Commissioner v. Fink

Peter and Karla Fink (plaintiffs) were the controlling shareholders of Travco Corporation (Travco). Together, the Finks owned 72.5 percent of Travco’s outstanding stock. Travco experienced financial problems, and the Finks voluntarily surrendered some of their shares of Travco stock to the corporation to make the corporation more attractive to investors. The Finks received no compensation for the surrendered shares. After the surrender, the Finks owned 68.5 percent of Travco’s outstanding stock. On their income-tax returns, the Finks claimed ordinary-loss deductions totaling approximately $390,000, their adjusted basis in the surrendered shares. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deductions. The Commissioner reclassified the stock surrender as a contribution to capital resulting in no immediate tax-deductible loss. The Commissioner reasoned that instead of claiming a loss, the Finks should have adjusted their total basis in Travco stock by adding the basis in the surrendered stock to the basis in their remaining shares. The Finks argued that the surrender was not a capital contribution because the surrender resulted in a reduction of their ownership in Travco. The United States Tax Court upheld the Commissioner’s determination. The court of appeals reversed the tax court, holding that the Finks were allowed to deduct their adjusted basis in the surrendered shares. The Commissioner appealed.