An ordinary net loss of $20,857.18 was sustained by the partnership if the preferred and common stock of the Flamingo Hotel Company, which the partnership held in its inventory as of July 14, 1949, became worthless at some time during 1949, before July 14. Our finding that the Flamingo stock did not become worthless at any time in 1949 disposes of this contention.

The other contention, that the partnership sustained an ordinary net loss of $37,539.13, requires a more lengthy explanation. In support of this contention, the petitioners advance the theory that the partnership's closing inventory was transferred to creditors in payment of debts of the partnership, resulting in a loss of $59,706.95, the difference between the cost basis to the partnership of the closing inventory and an alleged market value thereof. If the petitioners' theory is correct, the partnership sustained in its last period of operations a net loss of $37,539.13.

For the purpose of considering this contention, it may be assumed, without deciding, that $59,706.95 was the difference between cost and the true market value of the closing inventory on July 14, 1949.

Respondent does not agree that the market value of the closing inventory on July 14, 1949, was less than cost to the extent of $59,706.95, or any other amount.

The evidence is clear that the partnership as such did not enter into any transaction (such as a sale or exchange) involving the transfer of any of its assets to creditors in payment of debts upon which loss or gain can be predicated. Briefly, what actually happened, as is set forth in the Findings of Fact, was as follows:

On August 26, 1949, after Macklin's death, Lincoln, with the consent of Macklin's estate, filed an application in the Probate Court, as surviving partner, to purchase the interest of the deceased partner in the partnership assets, at their appraised value, in accordance with the provisions of section 8089 of the Ohio General Code. The court approved Lincoln's application. Lincoln, under Ohio law, had a right to make such election. If he had not made such election, the executors of Macklin's estate would have had to petition the court for the appointment of a receiver for the partnership. Sec. 8091, Ohio General Code.

Lincoln's first step prior to making the election was to petition the court to appoint appraisers to make an inventory and appraisement of the assets and liabilities of the partnership. Appraisers were appointed and their report was approved by the court. Their report of inventory and appraisement showed that, as of July 14, 1949, the partnership's liabilities exceeded its assets by $11,355.60. Accordingly, Lincoln, as surviving partner, acquired the interest of the deceased partner in the assets of the partnership without paying any consideration to Macklin's estate; he acquired all of the assets of the partnership and assumed all of its liabilities as the surviving partner.

1.
The following proceedings have been consolidated herein: Lillian C. Lincoln, Docket No. 38876; John C. Lincoln and Helen C. Lincoln, Docket No. 39055; Estate of Gordon S. Macklin, Deceased, Glen O. Smith, Co-Executor, and Evelyn B. Macklin, Surviving Spouse, Docket No. 39159; Estate of Gordon S. Macklin, Deceased, Glen O. Smith and Evelyn B. Macklin, Executors, Docket No. 39160. The difference of $16.05 between the total of partnership liabilities to others than John Lincoln as disclosed by the appraisers' report, $393,478.99, and the total amount paid to others than John Lincoln, $393,457.94, is due to a reduction in the amount of one liability owed by the partnership.The difference may represent interest of $200 which Lincoln received on his capital investment in the partnership during the period in question, which sum Lincoln may have included in his reported gross income as interest; or the discrepancy may represent a typographical error. Secs. 8085, 8089, and 8091, Ohio General Code.